---------- Forwarded message ----------
From: S G Naravane
From: S G Naravane
Subir Gokarn - July 1, 2016, 5:29 pm
As we head towards the 25th anniversary of the economic liberalisation of 1991, we can, of course, expect quibbles about whether the process had actually started earlier during the 1980s. However, in terms of scale, scope and, most importantly, aspiration, there is no doubt in my mind that the process that began with the new government presenting its first Budget in July was a game changer. It decisively put the economy on a new and, I believe, potentially better trajectory. Whether this potential was realised or not will surely be the subject of much of the commentary on the occasion. A fair judgement would be that there have been significant achievements, but the reform process remains a work in progress. Satisfaction must be tempered with impatience with the fact that the benefits of reform are unevenly distributed. The celebration is warranted, of course, but so also is a reflection. What worked, what didn't and what next? In that spirit, here are a few thoughts.
A striking feature of the reform process is the apparent commitment to the broad agenda by every government that has been in office over the 25 years. We have had seven elections and eight governments. Six of those governments were coalitions. Three of them did not complete their terms. One of them saw a change in Prime Minister. From a distance, this could be seen as a relatively turbulent political scenario. Yet, all these governments—both in their rhetoric and, more importantly, in their actions—have pushed ahead with the broad reform agenda. Neither party identity nor coalition complexity appears to have caused significant deviations from the roadmap. The pace of implementation, the priority placed on different components and so on certainly did vary across regimes, but the roadmap itself became firmly entrenched.
One could look at this from the "glass-half-full, half-empty" perspective. The co-ownership of the broad agenda is commendable and, from an international perspective, rather rare. Political conflicts have characterised reform processes in virtually every country that has initiated them. Many have not been able to overcome these conflicts, severely hobbling the process. On the other hand, it could also be argued that political differences have hamstrung many important reform measures, not only setting the process back but also diluting the effectiveness of other measures that might have been implemented.
"Tipping point" is a term used across a variety of disciplines to denote the convergence of a set of factors, which leads to a dramatic change in outcomes. It has been used, and I think justifiably, to characterise India's economic performance during the reform period. The most important lesson from the 25-year trajectory, I believe, is that the benefits of reform only accrue when a whole range of reform measures is carried out, leading to a tipping point. This may be either helped or hindered by external forces, but, as they say, fortune favours the brave.
India's tipping point came in 2003. A brief growth spurt between 1994 and 1997 did hint at the dividends from reform, but, clearly, not all the elements were in place to sustain the momentum. By 2002, serious questions were being raised about the merits of liberalisation in the absence of a significant growth dividend. Fortunately, the performance of the economy during the 2003-08 period quelled these concerns, and the recent deceleration of growth has not revived them. But more on this later. Here, I want to highlight a few of the drivers that converged to create the tipping point.
First, there was a relatively favourable global environment. Of course, this was not within the control of Indian policymakers, but it contributed significantly to the benefits accruing from the broad-based opening up of the Indian economy over the first decade of the reform period. On the trade front, booming traditional exports combined with the ITES surge to produce current account surpluses in three out of those five years. Capital inflows responded to a liberalised investment regime and attractive growth prospects to render the balance of payments stress a thing of the past. During that period, the policy dilemma turned very quickly from dealing with forex scarcity to forex surpluses. That certainly brought with it a new set of challenges, but with Forex (as with many other things), problems of plenty are less stressful than problems of deprivation!
Second, the domestic macroeconomic situation entered into a virtuous upward spiral. Inflation was low, allowing interest rates to turn stimulatory. This contributed to a surge in aggregate investment, which had been relatively steady at around 25 percent of GDP through the previous five years. It accelerated to over 35 percent during the boom period. But, beyond the aggregate, the composition of investment was particularly important. Public investment, most visible in the form of the National Highway Development Programme, also rose significantly, touching a high of almost 25 percent of total public spending by 2008. And, even as this was happening, the fiscal deficit declined sharply, helped by rising tax revenues both at the central and the state levels. The latter was largely due to the VAT implemented by a number of states in 2005.
Third, there were several factors that contributed to an increase in productivity across the board. Some of these were directly the result of the industrial, trade and financial sector policy reforms that began in 1991. These combined to increase competitive intensity in several product and service markets, resulting in greater efficiency. In turn, lower interest rates and greater efficiency fed into higher profitability, reinforcing the investment momentum described earlier. Another important contributor to the productivity improvement was the very rapid increase in the range and quality of telecom services in response to changes in the telecom policy. I remember several occasions when I was stuck in traffic or even sitting in an airplane waiting for the fog to clear, being able to read and send documents and participate in conference calls. Telecom expansion helped to offset the productivity drags created by other infrastructure deficiencies.
As I said, one could add any number of other factors that played a role in the Indian economy reaching the tipping point in 2003. These were, to my mind, the most important and all of them were directly related to the reform process. The key insight here is that, for the reform dividend to be realised, the spread and coverage of reform measures matters. It is naïve to expect actions taken in individual domains to have much of a macroeconomic impact. However, equally important, reforms appear to have had shelf lives; even if they did not have the desired impact immediately, they did kick in when other, complementary measures were implemented. It may have taken 12 years to get to the tipping point, but then, 12 years is better than never!
The high growth phase
sent from samsung galaxy note3 neo, so please excuse brevity