The 2012 wave of economic reforms: A Comparative analysis with 1991

The 2012 wave of economic reforms: A Comparative analysis with 1991

Raphael Sujith

Raphael Sujith is an MBA student at the Said Business School, University of Oxford. He will be joining Cognizance as a Management Consultant in the US this September.

Since its independence in 1947, Indian economy’s growth had been slow till 1990. The country was largely isolated, at times intentionally, from the rest of the big markets. Due to its huge size, lack of visionary leaders in national economics, administrative red tapes etc. India’s dream for self-reliance remained far. The first major push for economic reforms came in 1991 when Dr. Manmohan Singh took charge of the Finance Ministry under Prime Minister Narasimha Rao.

The scenario and the impact of 1991 reforms

Until 1991, Foreign Direct Investments were restricted and needed levels of government approvals. These restrictions resulted in FDI averaging only about $200 million annually between 1985 and 1991. India was considered more restrictive by world economic powers and despite the opportunity for trade links the choking feeling of these restrictions kept these powers away from having big commercial links.

India’s foreign exchange reserves reached alarming levels in June 1991 facing default. The restrictions on imports resulted in reduction of industrial output. International agencies such as IMF were forcing India to undertake key reforms. To tackle this, Singh devalued the rupee (by about 24%) and opened a few sectors to foreign investments. The interest rates and licenses were relaxed. Foreign investments amounted to US$132 million in 1991–92 and it grew to $5.3 billion in 1995–96. Deficit in the country’s current account which was 3.2% of GDP in 1991 was brought down to 0.4% by 1994. Inflation declined to 8.4% from two digit levels. The ruling government had the mandate in the parliament making them confident for these moves.

Import duties were slashed from levels as high as 200%. Sectors which had strong public sector presence such as telecommunications, fossil fuel exploration, steel etc. started seeing significant private investment. The equity stake in state owned institutions were offloaded gradually to up to 49%. About Rs840 billion was gathered for budgeting.

India coped up well in averting the deficit crisis and was on the track on economic reforms. The economy grew at a healthy rate in between 7 to 9%. Inflation was lowered but still remained in high levels creating strain for non-upper class. There was a huge boom in Technology services sector which contributed 1.2% of the GDP in FY 1998 and grew to 7.5% in FY 2012.

2012 reforms and what brought India to this

India’s growth rates fell below 7% recently. As the government tried to stay afloat in coalition politics, it found it tough to continue the economic reforms through consensus with various parties.  Corruption and scandals reduced the confidence of foreign investors. Manmohan Singh, now the Prime Minister, was branded by the Times Magazine as an underachiever, given his immense credentials and the slow pace the country was growing under his leadership. The stories of companies such as TATA and Posco facing tough challenges in land acquisition made matters worse. New industries were reluctant as there was severe energy shortage in many states. The government was forced to introduce more reforms on a war footing.

As part of the 2012 reforms the controls by the state on various sectors were relaxed. Sectors such as retail, energy, media, and domestic airlines were being opened up. India is one of the largest retail markets in the world with estimated annual sales of USD 450 billion. The reforms will help larger foreign companies enhance their presence in the country with better logistics and expertise. In theory this will also help bringing the food prices down as these firms can eliminate the middle men involved and purchase items directly from the farmers. The farmers may also get a better deal for their produce and will help revitalize the agriculture sector. Also large brands need to source their products locally and this will help improve regional production.

Most of the companies which operate domestically in the aviation sector are in loss. New technologies and practices which have been in place in developed markets for years will be brought to the sector as part of foreign investment. The opening up of the energy sector will help partially solve India’s energy crisis. Similarly the broadcasting sector will attract investments and create a change similar to the mobile phone revolution during the 2000s.

1991 vs. 2012

The reforms in 1991 and 2012 have come in different circumstances. The country currently is losing confidence in international investors and it is high time that it brings back the interest to the developed world. More relaxation needs to be put in place at state levels so that investments can flow freely and administrative issues can be resolved faster between national and state levels. Infrastructure projects undertaken by the government need to be speeded up and hopefully the National Investment Board will help in approving large projects faster. Land and labour rules need to be reformed so that the projects are not stuck in land acquisition. Above all corruption has to be strictly controlled or else the goodness of all these reforms will just fizzle out.

The fear of electoral backlash in 2014 will force the government to be cautious in completing these reforms. The negotiations with regional parties will be tough and this process may be grinding. Opening the retail sector has already started creating backlash among various sections of the country. The markets have responded positively for these changes and the risk of falling into lower grades of credit ratings would force the government to continue its efforts. India being a country which takes its own time for things, these changes will be slow and would bear fruits in medium to long term. In comparison it is history repeating in India in terms of reforms and growth but considering the political nature and the diversity of the country, it is a wait and watch game on how successful these changes are going to be.