Vijay Kumar Gaba

 Continuing from yesterday…(see here)

Last month the incumbent NDA government completed nine years in power with BJP having full majority in the Lok Sabha on its own. In the 2014 general election, it was after three decades (post the landslide win of the Congress party led by Rajiv Gandhi in 1984) that a single party (BJP) had secured over half the seats in the Lok Sabha. Obviously, the people had great hopes from the new government that has won their confidence on the promises of a corruption free regime with equal opportunities (Sabka Saath Sabka Vikas).

For the 5years (2014-2019) the Indian economy (Real GDP) grew at a CAGR of ~7.4%, slightly better than the CAGR of ~7.1% during the previous five-year term (2009-2014). In 2019, the BJP returned to power with an even larger majority. During the first four years of the current term, the Indian economy has grown at a CAGR of 3.1%, the slowest pace of growth achieved by any government in the post liberalization (1991) era.

The best growth trajectory was seen during UPA-1 tenure when the economy managed to grow at a CAGR of 8.52% (2004-09). This was perhaps the outcome of massive reforms implemented by the preceding NDA-1 government (1998-2004); in which monopolies of the government over the core sectors like power, mobile telecom, coal, roads, oil & gas, airports, ports, etc. were divested. NDA-1 also implemented massive investment-oriented policy initiatives like SEZ, NHDP, PMGSY, Missile & GPS development, UMPP, NELP, etc. that led to accelerated investment and growth in the following decade.

The UPA government (2004-2014) earnestly took forward the reforms initiated by the NDA-1. It substantially liberalized the FDI regime; signed the Civil Nuclear Deal to usher a new era of strategic partnership with NATO & NSG; and introduced the first universal basic income scheme in the form of MNREGA and food security scheme in the form of National Food Security Act 2013.

Most important, it laid the foundation of complete digitization of the Indian economy in the ensuing decades by creating robust platforms like UIDAI (Aadhar) and NPCI (UPI, Fastag etc.); and laying an aggressive roadmap for financial inclusion in the budget speech of FY11 in accordance with the recommendation of the Rangarajan committee (2008).

The financial inclusion roadmap required banks to reach 73,000 rural habitations with a population of over 2000 by March 2012, using information and communication technology-based models and banking intermediaries (Business Correspondents). RuPay – an Indian domestic debit card, introduced on 26 March 2012 by the NPCI was a key landmark in this journey. Basic Savings Bank Deposit Account (BSBDA) along with BC proved extremely successful in increasing the total number of banking touch points from ~67k in FY10 to 586k in FY16 (RBI Annual Report FY17). (BSBDA was rechristened as Jan Dhan Yojna- PMJDY with enhancement of scope to include some other financial services within its ambit.)

The UPA government also introduced The Constitution (115th Amendment) Bill, 2011 to implement a common nationwide GST based on Ajit Kelkar committee (year 2000) recommendations; though the bill could not be passed due to opposition from other parties. The UPA government also introduced The Real Estate Regulatory Authority (RERA) Bill in August 2013. The bill was referred to the standing committee of the parliament, which submitted its report after considering public comments in February 2014. The Bill therefore could not be passed during UPA-2 tenure.

It could be argued that sub-optimal performance of the economy in the past four years is primarily due to the impact of Covid-19 pandemic that shutdown the economy for almost 6 months in 2020. In my view, however, the argument could be accepted only as partially valid. Most previous regimes had also witnessed massive disruptions and displacements like the financial sector crisis (failure of UTI, ICICI, IDBI, ICICI etc.); Asian currency crisis (1997), global economic sanctions post 1998 nuclear tests; dotcom burst; global financial crisis (2008-2010); energy inflation due to wars in the Middle East Asia; banking crisis due to collapse of infrastructure sector that was used to stimulate the economy since 1998 with numerous unsustainable projects; political instability (three election in three years 1996-1998); Kargil War; incoherent political alliances (especially UF, NDA-1, UPA-1) etc. Despite all this, most governments could achieve a higher growth rate than what we have seen in 2019-2023.

It is evident from the pace of highway construction, digitization of the economy, financial inclusion, and extension of universal basic income schemes, etc., that the incumbent government has pursued the programs and policies initiated by the previous governments and continued to build upon the platforms created by his predecessors. Schemes like PLI have also set ambitious targets; even though the results so far have not been encouraging.

However, we have not seen any transformative policy initiative that can lend the necessary velocity to the economy to catapult it into a higher orbit. There is little progress in the areas of agriculture reforms, disinvestment etc. Fiscal sustainability has remained compromised, as the debt burden has continued to increase. The private capex has mostly remained evasive due poor demand conditions and risk averseness of banks. Though the situation has shown marked improvement in the past 15-18months. The price situation has remained volatile, mostly governed by external factors like global prices of commodities and weather conditions. There is little evidence to show that the government and/or RBI have any plan in place to control the volatility in prices.

In my view, however, the worst aspect of the current regime has been the failure to ensure adequate employment, especially in the manufacturing sector. More on this tomorrow.

I travelled to the Agra, Aligarh and Bareilly divisions of the state of Uttar Pradesh last week. Holi being the principal festival of these regions, it was the peak season of festivities in these areas. Since, in the past two years, the Covid pandemic impacted the festivities to a great extent; this year’s celebrations were particularly enthusiastic. A good sugarcane and bumper wheat crop added to the farmers’ delight. Poor realization for potatoes was a little dampener.

The elections to the state assembly have just concluded and the new government is yet to be formed. Both the principal political parties, the BJP and SP, have performed well in the elections. So the political leaders and workers were also seen celebrating with fervor.

Broadly, the aerial socio-economic view of the region appeared quite ebullient and promising.

There are few observations that I would like to share with the readers. These observations are relevant for understanding some popular political narratives, and more important, understanding the (un) relationship of politics and economics.

I have been travelling to Bareilly from Delhi for the past 25years, at least 4 times a year. In late 1990s, the distance of 260kms used to take 8 to 9 hours by road and more than 7 hrs by train in normal course. The highway was a single road (without a divider) and the train route was not electric. We had to pass through cities like Hapur, Moradabd, and Rampur. Crossing Ghaziabad district was a nightmare even till a few years ago. There were five railway crossings on the way. On a bad day, each crossing could take 30-40 minutes to cross. Travelling in daytime would mean 30-60minutes of time to cross Hapur and Moradabad cities. On the way we had to cross the river Ganges at Garh Mukteshwar, which had a narrow bridge, barely sufficient for two buses to cross each other. One overladen truck, bullock cart or tractor trolley would mean one hour of jam. A vehicle breaking down on the bridge would mean 6 to 8hrs of traffic jam and a 30-50km detour through nearby villages using unpaved roads. In the Bareilly city 5-6hrs of power cut was considered normal. On bad days the power cuts would last 10-12hrs.

The highway being a single road, it was a constant struggle to save one-self from road transport bus drivers, who for some unknown reason were always in a tearing hurry, and enjoyed scaring the traffic coming from the opposite side. The trucks were mostly overloaded with sugar cane, fodder, food grains or perilously hanging steel rods. Almost every person driving a personal vehicle had the James Bond like driving skills, for dodging the cattle freely crossing the roads; transport buses swirling like missiles; bullock carts strolling in the middle of the road; and big potholes in the middle of the roads. Driving at night was particularly challenging.

Things started improving towards the end of the millennium. Construction of Moradabad bypass road obviated the need to cross the crowded city. An Inland Container Depot (ICD) in Moradabad was set up and the project to widen the highways to 4 lanes was undertaken. Bridges were made on numerous intersections on the highway. Then Hapur bypass was constructed. The rail route was electrified to increase the speed of trains. Then the highway was further widened to 6 lanes and rail over bridges were built over all railway crossings. A new wider bridge was built on Ganges to avert traffic jams. The Delhi Merrut Expressway has made the drive on Delhi-Hapur section a breeze.

The journey now is much safer and faster. The travel time now is about 5hrs, both by road and train. More importantly, this 5hr is highly predictable since there are very low chances of a traffic jam on railways crossing or bridge.

The power availability has improved significantly in past 25years with completion of plants like Rosa (1200MW), Anpara units 6 to 9 (2200MW). The availability of power also increased from the Tehri hydro project. The distribution of power was privatized in the region, resulting in better distribution infrastructure (fewer breakdowns) and lower losses.

Similarly, the Noida Agra expressway, Agra Lucknow expressway, Lucknow Faizabad Expressway and numerous other highways and infrastructure projects have been undertaken and completed in the state in the past 25years.

The most significant development project in the state has been the focus on girl education. Significant monetary and other incentives have been provided for the primary, secondary and higher education of girls, especially the girls from minority and backward communities. This has resulted in lower net fertility rate in the state and better labour participation in past one decade. We saw some glimpses of this in 2011 census data. The 2022 census data will definitely show a bigger picture.

It is pertinent to note that past 25yrs have seen BJP (1996-2002 and 2017-2022); SP (2002-2007 and 2012-2017); BSP (2002-2007) governments in the state and NDA (1998-2004 and 2014-2022) UPA (2004-2014) and United Front (1996-1998) governments at the center. The infrastructure improvement has been a consistent quotient during all regimes. No particular government can claim exclusivity in this context.

More than the highways, the roads built under the PMGSY scheme started by the NDA-1 government and consistently pursued by the subsequent governments have made a larger impact on the life of the predominantly rural population of the state. Because these roads have brought schools and hospitals within reach of the rural population.

The point I am trying to make is that the development in India has been a gradual process. It has gained momentum in the past 25yrs with increased participation of the private sector, improved regulatory and legal framework, and advancement in technology. For example, the change in land acquisition compensation policy (2013) has played a major role in faster execution of highway projects. Availability of better equipment, improved availability of essential raw material like steel and cement, and use of geospatial technology for mapping and monitoring etc. have also made execution efficient. The political parties have the right to lay claim on exclusivity of development in their regime, but the people, especially voters and investors must learn to believe what they see and experience, rather than what the political leaders tell them in their speeches.

The trajectory of economic development in India in present days is mostly a function of demand for infrastructure, availability of risk capital, and technology advancement. The political party in power usually has a minor role in the entire development process.

There are many things that have not changed in the state or worsened with each change in the regime. I would leave that discussion for some other time.

 Three decades ago, on 24th of July, 1991, when Pallath Joseph Kurien, Minister of State for Industry in Government of India, tabled the New Industrial Policy (NIP) in the Lok Sabha, not many would have realized how big was the moment in the socio-economic history of Independent India. After six years of preparation and facing political challenges, the new policy, which sought to end the Nehruvian Socialism in the country, finally saw the light of the day.

The process of economic reform was set in motion by Vishwanath Pratap Singh, the finance minister in the government of Rajiv Gandhi (1984-1987). It gained further impetus when Ajit Singh, the MIT educated, tech savvy industry minister of National Front’s government assumed the charge (1989-1990).

The original draft of NIP was prepared by Amar Nath Verma (then Industry Secretary) and Mohan Rakesh (then Chief Economic Advisor to Industry Minister Ajit Singh) in 1990. The proposal to radically reform the industrial policy of India were patronized first by Ajit Singh & Vishwanath Pratap Singh (1990), then by Yashwant Sinha & Chandrashekhar (1991) and finally by Manmohan Singh and Pamulaparthi Venkata Narasimha Rao (1991).

The NIP was followed by supporting reforms in the financial sector and fiscal policy. The committees set up in 1991 under the chairmanship of Raja Jesudoss Chelliah and Maidavolu Narasimham for Tax reforms and Financial Sector Reforms respectively. The recommendations made by these committees and several follow up committees like Narsimhan Commmittee 2.0, Shome Panel, Kelkar Task Force etc. have formed the basis of the economic and fiscal reforms in the country in past three decades.

Indubitably, we have travelled a long distance from 50% corporate tax rate to in 1990 to 25% in 2021. The journey in indirect taxation has been even more spectacular. From a multitude of classifications and tax slabs in 1980s, we have achieved minimum number of tax slabs and a single Goods and Services Tax (GST) in three decades.

Financial sector has also seen a metamorphosis in past three decades. Capital controls have been materially relaxed. A developed national trading & settlement system for financial instruments has been established. Foreign trade is materially deregulated. Financial inclusion has progressed materially with liberalization of banking, insurance and pension sectors. After initial hiccups, the Insolvency and Bankruptcy Code is now evolving fast.

The work of reforms though is still in progress and we have many more miles to cover. The reforms in two key sectors Agriculture and Industrial Labor have started by passing key legislations in 2020. The government has also outlined a clear policy on disinvestment of public sector enterprises. From the legacy process of reforms, The Direct Tax Code, The Indian Financial Code, Development of Retail Debt Market, Land Reforms, GST rates rationalization and coverage expansion, etc. are some of the areas where progress is still needed.

In recent years an entirely new economic development paradigm has emerged globally. Sustainability and Tech driven trade and commerce have emerged as the most dominant global socio-economic trends. India has the opportunity to adapt to these trends early by implementing a futuristic policy framework. The progress made so far appears patchy and reluctant. Comprehensive and constitutionally enforceable policies for sustainable development and digital commerce (including currencies) need to be evolved and implemented earnestly, at the earliest.

Backdrop of 1991 reforms

The reforms in 1991 were neither ushered voluntarily, nor enjoyed wider support. These were rather necessitated as the socio-economic milieu of the country had reached the brink of disaster. Four decades of pseudo-ness in post-independence policies had introduced numerous distortions in the society and economy.

The pseudo socialist model of development adopted post-independence in fact perpetuated the colonial feudal model. The private sector monopolies were protected through licensing controls & state patronage, and hugely inefficient public sector monopolies were created. Even implementation of Monopolies and Restrictive Trade Practices Act and Foreign Exchange Regulation Acts in 1972, were misused to perpetuate the dominance of already well-established industrial families.

The entire development paradigm was designed to focus on the weaknesses (risk capital and technology) of the country. The strengths of the country (food, art, culture, religion, languages, etc.) were undermined and allowed to dissipate easily. The effort of the government was on discouraging and regulating consumption, rather than increasing production and productivity. Industrial and scientific knowledge and technologies were mostly imported. The term “imported” became synonymous with quality and prestige and “local” became a derogatory reference. Even to date, many companies of old era proudly include “imported” or “foreign” technology in their promotion campaigns.

The backdrop of 1991 reforms was set by convergence of many social, political and economic factors.

Firstly, the country was witnessing unrest on many counts, most notably - Implementation of Mandal commission and Ram Mandir movement had become major socio-political issues.

The Congress leader Rajiv Gandhi had just been killed by Sri Lankan Tamil suicide bombers. Regional socialist parties had risen to capture power in the Congress strongholds UP and Bihar. Having permanently lost West Bengal and Tamil Nadu earlier, the Congress party’s popular support was shrinking to a few states in central and western India.

The collapse of USSR and Berlin wall meant realignment of global order. The non-aligned India, which was in fact closer to USSR, was left vulnerable on many counts, especially geopolitical support and crucial defense technologies.

In the post emergency era, the efforts of various governments to catapult India to higher growth rate through fiscal expansion had culminated in significant balance of payment crisis. The ten years of fiscal expansion did manage to break the vicious cycle of the Hindu rate of Growth (3-4%). Briefly a higher growth rate (7.6% average during 1988-1991) was also achieved; but it was not sustainable for obvious reasons. The gulf war and two years of severe droughts further aided to the economic woes.

The multitude of crisis pushed the policy makers to adopt a pro market approach. The Congress Supported minority government of Chandrashekhar sought IMF help and committed to a radical reform in fiscal policy and industrial policy. A roadmap was prepared for disinvestment of PSEs, fiscal reforms and implementation of NIP. However the government fell days before the finance minister Yashwant Sinha could present, what could have been the first dream budget of Independent India.

Impact of reforms

There is little argument over the fact that the economic and fiscal reforms initiated in 1991, India were inevitable. These reforms did help in bringing the Indian economy back from the brink of disaster; even though the adequacy and efficiency of reforms has remained a matter of intense debate ever since.

Three decades of reforms have resulted in many structural changes in Indian economy. The contribution of agriculture has reduced to about one sixth, while services now contribute more than half of the GDP. The structure of foreign trade has also changed in favor of manufactured goods and services. The balance of payment has remained robust. We have faced three global crises (2000, 2008, and 2020) without an iota of problem.

Financial markets have remained an example to the world. India has perhaps been the only major global financial market that neither shut down nor imposed any trade restrictions during 2000 and 2008 market crisis.

Positives

In my view, the 1991 reforms made three most important contributions to the Indian economy:

1.    The process of reform dismantled the pseudo socialist mindset of the policy makers; unleashing the private enterprise which had remained constricted since independence. Consequently, the minority socialist government of United Front in 1996-1998 presented the second dream budget. Another minority government supported by socialists (NDA 1998-2004) divested numerous government monopolies like coal, ports, mobile telecom, roads, power, airports, etc. without much trouble. The response to global sanctions post 19998 nuclear test was not lower spending, but larger capex on building local capacities. The UPA-1 government supported by communists made a nuclear deal with USA and UPA-2 allowed foreign capital in retail trade. The final epithet of older policy regime was written by NDA-2 with dismantling of planning commission; permitting off the shelve banking licensing; and move to privatize two PSU Banks (NDA-3).

2.    Shifting of policy focus on increasing production & productivity rather than constricting consumption. This allowed the Indian businesses and consumers to globalize; aspire more and achieve more. We could become part of global alliances and treaties without much resistance. We could set up large scale capacities in automobile, pharmaceutical, textile, space technology, civil aviation, ITeS, and housing etc. Private enterprise could attract significant capital from global investors.

3.    The horizons of the entrepreneurs expanded materially. The post reform generation of entrepreneurs was not infected by the traditional constraints. The new generation could think about globally competitive scale. They were not constrained by traditional characteristics like complacency, frugality, austerity, contentment etc. Targtes were now being frequently expressed in “Billion dollars” terms rather thn millions. Dreams not only became larger but also started to get realized. Consequently, the Indian MNCs started to grow in diverse areas like metals, automobile, ITeS, pharmaceuticals, hospitality etc.

Not so positive

However, statistically speaking, the reforms have not been adequate in putting India firmly on the path to become a middle income economy.

On relative basis, the peer economies like China, South Korea, Thailand etc. have done better than India. Our share in global trade has only marginally increased to ~3%, while China more than tripled it share in global trade to over 17%.

 Not making national education & youth policy an integral part of reforms has perhaps been a grave mistake. The growth in India has definitely failed in ensuring adequate employment generation. Despite significant reduction in agriculture’s share in national income, the percentage of population dependent on farm sector continues to remain in excess of 60%. We have miserably failed in exploiting the demographic dividend.

Though, the financial markets developed a global scale infrastructure, we have not been able to implement a robust system for early detection of frauds and scams. Consequently, the investors continue to lose significant amount of money due to frequent scams and frauds in banking system and financial markets.

Many recent steps taken by the government indicate that the policy makers are full cognizant of the inadequacies of Indian economy. The new education policy, schemes and incentives to promote local manufacturing and exports, farm sector reforms, etc. are important steps that shall help in overcoming these inadequacies in the decade of 2020s.