Friday, November 29, 2013

Tentative Rollback of License-Permit-Quota (LPQ) Raj: Indira 2-Rajiv


     An earlier article, "Nehru-Indira Socialist Economics Failed," showed that the welfare of the average Indian declined relative to that of the average citizen of the world between 1950 and 1980.  Towards the end of the 1970s a number of analysts began to realize that the Socialist ideological – Statist - Bureaucratic approach to economic policy was leaving India further behind the dynamic developing countries.  The Janata Party was in the forefront of efforts to reverse the most egregious features of this regime, but it could not change much because of political instability within its ranks. Mrs. Indira Gandhi had three years, post 1977 election defeat to hear newly emboldened critics of her economic policy failures.  When she returned to Power in January 1980, she started reversing some of the most oppressive controls she had instituted, controls never seen before or since in a non-communist country. The rollback of the LPQ raj was continued by Rajiv Gandhi, who succeeded her on her death in 1984. V P Singh became PM after the 1989 elections and Chander Shekhar who succeeded him, were more like book ends to this phase of Economic development, given the political turmoil and dissensions unleashed by them. The roll back of the Nehru-Indira1 LPQ raj by Indira2–Rajiv resulted in an acceleration of the rate of growth of India’s per capita rate GDP during 1980 to 1991 and began the Welfare catch-up of India with the rest of the World.

 Welfare Catch-Up

     The World Data Indicators, the standard series of data for World economy has data on Per capita GDP at purchasing power parity from 1980.  It is therefore the preferred source for comparing Welfare relative to the rest of the World from 1980 onwards.  According to this source India’s per capita GDP at PPP was 0.15 of world average in 1980 and had increased to 0.18 of the World average by 1991. In other words the Welfare of the average Indian, improved by 19.3% relative to that of the average World inhabitant between 1980 and 1991.  17.2% points or 9/10th of this improvement came during the Indira 2- Rajiv regime.
   The average per capita growth rate of GDP in India during 1980 to 1991 was 3.0% per annum compared to an average per capita growth rate of 1.1% per annum for the World.  Thus India’s per capita GDP grew an average 1.9% faster than the World economy during this period.  This was almost a complete reversal of the relative per capita growth rates in the previous two decades.  Though the average Indian was still pathetically poor relative to the average world inhabitant in 1991, the process of “welfare catch-up” with the rest of the World had finally begun.

Tentative Change

   At the end of the 1970s every aspect of production, pricing, investment, import and export was controlled by the Central Government. In the 1980s only the most glaring distortions were corrected. The scope for diversification (production of related items) and expansion of capacity for the industries under investment licensing (up to 25% above licensed from 0) was expanded. The definition of small-scale industry (SSI) was raised by increasing the size limit (value of output/sales) abd 40 industries de-reserved. The cement and aluminum industries, and others with assets below 5 (15) crore de-licensed in in 1985(1988) subject to conditions. The limit below which MRTP clearance was not required for investment by “laege industrial houses” was gradually raised to Rs. 100 crore. There was virtually no reform in other production sectors such as mining and agriculture.
   Imports of capital goods were made procedurally easier through licensing of imports for modernization and export industries. Intermediate imports were gradually moved from licensing to tariff protection and made available for export production at lower duty.   Tax rates declined slowly from the absurd highs they had reached in 1970s e.g. 100% marginal rate on income from assets, inclusive of wealth tax) and modified value-added tax (MODVAT) credit was introduced into the excise tax.
The control regime, however, continued to be extended in exchange management and import tariffs continued to rise.  The fiscal deficit also expanded from around 6% in the early 1980s to 9% in 1991 while the revenue surplus became a deficit of 4% over the same period. This was one of the reasons for the Balance of Payments crisis in 1990-1991 that concluded this phase of economic development. By 1991-92 the share of the Public sector in total GDP had risen to 25.9% from 22.1% in 1979-80. The public sector share of Gross Capital Formation was still high at 38.4% of total [Virmani (2004)].[i]    Leaving aside small scale sectors like Agriculture, Trade, Hotels and Restaurants and unregistered manufacturing the presence of Government was much higher.  Government thus still controlled the commanding heights of the economy besides retaining much of the institutional structure of the stifling LPQ Raj


      The LPQ raj started to change during 1980s and its enforcement slackened due to deterioration in governance.  Though individual policy reforms were incremental (‘tinkeization’), remaining controls and restrictions started to be evaded thus resulting in greater de-facto de-control.  They were also politically credible signals of the intent to reform failed policies. This had an impact on the investment environment leading to more private investment and a shift from building of structures towards machinery and equipment. The opening of the economy to capital goods imports reduced their relative price and magnified the impact on investment efficiency. An increase in the fiscal deficit, stimulated government consumption and raised production in the presence of an output gap.  Consequently the massive gap between the welfare of the average Indian and that of the average World citizen began to close for the first time in modern Indian history.

[i] Arvind Virmani, “India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth,” Working Paper No. 122, ICRIER, February 2004. and
Arvind Virmani, “Sources of India’s Economic Growth: Trends in Total Factor Productivity,” Working Paper No. 131, ICRIER, May 2004.

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