People's Democracy

India’s Failed Economic Reform

 Dipak Basu

THE major argument of the proponents of ‘Economic Reform’ was that the earlier planned development in India from 1951 to 1990 has restricted the growth of the Indian economy. International financial institutions have long argued that a market economy will release the tiger of India caged by the restrictions of the planned regime. The so-called ‘Economic Reform Programme’ was started in 1991 with false hopes created by liberalisers, but after thirteen years of reforms, Indian economy is in a worse condition than it was during the planned regime.  The reality is very different from the forecasts made by the international financial institutions.

ECONOMIC GROWTH

Economic reforms were started in 1991-92.  The argument of the proponents was that the previous regime of the planned economic development in India had resulted in a slow growth of the economy. The ‘Reform process’ was supposed to bring in a new phase of rapid economic development by removing the distortions caused by restrictive government policies under the planned regime of 1951-90. Let us examine what are the consequences of the ‘Reform Process’ on economic growth. The Table 1 gives us the comparative figures:

The figures in the table show that the overall growth rate of the GDP (Gross Domestic Product) in the ‘planned regime’ had not done badly during 1980-90 compared with the ‘reformed ‘ regime during the 1990s.  In fact, in the later phase of the ‘reformed’ regime from 1997 the growth rate of the economy was much lower than during the ‘planned’ regime.  This is true in almost every area, per-head income, fixed capital formation, government consumptions, and growth rates for industry, agriculture, and the efficiency of capital. Only the service sector and private investments did better under the ‘reformed’ regime.  In agriculture, the most important segment of the economy, the performance of the ‘reformed’ regime is the worst.

Table 1

Comparative Economic Growths under ‘Planned’ and ‘Reformed regimes in India (Growth Rates)

Note: ICOR= Incremental capital to output ratio, an index of inefficiency of capital. Source: Economic Survey, 2001-2.

The most important argument of the supporters of the ‘reformed’ regime that planned economy was inefficient, is not supported by the facts.  The incremental capital to output ratio (ICOR) signifies the inefficiency of capital, if it is growing the economy is getting increasingly inefficient to utilize capital.  This is what has happened in the ‘reformed’ regime of the 1990s, where the ICOR had gone up from 3.65 during the 1980s to 4.35 during the 1990s and to 4.47 during 1997-2000, proving exactly the opposite of what the World Bank-IMF economists and their Indian supporters are preaching.

The saving rate during the ‘reformed regime’ is stagnant now. In 1990-91, the national saving, as a percentage of the national income was 23.1.  In 2000-1, it was 23.4.  Without the increase in the saving rate, the economy cannot grow, as savings means supply of capital for growth. The fantastic growth rates observed in Singapore, Taiwan, South Korea and above all in Japan during the post-second world war period were due to their very high rates of savings, more than 34 per cent. In China as well, savings rate is more than 40 per cent.  In India, the saving rate is 23 per cent and it has not gone up much for the last ten years.  Thus the great declarations of the liberalisers that India will achieve 8 per cent growth very soon, is nothing but wishful thinking, which cannot be materialised without massive increase in the saving rate.

However, if the recommendations of the Kelkar Commission on public finance to remove all incentives for savers and the proposals to abolish compulsory provident funds and pensions for the employees, are to be replaced by the Chilean style voluntary private pensions, are any indicator of the intentions of the government, the economic policy of the government is directed against the savings rate.  Perhaps the government expects that foreign investments are going to rescue the economy, but there is no evidence anywhere in the world that an economy can be developed using foreign investments alone. Foreign investments follows high rate of economic growth.  Japan and South Korea have developed without any foreign investments. Flows of Western foreign investments to China have started after China has already achieved, double-digit growth rate for her economy.

The cost of whatever growth the ‘reformed’ regime has achieved so far, is the high level of debts for India.  The total external debt outstanding for India has gone up from US 83.8 billion dollar in 1991 to US 100.3 billion dollar in 2001.  How India is going to pay these back when India’s balance of payments, despite of continuous devaluation of rupee since 1990, is in chronic deficits, is unknown to the government. At the same time, India is having a very high level of foreign exchange reserve, signifying the inability of the Indian economy to absorb foreign capital. That is preventing rupee to go down in order to maintain India’s competitiveness in the world economy. A country must devalue when it receives foreign investments, if it is unable to do that its balance of payments will sooner or later will collapse and there will be sudden outflows of money which can destroy the economy.  A situation similar to that already took place in South-East Asia in 1998, however India has not learned any lesson from it.

GROWTH OF MONOPOLY HOUSES

Liberalisation measures have benefited a minuscule section of the society. They have encouraged growth of monopoly houses reflected in rapid growth of their assets. For example, assets of Tatas increased from Rs 85,310 million in 1991 to Rs 474,460 million in 1998-99, that is, in just eight years. Over the same period assets of Reliance rose from Rs 360,00 million to Rs 337,570 million and that of Essar rose from Rs 7,560 million to Rs 171,450 million. Likewise other industrial houses also registered phenomenal growth in their assets.

Economic ‘reforms’ particularly the liberalisation measures have enabled private companies to earn huge profits even during the latter half of the nineties when industrial growth was sluggish. In the year 2000, net profits of Reliance industries, the largest private sector company increased by 41.3 per cent. Net profits of Tata Steel rose by 49.7 per cent, of Grashim industries by 43.3 per cent and of Hindustan Lever by 27.8 per cent. Among the top 10 private sector companies Telco and Larsen and Toubro were the only companies which failed to register an increase in their profits in the year 2000.

RUINATION OF AGRICULTURE & PDS 

The government in a way has rendered the Public Distribution System (PDS) irrelevant. People have been divided into two categories - those below the poverty line (BPL) and those above the poverty line (APL). A large number of people above the poverty line are really poor but the issue prices of foodgrains, which were fixed for them under the PDS, are either equal to the prices prevailing in the market or even higher.

For the people BPL the issue price of wheat was raised from Rs 250 per quintal in 1997-98 to Rs 450 per quintal in 2000-01.  Likewise, the issue price of rice has been raised from Rs 350 per quintal to Rs 565 per quintal. At these increased issue prices of foodgrains most of the rural poor now find it difficult to purchase their monthly quota of ration. The food subsidy has been drastically reduced and the results are there for everyone to see. In July 2002, 63 million tonnes of foodgrains were lying in the warehouses of the Food Corporation of India and yet the people were dying of starvation in the rural areas.

Two major factors are responsible for the present ruination of agriculture in this country.  First, in its eagerness to reduce fiscal deficit the government has substantially reduced the development expenditure in agriculture.  Secondly, import liberalisation has contributed in a big way reduction in the prices of agricultural products.  Having failed in getting remunerative prices for their products, many farmers have curtailed their farm operations, which in turn have increased unemployment among the agricultural workers.  Import liberalization is thus a major cause of the existing plight of the peasantry.  Suicides by many farmers in the recent past reflect the consequences of the liberalization measures.

INCREASED POVERTY

The economic reforms have contributed to increased poverty and economic inequality.  First, we need to examine as to what has happened to incidence of poverty.

According to the NSS (National Sample Survey) in 1983, while 45.6 per cent of the rural population was below the poverty line, the incidence of poverty in urban areas was around 40.8 per cent.  Hence, the overall incidence of poverty for the country as a whole was 44.5 per cent.  By 1990-91, the incidence of poverty had declined to 35.0 per cent in the rural areas and to 35.3 per cent in the urban areas.  Taking the two sectors together the incidence of poverty was 35.1 per cent.  This implies that during the eighties the increase in growth rate coupled with the poverty alleviation programmes led to a significant decline in the spread of poverty.  This trend was however reversed during the nineties and the liberalization decade witnessed a steep rise in the incidence of poverty particularly in the rural sector.

In 1998, 45.2 per cent of the population in rural areas was below the poverty line.  Even overall, situation was not distinctly better as at the country level -rural and urban sectors considered together 43 per cent of the population was below the poverty line.

The rise in the overall poverty ratio during the post-reform period in spite of the higher GDP growth is to be attributed to the growing rural-urban divide. The 53rd round of the NSS data for 1997 (January to December) reveal that India's rural poverty ratio had gone up by 3.42 per cent between 1991 and 1997 even as urban poverty ratio declined marginally by 1.32 per cent.

Measured in terms of monthly per capita expenditure, the poverty ratio was estimated at 33.97 per cent in the urban areas in 1997 against 35.29 per cent at the beginning of 1991 (46th round of NSS data). On the other hand, the proportion of rural population in the poverty bracket had risen over the same period to 38.6 per cent from 35.04 per cent.

The 54th round of NSS for 1998 conducted between January and June 1998 shows a widening of disparity between rural and urban expenditure at both current and constant prices. In absolute terms, the average per capita expenditure at current prices rose from Rs 244 in 1991 to Rs 382 in 1998 in rural areas and from Rs 370 to Rs 648 in urban areas. At constant prices, the expenditure has actually declined from Rs 164 in 1991 to Rs 153 in 1998 in rural areas and rose from Rs 257 to Rs 269 in urban areas.

Supported by the World Bank, Indian government has introduced a new method to calculate the poverty rate so as to conceal the facts and propagate a massive reductions of the poverty rate which given the increasing rate of unemployment cannot be supported by the facts.

The methodology for collecting data on consumption expenditure was changed by the NSS for the 55th round and the government got the estimates of the poverty, which were not comparable with the earlier estimates.  One of the major flaws is to assume that the rate of poverty in the villages around an urban centre is the same as in the city itself.

The NSS data for 1999-2000 reveals that the rate of growth of total employment fell sharply from 2.04 per cent per year during 1983-94 to 1993-94, to only 0.80 per cent per year in the 1993-94 to 1999-2000 period. On the other hand, labour force has grown at a rate of 2.0 per cent per annum during the same period. How poverty can go down when unemployment is increasing only the World Bank and the Indian government can answer.

However, since these biased  estimates of poverty based on the data obtained from the 55th round of the NSS showed lower incidence of poverty, the government adopting Goebbelsian tactics propagated the lie that the incidence of poverty declined during the decade of economic reforms.  This approach of the government of manipulating the methodology to obtain convenient results to prove the point that the liberalization measures have brought down the incidence of poverty is highly unethical as it amounts to criminal misuse of statistical tools

As a result of the reform measures of the nineties, income inequalities have increased.  In 1992, the lowest 40 per cent households had accounted for 20.6 per cent of the national household expenditure.  Their share however declined to 19.7 per cent in 1997.  In contrast, share of the top 10 per cent households in the national household expenditure rose from 28.4 per cent to 33.5 per cent over the same period.  This accentuation of income inequalities may be attributed to the reform measures of the nineties, which on the one hand denied employment opportunities to the common people but enriched business community.

(Dr Dipak Basu is Professor in International Economics, Nagasaki University, Nagasaki, Japan.)

(To Be Continued)