ECONOMIC REFORMS: IMPACTS AND CHALLENGES

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1 88 Integral Liberation Vol. 10, No. 3 September 2006 ECONOMIC REFORMS: IMPACTS AND CHALLENGES John M. Itty The three different sets of economic policies followed in India since independence are usually known as pro-socialist ( ), proindigenous business ( ) and pro-market (1991 onwards). Economists and planners who hail the pro-market policies criticise the previous ones and make tall claims about the performance of the economy after They dub those who disagree as orthodox leftists who oppose industrial development. Under this scenario, this article briefly examines the focus and results of the three different policies, their impacts on the health of the economy and the life of the people, and today s socialist challenge. The Three Different Policy Regimes The thrust of the economic policy of India from 1950 to 1980 was economic growth with social justice. This objective was pursued through planned development under the leadership of the state, with space for the private sector and direct expenditure by the government in the social sector. To bring about industrial development in the stagnant economy left by the colonisers, the public sector undertook the responsibility of providing not only social and economic infrastructure facilities, but also the supply of capital and intermediary goods at a low price. Private sector companies were encouraged to grow in the consumer goods sector. The government also created public sector financial institutions. Further, private companies were protected from foreign competition to help the growth of a strong Indian capitalist class. The strategy envisaged was import substitution and less reliance on foreign countries. The government however introduced controls and regulations on the private companies to prevent monopoly practices with a view to protect the interests of consumers and workers. Formerly Professor at the Kerala Institute of Local Administration, John M. Itty is now Hon. Fellow, School of People s Economics, Mavelikara. <thuralayil@sancharnet.in>; <jmitty@rediffmail.com>. This is popularly known as the Nehruvian policy with a socialist slant. This policy produced the following positive results: 1) breakthrough in industrial development, the country becoming the 12 th biggest industrial power in the world; 2) self-sufficiency in the production of almost all consumer goods, all transport equipments except passenger aircrafts and most of the capital and intermediary goods; 3) minimum dependence on foreign capital and technology; and 4) increase in the production of foodgrains from around 50 mn tons to over 150 mn tons by However, these policies faced the following deficiencies: 1) greater financial burden on the government on account of development and social sector expenses and the loss in public sector companies; 2) average annual growth rate of only around 3.5%, often referred to as the Hindu Growth Rate; 3) capture of monopoly power by the capitalists despite the controls and regulations; 4) increase of poverty and inequality, and failure to ensure social justice; and 5) worsening of the balance of payment. These indices seem to indicate the overall failure of the economic policies, but there are different views about the results. According to Deepak Nayyar (2006) for example, the pace of the economic growth then constituted an impressive and radical departure from the near stagnation of the colonial past. However, by the end of the 1970s, the voices ignoring the gains and exaggerating the failures got the upper hand. Whether the general disapproval of the Nehruvian policy was based on a correct perception of the interests of the nation or whether it concealed the interests of various groups like the monopoly capitalists, rich farmers, bureaucracy and organised labour is a matter of debate. Whatever may be the reason, there was loud talk about the failure of the Nehruvian policy. This situation prompted Indira Gandhi to introduce basic changes. The 1980 new policy made a radical shift to the right. It focused on growth first and put social justice in the background. Companies were liberated from the regulative regime with the rationale that this would enhance the efficiency of the private sector and help the economy to achieve higher growth. The new policy diluted the provisions for licensing and the Monopolies and Restrictive Trade Practices Act,

2 Economic Reforms: Impacts and Challenges 89 and provided freedom for the entry and expansion of private companies. This policy is called the pro-indigenous business policy. It was also a partial shift towards the East Asian Model of Development. By the end of the 1980s, there appeared an orchestrated demand for another radical change in economic policy. The apparent reason was the foreign exchange crisis the country faced in Many however believe that this situation was created by external manipulations. In fact, it was the collapse of the Soviet Union and the emergence of a uni-polar world order that prompted the new thinking in favour of an economic policy in tune with the changes in international relations. The proactive role of international lending agencies like the World Bank and the IMF provided further encouragement for this change. The thrust of the 1991 new policy is the opening of the economy to the global market and the withdrawal of protection to Indian companies. It is argued that this would enhance the competitive efficiency of Indian companies and the overall economy, leading to higher economic growth. Accordingly, delicensing and deregulation of companies, equal treatment of Indian and foreign firms, cut in import duties, convertibility of currency, privatisation of the public sector, changes in labour legislations and other such measures are being implemented in a phased manner. The subservience of national laws to the WTO is a main feature of the policy, which is called promarket and neo-liberal. Questioning the Claims of the Neo-Liberal Policy While introducing the new policy in 1991, our planners promised a breakthrough in the rate of growth and industrialisation. They assumed that the neglect of the agricultural and social service sectors would be taken care of by higher growth and industrialisation. From the mid-1990s, the ruling class with the help of the media and a section of the academia propagated the success of the new policy with the claim, India is shining. Within a few years the new policy has created a new middle class with more wealth, and an unprecedented boost in the consumer market; as a result, visible changes are seen in the lifestyle of the middle class, even in villages. This makes ordinary people feel that the new policy is a success. This belief is supported by continuous govt. claims and the euphoria created by the media about the higher growth rate and steep rise in the sensex. 90 Integral Liberation Vol. 10, No. 3 September 2006 The studies of many researchers however give a different picture about the performance of the economy under the neo-liberal regime. Rodrik and Subramanian (2004), Virmani (2004) and Panagariya (2004) indeed hold that there is nothing unusual about the economic growth after 1991, for comparable growth rates were witnessed during the 1980s. The findings of Deepak Nayyar (2006) are still more revealing. In the 20 th century as a whole, the turning point in economic growth was circa 1951 ; since independence, it was circa The turning point in the early 1950s was more significant than the structural break in the early 1980s. In any case, 1991 was not a watershed. Thus, it is not possible to attribute the turnaround in India s growth performance to economic liberalisation. During the period, our country s growth was respectable, and no worse than that of most countries. Yet, it was simply not enough in relation to India s needs. During the period, our growth was impressive and much better than in most countries. But even this was not enough. The moral of the story is clear. Caricature perceptions about the economic growth in India since independence are not correct... From 1950 to 1980, India was not the lumbering elephant that it is often made out to be... From 1980 to 2005, India was not quite the running tiger that some believe it has become. Comparing the GDP growth rates for all the years from to , Baldev Raj Nayar concludes that the economic liberalisation and the higher growth rate began in rather than in 1991 or 1980, as is popularly believed. Table 1 also shows that there was no dramatic change in the average growth rate between the and the periods. (The years and confuse these trends because of their very low growth rates.) Therefore, the much trumpeted success of the 1991 economic policy is not supported by facts. Table 1 GDP Growth Rates Selected Periods Growth Rates (%) to to to to to to to to Source: Nayar (2006).

3 Economic Reforms: Impacts and Challenges 91 Deepak Nayyar (2006) thus understands today s challenge: The real failure, throughout the second half of the 20 th century, was India s inability to transform its growth into (genuine) development, which would provide all its citizens with a decent life. Economic growth and distributional outcomes are inextricably linked with each other. This link is provided by employment creation. Jobless growth is not sustainable either in economics or in politics. The creation of employment would only reinforce economic growth. On his part, Kohli (2006) argues that the recent acceleration of economic growth was more a function of the pro-business tilt than of the post-1991 economic liberalisation. Babu s study (2005) concludes that the annual growth rate climbed to 5% from the 1980s and stood at 5.6% in the last two decades of the century. All these studies disprove the claim that the higher growth is the result of the 1991 neo-liberal policy. Rapid industrial development was the other important promise of the neo-liberal policy. M. Babu (2005) shows that, compared to , the growth rate of both the industrial sector and its sectoral contribution declined in (Table 2). The Table also reveals some possible constraints for future growth. The fact that 60% of the overall growth is accounted for by the tertiary sector points to the lopsided nature of the growth in the 1990s. It is evident that the industrial sector has failed to emerge as the growth driver in the era of the neo-liberal economic policy. Table 2 GDP Growth and Sectoral Contribution (%) Sector Growth Rates Share in GDP Sectoral Contribution to growth I II I II I II Primary Secondary Tertiary GDP Source: Babu M (2005). Note: I refers to the period to , and II to the period to Integral Liberation Vol. 10, No. 3 September 2006 Table 3 Workforce & Employment Growth (%) Workforce Employment Growth Rates Sector I II III Primary Secondary Tertiary All Sectors Source: Babu M (2005). Note: I refers to , II to ; and III to Further, the basic nature of the economy has not undergone any radical change since the majority of the workforce still remains in the primary sector (Table 3). While 60% of the growth stems from the tertiary sector, 60% of the workforce still depends on the primary sector for its livelihood. Whatever growth the economy achieved is jobless growth, for the growth rate of employment instead of increasing has declined to 1.03% since 1993 (Table 3). The growth of the tertiary sector failed to generate additional employment. The dependence of industry on the agricultural and service sectors, in terms of demand linkages, has increased more than 3 times in the 1990s, compared to the 1970s and 1980s. A large workforce contributing a small share of the GDP implies that the productivity per worker is low. In spite of the promised higher productivity through competitive efficiency, there is no improvement in the output per worker. The above factors indicate that there is no improvement in the industrial sector. Our current growth rate is not therefore the result of the 1991 policy, but the compound result of the past policies. At least partly, the higher growth rate since the mid-1970s is due to the earlier pro-socialist policy, and the post-1991 lack of improvement in industrial growth comes from the withdrawal of government investments. The recent growth is based on an unhealthy and fragile foundation that neglects agriculture and relies too much on the service sector. Although the widening of income inequalities has been evident from the 1960s, this trend became more intense during the post period. According to a study by Business Standard, the number

4 Economic Reforms: Impacts and Challenges 93 of billionaires in India increased from 178 in to 311 in Whereas India took about 55 years to produce 178 billionaires, she added 133 in a single year! The collective net worth of these 311 individuals was Rs 3.64 trillion in , i.e. 6.9% of the GDP at current prices! In contrast, according to a Situation Assessment Survey of Farmers conducted by the NSSO, the average monthly per capita expenditure of farm households was only Rs 503 in 2003 a misleading average for the data include the big zamindars too! Impact on the Social sector The promoters of the neo-liberal policy advocate cuts in government expenditure in the social sector to reduce the fiscal deficit. They argue that the social sector will improve as a result of the general prosperity provided by higher growth. But the social infrastructure is as critical for human resource development as the physical one (IGIDR 2002). According to Dreze and Sen (2002), the major reason for the success of East Asian countries and China is their attention to the social sector development through their efforts to improve education, health care and land reforms. The pitiful condition and worsening of the social sector development in India is a casualty of neo-liberal policies. The 2004 UNDP Report ranked India 127 th out of 177 countries in this respect. India s position is lower than that of countries like Indonesia, Malaysia, China and Sri Lanka. Table 4 gives three key indicators of the social sector development in some selected countries. Once can see that India s position is much lower than that of countries Table 4 Indicators of Social Sector Development in Selected Countries Country Adult literacy Life Expectancy Infant Mortality Rate % at Birth (Years) per 1000 live births India China South Korea Thailand Philippines Brazil Japan Source: Compiled from three Tables given by Sekhar (2005). 94 Integral Liberation Vol. 10, No. 3 September 2006 like Thailand, Philippines and Brazil. Sekhar (2005) holds that in India, there is excess activity by the government in some economic spheres, but also insufficient and ineffective intervention in many other fields like land reforms, education, health care, social security and promotion of social justice. The Suicide Mortality Rate (SMR) is the number of suicide deaths per 100,000 population (age group of 5 + years). The growing SMR in India between 1975 and 2001 may be attributed to a considerable extent to failures in both the economic and social sectors. Table 5 gives some basic data compiled by Mishra (2006). While the SMR declined during the period, it sharply increased in the next two decades. The shift in economic policies from a socialist slant to probusiness and pro-market reforms has probably influenced this steep and consistent rise in the SRM. The Socialist Challenge Ahead Table 5 Suicide Mortality Rates (SMR) in India (5 + years) (per one lakh population) Year Males Females Source: Compiled from 2 Tables given by Mishra (2006). The growing exclusion and marginalisation of various sections of the people leading to the increasing rate of suicide is an index of deprivation not of development. Dreze and Sen (2002) give the examples of South Korea, Taiwan and Thailand that follow marketoriented capitalism; Cuba, Vietnam and pre-reform China that pursued a socialist path; and Costa Rica, Jamaica and Sri Lanka that adopted different mixed systems. All these countries left India behind. According to these writers, the reason for their success is the primacy they have given to the social sector development, thus expanding the social opportunities by providing education, health care, land reforms, gender equality, environmental care, etc. These opportunities helped to generate and sustain higher economic growth. According to Dreze and Sen, the lack of attention by the planners in India to promote social development is an obstacle for higher growth today and tomorrow.

5 Economic Reforms: Impacts and Challenges 95 The major lesson India can draw from the economic reforms since the 1980s is that abandoning the policy of the mixed economy with socialist objectives not only damaged the social sector but also caused lopsided growth. The East European countries that abandoned socialism faced the same problem within a short period. The growing opposition of the people to the WTO across the world is another evidence of the deficiency of the neo-liberal economic policy. As a result, faith in the omnipotence of neo-liberalism is on the wane and there is a felt need to seek alternatives. As socialism is the only alternative to capitalism/individualism, no other philosophy can serve as the basis in the search for alternatives. What brought about the collapse of socialism in East European countries was not its principles and objectives, but its defective practice. Attempts to re-envision the principles and practice of socialist programmes, based on the historical and cultural specificities and the differences in the resource endowments of each country and region, are therefore needed. This is the challenge before pro-people individuals, groups and movements around the world. In India, public action must consequently pressure the government to make the necessary changes in the existing economic policy. REFERENCES 1. Babu M, Suresh (2005): India s Recent Economic Growth, Economic and Political Weekly (EPW), July Dreze, Jean and Sen, Amartya (2002): India Development and Participation, Oxford University Press, New Delhi. 3. IGIDR (Indira Gandhi Institute of Development Research) (2002): India Development Report, ibid. 4. Kohli, Atul (2006): Politics of Economic Growth in India, , EPW, April Mishra, Srijit (2006): Suicide Mortality Rates across States of India, , EPW, April Nayar, Baldev Raj (2006): When Did the Hindu Rate of Growth End?, EPW, May Nayyar, Deepak (2006): Economic Growth in Independent India, EPW, April Panagariya, Aravind (2004): Growth and Reforms..., EPW, June Rodrik, Dani and Subramanian, Arvind (2004): From Hindu Growth to Productivity Surge, IMF Working Paper WP/04/77, Washington DC. 10. Sekhar, C S C (2005): Economic Growth, Social Development and Interest Groups, EPW, Dec Virmani, Arvind (2004): India s Economic Growth: From Socialist to Bharatiya Rate, Working Paper No. 122, Indian Council for Research on International Economic Relations, New Delhi.

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