Backdrop
One of the first policy actions of the Aam Admi Party on forming the
Delhi State government was to announce that it would try and rescind the
decision of the previous Sheila Dixit government to allow FDI in Delhi’s retail
sector. The anti-FDI position of the left
in BJP(or RSS) is very similar to that of the leftists in the Congress party
even though they draw their inspiration from different sources. There is therefore a danger that the
manifestos of several parties may take an anti-FDI stand, and thus
unnecessarily bind the next PM and the ruling coalition into policy positions
they may regret. It is therefore vital to understand how India
has benefited from the opening and globalization of the Indian Economy since
1991. The note shows how Globalization
of the Indian economy, acceleration of economic growth and improvement in peoples
Welfare have progressed in tandem during the tenures of both Shri Narsimha Rao
and Shri Atal Bihari Vajpayee as Prime Ministers from 1991-2 to 2003-4.
Nineties Reforms
The 1990s policy reforms consisted of three major elements- Domestic
decontrol, Tax reforms and External opening and one smaller element- Public
sector disinvestment. Both the domestic
and external liberalization focused on product and capital markets. On the
product side, prices, production, investment, imports, exports and technology
import were freed from controls. Agricultural
products were kept out of this agenda and remains largely so till today, at
great cost to consumers and farmers. Capital
markets were also liberalized in a carefully phased manner to allow domestic
companies to raise funds and for domestic and foreign savers to supply capital
and innovative financial products. This was accompanied by a major effort to
simplify Central government taxes (CIT, PIT, sales-excise-VAT, customs) by
reducing exemptions & deductions and unifying and reducing rates. The
Public Sector disinvestment was also intended to nudge the political owner
(govt. departments) and the bureaucratic managers & employees to act more
like private owners and managers. The
basic objective of this set of policy reforms was to improve the
competitiveness of the product and capital markets and thus promote
productivity and growth. These reforms
succeeded in promoting competition and opening, and raising the growth rate of
the economy, resulting in a closing of the gap between the Indian per capita
income and the World average.
Outcome: Opening & Competition
India’s Imports rose from 8.3 per cent of GDP
in 1990 before the Narsimha Rao reforms to 19.3 per cent in 2004, the last year
of the NDA government. Part of this was a consequence of the rising World trade
ratios. However the (negative) gap between the Indian and World Import-GDP
ratio almost halved from 11.9 per cent to 7.3 per cent. India’s exports also
rose from 6.9 per cent of GDP in 1990 to 15.3 per cent in 2004, closing the (negative)
gap between Indian and World export-GDP ratio from 12.9 per cent to 9.3 per
cent. There was a corresponding opening
of the Capital account and of technology imports as jointly captured by the
inward Foreign Direct Investment (FDI). The ratio of net inward FDI to GDP
increased eleven fold from a miniscule 0.07 in 1990 to 0.8 in 2004. The ratio of Global FDI flows to World GDP
however almost doubled from 0.93 to 1.66. Thus, India’s FDI-GDP ratio remained
below the World FDI-GDP ratio by 0.86 per cent points. Overall the opening of the Indian economy to
international goods, services and capital improved competitiveness of the
domestic producers and accelerated growth.
Growth and Welfare
Indian Industry responded to the
increased competitive pressure and opportunity for import of higher quality
input, capital goods and technology by raising the rate of investment and
productivity growth, particularly in the corporate sector and thus accelerating
economic growth. The growth of per capita income at purchasing power parity
accelerated to 4.3 per cent per annum during 1992 to 2004, up 1.4% point from
an average 2.9 per cent per annum during 1981 to 1991. Though part (0.6% point)of
this was due to an acceleration of World growth, Indian per capita income
growth was faster than World average by 2.5% points during the
Narsimha-Vajpayee period compared to the 1.7% point gap during 1981-1991 (Indira2-Rajiv).
As a result of this growth acceleration, Indian per capita GDP at PPP rose from
18% of average World per capita GDP in 1990-1991 to 24% in 2004.
Lessons For Future
The economic reforms of the 1990s were wider and deeper than those of
the 1980s, overall as well as on the three major dimensions:[i]
Domestic decontrol, tax reform and
external liberalization (opening and globalization). Consequently they resulted
in a greater acceleration of economic growth relative to average World growth
and a faster closing of the gap between the welfare of the average Indian and
the average World inhabitant. We need to carry forward and complete the reforms
in these three areas, including agriculture decontrol, further simplification of
taxes and FDI in Defense, Insurance and Retail. Reforms have been very limited and hesitant
in one dimension, which has been shown to enhance productivity growth:
Disinvestment and privatization of the Public sector, including Public sector
Banks and Financial institutions, and de-monopolization of infrastructure
enterprises. This is partly due to
inertia-the original objectives have long since become irrelevant and practiced
only in the breach. Land market reforms
remain flawed and incomplete. Labor laws remain mired in an ideological swamp.[ii]
These reforms could yield enormous dividends in terms of Welfare gains in the
next two decades! We can only hope that the next government will have the
understanding, will and political leadership to carry them out.
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A version of this article appeared on the
editorial page of the Times of India on
20th February 2014, under the banner, “Don’t
Close Down, Open Up.” http://timesofindia.indiatimes.com/home/opinion/edit-page/Globalisation-during-Narasimha-Rao-and-Vajpayee-years-was-good-for-growth-and-welfare/articleshow/30689500.cms
[i]
See for instance, Arvind Virmani, “Policy Regimes, Growth and Poverty in India:
Lessons of Government Failure and Entrepreneurial Success!, Working Paper No.
170, ICRIER, October 2005. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233
or other references at https://sites.google.com/site/drarvindvirmani/growth
[ii]
See Arvind Virmani, "Reform Agenda for Growth and Welfare," Policy
Paper No. 1/2014, New Delhi, January 2014; at https://sites.google.com/site/drarvindvirmani/policy-papers
or “Reforms for Policy and Growth” at http://dravirmani.blogspot.in/2013/12/reforms-2014-19-for-employment-and.html
for further details.
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