India Transformed: The Economy Since 1991 And Beyond
Memories of what India was like 26 years ago, when the 1991 reforms undertaken against the backdrop of a crisis changed the course of the economy, are slowly fading. Yet some of the India’s most successful business leaders and economic thinkers continue to point to 1991 as the moment that changed the direction for their individual businesses and the economy as a whole.
Over 30 such leaders have penned down their individual experiences in a book titled ‘India Transformed – 25 Years Of Economic Reforms’ edited by Dr. Rakesh Mohan, former deputy governor of the Reserve Bank of India. Mohan, who was deeply involved in various aspects of the reforms undertaken at the time, told BloombergQuint in an interview that apart from keeping the memory of the 1991 reforms alive, the idea behind the book was also to say – if it was done once, it can be done again.
If we could make these significant changes in the last 25 years, why not similar changes in the next 25 years. So, that we can go up to the aspirational (growth) rate of 8-10 percent in the next 25 years.Rakesh Mohan, Former Deputy Governor, Reserve Bank of India
What Was Not Done
Mohan, himself, writes in the book on the industrial policy reforms undertaken in the early 1990s, which helped rid India of the much-maligned licence raj. Almost 26 years to the date, on July 24, 1991, a package of industrial reforms was announced, Mohan recalls. The package included the abolition of industrial licensing, inviting foreign investment, allowing private investment in a wider array of industries and the scrapping of the MRTP (Monopolies and Restrictive Trade Practices) Act.
The changes that were announced, and their impact, is now well documented. What is not as widely known is what was suggested but not done.
Mohan writes about three such suggestions:
Although the 1991 Industrial Policy Statement was comprehensive and self-contained, there were three important elements of industrial policy that were not addressed, presumably due to perceived political difficulties - promotion of industrial restructuring, labour reforms and the abolition of small-scale industry reservations. If these areas had also been addressed in the first flush of enthusiasm for reforms in the 1991-1996 period, it is likely that the response of the Indian economy could have been such that East Asian type high growth might have been possible.
While a framework for industrial restructuring is now being put in place via the Insolvency and Bankruptcy Code, comprehensive labour reforms remains elusive.
The lack of a social security net remains one hindrance to reforms that may lead to realignment of labour in the economy. Mohan recalls that at the time of the 1991 reforms, a proposal was made to set up a National Renewal Fund (NRF), which was intended to be a pool of funds that could be used to retrain workers who may be displaced. The concept, which, according to Mohan, is relevant even today, included setting up an insurance fund for employees. The fund could be set-up from a combination of budgetary sources, external loans (the World Bank had agreed to such a loan in 1992) and contributions from employees. The fund could then be used for industries undergoing restructuring and employees could be given golden handshakes.
The fund never took off for reasons that Mohan writes remain unclear to him.
Had the NRF been successfully put in operation, I do believe that the course of Indian industrialization could well have been different over the 25 years that followed. In particular, it is possible that progress could have been made on labour reforms if the NRF had indeed succeeded in convincing organized labour that industrial restructuring was in their favour and that they actually had appropriate social protection.
Services & Industry Must Fire For High Growth
Mohan believes the lack of labour reforms continue to be one constraint on industrial growth in the economy, which is essential if India wants to aspire from growth rates between 8-10 percent.
Average industrial growth in the 25 years since 1991 has been around 7 percent, higher than any previous 25-year period, but not spectacular in comparison with the fast-growing East Asian countries. If India is to ascend to middle-income levels from its current low and middle income status, economic growth has to be consistently above 8 percent a year for the next couple of decades. Even with such a growth, Indian per capita income will reach the current Chinese level in about 25 years from now.
Between, 3-4 percent growth in agriculture is realistic and that is 10-15 percent of GDP. So, to get an average of 8 percent growth, something has to compensate. Both industry and services has to grow more than 8-10 percent to be able to get overall 8 percent GDP growth. Therefore, you really need to aspire for industrial and services growth, both around 10 percent a year at minimum.Rakesh Mohan, Former Deputy Governor, Reserve Bank of India
Mohan adds that to achieve that objective, both the savings and investment rate in the economy needs to move up. Both public and private investment need to pick up and investment in infrastructure needs to be close to 8 percent of GDP, Mohan said. Savings, which have fallen to about 30 percent of GDP, also need to pushed back up towards 35 percent of GDP.
“On the household side, we need to work harder on increasing opportunities for contractual savings which is to do with life insurance, pensions, PF, etc,” Mohan said adding that this will help provide a social security net but also longer term savings which are available for investment.
It serves two purposes, it provides avenue for savings for social security because as we urbanize, families will be more nuclear and you need social security for old age. That’s a social good. Second, if you have higher contractual savings you have longer term financial savings available for longer term investment particularly in infrastructural industry.Rakesh Mohan, Former Deputy Governor, Reserve Bank of India