Savouring a Decade of Reforms
This month marks the end of the first decade of India’s economic reforms. What have we accomplished? In this feel-good piece, I demonstrate that the focus on incremental reforms in individual years results in an understatement of the totality of India's achievements.
Economic Times, July 18 2001
THIS month marks the end of the first decade of India’s economic reforms. What have we accomplished?
During the last two years, I have written critically about the pace and content of the reforms. But today is different: in this feel-good piece, I wish to demonstrate that the focus on incremental reforms in individual years results in an understatement of the totality of our achievements. The analogy is with the hour hand of the clock, which looks completely static, and yet completes a full circle every twelve hours.
Begin by recalling the industrial policy prevailing prior to the launching of the reforms. The heavy industry was a state monopoly. Other industry was either subject to strict industrial licensing or reserved for the small-scale sector.
The tight control of the government on the industry was aptly captured by a leading cartoonist in a 1980s comic strip in which the industry minister is shown telling his staff, "We shouldn't encourage big industry — that is our policy, I know. But I say we shouldn't encourage small industries either. If we do, they are bound to become big..."
The reforms of the last ten years have gone a long way towards freeing up the domestic economy from this state control. The state monopoly has been abolished in virtually all sectors. With rare exceptions, all sectors of the industry have been opened to the private sector. The Licence Raj is a thing of the past with the result that limousines of major industrialists are no longer queued up at the Udyog Bhavan. The small-scale reservation still persists but even here progress has been made. Apparel, with its large export potential, has been opened to all investors.
In the area of international trade, in 1991, import licensing was pervasive with goods divided into banned, restricted, limited, permissible and those subject to open general licensing. The OGL category was the most liberal but it covered only 30 per cent of the imports. Moreover, certain conditions had still to be fulfilled before the permission to import was granted under OGL system.
Imports were also subject to excessively high tariffs. The top rate was 400 per cent. As many as 60 per cent of tariff lines were subject to rates ranging from 110 to 150 per cent and only 4 per cent of the tariff rates were below 60 per cent. The exchange rate was highly over-valued. Strict exchange controls applied to not just capital account transactions but also current account transactions. Foreign investment was subject to stringent restrictions. Companies were not permitted more than 40 per cent foreign equity unless they were in the high-tech sector or export oriented. As a result, foreign investment amounted to a paltry $100 to 200 million annually.
Today, import licensing has been completely abolished. Even as developed countries continue to protect textiles and clothing sector through the multi-fibre arrangement, India has done away with quantitative restrictions in this sector. Our highest tariff rate has come down to 35 per cent with the average tariff rate declining to approximately 25 per cent. Our foreign investment regime is as liberal as in other developing Asian countries.
Ten years ago, telecommunications services were a state monopoly and constituted a major bottleneck on the conduct of business activity. So callous was the attitude of the government that when a Member of Parliament complained about poor telephone service in Delhi during early 1980s, the then telecommunications minister proceeded to remind him that in a poor country like India, telephone was a luxury. The minister then added that if the Member was unhappy with the service, he could return his phone since many customers had been queued up for it for years.
Today, private sector has become an active participant in the telecommunications sector and the New Telecom Policy, issued in 1999, sets the target of providing telephones on demand by the year 2002. In many cities, this goal has already been achieved. The provision of cellular mobile as well as fixed service is now open to private sector including foreign investors. As a result of these changes, telecommunications services in India are fast leapfrogging.
Progress has also been made in many areas that were previously off limits to reforms. Insurance has been opened to private investors, both domestic and foreign. Diesel oil and gas prices have undergone some increases. At least symbolic reductions have also been made in fertiliser and food subsidies. The value-added tax has undergone a substantial rationalisation.
These reforms have paid handsomely. We have been able to achieve a growth rate of more than 6 per cent with full macroeconomic stability. The rate of inflation has been low and foreign exchange reserves are sufficient to finance imports for more than eight months.
But the greatest change in the last ten years has perhaps been in the attitude towards reforms. As Vijay Kelkar, Executive Director, IMF, puts it, whereas the reforms in early 1990s were crisis driven, today, they are consensus driven. Initial fears that changes in governments will bring the reform process to a halt have turned out to be unfounded. Governments have come and gone but reforms have stayed.
We now have a prime minister who actively seeks the roadmap of reforms from his Economic Advisory Council so that he may double the country's per-capita income in the next decade. We have a commerce minster, who boldly refuses the demands for a firewall of tariffs by the industry. And we have a finance minister who is keen to push ahead with reforms with each successive budget.
Prior to the launching of the 1991 reforms, in a speech at the World Bank, Abid Hussain joked that while pessimistic Indian economists thought things could not get any worse, optimistic economists thought they could.
Today, our optimism need not be so muted. Of course, much remains to be done. But that is the subject of future columns.