How good is our liberalization?


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EVEN Rip van Sinha has now woken up to agree that the economy is in bad shape. Not that we needed his authoritative voice to confirm what has been known for much of the post-reforms period, known in media shorthand as the ‘liberalization’ decade. The 10th anniversary of liberalization was celebrated recently but apart from the normal adulatory speeches and articles by the usual gang, little serious introspection has taken place. This then maybe the time and place for it.

The central problems of the Indian economy continue to be widespread and extreme poverty, low productivity and ever increasing disparities. If the performance of the post-1991 era is to be judged by these yardsticks then there is little that can be said for the process that was ushered in by the Narasimha Rao government. The only ‘real’ benefit of liberalization was that it freed certain sections from the oppressive control of the state, which under the pretext of central planning aimed at creating a socialist pattern of society, gave us a corrupt system that resulted in a vastly unequal and under-productive society.

The sections who were liberated from the oppressive and often mindless control of the state, not surprisingly, were the very ones who benefited most when we were trying to create a ‘socialist society’. Liberalization, as we know it so far, has failed to address India’s core economic problems. Poverty has grown, productivity has fallen, and income inequality has widened.

At this stage some personal clarification is required, as the debate that continues to swirl around liberalization has given rise to a McCarthyism of its own. If you support liberalization you are branded an agent of MNCs, somehow unpatriotic and therefore in the pay of the IMF and the World Bank, if not the CIA. If you express dissatisfaction with the liberalization process, you are branded a socialist or worse a swadeshiwallah in khaki shorts. I have had the good fortune of being attacked by both sides since I am with neither. Nor am I an idiot who is unable to read facts. Most of these facts, nicely concised each year by the Tata’s as the Statistical Outline of India, the latest of which was published in 2000-2001, tells a different story, which is why we must question the quality of the economic policies that came to be adopted since the advent of liberalization.



The facts now available do indicate that we have after all not done too well after liberalization. So much so that even its progenitor, former Prime Minister P.V. Narasimha Rao, has called for a rethink on the impact of the policy shift he and Manmohan Singh so boldly began. That there are many economic and political dinosaurs around who still hanker for a command economy suggests that liberalization has not gone off too well. It seems that unlike dinosaurs, that became extinct 65 million years ago when a giant meteor crashed into the earth resulting in a series of cataclysmic events, Narasimha Rao’s liberalization meteor was a bit of a damp squib.

That is mostly due to the fact that instead of becoming an all encompassing process that would not only free the economy and stimulate entrepreneurship and creativity, but also restructure government to make it more accountable, transparent and honest, it just became an initial first step that did away with the quota allocating industrial licensing policy, opened up more areas to foreign investment and little else.

One could argue that without the liberalization package the economic condition would have worsened. This is plausible. The roots of the problems that afflict us today were sown in previous decades. We know what these are. Therefore, the biggest failure of the ‘reform’ process ushered in 1991 was that it just did not do enough. It has now remained stalled for long in the mire of crony capitalism and bureaucratic sloth.



Stripped of all rhetoric, liberalization was intended primarily to do two things. First and foremost it was supposed to accelerate industrial growth. Next, to attract huge inflows of foreign investment to finance infrastructure development. Neither happened. Industrial growth in the decade 1981-91 was 7.7%. Since 1991-92 it has been 5.8%. Foreign Direct Investment or FDI from 1991 to 1999 amounted to US$ 12879 million. Of this US$ 2440 million are NRI investments, suggesting that a good part of it is actually money clandestinely stashed abroad and returning to bolster equity positions of owner-managers, a somewhat quaint term to describe people with small individual holdings who are still permitted to manage companies as personal properties and private fiefdoms.

Former Finance Minister P. Chidambaram, one of the more hyper-enthusiastic high priests of liberalization, was of the view that India needed about US$ 10 billion or Rs 43,000 crore of FDI a year to pull itself up to world standards by the middle of the current century. Instead of the US$ 90 or so billion we wanted, we have so far attracted only US$ 13 billion. So how good was our liberalization?

There are other indicators too that strongly suggest that liberalization rather than speed up growth and development actually slowed it down. Agricultural growth, which averaged 4.04% p.a. for the decade 1981-91, fell to 2.3% p.a. for the period 1991-99. The impact of this can be most seen in food prices. The average annual price rise during the 1980s for food articles was: rice 5.6%, wheat 5.7%, and pulses 11.2%. During the following decade these changed to: rice 10.2%, wheat 9.5%, and pulses 11.4%.

Since 1981 the area under foodgrains and oilseeds crops has remained almost static at about 150 million hectares while the number of people working on the land increased from 186.2 million in 1991 to 228.2 million in 1999. This suggests a major slowdown in the growth of real incomes and wages in the rural sector because foodgrains production only grew from 176.4 million tons in the year 1990-91 to 192.4 million tons in the year 1997-98.



The World Bank estimates the annual average growth of wage rates of unskilled agricultural male workers in the ’80s to be 4.6% as opposed to 2.5% in the ’90s. It would seem that but for lower wages given the greater availability of farm workers, the rise in food prices would have been higher. While all through the 1980s the wholesale price index rose at an average annual rate of 6.9%, it grew at 8.8% in the liberalized roaring ’90s.

Employment generation in the organized sector too suffered. It was growing at a modest 1.6% during 1981-91, just about keeping pace with the population growth rate. Since then the growth in jobs in the organized sector has halved to 0.8% while the population continues to grow as before.

The power sector, which was a major source of concern at the beginning of the last decade, too did not show any great leap forward though the centrepiece of the liberalization policy was the opening up of the sector to foreign capital and ownership. As a part of liberalization we saw the worst examples of crony capitalism unfold. Promoters of power projects were not only assured an extraordinarily high rate of return, 16% p.a., but were given all sorts of other guarantees as well. They were protected against currency fluctuations, and payments and off-take were both guaranteed, thus insulating them against all risks, giving the term risk capital an entirely new meaning.



It would seem that the huge sums of money that Enron showed in its books as having been expended on ‘educating’ Indian opinion leaders, presumably politicians, was well spent as our leaders showed no signs whatsoever about making any educated decisions. So blatant was the cronyism that Michael Porter of the Harvard Business School commented that such behaviour was giving liberalization a bad name, increasing the risk of the liberalization baby getting thrown out with the bath water. Even after all this, after all the education and well-lined pockets, the growth of electricity generation capacity fell to 3.5% p.a. for 1991-99 as opposed to 12.4% for 1981-91. Electricity generation fell from 17% to 7.8% for the corresponding periods.

The foreign trade picture too was to radically change as a result of liberalization. This it probably did. For imports, which were growing modestly at the rate of 4.5% p.a. during 1981-91, spurted to 7.97% p.a. during 1991-2000. But did it make a big difference to exports? Not really, because the change was miniscule – from 8.28% to 8.41%. All the time we were being told that if imports grew so would exports. But that just did not happen.

The trade deficits have been growing exponentially. In 1980-81 the adverse balance was Rs 5838 crore; in 1990-91 this was Rs 10645 crore. By 1998-99 it had swelled to Rs 55478 crore. It would seem that besides devaluation, ostensibly to make exports more competitive, we have had no foreign trade policy worth the name. In 1981 the dollar was worth Rs 8. In 1991 this changed to Rs 18 and now to little more than Rs 48.

The 1991 Census confirms that even after four and a half decades of independence over 80% of all rural workers are employed by the agricultural sector. As many as 52% of the men, and 18% of the women living in rural India are farm workers. In many states the dependence on the agricultural sector for employment has increased. This continuous assured supply of labour to the rural sector clearly has a depressive effect on the daily wages of agricultural and other rural workers. It is small wonder that they comprise of the bulk of the poorest among the poor.



Over 85% of the daily income of these workers is spent on food articles. Clearly the brunt of the impact of the high rate of inflation that has been a characteristic of the entire period has been borne by this sector. The wholesale price index for foodgrains has gone up by 90%. Cereals have gone up by 63%, pulses by 86.7%, vegetables by over 100%, sugar and gur by 87.4%. Thus the rate of effective inflation for this sector has been over 25% as opposed to the general annual rate of inflation of 10%.

The per capita income of people in this category is much below the national average of around Rs 7000 per year. It is estimated that the farm worker on an average is employed for less than 150 days a year. Even assuming a daily wage of Rs 40, this amounts to about Rs 6000 each year. If the wife is also working this could at best mean a family income of about Rs 12000 per year or a per capita income of Rs 2400 a year for a typical family of five.

In reality the situation is far worse as the lower the income the larger the family size, implying not only more children but also more other dependents like aged parents. So the poor are really much worse off than the average figures would suggest. The average in a country such as ours, with the prevalent high income inequality, is actually quite high when compared to the norm. More indicative than the average per capita income, which is GNP divided by population, would be the distribution of incomes.



Surveys by the NCAER reveal that almost 59% of all households accounting for 526 million people have an annual income of less than Rs 12500. This means a monthly household income of about Rs 1000 or about Rs 200 per head. This by any yardstick is an abysmally low income and makes a better poverty line than the government’s generally accepted poverty line. Households with incomes between Rs 12500 and Rs 40000 per year account for 331 million people. Only 4.1% accounting for 37 million have an income of over Rs 40000 a year. Even within this group it would seem that a few have got it all. The NCAER has also estimated that 1.4 million Indians have an annual income in excess of Rs 5 lakh. It would seem that this is the group at whom all our economic reforms and the faculties of our ‘sarkari’ economists are focused.

By the Government of India’s own admission about 240 million people live below the poverty line. The poverty line is really the line of destitution. At this level people have just about enough money to provide themselves with food converting to 2200 calories and with nothing else. No roof, no clothes, no security, no minimal comforts, let alone schools, medicine and any fruits of the industrial revolution, what to speak of the other techno-economic revolutions that have followed! It is not the consecutive devaluations of the rupee, the unprecedented inflation, the widening of the trade deficit, or even the phenomenal increase of the foreign debt, but the increase in the incidence of poverty since 1991 that really indicts the successive regimes and the stunted process of liberalization that has taken root in India. The process, unfortunately, has become a kind of Suhartoism with the sons and sons-in-law making hay while the sun shines.



Realizing that all has not gone well with the process of liberalization, some belated attempts have been made to suggest that the new policies had an impact on poverty. In other words, that growth is indeed trickling down. In 1994 the Congress government claimed that the incidence of poverty had come down to 19%. Every reasonable person, both then, as even now, considers the methodology used by the government as unreliable and unscientific. Though the government had in 1989 appointed the Lakdawala Committee to improve the methodology, its recommendations have not been implemented till now. Possibly, if used, they would show that the incidence of poverty is far higher.

In 1991, I published a paper along with Shantanu Nagpal, then a PPE student at Oxford, using basic human needs and quality of life parameters to estimate the incidence of poverty. Among these were proper nutrition, shelter, access to services like education, health, clean drinking water, and public transportation. Using these expanded set of criteria we estimated that over 70% of Indians fell below the poverty line. Our analysis was that if these yardsticks were adopted, the government would be pushed into adopting a new set of policies to target its goals and prioritize them more systematically. Evidently, our system is still not ready for such a major change.

Thus we still retain a poverty line defined on a caloric norm of 2400 calories per day for rural areas and 2100 calories per day for urban areas. At 1992-93 levels this translates to a monthly per capita income of a mere Rs 264! We all experience the cost of living on a daily basis and so know the absurdity of this definition. There are many discordant notes sounded by prominent experts on official claims about the drop in poverty. According to an analysis by Oxfam, based on a published study by Tendulkar and Jain, in the first years of liberalization itself poverty levels rose from 35.55% to 48.6%. Even the World Bank is not inclined to accept the GOI’s claims on the war on poverty and want.



Two papers by S.P. Gupta, Member, Planning Commission and Gaurav Datt, after analyzing the data thrown up by the latest National Sample Surveys, conclude that the incidence of poverty has actually gone up since 1991. Gupta’s conclusions are quite disturbing. According to him the incidence of poverty, which dropped from 44.5% in 1983 to 34.3% in 1990, grew to 43% in 1998. Datt is more charitable and comes to the conclusion that while urban poverty has shown a decline, rural poverty levels have been static.

As a graduate student at Harvard, I attended a debate between Galbraith and Laffer. Laffer was the high priest of trickle down economics and naturally defended the economic logic of his beliefs. After listening to him for a while, Galbraith with great wit and pungency commented that it seemed that trickle down economics is like feeding horses oats so that the sparrows can eat the dung! Despite this people like Narasimha Rao had touching faith in trickle down economics and speaking at a CII meet in Calcutta in 1995 actually pleaded for some more time arguing that benefits needed time to ‘trickle down’.



Even the experience of the USA has shown that growth does not trickle down voluntarily. Only an enabled and empowered population that can meaningfully join in the growth process can suck it down. Our record in this is still pathetic. Education receives next to nothing in the budget. Even after Amartya Sen received the Nobel Prize, and after our leaders went berserk seeking photo opportunities with him, no attempt was made to understand his work and what he recommends for India. Last year I suggested that a special fund of Rs 2000 crore each year be established to accomplish universal literacy and raise the standards of all tiers of education. I further suggested that this be called the Amartya Sen Yojana. It was turned down on the plea that funds were not available. Soon thereafter the government announced a pay hike to employees of PSUs amounting to just about this much each year. This despite the fact that according to a MOF study the PSUs had posted a cumulative loss of Rs 202000 crore!

Though our economic programmes must be aimed at the upliftment of the majority of people who are poor, in the last 10 years the economic debate was focused on the supposed industrial and infrastructure development of India to be spearheaded by foreign capital. The budgetary allocations for most development programmes, particularly in the social sectors, have been slashed. If India is ranked 39th in terms of competitiveness or more accurately the lack of it, the fact that close to 50% of the population over the age of six is illiterate, or that expectancy of life is a mere 58 years has also a lot to do with it. We do not seem to have learnt that no economic development is possible if the capability of the majority of the people continues to be sub-marginal.

Very clearly there is no money in the kitty to make any meaningful allocations for real development. Each year we go through a budget exercise, which generates a lot of hoopla without making a whit of a difference to how the country’s finances are being managed. After making provisions for interest (Rs 105000 cr); defence (Rs 70000 cr); salaries (Rs 450000 cr); direct subsidies (Rs 28000 cr), there is hardly Rs 20-30000 crore available for any development related expenditure.



What happens in practice is that as each year draws to a close the finance ministry realizes that its expenditures have once again gone out of control and both revenues and collections have fallen behind. So every year the provisions for development are drastically slashed. As a result the ratio of capital expenditure to the budget has shown a declining trend for each of the past 10 years. What generates euphoria or the moans that follow budget proposals are the marginal changes that give or take goodies away from the only people who matter in this country. People like us, the ones with the decibels. You don’t agree with me? What would you say if the government was to remove the subsidy of more than Rs 120 per cylinder on domestic gas?

If money has to be found for development, then clearly something must be done to break the fiscal logjam. Either expenditure is cut drastically or money is found from the system. Revealed and hidden subsidies account for more than Rs 100,000 crore each year. The total cost of government employees – central, state and local – is a whopping Rs 180,000 crore or almost 10% of the GNP. At times the only reason we the people exist seems to be to support the colossal number of people who are notionally in our employment. But we are unable to even contemplate this problem given the manner in which the political economy has loaded the electoral dice. So we will waste money on self-absorbed government employees and not have money for schools, hospitals, roads, canals and whatever else is so essential for our well-being.

This is why the longing for foreign capital. But little of that is going to be forthcoming till we get our act together. Even then what will come will be a fraction of what is needed. In any case, no foreigner will invest in roads, canals, dams, lift irrigation, primary schools, public health centres and the like. They will, but naturally, look for quick and easy pickings. Money to transform India radically must come from within. That means releasing capital locked in the unproductive public sector, slashing sub-sidies and cutting governmental expenditure.



Implicit in this is that the role of the state in arranging our lives must reduce. Not only has government no business to be in business, it has to grow smaller to become more effective. The public administration paradigm is as much to blame for our dismal performance. Yet no debate has taken place on restructuring government. Power to the people must no longer be a mere slogan and the power to manage assets like schools, hospitals and local infrastructure administration must be given to smaller administrative units like districts and municipalities. No process of liberalization will succeed if we cannot get government off the people’s already overburdened backs. Liberalization not only means less government but more local government.



Ten years after Manmohanomics this process has yet to begin. What then did happen? It would seem that the more things seemed to change the more they remained the same and so living got more expensive. For instance, much song and dance was made about dismantling the industrial licensing regime. This was long overdue, not only because of the rent collecting proclivities of the decision-makers, but because we saw many other countries doing better and thought that it was the existing regime that was slowing us down. There might have been some truth in this. In practice, only the rent collection centres moved. With industrial licensing gone ‘allocation’ became the domain of the financial institutions, meaning that the rents are now collected in a different set of buildings. So how have things really changed?

But is there anything positive one can say about the liberalized era? Well, GNP it seems grew ever so slightly faster at 5.8% p.a. as opposed to 5.46% p.a. in the previous decade. How much of this can be attributed to the rise in expenditure on public administration that has been bounding up in two digit percentage figures – as high as 14% last year – and with unintended irony shows up in national accounting figures as part of the service sector, is anybody’s guess. If despite this the growth performance is still something to cheer about, did anything trickle down at all? Report No. 19471.IN of the World Bank has pronounced that poverty levels have remained constant around 33%. In other words, the numbers living below the poverty line have swelled by 46.7 million to 326.04 million in 2000.

Not long ago Manmohan Singh was attacked by some of his colleagues in the Congress Working Committee. Typically, this was not well thought out criticism but more of a Pavlovian assault aimed at dislodging an outstanding individual from his high and special place in our polity. If Manmohan Singh is to be criticized, it must be for not articulating a fuller vision of liberalization and pushing for it. He is still in a position to do so.

Economic reforms can only become meaningful when accompanied by a change in focus and a restructuring of the system of government. Over-centralization of government results in the allocation of scarce resources to the already privileged. We see abundant evidence of this in all walks of life. Typical of this is the system of education that prevails in our country. The quality of education and its infrastructural facilities for the majority of Indians living in the hinterland is related to the amount expended upon it. On the other hand, institutions of higher education in our urban centres catering mostly to the upper class and caste elites, are highly subsidized and account for a greater share of the appropriation for education. Another typical instance is the amount expended on civil aviation which, for the past decade and a half, is consistently more than what is allocated for irrigation. The list is endless.

To the question whether we will do any better after Phase II reforms, the short answer is, very unlikely. First, and this is important, neither Atal Behari Vajpayee nor Yashwant Sinha have the intellectual resources or the burning ambition to transform this country. On the contrary, there is much that indicates that they are quite satisfied with the existing arrangement that allows them and their cohorts to make a few personal pickings and give them a few more days to ‘enjoy power’, which is a uniquely Indian phrase.