Economist’s Column Economic Liberalisation in India

Economist Column Economic liberalisation in India

The Indian Economy is fifty years old. It had started its march towards growth with social justice under explicit state patronage but within the broad framework of a mixed economy with centralised planning after it attained political independence from two centuries of British rule in 1947. The basic idea behind he introduction of planning for heavy industries in the public sector and introduction of control and command by the state in matters of resource allocation, pricing and production targeting had been that the private capitalist class in India was not strong enough to undertake huge investment during the initial phase of development and that the signals of the market were not enough to guide resources towards production in desired lines in accordance with social priorities as set by the planners. On the whole, the underlying thrust of industrialisation was of the import-substituting variety because full integration with the world economy at the initial stage of industrialisation was not considered conductive to the overall growth profiles projected by the policy makers, and the foreign exchange constraint was seriously a binding one. The infant industry argument for protection was used on the plea to reap the dynamic comparative advantage in the long run and was reflected in practice in the form of wide ranges of tariff and non-tariff barriers to foreign trade as well as systematic overvaluation of the rupee, which led to balance of payments disequilibria and as a consequence periodic and sustained urge for foreign assistance and international borrowing on a large scale with politico-economic ramification of wide nature. In the domestic front, we had experienced plethora of controls not only with respect to the industrial sector activities, but practically in all aspects of the economy, ranging from growth promotion to redistributive measures. The inefficiencies associated with both market failures as well as market distortions were manifested in sectoral and regional imbalances in the economy, faltering of the macroeconomic management as reflected in the rise of fiscal deficits over time, chronic inflation and the burden of public borrowing, together with continuous rise in trade deficit and dwindling of forex reserves, which called for massive borrowing from the international commercial and multilateral sources, apart from staggering unemployment, poverty and related deprivations leading to a low quality of life in general. Some of these problems are there with us since independence, while their character and ramifications have changed over time in response to the changing realities and government policies. Newer problems have also appeared and their severity and importance also have undergone qualitative changes over the years, as the nation marched gradually, though not very convincingly, towards the twenty-first century. And in July 1991, the Government of India thought it necessary towards reversing the main strand of its economic policy towards more market-friendly environment and greater integration with the world economy, which was undergoing substantial changes in the recent years. This liberalisation experiment in the Indian economy has opened up new issues both for the policy makers and the professional economists, and in this paper we shall deal with some of these economic issues in some details.

The conjectures and suggestions for extending the policy reforms in the different sectors of the economy stem from our presumption that our policy makers shall not repeat the mistakes of the last four decades of planning and excessive control which had generated inefficiency corruption and extensive deprivation for the masses. In other words, assuming that the general trend of economic reforms towards globalisation and liberalisation shall not be abandoned for reasons of political expediencies, the issues of capital account liberalisation, agricultural sector reforms and social sector development shall be the priority areas of future designing of economic policy in our country. This does not mean that other areas in which we have already initiated measures should not be pursued with seriousness or for that matter the lacunae need not be corrected. In fact, the basic tenor of our argument has been that unless the concerned areas are seriously brought under the purview of the overall strategy of economic reform and institutional change in an integrated manner the present ad hocism in our policy planning and design cannot be done away with and that unless that is done with urgency the benefits of economic reforms shall fizzle out in the medium run with adverse consequence for the economy and the people. At this stage one should carefully think about the speed of reform that is considered optimal for the economy. The gradualist approach as adopted by our policy makers has the danger of diluting the sting of the hard decisions about reforms and their spread across sectors. The advantage of such an approach had been the flexibility to pacify and accommodate the different pressure groups so that the conflict of their interests does not stand in the way of actual implementation of the reform package. One must recognise here the fact that the need for economic reforms in our country arose mainly because the economy faced severe maladies and that such maladies often require quick attention and rectification which a gradualist approach could hardly satisfy and in fact it may lead to serious dilution and abandonment of the reform packages. That does not of course imply that one always goes in for quick actions on all aspects of economic policy without caring for the consequences or without ascertaining whether the pre-conditions for a specific economic reform exist or not. If the state and the polity is essentially myopic, then long run perspectives in economic policy designs are difficult to be sustained, because the political costs of successful implementation of such programmes are too high.