The entire series is worth watching, but I picked this one in particular because of what Harsha and Ashwin talk about at around the 24 minute mark.
Tag: 1991 reforms
Land, Labor and Capital
A very long extract to begin with today, because it just is that important:
The first tentative economic reforms began after Indira Gandhi came back to power in 1980. Political scientist Atul Kohli has written of how she made her peace with Indian business houses. The licence raj was eased. Taxes were reduced. VP Singh presented a reformist budget in 1985, when Rajiv Gandhi was prime minister. Manmohan Singh helmed the seventh five-year plan. It focussed on technology, productivity and efficiency. The Reserve Bank of India allowed the rupee to gradually depreciate in a bid to promote exports.
https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html
The growth spurt in the 1980s was supported by a large increase in fiscal deficits as well as international borrowing. It was unsustainable. The road to the 1991 crisis lay ahead. The macroeconomic crisis—in the midst of political and social instability —was a turning point. The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, slashed import tariffs, opened up the financial sector, attracted foreign capital, fixed public finances and made the rupee convertible on the current account. In his landmark budget speech in July 1991, Manmohan Singh cogently argued that the balance of payments crisis was a symptom of a deeper malaise: macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened the incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology, and much more. The great achievement of 1991 was not each reform in isolation, but the rollout of a comprehensive reform programme where different parts complemented each other.
The development state was replaced by the regulatory state. The government was no longer the main vehicle of investments. That job was handed over to the private sector, while new regulators were set up or empowered to ensure markets functioned well in a wide range of areas.
The entire column is excellent – that’s why we’ve spent four days (and counting) on it. But it is awe-inspiring to see how concisely and yet how thoroughly Niranjan has spoken about the 1991 reforms in three short paragraphs. Shruti Rajagopalan and her excellent colleagues at the Mercatus Center have an entire website dedicated to the events of 1991 and what came after, and I would strongly encourage you to spend a lot of time on it.
If you are younger than thirty years today and are reading this, you need to understand why you are able to read this today. You need to understand how the Indian economy changed enough for me to be able to write this blog in addition to all of what I do to earn my daily bread, and you also need to understand how your own income (or that of your family’s) went up enough to be able to afford the device that you are using right now to read this. To say nothing of the job/business that paid for this device- both the device and the job likely wouldn’t have been available prior to 1991.
I hope to write more about how the 1991 reforms changed lives on the ground for those of us who were around in the 1990’s and the early 2000’s. In all my classes, I tell my students that they have a secret superpower that they should make full use of. This secret superpower is called TMKK. It stands for Toh Main Kya Karoon? In English, that means ‘so what should I do?’, although a more accurate translation would be ‘so why should I care?’.
Consider this sentence once again: “The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, slashed import tariffs, opened up the financial sector, attracted foreign capital, fixed public finances and made the rupee convertible on the current account.”
Especially as a young student, you should absolutely be asking TMKK. How did the life of the average Indian change because industrial licensing was abolished? So what if import tariffs were abolished? What could I buy and consume that I could not earlier? How did opening up the financial sector help ordinary folks who were around in the 1990’s? What changes in the lives of ordinary citizens when India finds herself able to attract foreign capital?
You get the drift. I suspect most folks nod along when they hear us economists rhapsodize about 1991, without really getting what was in it for them. But they need to know. One, to better understand why exactly 1991 was so important, and second, to realize how fragile our economic freedom is, and to do our utmost to preserve it in the years/decades to come.
In their book, Tryst with Destiny, Bhagwati and Panagariya speak about how far India has come since 1991. And it really has come a long way! But they also speak about the need to have sustained and accelerated growth from here on in (the book was published about a decade ago). And they say that this needs two kinds of further reform.
Track I reforms are all about accelerating and sustaining growth, while making it even more inclusive, while Track II reforms are about making redistribution even more broad-based and effective. And they make the point that while 1991 was a great start to Track I reforms, there is a long, long way to go:
If truth be told, India is far from done on Track I reforms for two broad reasons. First, the potential for growth remains grossly underexploited. The economy remains subject to vast inefficiencies. Removing these inefficiencies not only offers the opportunity to arrest the recent decline in growth but to push the economy to a double-digit growth trajectory. Second, the poverty reduction that directly results from growth, in terms of enhanced wages and employment opportunities per percentage point of growth, can be increased: we can get a larger bang for the buck.
Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.
Every single economics student is taught, sooner or later, about the three factors of production: land, labor and capital. The link I have added here mentions a fourth, but let’s keep things simple for now. And I find it instructive to think about what Bhagwati and Panagariya choose to talk about in Part II of their book. This section of their book is about accelerating, widening and deepening what they refer to as Track I reforms, and the these are the first three sub-sections:
- Labor laws
- Land Acquisition
- Infrastructure
That is to say, even now, a full 75 years after India’s Independence, it isn’t as easy as it should be to utilize land, labor and capital to the fullest extent possible. You may agree or disagree with their solutions to these problems, but I would argue that the diagnosis is spot on.
The Indian economy is freer today than it was in 1990, and that is really and truly awesome. But it isn’t free enough, and much more work remains to be done.
Quite what this work is, and how to best go about it, is the journey that we need to undertake on the long road to breaking free.
And if this challenge excites you, well, like it or not, you are a student of the Indian economy – welcome to our tribe!
India: Links for 18th November, 2019
- ““In the end it was this access to unlimited reserves of credit, partly through stable flows of land revenues, and partly through collaboration of Indian moneylenders and financiers, that in this period finally gave the Company its edge over their Indian rivals. It was no longer superior European military technology, nor powers of administration that made the difference. It was the ability to mobilize and transfer massive financial resources that enabled the Company to put the largest and best-trained army in the eastern world into the field””
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An excerpt that itself was excerpted, but too delicious to resist – Alex Tabarrok writes an excellent review of William Dalrymple’s latest book on the East India Company.
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.. - “The problem is that, rather than examining independent indicators of economic activity, the Bretton Woods’ forecasts appear to be based primarily on (a) extrapolation of the official growth figures, and (b) some subjective adjustment based on staff’s assessment of policy changes.”
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CGDEV on reporting of India’s growth numbers.
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.. - “Is all this working? Economists have talked about the possibility of green shoots of recovery in the second half of this financial year. However, looking at the data for July to September 2019, for now the slowdown is well and truly in place.”
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Vivek Kaul isn’t impressed with the state of the Indian economy.
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.. - And perhaps with good reason: Somesh Jha on the fall(!) in rural demand.
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“Consumer spending fell for the first time in more than four decades in 2017-18, primarily driven by slackening rural demand, according to the latest consumption expenditure survey by the National Statistical Office (NSO).”
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.. - Slate Star Codex on 1991, and the difficulty of using statistics. Econ nerds only!
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“…”we need to study and raise awareness of the history of democratic, comparatively “nice” countries that did nothing worse than overregulate business a bit – and investigate whether even these best-case scenarios still doomed millions of people to live in poverty. My (biased) guess is that careful study will show this to be true.”
Staring into the abyss: A review of To the Brink and Back, by Jairam Ramesh
A while back, I read a book by Sanjaya Baru, famous nowadays for having penned the book “The Accidental Prime Minister”. While that book was certainly more topical, his other book, the one I am referring to right now, is far more interesting. The title of the book is , quite simply, “1991”, and the subtitle is “How P.V. Narasimha Rao Made History”.
The reason I bring that book up right now is because Mr. Baru begins his book by speaking about how, while at an event at a university near Delhi, he asked students about the importance of the year 1991, and some levity aside, many people didn’t have a clue. Things became, he goes on to mention, slightly better when he asked the same question to a slightly older age group, and many people mentioned the reforms of 1991. What those reforms were, and who was responsible for them is a story, Mr. Baru says in the introduction to his book, many people are not aware of. Given the subtitle of his book, it is clear who the protagonist is – and further evidence in favour of his argument is to be found in the book that is the subject of this blog post: “To the Brink and Back: India’s 1991 Story”, by Jairam Ramesh.
The book (a very short one) is Mr. Ramesh’s recollections of those tumultuous three months or so, when, as he so memorably puts it, history was put in motion. I often say in classes I teach that India gained her political independence in 1947, and started to gain her economic independence in 1991. The first half of that statement is a fact, and the second half is false, too true or not true enough depending on where you stand on the spectrum of economic ideology. But no matter where you find yourself on that spectrum, what is indisputably true is the fact that 1991 was a turning point for the Indian economy.
Having read both books, and some others besides, on the events of 1991, here is my simple list of why 1991 was so important:
- A lot of people today don’t know, or don’t want to know this, but there was, for quite a few people, a choice to be made. “To default or not to default” was an actual dilemma for some, and reading about those times makes it clear that the former option was certainly on the table. It is our great good fortune that the people in charge, and the then finance minister in particular, did not view it as a dilemma – India simply would not default. That in itself was a signal to us and the rest of the world – and the importance of that signal cannot be overstated. Put another way, the economist took a political stance that had truly far reaching economic consequences.
- India finally became competitive in the global markets, because of the devaluation of her currency. A strong currency is often taken to be a proxy for a strong nation, but nothing could be farther from the truth. If you chart India’s exchange rate movements (vis-a-vis the dollar, say) against her GDP growth rate, you can see this quite clearly. That devaluation mattered, it truly mattered. Ask Infy. And as the book makes clear, getting people to agree with this decision wasn’t all that easy.
- This point is the most important of the lot: our industrial policy changed on the morning of the budget. Yes, Manmohan Singh presented that budget, but the far more important announcement was about our industrial policy changing – for the better, at long, long last. This includes changes in the MRTP (Monopolies and Restrictive Trade Practices)Act, changes to the way foreign firms could invest in India, and changes in what kind of licences would be needed to produce, well, almost anything. And much else besides, I should add – but the point that one should understand is that the shackles were taken off where India’s producers were concerned.
There is, please understand, much more to the reforms of 1991, and most of it is contained in the book. But to me, the book is important because it makes a point about a political decision that had far reaching economic ramifications: India would honour her debt, no matter what the cost, and no matter what changes needed to be made to her industrial policy. This (political) commitment to do the right thing has had (economic) consequences that we are benefiting from today and beyond.
The book speaks about who did what before, during and after the three months of June, July and August 1991, and credit is given and withheld in various cases by Mr. Ramesh. See, for instance, his repudiation of Yashwant Sinha’s claims to have been the true father of the whole reforms story.
I’m not so interested in who did what though – reading the book to understand what happened, and how it happened is a fascinating lesson in the art of political economy. The chapter on the roll back of the increase in urea pricing, for example, is a great for understanding how to push what you want through – you can almost see Cialdini nodding in approval.
Is the book written for the layperson who knows nothing of economics? I will not pretend that it will be easy going, but I will say this: you will appreciate the importance of 1991 far more at the end of it. And as a citizen of India, four hours or so is a worthwhile price to pay to understand how we got to be where we are.
Why 1978 and 1991 will likely be the most important years of the 20th century
If you had to pick just one year from the 21st century and say that this was the year that mattered the most, which year would you pick? Some might pick 1939 and the start of WWII. Others, for the same reason, might pick 1945, as the year it finally ended. Others more in tune with the long run forces of history might pick 1914 because that’s when the whole thing really started.
But that’s answering the question from a European perspective. Closer to home, you might want to pick 1947, and our neighbours to the east might pick 1949 for broadly similar reasons. But as an economist from these parts, my choice would by 1978 from a broader perspective, or 1991 from a purely Indian one.
Because 1978 was the year in which Deng Xiaoping famously said “Let some people get rich first” and kickstarted the process of market reform in China. Xiaogang is a village that almost nobody outside of China has heard of, but if you’re interested in the question of how nations get richer over time, you should take the time out and click on that link. There’s a lot else that Chinese economic history has to teach us, but we’ll get to it over time.
Let’s move on to the other date that we think is important from the 20th century: 1991.
“A moment comes,which comes but rarely in history,when we step out from the old to new,when an age ends,and when the soul of a nation,long suppressed,finds utterance.” Famous words, uttered by a famous politician, and possibly the most famous speech by an Indian politician. We’d argue that these apply in almost equal measure to the year 1991, because that is when the entrepreneurial spirit of India, long suppressed, finally found utterance.
It is when business stopped being a bad word in Indian parlance, and getting (and staying!) rich was seen not as a dubious achievement but an everyday event. Indians going to movie houses post 1991 admired the Mercedes that Amir Khan drove to Goa in Dil Chahta Hai, and not the smoudering angst that Amitabh Bachchan harboured against the system in Deewar. Aspirations were a good thing, and it was ok to say that publicly after 1991.
The Liberalized Exchange Rate Management System (LERMS), the New Economic Policy (NEP) of 1991 and the other economic policies of that era were remarkable, and are rightly being celebrated today as the cornerstones of the remarkable change that has been wrought in India since. And we’ll talk about the impact that these policies had in the posts to follow.
But they are, in a sense, merely the tools that allowed P Chidambaram, Montek Singh Ahluwalia, PV Narasimha Rao and above all, Manmohan Singh to say what Deng Xiaoping had said all those many years ago in China.
1991 was about letting Indians get rich.
EconForEverybody 