30 Years After The Economic Reforms Of 1991, What Are The New Ideas For Growth?

The following is my perspective on the reforms. They don’t amount to a negation or repudiation of what Swaminathan Aiyar had written:

(1) In Aiyar’s piece, this line is a particularly good shot: “India looked better after 25 years of reform than after 30.” Of course, strictly speaking, growth deceleration set in, in 2018-19 and continued into 2019-20. Then came the Wuhan virus in 2020-21 and its Delta variant.

(2) Let us remove the first two years of reforms — 1991-92 and 1992-93 — from our analysis. The reforms were settling down. Let us also remove 2018-19 and 2019-20 — the years in which economic growth sharply decelerated. In the 25 years between 1993 and 2018, India had achieved 7 per cent real growth or more in 15 years. I have taken the liberty of including two or three years in which growth was between 6.6 per cent and 6.8 per cent in this category.

(3) In the 25 years between 1964 and 1989, India had achieved that growth rate only in seven years. So, yes, there is prima facie evidence of association between economic reforms and acceleration in economic growth.

(4) However, of the 15 years in which growth exceeded 7 per cent, there was a streak of seven out of eight years between 2003-04 and 2010-11 in which growth exceeded 7 per cent. The only exception was 2008-09. But the Uber-7 per cent number achieved in the later years of this eight-year period arguably set the stage for the underperformance to follow, due to the seeding of non-performing loans and impaired financial system during that period.

(5) An interesting and contrasting parallel was between 1997-98 and 2002-03 when growth exceeded 7 per cent only in one year out of the six. However, the reforms initiated in this period — high real interest rates forcing corporate deleveraging, small savings interest rate liberalisation, privatisation, infrastructure building, etc, — were among the contributors to the high rates of growth that came from 2003.

Growth or deceleration or stagnation, the lagged effects of earlier acts of omission and commission are important. It is understandable that op-ed have no space for them.

Likewise, it is possible that the reforms of the last few years such as the introduction of GST, IBC, direct benefit transfer (DBT) and financial inclusion will be further improved upon in the coming years and will start making larger contributions to economic growth in the coming years.

(6) Equally importantly, synchronised global growth that happened since 2003 added about 1 per cent to 1.5 per cent to the growth rate every year for the next seven years. Well before the ‘forgettable last five years’, Ruchir Sharma had written in The Rise and Fall of Nations that the downshift in global trade growth would shave off that 1 per cent to 1.5 per cent contribution of exports to economic growth in the second decade of the millennium. That happened for many of the high-flyers of the first decade —India, Brazil, Indonesia and South Africa.

The only country that has sustained a very high growth rate for little over a quarter century is China. It is a unique case. Up to 2005, growth was largely productivity-driven and post-2005, it was debt-driven. We will ignore lingering and persistent issues with growth measurement in China.

(7) In the final paragraph, Aiyar’s article referred to the remaining things that need to be addressed for growth to recapture the heights of 7 per cent and above. Most of these hurdles were present before with the same level of intensity or higher even in the quarter century from 1993 to 2018 when growth exceeded (or came close to) 7 per cent in 15 of them. So, one argument is that they did not stand in the way.

(8) In India, growth decelerated in 2018-19 and in 2019-20. In 2018, on top of the impaired banking system, a ‘too-big-to-fail’ non-banking financial company failed. That is IL&FS. The Reserve Bank of India had maintained an ultra-tight monetary and liquidity policy too — just one piece of evidence to corroborate it.

In the first decade, the rupee appreciated in seven out of 10 years against the US dollar. In the second decade, the rupee appreciated in just one out of 10 years. That was 2018, a year in which the Federal Reserve was also increasing interest rates. So, one can imagine how restrictive India’s monetary policy was, in 2018.

(9) There are three external/exogenous growth headwinds for India (and emerging market economies in general) in the remaining nine years of this decade: (i) continued and accelerated reversal of globalisation and consequent deceleration in global trade volume growth; (ii) emphasis (or, obsession) with green growth shutting out relatively more affordable fossil fuel-based energy and industrial growth and (iii) economic slowdown, asset price crash and social implosion in advanced nations.

The article/chapter on the ‘state of the economy’ in the July monthly bulletin of the Reserve Bank of India has a good box on green finance and its implications even though the box does not state them as risk factors. They are. The article can be found here.

(10) So, if India manages to grow its real gross domestic product (GDP) by 5 per cent and nominal GDP at 9 per cent between 2021-22 and 2029-30 and assuming a dollar-rupee exchange rate of 70, India’s real GDP will be $3 trillion and nominal GDP $6.7 trillion by the end of the decade. I will take that.

The issues that Aiyar identifies in the last paragraph will have an asymmetric payoff. If addressed, they may not add much by way of growth for the rest of the decade. However, if unaddressed, they pose downside risk to the above numbers.

Therefore, those issues need to be placed and kept front and centre of the public policy agenda for the rest of the decade and beyond.

I will add two more to his list. First, reform of the Indian banking system. The nationalisation agenda has run its course. This government has signalled its intention to shrink the size of the public sector and withdraw from government ownership. But, intentions have to translate into action. I had written about it in 2018 for Swarajya and recently, Tamal Bandyopadhyay had written along similar lines.

Second issue has to do with the behaviour of the Indian private corporate sector. If listed companies and large enterprises do not reward their workers fairly, keep executive compensation in line, pay their suppliers on time, invest in capital formation and utilise bank loans for the purposes intended, then they too will pose a big downside risk to the India growth story.

This article was first published on the author’s blog, and has been republished here with permission.