Financial Daily from THE HINDU group of publications
Thursday, May 16, 2002
Economic and fiscal policy reforms -- I: Looking back to move ahead
INDIA embarked upon major economic and fiscal policy reforms in the early 1990s in the wake of a serious balance-of-payments (BoP) crisis. The First Generation Reforms played out in the last 11 years with liberalisation happening across key areas of fiscal policy, trade and exchange rate regime, industrial and foreign investment policy, financial sector among others. The results were mixed. With the Second Generation of Reforms now on the anvil, it seems opportune time to review the developments of the last decade so that the gains can be consolidated and the weaknesses or imbalances addressed.
The BoP crisis of 1990-91 was ominous. By mid-1991, the country's foreign exchanges reserves were less than $1 billion, barely enough to sustain two weeks of imports. The growth in exports declined dramatically and in the absence of any support from foreign commercial lenders, India was forced to pledge a portion of its gold reserves to avoid an imminent default in its international debt service obligations. Though the immediate trigger for the BoP problem was the oil price shock and the dwindling remittances from West Asia due to the Gulf War, the legacy of excessive economic controls, high cost import substitution policies and heavy dependence on external commercial borrowings during 1980s, was also to blame.
The impending crisis forced the government to initiate far-reaching policy reforms to attain macro-economic stability and higher rates of growth. The decade-long reform process which can be divided into two phases of crisis management and stabilisation (1991-92 to 1993-94)) and the post-stabilisation phase (1994-95-till date) sought to transform India from an over-regulated and closed economy into a fairly open one with a greater role for the private sector and market forces in the allocation of resources.
Eleven years down the line, the picture that emerges is quite a contrast. The structural adjustment programme that followed the BoP crisis was reasonably painless with no drop in the total GDP growth or incidence of high inflation or large-scale unemployment, as was feared. The GDP annual average growth rate actually accelerated from 5.6 per cent during the 1980s to little over 7 per cent during the mid-1990s. According to the Economic Survey 2001-02, the inflation, in terms of the wholesale price index, was lowest in the last two decades and the foreign exchange reserves touched a new high of $50 billion in January 2002. The current account deficit declined to 0.5 per cent of GDP and the trade deficit narrowed to 3.1 per cent of GDP in 2000-01.
The economy also successfully weathered several harsh tests including the East Asian financial meltdown during 1997-98, international sanctions following the Pokhran tests in 1998 and a general slowdown in the global economy.
Despite impressive statistics, the results of the decade-long reforms process have left economic analysts a little puzzled as to why "the sleeping economic tiger'' which should have outpaced China to become a major Asian economic power continues to sleep so blissfully defying all earlier predictions. It is being argued that sectoral and spatial distribution of the economic growth has been uneven. There are concerns that the income distribution is skewed and does not cover all sections of society. The overall fiscal situation remains grim. Cumulatively, these issues raise questions on the long-term sustainability of the reform process and economic growth, especially in terms of its quality and outcome.
The initial upswing in economic performance during the mid-1990s gradually tapered off and the economic growth was 4 per cent in 2000-01 and 5.4 per cent in 2001-02. Most disconcerting is that the relatively high growth rates of the last decade have not been sourced to the performance of the agricultural and industrial sectors (which provide employment to majority of the people) but to the services sector.
A perceptible decline in the contribution of the agricultural and industrial sectors to the overall GDP growth and the emergence of the services sector as the prime mover of the economy indicates that the real income generation is not taking place in sectors which provide sustenance and livelihood to the bulk of the Indian population. This also hints at the possible existence of hidden unemployment, under-employment and as a result, lack of adequate purchasing power among those employed in the primary and secondary sectors. These distortions skewed income distribution along with the lack of purchasing power necessary to propel demand among a large section of the population coming at a time of general economic slowdown could be a perfect recipe for a prolonged recession in the national economy.
Balanced regional development has always been an avowed objective of policy planning in India. Hence, it is pertinent to ask as to what has been the impact of the reform process on this objective. The policy reform process at the State level in India has been rather slow and the outcomes have also been varied. Few States such as Tamil Nadu, Andhra Pradesh, Karnataka, Maharastra and Gujarat have been reform-oriented while others have to do a lot of catching up.
An analysis of the Gross State Domestic Product of 10 States in the pre-reform period (1980-81 to 1990-91) and the reform period (1991-92 to1997-98) shows wide variations in the economic performance of States. The National Human Development (HDI) Report-2001 indicates that while there has been a considerable improvement in the quality of life and levels of human well being across the States during the last two decades, wide inter-State disparities continue to remain.
However, the existent inter-State socio-economic aberrations cannot be blamed on economic reforms in the absence of reliable statistics and information. Nonetheless, the genuine apprehensions that the reforms programme may have created certain imbalances need to be recognised and rectified.
The overall fiscal situation of the country is another area of serious concern. The fiscal deficit for 2001-02 has been projected at 5.1 per cent of GDP compared to the Budget estimate of 4.7 per cent. The revenue deficit of the government is pegged at Rs 91,733 crore in the 2002-03 Budget, up from Rs 78,821 crore in 2001-02. The Economic Survey 2001-02 has clearly brought out the deleterious effects of the total fiscal deficit of the Union and the State governments, which is estimated to be about 10 per cent of GDP "a situation very similar to that prevailing in the early 1990s". But, in reality, the position could be much worse, if the off-Budget borrowings, outstanding guarantee liabilities, and the poor performance of the Central and State PSUs are taken into account. Therefore, the issue of fiscal restraint and consolidation at the level of the Union and the States assumes a very high priority in the Indian context.
Notwithstanding these upsets, the gains made during the decade-long reform process are substantial. We have demonstrated the capability to grow at a fairly high rate without running into BoP problems, and weathered major global economic upheavals. The external accounts are stronger, the trade and tax regimes more simplified and the financial sector liberalised. But the slowdown in GDP growth after 1997-98, its skewed sectoral and spatial composition, possible inequities arising out of it coupled with declining overall fiscal health of the country are areas of concern. The fact that the process is no longer reversible is not under question. But where is it that we go from here is the real question?
(The author is Deputy Secretary, Finance Department, Government of Tamil Nadu. The views expressed are personal and do not in any way reflect the policies of the Government.)
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