Why 1991 stands out as a watershed year in the economic history of India

• This was the year in which the economy was faced with a severe balance of payments crisis.
• In response, we launched a wide-ranging economic program to reform, restructure and modernize the economy.
• The break with the past came in three important ways:
• Dismantling of license and permit requirements: The vast network of licenses, controls, and permits that dominated the economic system was dismantled.
• Redefining the role of the state: Changes were made by redesigning the role of the state and allowing the private sector a larger space to operate within,
• Integration with world economy: The inward-looking foreign trade policy was abandoned and the Indian economy was integrated with the world economy and trade.

Judging the performance of the economy after liberalisation

• It is appropriate to look at three broad parameters to judge the performance of the economy after liberalisation — growth rate, current account deficit, and poverty reduction.

1) Growth rate after 1991

• Between 1992-93 and 2000-01, GDP at factor cost grew annually by 6.20%.
• Between 2001-02 and 2010-11, it grew by 7.69% and the growth rate between 2011-12 and 2019-20, was 6.51%.
• Best growth rate: The best performance was between 2005-06 and 2010-11 when showing clearly what the potential growth rate of India was.
• This is despite the fact that this period included the global crisis year of 2008-09.

2) Foreign reserves

• BoP: The balance of payments situation had remained comfortable.
• Most of the years showed a small deficit.
• The exceptions were 2011-12 and 2012-13 when the current account deficit exceeded 4%. This was taken care of quickly.
• Forex reserves: Foreign exchange reserves showed a substantial increase and touched $621 billion as of last week.
• The opening up of the external sector, which included liberal trade policy, market-determined exchange rate, and a liberal flow of external resources, has greatly strengthened the external sector.

3) Poverty ratio

• Going the Tendulkar expert group methodology, the overall poverty ratio came down from 45.3% in 1993-94 to 37.2% in 2004-05 and further down to 21.9% in 2011-12.
• The post-reform period up to 2011-12 did see a significant reduction in poverty ratio because of faster growth supplemented by appropriate poverty reduction programmes such as the Rural Employment Guarantee Scheme and the Extended Food Security Scheme.
• With the decline in growth rate since then and with negative growth in 2020-21, this trend must have reversed, i.e. the poverty rate may have increased.

Way forward

• Growth requires more than reforms. Reforms are, in the words of economists, only a necessary condition. It is not sufficient.
• Need to increase investment: It is the decline in investment rate of nearly five percentage points since 2010-11 that has led to the progressive decline of the growth rate.
• Reforms supplemented by a careful nurturing of the investment climate are needed to spur growth again.
• Reform agenda must continue: First of all, there is a need to move in the same direction in which we have been moving in the past three decades.
• Policymakers should identify the sectors which need reforms in terms of creating a competitive environment and improving performance efficiency.
• From this angle, we need to take a relook at the financial system, power sector, and governance. Centre and States must be joint partners in this effort.
• Second, in terms of government performance, there should be an increased focus on social sectors such as health and education.

Conclusion

Growth and equity must go together. They must not be posed as opposing considerations. They are truly interdependent. It is only in an environment of high growth, equity can be pushed aggressively.

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