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Home / Opinion / Views /  Montek Ahluwalia: We should be thankful for the economy’s liberation

This piece is part of a Mint Debate on India's economic liberalization. Read the counterview by Jayati Ghose here

The 30th anniversary of the 1991 reforms has triggered a flood of comments and recollections. It is a well deserved commemoration of the dismantling of one of the most restrictive economic systems adopted by any developing country, and one that is commonly regarded as the main reason why India’s growth was disappointingly low.

Although supporters typically laud the reforms as ‘liberalization’, critics denigrate them as ‘neoliberal’. This pejorative has gained currency in the aftermath of the financial crisis of 2008 and the ongoing pandemic, both of which have produced a swing in favour of a greater role for government. This is understandable in an environment in which income levels of the poor have fallen in both developed and developing countries, and the private sector, swamped by uncertainty, is unwilling to invest. Loose monetary policy, instead of stimulating the real economy, has only inflated asset prices. As a result, wealth inequality has increased precisely at a time when poorer sections are being hurt.

These are genuine problems which should make us think about how we proceed from here. But they do not justify a rethink on what was done in 1991.

Anyone 50 years old today was only 20 when the reforms began, and can be assumed to have little personal knowledge of the business environment in 1991. Since this group makes up 78% of the country’s adult population, a brief recap of the system that had to be reformed will illustrate why change was needed.

The so-called commanding heights of the economy were reserved for the public sector, and the private sector could not invest in them even if it wanted. In all other sectors, private companies could make new investments, but only if they got industrial licences from the government. These were given on a very non-transparent basis and were especially difficult for large companies, lest it increase economic dominance. I recall Rahul Bajaj amusing audiences by saying that his customers had to wait for several years before they could get a Bajaj scooter because he could not expand output beyond the limit allowed by the licence without risking criminal prosecution!

India’s trade policy was also geared to eliminate incentives for efficiency. Imports of consumer goods were completely banned, effectively insulating producers from foreign competition. Imports of capital and intermediate goods needed for production were allowed, but only with import licences. These were given by the Controller General of Imports and Exports after evaluating (a) whether these imports were essential and (b) if no indigenous alternative was available. Such decisions were taken by a bunch of officials who had no practical knowledge of business conditions.

The Left was particularly opposed to the reforms and the CPM government of West Bengal circulated an alternative adjustment programme. It criticized the 1991 package of devaluation cum import liberalization as succumbing to Western pressure to open India’s markets, risking a worsening of the balance of payments. It argued that external deficits were best addressed by careful administrative scrutiny to ensure that only imports that were really needed would be allowed. It reflected a touching faith in the ability of bureaucrats to reach the right decisions!

In my book Backstage, I recount the experience of Maruti Udyog, then a public-sector company, in getting permission in the 1980s to import Japanese machinery to machine the engine block for its Maruti 800. The import licence for it was denied because the state-owned HMT claimed it was supplying similar machines for scooter makers and could supply Maruti with what it needed. But Maruti persisted, arguing that domestic machines would not assure it the right quality.

Since Maruti was also state-owned, and it was known that Prime Minister Indira Gandhi took special interest in the project, the matter had to be decided at the level of the industry minister. Maruti arranged to have the engine block of its 800 model and a scooter brought into the minister’s office to show him the difference in sophistication of the two products. Maruti got the import licence it wanted, but if it hadn’t been for its special position, the decision may well have gone the other way.

I could go on, but the picture is clear. We owe a great deal to the duo of P.V. Narasimha Rao and Manmohan Singh for liberating the economy from the dead hand of bureaucratic control. It was not done in a big bang, but gradually, and gradualism also meant that its benefits flowed in over a period of time. However, there is little doubt that benefits did flow.

The major objective of the reforms was to lift the economy’s growth rate, and this was achieved. In the 23 years afterwards, up to the end of the United Progressive Alliance (UPA) period, India’s economic growth averaged about 7%. In the 23 years before reforms, it was only 4.2%.

And growth was not the only objective. As growth accelerated, the UPA adopted a strategy of ‘inclusive growth’, to ensure that the benefits of growth also reached the poor. The strategy included accelerating growth in agriculture and supporting incomes of rural wage earners though rural employment guarantee programmes.

The result was that agricultural growth did accelerate, and there was also greater poverty reduction. Between 2004 and 2011, the last year for which data is available, about 140 million people were pulled above the poverty line.

The covid pandemic has, of course, changed everything, with a sharp increase in poverty predicted by many studies. But that is a new phenomenon we have to manage separately.

Montek Singh Ahluwalia is former deputy chairman, Planning Commission, and currently distinguished fellow at the Centre for Social and Economic Policy.

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