Insights into Editorial: Seven failures of economic liberalization
12 July 2016
2016 marks 25 years since the so-called “economic reforms” were launched in India in July 1991. By now, intentions behind policies and practices that characterized such reforms are well known, viz. radical deregulation, marketization and privatization of the industrial, technological and financial sectors, and an across-the-board induction of foreign direct investment and foreign institutional investment, and so on.
What necessitated such transformation?
Licence raj had the unintended consequence of giving birth to a vast and unending bureaucracy, significant public expenditure and the development of a few large corporations that would dominate the private sector. Besides, exports were encouraged while at the same time imports were discouraged.
What changes were introduced?
The external shock of 1991 set the stage for a fundamental mindset shift. The government no longer selectively removed restrictions and rules, though they were only selectively applied. The government also did away with licence raj, ended many public monopolies, and opened several sectors to automatic approval of foreign direct investment. It was an undeniable paradigm shift, and one that changed India dramatically.
The broad goals of this transformation were:
- To increase the productivity of investment of Indian industries.
- To improve the performance of the public sector in order to gain a competitive edge in a fast changing global economy.
- To achieve greater social equity.
Failures of economic liberalization:
The end of the licence raj and the opening up of the economy to private and foreign capital are some positive outcomes of reforms initiated in 1991. However, these reforms have some failures too.
- The share of manufacturing in the gross domestic product is 16.2% now. In 1989-90, the share was 16.4%. This shows that its share in the economy has not increased.
- The combined fiscal deficit of the centre plus the states, as a percentage of GDP, has risen beyond the 1991 level. In 2014-15, the combined fiscal deficit, as a percentage of GDP, was higher than it was in 1995-96. Hence, it has failed to curb the combined fiscal deficit.
- The central government’s gross tax revenues as a percentage of gross domestic product have also remained below the 1991-92 level.
- In 1990-91, capital expenditure accounted for 30% of total central government expenditure. The budget for the current fiscal year puts the share of capex at a mere 12.5%. Productive capital expenditure on infrastructure has not significantly improved.
- Economic liberalization has failed to provide secure and decent jobs to the mass of the population. In spite of all the reforms, the number of employees per non-agricultural establishment has been coming down steadily. It was an average of 2.39 employees per establishment in the 2013 economic census, compared to 3.01 persons in the 1980 economic census. This means the vast majority of the establishments in India are in the informal sector, with neither the capital nor the technology to improve productivity.
- Compared to neighbouring Bangladesh and Nepal, India’s performance in bringing down under-five mortality rates is not so encouraging.
Widespread liberalisation of the economic policy regime was long overdue in 1991, and has played a positive role since, but its impact has run its course and the policy has recognisable limits. It’s now up to the government to address these failures.