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Reforms do have a human face

Arvind Panagariya

Wednesday, May 19, 2004

To dispel any fears that reforms might be set back under the incoming Congress-led government, within hours of the stunning election results, party spokesperson Ambika Soni announced publicly, “The Congress has always held that we want reforms. But they have to have a human face.”

    Of course, Soni could have claimed much more as Mrs Sonia Gandhi herself did a day later. “The economic reforms were initiated by the Congress, by my husband, and later by Congress governments,” reminded the future prime minister during an interview on the BBC.  Indeed, as I document systematically in the paper, “India in the 1980s and 1990s: A Triumph of Reforms,” the piecemeal reforms by Rajiv Gandhi in the second half of the 1980s played a key role in pushing the GDP growth rate to a whopping 7.6% between 1988-89 to 1990-91. Subsequently, starting in 1991, the more systematic and comprehensive reforms by finance minister Manmohan Singh ensured that the higher growth rate of the 1980s was sustained. Against this background, it is unthinkable that Mrs Gandhi would reverse course.
The allegation that reforms lack a human face must be answered, however. Admittedly, politicians seeking limelight have focused disproportionately on the achievements in the information technology sector, fuelling the impression that reforms have helped only a blessed few. But this is a gross distortion of the true picture.

The biggest achievement of the reforms to date remains the unprecedented reduction in poverty. During the past two decades, the proportion of those living below the poverty line has been cut by approximately half. This is in contrast to the dark days of autarky, licence raj and state ownership when virtually no success was achieved in bringing relief to the poor. Ever since Independence, the goal of our policy had been to eliminate poverty but no success was achieved until liberalisation helped push up the growth rate.

Of course, much more can be done for the poor and that is where the Congress has been successful in connecting better with the voters than the NDA. Despite the substantial reduction in poverty, the absolute number of those living below the poverty line remains large at 250 million. As  the official poverty line itself is relatively low, perhaps another 100 to 150 million people right above the poverty line also live a life of deprivation. Hence, the task of giving a decent living standard to 350 to 400 million Indians remains unfinished.

Part of the solution to this problem undoubtedly lies in bringing roads, housing and jobs to rural India as the Congress manifesto contends. But no matter how popular and attractive these policies may seem, the ultimate long-term salvation of the poor lies in providing them high-wage jobs which in turn requires rapid industrialisation. Currently, 65% of India’s population depends on farming. Unless the bulk of this population is moved to industry, whether rural or urban, the heavy pressure on the farmland will preclude significant improvement in the living standard of those earning their incomes from small pieces of land or just labour.


Virtually all developing countries that have successfully eliminated poverty and transited to middle-income status have done so through near double-digit growth of traditional industry. Such growth has allowed the industry to progressively draw the landless or near-landless poor from agriculture into gainful employment and to simultaneously reduce the pressure of  population on farmland.

Reforms in India, on the other hand, have failed to produce fast growth in industry and hence transform the economy from predominantly agricultural to predominantly industrial. The much celebrated information technology sector cannot absorb farm population rapidly, both because it requires 15 years of prior education and, at less than a million employees, has a very small base. In the past decade, not only has Indian industry grown slowly at approximately 6%, its pattern has also been biased in favour of such capital- and skilled-labour-intensive sectors as auto, auto parts, telecommunications, pharmaceuticals and drugs. Labour-intensive industries such as textiles and clothing, footwear, toys, various household items and food processing have at best grown at the average rate of the economy and often much slower.

The reasons for this slow and lopsided growth of the industry are not hard to understand. At the macro level, large fiscal deficits have starved the private economy of investment. And at the micro level, we have made it nearly impossible for labour-intensive sectors to operate on an economically efficient scale. Thus, despite some progress recently, a large majority of the labour-intensive sectors remain reserved for small-scale enterprises. Additionally, labour laws make the setting up of large-scale enterprises unprofitable. As a result, big industrialists and foreign companies have chosen to focus their efforts on capital- and skilled-labour-intensive sectors that are open to them and not subject to the tyranny of labour laws.

If India is to transform itself from a predominantly agricultural to an industrial economy, it must immediately open all sectors to enterprises of all size. Any protection to the small enterprises should be given through direct financial assistance. With the import quotas on textiles and clothing in the rich countries slated to expire on January 1, 2005, this sector is poised for a major global reorganisation. And it will be a pity for India to once again miss the opportunity to capture its fair share of the global market in this key labour-intensive sector.

But the end to the small-scale-industries reservation will be insufficient. Unless our labour laws are reformed simultaneously to achieve a balance between the rights and obligations of workers, India will still miss out on the ongoing reorganisation of many industries in terms of large-scale global production chains. It is unthinkable that even in textiles and clothing, companies will establish the large-scale production chains in India that are fast becoming a commonplace in China and many other developing countries