There is a fairy tale version of India's economic reforms that has seized the popular imagination. It goes like this. The Indian economy was comatose until 1991. Then, a brave band led by Narasimha Rao (or Manmohan Singh,if you like) strode in and waved a magic wand called 'reforms'. Private entrepreneurs then stepped in where the state had dominated the economy. ZOOM.... the Indian economy took off, never to look back again.
That, as I said, is the popular perception. The academic viewpoint tends to be rather different. It would highlight three key facts:
1. The 'structural break' in India's economic growth, occcured, not in 1991, but in 1980, a full decade before 'reforms' were said to be have been ushered in.
2. Growth accelerated from 6% to 8% in 2003-04 just when people had begun to give up on 'reforms' and were wringing their hands in despair over the opportunities being squandered by the Left-supported UPA government.
3. The state sector and public sector enterprises are very much part of the turnaround story.
Start with the first point. Enough studies have documented the acceleration in growth rate in the eighties to around 6% from the 'Hindu' rate of 3.5% in the preceding decades. In the nineties, the growth rate did not change significantly.
What caused the acceleration in the eighties? Well, there was a definite pro-business orientation and a loosening of controls in the eighties itself- so certain policy initiatives had occurred in the eighties itself, whether you want to call these 'reforms' or not.
What we saw in the nineties was a continuation and extension of policies that had already been initiated in the eighties. While the overall economic growth remained at around 6%, the driver of growth in the nineties was not industry, which had been the primary target of 'reforms', but the services sector. The services sector is much larger than IT- it comprises things such as real estate, finance, tourism, etc, areas that were largely untouched by the nineties' 'reforms'. This is one big puzzle that needs to be cracked by those who believe that it was the nineties' 'reforms' ushered in more rapid growth.
The next big puzzle for the 'reforms' brigade is the performance since 2003-04. The 'reforms' brigade argued that the momentum created by the first round of reforms had been spent and that growth could be accelerated or even sustained only if the 'second generation' reforms were pushed through- labour market reforms, cuts in subsidies, privatisation, downsizing of government, greater FDI, etc.
The UPA government showed itself averse to these. But the rebound in growth in 2003-04, just before the UPA government took over, has been sustained since. How come? The big difference certainly is the increase in savings rate of 5.5 percentage points from 23.5% to 29% of GDP. Of this, nearly 4 percentage points is accounted for by the turnaround in public savings. Increases in savings made higher investment possible and this has caused growth to accelerate. This bears out point (3) above, namely, that the state sector has contributed towards higher growth.
An important aspect of India's growth story is the performance of the IT sector. This contributed to the improvement in the balance of payments in the initial years after reforms. Nobody can deny that the state contributed in a big way to the IT story-through the huge investments in technical education and also through tax breaks.
I believe that lower interest rates are the key element in the India story. There has been a huge surge in foreign inflows- whether through remittances, FII or FDI- and this has caused interest rates to decline. Lower interest rates have caused public savings to rise, they have made exports more competitive and they have fuelled a huge increase in consumption as the demand for retail credit exploded. The surge in foreign inflows, in turn, reflects growing overseas (including NRI) confidence in the Indian economy, confidence created by two decades of sustained growth, not just growth in the nineties.
Taken together, points (1) to (3) make it clear that the Indian growth story is not just about private entrepreneurship having come of age. The story is rather more complex than that and it embraces the state sector as well. So, it is simplistic to suggest that we can now get to 10% simply by rolling back the state even further.
Read my ET column on this subject.
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4 comments:
Dear Prof. Ram Mohan,
Your comments are very persuasive. Even if we post a 20% growth, the neoliberals will say it could have been 30% if only we had embraced reforms whole-heartedly.Their faith in reforms is almost religious in fervour, as Dr. Stiglitz points out.
It is now widely accepted that the state, and the public sector, are inefficient and corrupt beyond repair. In fact corruption and inefficiency are at least as pervading, if not more, in business. A government servant may pilfer at his level. But in the private sector the theft is often at the level of a business entity and hence of a greater magnitude. The public sector at least pays taxes honestly!
The news media focus exclusively on corruption, inefficiency, and waste in the government and the public sector. I don't remember reading single news story in my life about these fine qualities in, say, some failing Birla company, or Mumbai's defunct textile mills. One reason is that no public funds are directly involved. The other reason is that the press, and business press in particular, is worshipful towards wealth. E.g., interviews of business leaders are invariably hagiographic, no hard questions allowed about failed ventures.
Many public sector ventures are in fact run extremely well- the railways are a case in point. And the public sector has been a major factor in the Indian growth story so far.
Tumbaru, Very well said, I couldn't have put it better myself.There is a strong vested interest in propogating the myth that government is beyond redemption and that the private sector can do no wrong. This despite the fact that public sector enterprises and not just government entities such as the Railways are part of the turnaround story.
Incidentally, I have compared public and private sector performance at some length in my book Privatisation in India: Challenging economic orthodoxy (Routledge, 2005).
-TTR
Sir,
Irrespective of the liberalization in the 1980s India still remianed a heavily controlled economy both internally and externally. The 1991 reforms in my understanding show a clear 'hunger' towards opening up and globalization (may be out of compulsion given the economic crisis and paltry forex reserves).Ofcourse there was continuity with the reforms in the Sixth Five Year Plan but there was a clearly distinguishable acceleration which almost changed teh economic policy regime.
The decade of 80s also caused piling up of fiscal deficits. THe Indira Gandhi Govt did not take the soft loan available from IMF in 1981 after the OPEC price shock on teh grounds of 'self reliance'(!).
THe 1991 'team' seemed to be serious about reforms. THe IMF loan of some 1600 million, cut in capex and social sector expenditure brought back teh confidence of investors. This chaged attitude of the planners, in my view, make the 1991 team's reforms more applaudable than 1980s.
Sir
You talked of low interest rates due to huge surge of foreign inflows, but doesnt the inflow of foreign investment imply comparatively higher interest rates as compared to other countries. I would rather support the view that the low interest rates are due to the wide branch network of the Indian banks which has made low cost funds available for the Industry. Also won't the public savings rise with the interest rates? This is because the public would be more inclined to save rather than spend when the interest rates are high. The fact that savings as a percentage of GDP has increased could be more due to the fact that more and more Indians have been covered under the "still expanding Banking Network" bringing more and more money into the banking network.
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