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If there is one phrase that suitably captures the impact of three decades of economic liberalization after 24 July 1991, it is the explosion of choice in India.

Before 1991, cars could be bought from just three companies. Now there is a choice of more than two dozen. The same is true of two-wheelers. Well into the 1990s, one could withdraw money from a bank only for a few hours during the day. Now one can walk over to an ATM at any point of time. The waiting time for a landline phone connection back then could be as long as a decade. One can now get a mobile phone connection within a day. Television entertainment options were limited at best to a couple of hours every evening. Now over-the-top (OTT) platforms and cable TV are available 24/7 with a vast variety of viewing fare.

Back in the 1980s, most educated Indians wanted to settle down with a good government job, given the lack of private-sector jobs. On paper, there are more educational and career options available to youth now than there were in India three decades ago.

This is a very small sample of things that have changed the lives of many Indians since the economic liberalization of 1991. And this happened because the government of the day decided to open the Indian economy and let the private sector do things that it wasn’t allowed to do earlier.

Up until then, bureaucrats decided what a private company could do and what it couldn’t. They decided how much it could produce and even the amount of money it could raise from capital markets.

If that wasn’t enough, the government was in the business of everything, not just banks, telecom, power, steel, oil and coal. It also made bread, photo films, scooters, soft drinks and even condoms, stretching our already-limited state capacity.

Some of it was corrected by the economic liberalization of 1991, which led to private and international companies being allowed into many sectors, such as telecom, banking, aviation, automobiles and investing, among others. This led to wider choice and greater economic activity, which in turn led to faster economic growth.

In the period of four decades up to fiscal year 1990-91, the Indian economy grew by an average 4.1% annually. Since then, it has grown by 5.8% per year, with a contraction in 2020-21 due to the covid pandemic. For the 30-year period ended 31 March 2020, India’s economic growth was 6.2% per year.

Higher growth has not been seen across all parts of the economy. Agriculture grew by 3.1% per year during this period. The non-agricultural part of the economy for the 30-year period ended 31 March 2020 grew by 7.1% per year.

Clearly, some of this growth has helped people move out of agriculture. Nonetheless, employment in agriculture as of 2019 still formed 42.6% of overall employment, against 63.3% in 1991. For a sector that contributes just around 13-15% of India’s economic output, the number of people it employs remains very high and not enough growth has taken place to take care of this.

Interestingly, India’s economic growth started going wrong between 2005 and 2008, and then things only worsened between 2008 and 2011, in the aftermath of the global financial crisis. The country became an excellent example of economist Hyman Minsky’s Financial Instability Hypothesis.

The basic premise of Minsky’s hypothesis is that when times are good, banks are willing to give riskier loans than they usually would, while businessmen want to take on more risk and expand their enterprises, and are thus happy to borrow more. This leads to increased investment in the economy and is supposed to deliver higher profits.

But that wasn’t how things worked out. Many projects for which businessmen had borrowed didn’t take off. In some cases, the loan money was siphoned off. This led to defaults.

The bad loans of banks as of 31 March 2021 stood at 8.35 trillion. This, after banks had already written-off bad loans of more than 10 trillion between 2013 and 2021. Not surprisingly, banks are reluctant to lend to corporations and many of them are not in any position to take on fresh loans. Of course, demonetization in 2016 and a messed-up implementation of the goods and services tax soon after that did not help the country’s cause of economic growth.

Thus, the ‘animal spirits’ needed to spur economic activity have gone missing. This can be seen in the fact that the labour participation rate in the Indian economy has fallen from around 48% in September 2016 to less than 40% in June 2021. And this isn’t just because of the pandemic.

The labour participation rate of a country is the size of its labour force as a proportion of its population above 15 years of age. According to the Centre for Monitoring Indian Economy, the labour force comprises all persons who are 15 years old or more and are employed, or are unemployed and actively looking for a job. When the labour participation rate falls dramatically, it basically means that many people have dropped out of the labour force simply because they can’t find a job.

If this situation has to be fixed and the country must cash in on its demographic dividend, the economy would need to grow by 6-7% annually over the next three decades. How will this happen? Your guess is as good as mine.

Vivek Kaul is the author of ‘Bad Money’.

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