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25 years of reforms: Where we are now

It is evident that the economic growth rates are transformed; not only was India’s growth in this quarter-century substantially higher than in the past, it was also less volatile than in the high-growth period of the 1980s, when it was hovering at an average of around 6%. Photo: PTIPremium
It is evident that the economic growth rates are transformed; not only was India’s growth in this quarter-century substantially higher than in the past, it was also less volatile than in the high-growth period of the 1980s, when it was hovering at an average of around 6%. Photo: PTI

A quarter of a century after India embarked on a journey to unshackle its economy, there is visible change

New Delhi: Manmohan Singh, the then minister of finance, ended his budget speech of 1991–1992 with a quote from French novelist Victor Hugo: “No power on earth can stop an idea whose time has come." He then went on to conclude with the declaration: “Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome."

Stirring words, indeed. Apt too, because this speech set the stage for the cleanest declared break from the past that India has seen on the economic front—both in years prior and since. Importantly, while the 1991 reforms were on a scale not seen before, they were in many ways a continuation of the “liberalization by stealth" reforms initiated in the 1980s. Piecemeal and limited as they were, these 1980s reforms were neither marginal nor inconsequential, as noted by economist Arvind Panagariya.

It’s difficult to do justice in prose in describing the protectionist regime, or “licence raj", that existed in India for four decades until 1991. No doubt that regime was designed partly by a well-founded (at that time) belief in the benefits of a planned economy and partly by the still-fresh colonialization experience that reinforced the merits of self-reliance.

Although this policy resulted in a number of important institutions and increased domestic capacity and capabilities, its failure was reflected in the much maligned Hindu rate of growth (annual per capita income growth of <1.5%).

Additionally, licence raj had the unintended consequence of giving birth to a vast and unending bureaucracy, significant public expenditure and the development of a few large corporations that would dominate the private sector. Ironically, a foreign exchange crisis in the 1950s helped intensify the licence raj, and a similar crisis brought an end to the policy in 1991.

The external shock of 1991 set the stage for a fundamental mindset shift. For example, the government no longer selectively removed restrictions and rules, though they were only selectively applied. The government also did away with licence raj, ended many public monopolies, and opened several sectors to automatic approval of foreign direct investment. It was an undeniable paradigm shift, and one that changed India dramatically.

Singh identified the broad goals of this transformation: to increase the productivity of investment of Indian industries, to improve the performance of the public sector in order to gain a competitive edge in a fast changing global economy, and to achieve greater social equity.

Twenty-five years hence, it is evident that the economic growth rates are transformed; not only was India’s growth in this quarter-century substantially higher than in the past, it was also less volatile than in the high-growth period of the 1980s, when it was hovering at an average of around 6%.

As a result, India has taken its place on the global economic stage—both as a key market for most multinational corporations and as a global provider of services.

The reforms spurred a new age of entrepreneurship, making India the fourth largest country and one of the fastest growing computer and digital start-up hubs in the world.

Clearly, not all of Singh’s goals have been met: Income inequality has grown, and the ratio between the top and the bottom wage-earners has doubled in 20 years. Conglomerates created during the license raj still dominate many sectors. India is No. 130 in the global Ease of Doing Business rankings. And industrial India is plagued by a lack of skilled, educated workers.

Additionally, some sectors—such as broadcasting, telecom, retail, and information technology—have leapfrogged in their development cycle, while others such as agriculture, roadways, manufacturing and electricity have yet to change much.

Structurally too, despite consensus at the central level—which has transcended governments led by different parties and coalitions—reforms have been deployed in fits and starts and not as a continuous process. And the reform mindset has taken hold in states to different degrees, as evidenced by variable progress on state-level fiscal and social indicators (education and health).

The process of reform has been far from smooth; in fact, it has been quite rocky. There have been many critics—and not just of the pace or process but also of the path itself.

Undoubtedly, these changes have come with costs that include ecological degradation, strains in social fabric, individual distortions emanating from conspicuous disparities, and others.

Many criticisms, exaggerated or otherwise, are based on substantive issues. Given the path of economics and polity globally over this period, though, the counterfactual is difficult to envision, much less argue or defend.

As we look forward to the next 25 years, realizing India’s full potential will task all of us with simultaneously making progress on further economic reforms and addressing the critiques. In essence, the reforms initiated in 1991 have transformed much of the country. While any short note on this past quarter-century can only come up with a mixed verdict, the view ahead is best summed up by a few lines of Russian writer Victor Serge’s poem: “The ardent voyage continues, the course is set on hope."

Nikhil Prasad Ojha is a partner with Bain & Co. and the co-editor of the Mint-Bain series on 25 Years of Reforms. Sri Rajan is the Chairman of Bain & Co. India.

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