25 years of economic reforms

The decades prior to 1991 may have been years of slow growth, but it is equally true that state-led growth did create capacities

Himanshu
Updated27 Jul 2016, 05:47 AM IST
Photo: Pradeep Gaur/Mint<br />
Photo: Pradeep Gaur/Mint

This week marks the 25th anniversary of the historic budget speech by Manmohan Singh, finance minister in 1991, which heralded economic reforms. While many would argue that the process of economic reforms and opening up of the economy had started earlier, in the 1980s, the fact remains that the events that unfolded after 1991 did result in a clear shift in the ideology behind Indian economic policy, from a dirigisme regime to a market-friendly regime. It is then appropriate to evaluate the successes and failures of the past 25 years, a period which has seen unprecedented growth as well as poverty reduction.

While there is a consensus that the economy has done better after 1991 than in the earlier period according to standard metrics of economic performance, there are concerns about the performance of the economy on various social indicators. These appear to be worse, given the high growth rate that the economy has achieved in the past decade.

But the real issues are not just the successes and failures of reforms but also the sustainability of the growth path that the economy has followed since 1991. The recent slowdown in economic growth may just be temporary but there are serious concerns that raise questions about the sustainability of the reforms as well as the future of economic reforms.

First among these is the issue of inequality, which by all measures has continued to rise since 1991. The rise in economic inequality has been consistent and has been seen on measures of consumption expenditure as well as on incomes. Some of the inequality may not be harmful if it is seen as just reward for skills or entrepreneurship.

Unfortunately, on both these counts concerns remain. While wages of highly skilled employees have shown a secular upward trend, a large majority of workers, particularly in the unorganized sector, haven’t seen wages rise commensurately in real terms. Along with a trend towards casualization and contractualization, there has been a worsening of employment quality and lack of social security even for those employed in the organized sector.

But a far more serious issue is the rise of crony capitalism. If the purpose of economic reforms was to get rid of the licence-permit raj, the reforms have failed to create a level playing field with crony capitalism, not just obvious in the case of natural resources such as petroleum, coal, iron and spectrum, but also among industries which have seen the opening up of markets and deregulation. The fact that the banking and finance sector, which was among the first to be opened up, is struggling with non-performing assets is a clear reminder of the perils of unregulated liberalization and crony capitalism.

While economic inequality has certainly been a hindrance for the majority of the poor to benefit from the fruits of economic reforms, the failure of the government to deal with structural inequality has also created a class of marginalized and vulnerable people.

These structural inequalities embedded in class, caste, gender and religion have not only grown after reforms, attempts at privatizing public services such as health and education have also led to further marginalization of the disadvantaged groups from the mainstream. The low improvement in social indicators has also been accompanied by growing distance between the Scheduled Castes/Scheduled Tribes/minorities versus the rest. The net result of the accentuation of the trend of rising inequality has been social unrest across social categories and across states.

However, the biggest challenge for the economy ever since the economic reforms were initiated has been the lack of employment creation. The fact that the workforce structure hasn’t seen much change from 1991 is a clear reflection of the lopsided nature of economic growth.

The agricultural sector continues to remain the largest employer with the absolute number of workers declining only recently. But the non-farm sector, which has been the engine of growth, has failed to absorb either those displaced by the agricultural sector or the new entrants to the labour force. These new entrants to the labour force are not just better educated and skilled than their counterparts in agriculture, but also more aspirational.

The lack of employment opportunities for a large majority is now reflected in social unrest such as the clamour for reservation by certain groups such as the Patidars, Marathas and the Jats. The deterioration of employment quality has also created a class of workers who are employed but remain vulnerable.

Twenty-five years since the reforms were initiated, it is not just an opportunity to evaluate what has happened in the past 25 years but also reassess the challenges of economic growth and poverty reduction in the next 25 years.

The decades prior to 1991 may have been years of slow growth, but it is equally true that state-led growth did create capacities which enabled the economic reforms to reap the benefits of liberalization. At a time when the economy is still vulnerable to rainfall variation despite decades of agricultural growth, the issue of economic revival is not just about opening up the economy and liberalizing the trade environment.

The fundamental issues of inequality, lack of social progress and inability of the economy to generate jobs require a strategic response if the process of reforms and growth has to continue. It is time for the next generation of reforms—those that deal with the structural bottlenecks to growth—rather than more of the same.

Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

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