24 Jun Reforms in 90s & Crisis in 21st century
(GS PAPER-3, Mobilization of Resources
Source- The Hindu)
- Thirty years ago, the liberalization regime launched in 1991 completed its 30 years in 2021.
- 1991 was a landmark moment in India’s post-independence history that changed the character of the economy in fundamental ways.
- A drastic balance of payments problem triggered an acute depression in 1991.
- To counter it, India’s economic establishment launched a multipronged reforms agenda to repair India’s macroeconomic record and ignite growth.
- Three decades later, the country faces another big test thanks to the Covid-19 pandemic.
- While the 2 crises are distinctly different in content and structure, they’re completely comparable in their respective severities.
India’s Post-1990 Economic Strategy
- It dismantled the huge network of controls and permits that dominated the financial system.
- It reintroduced the role of the state as a facilitator of economic transactions and as a neutral regulator instead of the first provider of products and services.
- It led to moving away ahead from a regime important substitution and to integrate fully with the worldwide trading system.
The outcome of Reforms:
- By the primary decade of the 21st century, India began to be seen as the fastest-growing emerging market.
- The 1991 reforms unleashed the energies of Indian entrepreneurs, gave untold options to consumers, and altered the face of the Indian economy.
- Far from poverty increasing, for the primary time, there was a considerable reduction in it.
Comparing 1991 Crisis With 2021:
Highest Fiscal Deficit and Macroeconomic Situation
- The 1991 crisis was caused by excess domestic demand sucking in imports and widening the present account deficit (CAD).
- A reduction in confidence triggered an outflow of funds and financing CAD forced a pointy drawdown in reserves.
- India had to pledge tonnes of gold to debar a default sovereign debt. Then, we had almost moved out of the exchange to buy critical imports.
- The pandemic-induced lockdown brought the wheels of economic activity to a grinding halt, triggering a pointy economic contraction.
- This has resulted in a collapse in production following the disruption caused by the pandemic, which, in turn, has caused a fall in demand.
- Faced with a collapse in demand, it’s appropriate to extend the fiscal deficit.
- The government allowed the fiscal deficit to expand to 9.6% last year.
- Today, the economy is shrinking at a rapid pace, with the central government defaulting on its revenue commitments to the states.
- Today, we’ve run out of jobs for our hordes of unemployed; poverty is increasing after decades of decline.
Criticism of the Reform-
- The 1991 reforms package faced heavy criticism as being dictated by the International fund (IMF) and International Bank for Reconstruction and Development.
- Further, a number of the reforms were criticized as an agent to capitalists.
- Such a centralized approach to reforms might not work now.
- It is often seen within the protest emanating from three farm laws.
Sustaining Public Expenditure:
- In the short term, sustaining public expenditure may be a key to reviving growth.
- Currently, public expenditure is very advantageous for providing more funds for vaccination and to hide expanded demand for the MGNREGA which is proving to be a valuable safety net.
- Also, there’s a requirement to undertake a reputable path for deficit reduction over the subsequent three years and revising revenue targets to a more realistic level.
Mutually Supportive Reforms:
- The 1991 reforms elevated because they were structured around a core package of mutually supportive reforms.
- Thus, the necessity is to maneuver far away from an extended list of reforms towards a more strategic approach, focussing on the foremost critical reforms needed immediately.
- In this context, the facility sector, the economic system, governance structures, and even agricultural marketing need reforms.
Improving Investment Climate:
Investment may be a key source of aggregate demand and economic process, during this context:
- Perceptions regarding growth prospects are key.
- The policy framework must be supportive of new investments in order that entrepreneurs are encouraged to require risks.
- Non-economic factors like a peaceful and sustainable environment and social cohesion also are relevant.
- The government must begin to act on these fronts.
Maruti Model of Disinvestment:
- The government should reduce its ownership to 26% in each undertaking, including banks, to strategic partners, recommending it under the Maruti disinvestment following 1991 reforms.
- In this context, PSUs like Air India, BPCL, and Concor are often sold within subsequent six months, with the commitment that twenty-four PSUs would be divested at the ‘Maruti model’ per annum for the subsequent five years.
- This will help in generating billions of rupees of investible surplus for the government.
- Today’s reforms also require far more discussion and consensus-building.
- The central government must work in tandem with state governments and consult different stakeholders impacted by reform decisions.
- The 1991 reforms helped the economy debar a crisis then bloom.
- It’s time to stipulate a reputable new reform agenda that will not just bring GDP back to pre-crisis levels, but also ensure growth rates above it had when it entered the pandemic