01 July 2021: UPSC Exam Comprehensive News Analysis

E. Editorials

Category: ECONOMY

1. India’s 1991 liberalisation leap and lessons for today

Context:

• In light of the historic economic contraction of the Indian economy induced by the COVID-19 pandemic and calls for economic reforms to revive growth, the article discusses the 1991 economic reforms and the road ahead for India.

Background:

Pre-reform era:

• The Indian economy before the 1991 reforms was based on strict regulation and could be characterized as a controlled system.
• The public sector accounted for a significant proportion of the economy with the so-called critical sectors reserved for the public sector despite their lacklustre performance.
• The private sector was not allowed to participate in a number of so-called critical sectors. In other sectors too, the private sector’s participation was highly regulated and dependent on obtaining industrial licences from the administration. This had given rise to a system popularly referred to as the Licence Raj.
• Over 860 items were reserved exclusively for small-scale producers, including many that had very high export potential. This robbed the economy of potential advantages of production at scale offered by bigger industries.
• Imports were very strictly controlled to protect scarce foreign reserves and also to protect the domestic producers from import competition. Foreign Direct Investment (FDI) was also discouraged.
• Such a controlled system was not suitable for encouraging enterprise or innovation.

1991 Economic Reforms:

• The 1991 economic reforms marked significant liberalization of the Indian economy including measures such as liberalization of industrial licencing, increased privatization and moving to a flexible exchange rate, etc. It focussed on industrial, trade and financial sector reforms.
  • The 1991 reforms with their emphasis on privatization aimed to unleash the energies of the private sector to accelerate economic growth.
  • Economic liberalization encouraged enterprise and innovation in the economy.
  • The emphasis on globalization ensured India was able to become part of the global supply chains and gain advantages from it.
• The 1991 economic reforms resulted in significant gains for India.
  • The GDP growth averaged 7% in the 25 years from 1992 to 2017, compared with an average of 5% in the preceding ten years and 4% in the preceding 20 years.
  • The 1991 reforms, though they mainly emphasized economic growth, did ensure an adequate flow of benefits to the poor. As the economic growth accelerated, poverty declined.
    • Between 2004-05 and 2011-12, about 140 million people were pulled above the poverty line.

Shortcomings of the 1991 reforms:

• Though the reforms were hugely successful a lot remains to be done.
  • The reforms envisaged in the financial sector remain an unfinished business as is evident from the ongoing crisis in the financial system of India, plagued by the NPA crisis.
  • Social sectors like health and education haven’t improved commensurate with the economic growth.
  • The development strategy has failed to suitably acknowledge and deal with the environmental impact of economic growth.
  • Key factor market reforms in areas of labour and land remain an unfinished business. This seems to be holding up further investment into the Indian economy. The attempts made to introduce land and labour reforms have faced opposition from several sections.

Concerns:

• The article expresses concerns over several developments in the recent past.

Increasing import tariffs:

• As against the progressive lowering of import tariffs over the years, there has been a reversal of this trend over the past few years.
• While this appears to be in line with rising protectionism globally, it could hamper India’s stated ambition to become part of global supply chains and adversely impact India’s ability to play a greater role in world trade.

Decision to stay out of RCEP:

• India decided to stay out of the RCEP [Regional Comprehensive Economic Partnership], based on the fear of flooding of cheap products from countries like China, a member of RCEP.
• This marks a departure from India’s attempt to move from “Look East” to “Act East” and also its attempts to become part of the global supply chains.

Employment concerns:

• The spectre of jobless growth has been a matter of great concern in the recent past.
  • Jobless growth is an economic phenomenon in which a macroeconomy experiences growth while maintaining or decreasing its level of employment.
  • A jobless growth economy indicates the existence of changes to the fundamental basis of work for everyone. In India, this could be observed in the change from being a predominantly agricultural economy to the services sector playing a significant role.
  • While some workers will do well, as they have the skills and training that growing industries require, others face long-term unemployment or underemployment and will be unable to find work until they obtain new skills.
• The substantial slowdown in GDP growth after 2016-17 led to employment actually falling from 474 million in 2011-12 to 469 million in 2018-19. Open unemployment has increased.

COVID-19 induced economic shock:

• According to provisional National Income estimates, GDP contracted by 7.3% in 2020-21. Many analysts say this underestimates the contraction as the adverse impact on the informal sector is not captured.
• This sharp fall in the GDP has led to a contraction in total employment. The pandemic has led to severe income and job losses adversely impacting the livelihood opportunities of several families in India.

Recommendations:

• India needs to get back to 7% to 8% growth if we want to make progress on poverty reduction and provide enough jobs for our growing labour force. In this respect, the article makes the following recommendations.

Addressing structural issues:

• Indian industry has to deal with poor infrastructure, poor logistics and time-consuming trade procedures, which reduce its price competitiveness in the global markets. These have to be addressed at the earliest.

On import duties:

• Given that the raising of import duties will also raise costs in the economy, the administration must desist from doing so.
• The government should engage with Indian industry and other experts to come to an agreement on what the average level of duties should be and how it should be reduced over time.
• India should move to an average duty rate of about 7%, gradually narrowing the range of variation across products and eliminating duty reversals.

RCEP membership:

• Instead of avoiding membership of multilateral trade platforms like RCEP over fears of competition, India should focus on improving the competitiveness of its domestic industries.
• To tackle unfair competition from China, India should consider imposing anti-dumping duties on China.
  • An anti-dumping duty is a tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value.

Free Trade Agreements:

• Given the increasing tendency of major developed countries to engage in bilateral negotiations over multilateral forums, India too should adapt to this new reality and focus on expediting its FTAs with the U.S., Europe and the U.K.
• This can help ensure market access for India amid the growing levels of protectionism being observed.
• India should also consider a give and take approach during these negotiations balancing the current and future potential of such FTAs.