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An Outline
Mihir Rakshit
Though some tentative steps towards liberalisation were taken in the mid 1980s,it was only from 1991-1992 that
the government of India has been implementing in earnest a fairly comprehensive economic reforms programme.
Without going into the details of all the reforms measures, I shall focus primarily on those policies which seem
to have important short- and medium-run macroeconomic consequences.
While all aspects of the behaviour of the Indian economy since 1991 cannot be attributed to the
reforms programme undertaken by the government, it is useful to take stock of the major macroeconomic
indicators over the last two to three decades, and to see whether or in which areas there have occurred
significantly positive or negative developments.
Perhaps the most striking feature of the Indian economy during the 90s was that unlike most other
developing nations which had adopted IMF sponsored structural adjustment programmes, India did not have to
undergo a prolonged period of downturn in GDP and capital accumulation : after a dip in the GDP growth rate
along with a sharp absolute decline in aggregate investment during 1991-92 , there was a smart spurt in both
the variables from 1992-93 onwards. Indeed not only were growth rates of GDP , per capita income and capital
accumulation higher in 1992-2001 than the corresponding averages in the 70s and the 80s, but the coefficients
of variations of these variables were also lower during the former period. The other important positive features
of the post-reforms era are:
(a) a considerable fall in the poverty ratio , from 36.0 percent to 26.1 percent, between 1993-94 to 1999-
2000;
(b) a sharp cut-back in monetised deficit from 2.7 percent of GDP in 1990-91 to (-)0.2 percent in 1999-
2000; and
(c) a decline in the inflation rate from double-digit figures in the early 90s to less than 5 percent during the
closing years of the decade.
It was in the external sector , however, that the performance of the economy was quite remarkable.
Considerable improvements in the balance of payments over the period 1990-91 to 2000-01 were attested by
(a) a reduction, as percentages of GDP, in external indebtedness and current account balance from 28.7 percent
and 3.1 percent to 22.3 percent and 0.5 percent respectively;
(b) increase in foreign exchange reserves from USD 5.8 billion (amounting to 2.5 months' import bill) to USD
42.2 billion (representing an import cover of 8.6 months);
(c)a sharp decline of short-term debt as percentage of forex reserves from 146.5 percent to 8.2 percent; and
(d)a fall in debt service payments as percentage of current receipts from 35.3 percent to 17.1percent.
The economy also became much more open during the reference period, with (a) merchandise trade- and
invisible trade - GDP ratios recording spectacular increases from 14.6 percent and 4.8 percent to 22.8 percent
and 12.0 percent respectively; and (b) a rise in the country's share of exports in world trade from below 0.5
percent to nearly 0.6 percent.
Finally for the fiscal scenario, which constitutes, by common consent, the weakest area in India's reforms
programme and has prompted, as we have seen, downgrading of the country's credit rating by an international
agency. In marked contrast to the behaviour of the two ratios during the earlier decade, the 90s were
characterised by a declining trend in both the total revenue- and tax-GDP ratio. Again as ratios of GDP,
government consumption, revenue deficit, fiscal deficit, primary deficit and public debt showed a declining
trend during the initial phase of the reforms programme, but the trend has been completely reversed since the
mid 1990s. The focus of successive budgets over the last 5 to 6 years has been reduction of these ratios; but the
problem has proved intractable and their actual figures have tended to be consistently higher than the budget
estimates by a fairly wide margin.
Remembering that in recent years the Indian economy has become much more open and hence subject
to external shocks to a greater extent than in the 80s, all the weaknesses of the economy noted above may not
perhaps be attributed to the reforms programme. However, not only the trade balance but exports also constitute
even now a relatively small fraction of GDP so that their behaviour cannot as yet account for major changes in
the country's GDP or other macro variables. Again, loss of the growth momentum and declining trend started
well before the Asian crisis, not to speak of the recent slowdown of the world economy. It is also pertinent to
note that India was an important beneficiary of the IT revolution in the 90s. If despite that the economy has
been experiencing deceleration in growth rates of GDP, investment and employment, and showing signs of
growing fiscal fragility, it appears reasonable to surmise that there must be something wrong, by way of
omissions or commissions, with the reforms programme itself.
The main sources of weakness of the reforms programme seem to be the following:
(a) Abdication of the government's responsibility to ensure adequate effective demand, confirmed
both by past policies and the Fiscal Responsibility and Budget Management bill lying before the
parliament.
(b) Reforms, especially in the financial sector, without first promoting and ensuring well functioning
markets so that (i) there could be adequate credit delivery systems for small and medium
borrowers; and (ii) investors were not taken for a ride by unscrupulous companies or financial
institutions.
(c) Fiscal fetishism or the bogey of public borrowing irrespective of its purpose or the state of the
economy.
More generally, the problem lies with acceptance of the (intermediate) targets laid down in the
canonical reforms agenda, without examining critically, in the context of the structural and other characteristics
of the Indian economy, how the various targets are related to one another ; whether they are consistent; or how
far they promote the basic objectives. The result has been intellectual lethargy in official circles. Indeed, the
counter-productive nature of many a government measure or failure to follow appropriate policies at critical
junctures may be traced to an inadequate appreciation of India's macro-economic linkages and hence of the
short- and long-run implications of the instruments used for attaining the (intermediate) goals. It is this
inadequacy which seems to lie at the root of:
(a) cutbacks in public capital formation, especially in infrastructure , for purpose of reducing fiscal deficit;
(b) reduction in agricultural investment along with rising procurement prices and fertilizer subsidies;
(c) failure to implement an expansionary policy even while the FCI has been carrying mountainous and rotting
food stocks; foreign exchange reserves are far above the requirement; and the economy has been suffering
from demand deficiency for a number of years;
(d) sharp reductions in monetised deficit despite the growing interest burden of the government and widening
output gap; and
(e) encouragement of FII inflows and accumulation of large forex reserves in the face of growing
unemployment and unutilised capacity in the economy.
GDP Growth Rate 2.95 (141.9) 5.81 (38.9) 5.61 (32.7) 6.1 (20.9) 6.68 (16.9) 5.35 (21.6)
Percapita GDP Growth Rate 0.73 3.67 3.68 4.17 4.75 3.42
Investment Growth Rate 4.65 (238.4) 6.48 (82.1) 6.93 (136.3) 8.31 (47.0) 9.63 (38.9) 6.68 (54.6)
Fixed capital formation Growth Rate 3.62 (181.2) 6.72 (33.8) 6.88 (86.9) 7.73 (75.6) 8.49 (84.2) 6.48 (57.2)
Public Investment Growth Rate na 6.9 (151.3) 3.2 (260.5) 4.3 (197.1) 2.28 (63.9) 7.75 (10.5)
Private Investment Growth Rate na 7.60 (251.2) 9.01 (205.1) 11.41 (151.7) 11.68 (189.8) 10.98 (74.4)
Public Consumption Growth Rate 4.42 6.92 (37.2) 6.38 (78.5) 7.63 (61.6) 4.66 (57.44) 12.58 (16.6)
(120.1)
Investment as % of GDP 17.64 21.23 24.42 24.41 24.82 23.90
Saving as % of GDP 18.38 19.51 23.20 23.15 23.50 22.80
ICOR 5.98 3.65 4.35 4.00 3.72 4.47
WPI Inflation 9.4 (100.6) 7.97 (48.8) 8.04 (42.1) 7.16 (54.6) 8.74 (42.9) 5.18 (70.5)
Services Share in GDP 34.40 38.60 44.30 44.92 43.04 47.28
Growth Rate 4.5 (36.2) 6.6 (29.9) 7.6 (24.9) 8.1 (19.6) 7.55 (24.4) 8.82 (11.4)
Contribution to 52.70 43.60 57.60 59.65 48.66 77.94
GDP growth
Industry Share in GDP 22.80 25.00 27.10 27.12 27.11 27.13
Growth Rate 3.7 (95.8) 6.8 (31.3) 5.9 (56.7) 6.39 (44.3) 7.61 (42.6) 4.86 (26.7)
Contribution to 28.70 28.90 27.60 28.42 30.91 24.67
GDP growth
Agriculture Share in GDP 42.80 36.40 31.15 30.40 32.42 27.88
Growth Rate 1.3 (585.7) 4.67 (125.6) 2.87 (131.2) 3.12 (125.1) 4.64 (80.8) 1.23 (297.8)
Contribution to 18.60 27.50 14.80 15.55 22.54 6.38
GDP growth
Sources: RBI, Report on Currency & Finance, 2000-01; RBI Handbook, 2001;Economic
Survey, 2001-02
Note: Figures in brackets indicate co-efficient of variation (%)