Infrastructure

30 years after 1991, reforms spasmodic, state meddling a constant in India

Read more at economictimes.indiatimes.com

I was a 17-year-old kid, who had just landed a column in a leading business paper, when I managed to get a pass to the Speaker’s gallery in the Lok Sabha to witness Manmohan Singh’s maiden budget speech in July 1991. India was going through one of the darkest periods in its post-Independence history following the assassination of Rajiv Gandhi while the new government was on borrowed time, rapidly running out of funds to pay its foreign debts.

But the winds of change were blowing in favour of technocrats such as Singh. Soviet communism had recently imploded, capitalism was firmly ascendant. The scene was set for India, too, to enact the basic tenets of a free-market reform package broadly known as the ‘Washington Consensus’.

I remember Singh’s speech as a galvanising tour de force, starting with a bow to Rajiv Gandhi, “As I rise, I am overpowered by a strange feeling of loneliness.” Singh’s words seemed to capture both the fear of the moment, and the growing hope that his reforms would generate real economic progress. I was riveted. The speech was 31 pages, most of it in language that reflected the new, technocratic tenor of the times: “Indeed the centrepiece of our strategy should be a credible fiscal adjustment and macroeconomic stability during the current financial year, to be followed by continued fiscal consolidation thereafter.”

The Soviet collapse had ushered in what many thought would be “the end of ideology,” which also implied the fall of demagogues and the rise of pragmatic policy wonks. Fiscal consolidation was cool. Singh, widely feted for budget discipline, busting up the licence raj and opening India to the world, was among the last of the popular technocrats. He and his mostly Oxbridge- and Ivy Leagueeducated team were the toast of the Davos crowd.

The reform momentum in India lasted for a couple of years. After that, as the economy pulled out of crisis and back on to a growth path, politics once again trumped economics. Fellow members of Congress, disappointed by state election setbacks, questioned the value of reform if it didn’t win votes. Singh, too, lost his zeal for reforms and later as prime minister was more focused on welfarism than on liberalisation.

Years later, one of Singh’s advisers told me their biggest mistake in 1993, in their rush to declare victory, was to quickly pay back the IMF loan taken at the depth of the foreign exchange crisis. So long as the loan was outstanding, the government could conveniently blame its creditors for pressuring them to reform. Without cover, it was difficult to enact tough measures.

This is not unique to India. Very few governments have pushed painful change without the pressure and cover of a crisis. The changes Singh engineered promised more drama than most: rolling back socialism, widening economic freedoms and consumer choices, including for the first time many foreign goods and brands. It was a heady time and the most memorable period in India’s checkered reform history, but not unique. India had advanced postcrisis reforms before, in the early ’80s, and would again do so in the early 2000s and early 2010s.

Throughout, India proved resistant to the sweeping transformation that would boost many East Asian economies. Too often, Indian politicians packaged measures designed to aid an individual business or industry as economic reform, when the measures in fact retard competition and growth. Pro-business is not the same as pro-capitalist, and the distinction continues to elude us.

Even Congress’ successors are steeped in the same socialist ideals, which open the door to state meddling. Every decade, a spasm of reform, yet India has barely inched up the Heritage Foundation rankings of economic freedom, still falling in the bottom third.

Thirty years after Singh’s speech we are at another “crossroads.” Though the pandemic battered every economy, India like many emerging nations lacked the funds to implement stimulus of the scale seen in many developed countries. So once again it is under pressure to reform.

But times have changed. Opening to the world is out, and national “self-reliance” is the new motto even in countries that were the big beneficiaries of globalisation. Free market ideas are out, socialism is fashionable again, particularly in the west. Fiscal consolidation is out, big government is in.

Many of the most advanced economies now practise a distorted form of capitalism marked by constant stimulus and bailouts, which is a form of socialism for rich individuals and corporations. Competent but dour technocrats like Singh are back in the shadows, colorful populists like Narendra Modi are in the spotlight. The spirit of the age is no longer pushing India toward a more competitive form of capitalism.

My highest hopes for India now lie, for the most part, outside of politics. Top of the list is the digital revolution, which by many measures is spreading faster in emerging countries like India than developed ones. China, where the digital economy now accounts for 40% of GDP, has shown how tech can lead economic development.

The irony: tech giants are now so powerful, the newly confident political classes are cracking down on them from China to the US. The risk in India too is a more adverse regulatory environment kills this new golden goose of global growth.

What India needs to keep in mind is that its economy is still relatively unfree, and so more than ever it should buck the global trend of more regulation and bigger government. As Singh stated in his speech back in 1991: less government means more growth. While the world is no longer in thrall to free market wonks, India would still be wise to mark those words.

Read more at economictimes.indiatimes.com

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