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Twenty Five Years of Economic Reforms; By K. Subramanian

Updated: Sep 1, 2023

C3S Paper No. 0107/2016  

It is better to study the progress of economic reforms more as a study in political economy than as one on economics per se. Policymakers world over have given up their attachment to abstract theories. They are keener to examine the acceptability of prescriptions to various sections of the society, the embedded institutional structures and, more importantly, the class composition. There will always be ‘winners’ and ‘losers’ when reforms are put through and, unless there is wide acceptance among groups of society, reform measures will flounder. It took a very long time for the IMF/Bank to learn this bitter lesson. It also explains why the reform processes put through by the IMF/Bank have met with resistance from recipient countries, especially the developing countries. The more recent experience of the IMF in handling the Euro crisis is equally relevant.

Some background to the reform efforts will be useful. It was on 1st July 1991 that India commenced its journey on the road to economic reforms. Having completed twenty five years, one would have expected celebrations attached to a Silver Jubilee Year. Sadly, there was none, either official or otherwise!

Indeed, our papers, especially the pink press, were flooded with reports on the background to reforms. They covered long interviews with leading actors, the so-called architects of reforms which included Dr. Manmohan Singh and Montek Singh Ahluwalia. Dr. Singh laments that we act only when the country is hit by a crisis and get back to status quo when the crisis is over. Many others have written about the impact of reforms on our economy. While some accounts were euphoric, others were somewhat circumspect about our reform record. Truth seems to be that reforms are often challenged by dominant sections of our country, especially during elections to Assemblies or Parliament. And reform retreats. It resurfaces after a lag under pressure from the capitalist class in combination with global players such as banks and multinational corporations. This zigzag pattern of reforms can be explained only in terms of the “politics of reform.” It has also been our experience that reform measures are announced unilaterally with a sense of urgency and secrecy without prior consultation with stakeholders. Later, they are challenged in public debates including in Parliament. But, the caravan moves on.

Even around the time when the reforms were unveiled in July, 1991, the background was shrouded in secrecy. Many, mostly on the Left, suspected the ‘invisible’ hand of the IMF. Not surprisingly, it was denied. Even now, in a recent article in Economic & Political Weekly (The 1991 Reforms: How home-grown were they? July 16, 2016) Montek Singh Ahluwalia claims that reforms were home-grown! He adds, “The obviously approved the reforms in that sense, but that it is not the same thing as saying it dictated the contents.”  Such an explanation is rather late in the day.

Getting back to the scenario in July 1991, we have the benefit of books which throw light on the circumstances leading to the breakthrough on economic reforms. One is by Jairam Ramesh (To the Brink and Back, Rupa, 2015) which reads like a thriller while narrating the story of reforms. The other is a biography of P.V. Narasimha Rao written by Vinay Sitapati. (Half-Lion: How P.V. Narasimha Rao transformed the Indian Economy, Kindle Edition, 2016.) Dr. Deepak Nayyar who was the then Chief Economic Advisor and was also involved in the earlier negotiations with the IMF has given a more detailed and balanced account of developments in his article in the Hindu. (How the economy found its feet, 25 July, 2016.)

With these, we are better informed. By end June 1991, economic crisis was knocking on our doors. Years of fiscal profligacy steered by populism and indiscriminate imports led to a situation in which India’s foreign exchange reserves were at rock bottom, estimated at $1.12 bn. Increase in crude oil price added to the worries. We were unable to meet international payment obligations. Talks with the IMF and the World Bank were already in progress to seek assistance and the Twins were known to be sympathetic. Deepak Nayyar offers a good account of the earlier negotiations with the IMF.  All that was required was a formal application to the IMF/Bank seeking assistance under SAP and Extended Financial Facility. Rao remained cautious all along.

He commenced discussions with key opposition party leaders like Chandrasekhar, V.P. Singh, L.K. Advani, Harkishan Surjeet and some others. On 27th June, 1991, Rao called for an all-party meeting. It was also attended by senior officials. Finance Minister Dr. Manmohan Singh gave an extensive briefing on the state of the economy and the gaping financial bankruptcy. He emphasized the imperative need to avert default at all costs. He also referred to the ongoing discussions with the Fund/Bank. While all the political leaders were reconciled to the necessity to resort to drastic steps to avert default and to save India’s global prestige, they were agreed view that under no circumstances should subsidies be sacrificed at the altar of IMF support.

In retrospect, it was a gamble played by Rao in the political arena. He was aware that Indian public opinion was averse to seek assistance from the IMF. As Sitapati notes, Rao himself was a protectionist until a couple of years ago and had to change his mindset. Dr. Manmohan Singh who had returned from the South-South Commission which recommended radical measures to safeguard the interests of the South vis-à-vis the North had to face similar embarrassment of having to undergo mental readjustments.

Surprisingly, as a shrewd politician, Rao had asked for a report from the IB. The IB report revealed a deep division even within the Congress’ ranks. “There were 55 MPs against liberalization of trade policies, including seven ministers such as alarm Jhakar and Madhavrao Scindia.” Some MPs opposed entry of multinationals and it included K.K. Birla. Bombay Inc. was opposed to the entry of multinationals. Needless to say, Left parties and labour unions were always against reforms, especially on the issue of subsidy reduction.

It was this public resistance to reforms which Rao had to contend with before embarking on them. He did so in his own style – by stealth! Chidambaram explained in a recent article how even though “dramatic changes were made to the economic policy, the government maintained a low profile and avoided any drama or hype.” The reasons indeed were obvious – not to rock the boat! It was only later that details of reform measures were publicized. Rao needed time to manage public opinion over reform efforts. While he did succeed in pushing the reforms, he bought an uneasy peace. This uneasiness has been haunting us since then. When Rao faced criticism over reforms, he shifted the blame, half seriously and half-jokingly to Dr. Singh who, in his own characteristic style, explained that he drew his inspiration from Rao! Truly, they were made for each other!

It has been an uneven or bumpy journey since then. The reform process can be broken up into the following five distinct phases: 1991-93, 1993-95, 1996-2004, 2005-09 and 2009-13.

It was the first phase which was marked by major reforms in trade policy, industrial licensing, finance and banking and current account convertibility. These were mostly administrative or procedural nature which could be done through official fiats. These created a global stir about India opening up. However, the reception in India was not wholly favorable. In the State elections held in the following years, the Congress Party was defeated in Andhra Pradesh, its bastion. Reform process was put on hold and Dr. Singh began to talk about “reforms with a human face.” During 1993 to 1995 the process was put in cold storage except for working on sectoral minutiae.

In later years, reform process became a victim of coalition politics. During the years1996-2004, liberalization was steady and calibrated. By then, Left parties had begun to throw their political weight behind economic policies to moderate the pace and contents of reform.

The years 2005-2009 marked the high tide of globalization and India began to have a greater share of global trade and finance. Very high rates of growth steered in particular by foreign capital inflows created illusions of uninterrupted high growth. Economists like Dr. Bimal Jalan wrote about India having crossed the turnpike to reach higher growth rates.  This dream would become a cropper with the eruption of global economic recession in 2008. The post-recession years were marked by the RBI or the government calibrating measures reactively to the global volatility and uncertainty rather than acting proactive. Those were the days when our attempts to meet the maelstrom of global crisis or even attempts to remain afloat were considered a measure of achievement! The last phase (2009-13) was marked by policy paralysis and the government mired in scandals in sectors like coal, telecom, etc.

As may be seen, progress of reforms was by no means smooth. It had a zigzag pattern depending on the coalition structure of the government in power. Many foreign observers have been lamenting over the tardy progress of reforms in India. However, they don’t reckon that unless the reforms serve the overall welfare of the people, there will be no acceptance. As a mirror image, this indeed was the bane of the reform programs advocated by the IMF, which is taken as the godhead of all reforms.

As is well known, IMF was relying on the so-called Washington Consensus (WC) which comprises ten recommendations. These were supposed to have been culled out by J.H. Williamson after his study of crises in Latin American countries in the earlier decades. The basic thrust of the WC is to shift the burden of growth or development from State to Market. It was truly in conflict with all the development theories postulated by economists, especially development theorists, in the post-second world war years. However, the IMF was able to push its programs due then existing global power structure marked by US hegemony.

The WC postulates the following: Low government borrowing and avoidance of large fiscal deficits; reduction in public subsidies; tax reforms to broaden tax base and reduce tax rates; interest rates to be market determined; competitive exchange rates; trade liberalization; liberalization of FDI; privatization of state enterprises; deregulation of business; and legal protection for private property.

These prescriptions had become non-negotiable in IMF’s dealing with borrowing countries. In fact, loan officers given to what is described as “Mission Creep” added their own conditions. Forgotten in all this game was that these cannot apply in social vacuum and had to take into account the existing institutional structures, natural endowments, level of development, etc. It was also the experience that when ‘reform’ package fails in the first round, the Fund staff recommends “second generation” or “third generation” reforms and keeps on raising the bar.

In many cases, the reform process created adverse conditions instead of promoting growth. Reduction of subsidies, especially in food, led to malnutrition, infant mortality and even famine in some. It is noteworthy that even the defenders faith, lament India’s poor record in achieving good position in the Human Development Index (HDI) of the UNDP. India has failed to achieve the Millennial Development Goals.

It was not surprising that the reform proposals sponsored by the IMF met with stiff resistance. Developing countries began to move away from the IMF and draw on other global financial resources such as banks. They had also built foreign exchange reserves much to the annoyance of IMF pundits and draw on them to meet their BOP shortfalls. (Much later they established their institutions in parallel like the AIIB.)

By 2008, the neglect of IMF by developing countries reached alarming proportions and created budgetary constraints for the Fund. The Fund was meeting its administrative, etc. expenses drawing on the difference between the rates at which it borrowed in the international market and the rate at which it lent to member countries. By 2009, the Fund had to sell a part of its gold stocks to be able to meet its budgetary costs. By then, the Fund seems to have lost its global role or legitimacy as a lender and was clueless.

The emergence of the global economic crisis in 2007-08 saved it when the G-20 decided to pump in extra funds to meet the global crisis. On SAP conditions there was marginal tweaking and attitudinal changes. Even so, some economists like Arvind Subramanian felt that the Fund was discriminating between developed and developing countries.

The crisis of 2008 has led to rethinking on major issues, especially on financialization. In the past, the World Bank was accused of over-selling globalization. Similar charge in more recent years after the crisis is that the IMF is overselling neoliberalism. There is evidence of rethinking within the IMF economists as reflected in one of its recent papers.(See, Neoliberalism: Oversold, Finance & Development, International Monetary Fund, June 2016.) There is rethinking on three major issues which are at the heart of WC or “reforms”: capital freedom, especially for short term capital flows; fiscal consolidation or “austerity”, and, acceptable debt levels.

It is clear now that IMF economists themselves are skeptical about financial openness and its impact on growth. They veer round to the view that the relationship between the two is complex and capital flows ipso facto do not promote growth. They are more concerned about costs of short term flows, especially volatility. They are worried about the distributional impact of fiscal consolidation strategies on low-income groups. On debt levels, they feel that there is no axiomatic percentage for debt/GPD and many more related economic factors will have to be examined. In short, the major tenets of the WC are questionable. It is clear that the experts in the IMF were applying a flawed matrix and amounted to barking a wrong tree! Surprisingly, these were the issues which many critics of the “reforms”, especially the Left, raised from the earliest stage when reforms were pushed through! Will IMF’s SAP take a new birth? Rather doubtful. If it does, it can find more acceptability among many developing countries. That means that the IMF which was riding a high horse for years has come down to earth.

India’s record on “reforms’ till date is somewhat mixed. Our manufacturing sector remains weak and lacks the strength to meet the challenges from foreign competitors. Trade reforms have failed in their objective in the Indian context. The idea that exposing Indian companies to foreign competition will enhance efficiency and promote growth has failed across the board, except in a few sectors. Rather than promoting efficient growth, import liberalization has damaged the domestic sector. Economists like Sudip Chaudhury have explained how import liberalization has led to “premature deindustrialization (Economic & Political Weekly, October 24, 2015.) This is because reform policy ignored the historical fact that it was the state support which promoted strong industries in East Asia. China is an example non pareil. Recent articles reviewing progress of reforms by economists like Dr. C. Rangarajan bemoan the withdrawal of State from promoting growth and welfare.

Foreign direct investment (FDI) has not resulted in transfer of latter day advanced technology. Indian investors seem to opt for the soft option of getting brand names to improve marketability than technology. Their record of in house R&D is abysmal. Due to lack of global competitiveness, our exports have languished for years and create continuing trade deficits. Heavy import dependence in critical sector like electronics, telecom, etc. is worrisome and creates continuing balance of payment problems. Rupee rates come under attack and the Reserve Bank has to intervene to stabilize them. Stock market volatility is steered by portfolio flows and cause the problems identified in the IMF paper cited above.

The opening up of financial sector, especially the FII flows, has created more problems than benefits. They have bloated the share values in the stock market without any benefit to the real sector. Very high dependence of FII has also created vulnerabilities in the sense that our stock market is subject to the vagaries of capital flows and interest rates in the US. The threat of QE exit by the US Fed is the worst lesson one can learn. But we have not. FII flows, together with freedom for companies to borrow in foreign currency, have led to balance sheet problems of our corporates. The older idea that India is insulated is no longer true.

Our banking reforms have created a different train of issues. While the freedom given to banks to fix interest rates sounds good in theory, in practice, it has not percolated down the line. Our financial markets remain shallow and restrict the ability to raise bonds by corporates. There is heavy and continuing heavy dependence on bank credit. The closure of term institutions such as IDBI was ill advised. In the early years, China directed bank credit to finance infrastructure projects. In later years, China stepped up investment by creating separate investment banks. China may be said to have overinvested. On the contrary, our commercial banks are unable to bear the burden of extending loans to private sector. When they did so under government pressure, it has led to humongous levels of non- performing assets which threaten the health of the banks.

Our fiscal consolidation efforts have curtailed investment in social services like health, education and nutrition. We occupy the 141st position in the HDI of UNDP. Amrtya Sen, the Nobel Laureate, has been pleading for attention to this area.

We have shown some improvement in some sectors such as research in atomic energy, space, etc. Some of our parameters such as GDP growth, poverty alleviation, etc. are better. On the whole, we cannot say that after Twenty Five Years of reforms we have emerged as a strong and vibrant economy. In many ways, we are more vulnerable than we were in July 1991. We cannot blame it all on globalization.

(The writer Mr. K. Subramanian, is an Associate of the Chennai Centre for China Studies – C3S. Email:

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