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The Anti-reform Lobby Has Got It Wrong

Arvind Panagariya

Finance Minister Yashwant Sinha has recently said that the consensus in favour of reforms is breaking down.  Coming from the general leading the charge for reforms, these are ominous words.

In trying to understand Sinha’s plight, one suspects that he is reacting to simultaneous attacks from two extreme sources which, though otherwise diametrically opposed to each other, have one thing in common:  hostility to economic reforms.   Thus, from the right, the “swadeshi” constituency within the BJP is asserting itself, pulling the government away from its agenda.  And from the left, armed with some new evidence of dubious quality showing that poverty has stopped declining since the beginning of the reforms in 1991, the traditional critics of growth-oriented reforms are striking back.

While Prime Minister Vajpayee and Sinha must fight their own battle with the Swadeshi Jagran Manch, the gratuitous attack by the critics on the left is altogether a different matter.  Having lost the intellectual battle for state controls in the wake of the precipitous fall of the Soviet regime under the weight of its own inefficiency and the steady rise of the Chinese economy following progressive liberalization, these anti-reform and anti-growth critics have been struggling to stage a come back ever since our reforms began.  But until recently, they have not had much luck.

A recent article by the World Bank’s Gaurav Datt, showing that poverty has not declined during 1990s, has changed this, however, handing the critics of reforms the opportunity they had been seeking.  Seizing on the evidence provided in the article, they now argues that whereas poverty declined in the heydays of the licence raj, dominated by rationing, price controls and nationalisation, during the reforms of the1990s, there was no such decline.

There is much that is wrong with the National Sample Survey data on which the study by Datt is based.  Columnist Swaminathan Aiyar has argued this convincingly in the Times of India (April 23, 2000) recently and I need not repeat it.  Instead, even accepting the NSS data at their face value, the critics of reforms must face up to two facts.

First, until the late seventies, the proportion of those living below the poverty line fluctuated with no significant time trend.  The last ten years of this period, which included the emergency rule, were characterized by the most severe controls in the Indian economic history.  Therefore, there is little truth to the claim that poverty fell in the heyday of the license raj.  Nor is there any concrete evidence supporting the view that poverty fell under the Hindu rate of growth since it was precisely during the heydays of the license raj that we experienced the Hindu rate of growth.

Indeed, the beginning of the decline in poverty in the year 1977 fortuitously coincided with the beginning of a phased liberalization of imports.  Those who follow India’s trade policy closely will recall that the demand for increased access to imported inputs by the industry, an improved foreign-exchange position (thanks to the remittances from the middle east and improved export performance) and increasing doubts about the efficacy of the controlled regime on the part of a few policy makers had catalyzed some import liberalization starting 1977.  Aided by large-scale external borrowing, this gradual liberalization continued throughout the 1980s via the expansion of the so-called open-general licensing (OGL).

While I will be stretching the evidence if I were to give the credit for poverty reduction during late 1970s and 1980s to this liberalization, the stretch is all the greater when the critics of reforms give the credit to license raj.  To-date, the external borrowing which helped boost investment, aided by liberalization of inputs which helped improve efficiency, is the best explanation for the high growth during the 1980s.  In turn, the pull-up effect of growth is the best explanation for poverty reduction during the same period.

            The second fact, discussed systematically by Yale University’s T. N. Srinivasan in a recent paper entitled “Poverty and reforms in India,” is that even during 1990s, poverty has failed to decline in states such as Bihar and Uttar Pradesh where reforms had minimal impact and where growth failed to materialize.  On the other hand, states such as Gujarat, Maharashtra and Tamil Nadu, which took advantage of the reforms, grew like tigers and experienced a decline in poverty as well.

            Independently of how one reads the available evidence, few will dispute four facts.  First, resurrecting the license raj is not an option today.  To my knowledge, even the most vociferous critics of reforms have not advocated the return to the throwbacks of the 1970s.

            Second, even if higher-quality data were to show that poverty actually declined during the1990s, its level is so high that much more needs to be done on this front.  It is safe to assume that at least a quarter to one third of India’s population continues to live in abject poverty.  After fifty years of independence, this is an embarrassingly high figure and we need a massive infusion of resources into education, health and other anti-poverty programs.

            Third, the resources needed to fight poverty will not come from thin air: to generate them, we must grow faster.  The balance of the available evidence is in favor of the view that growth by itself reduces poverty.  But once we take into account the extra resources it brings to attack poverty directly, the desirability of growth-oriented policies can be hardly disputed.

            Finally, Vajpayee and Sinha need to actively build consensus for reforms rather than passively yield to their critics. One way to silence them is to simply tie the reforms directly to poverty reduction.  For instance, as Professor Devesh Kapur of Harvard University suggests, they could earmark a proportion of the proceeds from privatization for poverty-reduction programs.  This will improve efficiency and reduce poverty, a win-win strategy that few would contest.

Economic Times, May 24, 2000