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Going past the 1991 reforms

A book of essays edited by former RBI deputy governor Rakesh Mohan explains how the 1991 reforms workedand why the scope needs to be widened now

Manmohan Singh played tough as finance minister in the Narasimha Rao government. Photo: Hindustan Times
Manmohan Singh played tough as finance minister in the Narasimha Rao government. Photo: Hindustan Times

“There is no time to lose.... Any further postponement of macroeconomic adjustment, long overdue, would mean that the balance of payments situation, now exceedingly difficult, would become unmanageable and inflation, already high, would exceed limits of tolerance." This is how Manmohan Singh described the prevailing economic situation in his landmark budget speech of July 1991, which marked a paradigm shift in India’s economic management. The economy has transformed in profound ways since the beginning of the reform process.

The completion of 25 years of this process in 2016 has provided an opportunity to assess progress and explore possibilities for the future. While several articles and books have been published on this subject over the past year, India Transformed: 25 Years Of Economic Reforms, edited by Rakesh Mohan, a former deputy governor of the Reserve Bank of India, goes beyond the macroeconomic aspect. The book also contains essays on issues such as foreign policy and security, governance and human development.

Mohan, a key architect of economic reforms who has also worked to take the process forward in different capacities, has brought together policymakers who were involved in implementing the reforms, business leaders who benefited, and analysts who have observed the process. India Transformed has essays by Montek Singh Ahluwalia, C. Rangarajan, Y.V. Reddy, Mukesh Ambani, Sunil Bharti Mittal, N.R. Narayana Murthy, Omkar Goswami, Ashok Gulati and T.N. Ninan, among others.

India Transformed—25 Years Of Economic Reforms: Edited by Rakesh Mohan,Penguin Random House, 670 pages, Rs999.
India Transformed—25 Years Of Economic Reforms: Edited by Rakesh Mohan,Penguin Random House, 670 pages, Rs999.

It is often argued that the 1991 economic reforms were carried out under pressure from agencies like the International Monetary Fund and the World Bank. Mohan’s introductory chapter and Ahluwalia’s essay address this issue in detail. It was clear to many even in the 1970s and 1980s that the planning process had failed to adapt to changing circumstances. This is also evident from the fact that in the early 1980s, the then prime minister, Indira Gandhi, appointed several committees to look at reforms and deregulation. A number of officials in government departments were also working on structural reforms—in the ministry of industry, for instance, Mohan was working on industrial policy in the later part of the decade. A consensus was evolving that something needed to done. Progress, however, was slow, largely owing to political reasons. Political instability in the late 1980s delayed the process further.

India inherited the command and control way of functioning from laws implemented during World War II. But instead of getting rid of colonial laws, the government imposed more controls. By 1990, Mohan notes, 836 items were reserved for small-scale industries, including almost all consumer items, such as clothing and shoes, which promoted manufacturing in East Asia. Consequently, Indian manufacturing became uncompetitive. Economic growth did pick up in the 1980s, but it was largely pushed by borrowings, including from external sources.

As a result, fiscal and external imbalance pushed India to the brink of a default. And as Singh said, there was no time to lose. But even though some in the new Congress government led by P.V. Narasimha Rao didn’t want to waste a crisis , it was not easy to convince the others. As Jairam Ramesh elaborates in his book, To The Brink And Back: India’s 1991 Story (2015), many ministers objected to the style and substance of the proposed industrial policy reforms. Fortunately, these were passed after a long preamble was added.

Ahluwalia argues that there was internal commitment to reforms, and in some areas such as trade liberalization, they went beyond what the multilateral agencies were recommending. In this context, one incident noted by Mohan is worth mentioning. Soon after taking over as finance minister, Singh told a meeting of secretaries: “If any of you have any difficulty with the proposed reform programme, we can find other things for you to do." That shows the kind of political backing he had. It also makes one wonder what happened to this firmness when Singh became prime minister. The answer, perhaps, again lies in political freedom.

India has come a long way, but a lot more needs to be done. A chapter by Ashok Gulati and Shweta Saini, for example, shows how agriculture, which was not on the reforms agenda, has lagged behind. Similarly, the chapter on education by Devesh Kapur and the one on healthcare by Nachiket Mor and others highlights what India has not been able to achieve in terms of outcomes.

India Transformed is a comprehensive guide for anyone who wants to understand the context, content and progress of the reform process. The key underlying message is that the process is working. India now needs to widen the scope of reforms and move forward at an accelerated pace.

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