Fiscal journey on a bumpy road

The Father of the nation, Mahatma Gandhi, had said on many occasions that freedom would have no meaning unless it delivered the three basic human needs–bread, clothes, and shelter–for every citizen.

Unlike Gandhi, Jawaharlal Nehru possessed a modern scientific mind. Since he did not trust private entrepreneurs and free market competition, he attempted economic development through the agency of the state. Thus, licenses were required for everything: to trade, to invest, and to expand factory capacity. But his over-confidence in the government as the agent for development led to creating a big bureaucracy that had to be fed at the expense of the poor people. Since then, according to Gurcharan Das, “our bureaucracy has become the single biggest obstacle to the country’s development.”

Not learning from her father’s mistake, Indira Gandhi continued to grow the size of the government. As a result, an estimated 60 percent of the budgets of the Indian governments at all levels go to pay the salaries of the civil servants. To her credit, the Green Revolution occurred under her watch and many farmers in Northern India were benefited by it. But in the end, she couldn’t end poverty. In fact, India’s economic growth slowed down during the period of her rule from mid-1960s to mid-1980s.

Knowing that the country’s economic situation was in desperate shape, Rajiv Gandhi initiated a few pliable reforms in the late 1980s that seemed to spur growth, but it was really foreign borrowing that fueled even that progress. It was not until July 1991 that some real economic reforms were initiated. This happened under the leadership of P V Narasimha Rao as Prime Minister, Manmohan Singh as Finance Minister, and P. Chidambaram as Commerce Minister. Most significantly, they virtually abolished the “License Raj,” a red tape-laden bureaucracy in which licenses spelled out not only who could manufacture which goods but also how much and at what price. Gradually, they also began to make it easier for foreign firms to invest in India. As a result of a number reforms, the national fiscal deficit had considerably reduced from 8.4 percent of GDP in 1990-91 to 5.7 percent in 1992-93. The inflation came down from 13 percent to 6 percent by mid-1993. Also, there was unprecedented increase in capital inflows and growth in exports of goods and services.

Foreign exchange reserves shot up from $1 billion to $20 billion by mid-1991. Foreign investments rose from $150 million to $3 billion by 1997. All these growths haven’t benefited only the rich. The percentage of population below the poverty line also dropped from 51 percent in 1977-78 to 36 percent in 1993-94. Then in 2004-05, it dropped further down to 27.5 per cent.

When Singh became prime minister in 2004, many hoped that he would continue to push reform, but in reality he became more of a figurehead. Of course, he was no Deng Xiaoping, the aggressive Chinese reformer. And his party president Sonia Gandhi was no Narasimha Rao either. Not surprisingly, the reforms initiated in the 1990s were left incomplete.

Now the opportunity to take the country forward is the hand of the Bharatiya Janata Party (BJP). The question is, Will the BJP pick up the economic reforms of 1991 that have been slowing down in the last two decades?

At least for now, our new present Prime Minister Narendra Modi appears to be on track---he talks of replacing the 65-year old socialist-era Planning Commission and seems keen to take full advantage of the current global economic environment. So, could this Modi-factor propel our economy forward and cause India to be one of the next super global economies? Let’s hope it will.

By: Mazie Nakhro