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Savouring a Decade of Reforms Arvind
Panagariya THIS
month marks the end of the first decade of India’s economic reforms.
What have we accomplished? During
the last two years, I have written critically about the pace and content
of the reforms. But today is different: in this feel-good piece, I wish to
demonstrate that the focus on incremental reforms in individual years
results in an understatement of the totality of our achievements. The
analogy is with the hour hand of the clock, which looks completely static,
and yet completes a full circle every twelve hours. Begin
by recalling the industrial policy prevailing prior to the launching of
the reforms. The heavy industry was a state monopoly. Other industry was
either subject to strict industrial licensing or reserved for the
small-scale sector. The
tight control of the government on the industry was aptly captured by a
leading cartoonist in a 1980s comic strip in which the industry minister
is shown telling his staff, "We shouldn't encourage big industry —
that is our policy, I know. But I say we shouldn't encourage small
industries either. If we do, they are bound to become big..." The
reforms of the last ten years have gone a long way towards freeing up the
domestic economy from this state control. The state monopoly has been
abolished in virtually all sectors. With rare exceptions, all sectors of
the industry have been opened to the private sector. The Licence Raj is a
thing of the past with the result that limousines of major industrialists
are no longer queued up at the Udyog Bhavan. The small-scale reservation
still persists but even here progress has been made. Apparel, with its
large export potential, has been opened to all investors. In
the area of international trade, in 1991, import licensing was pervasive
with goods divided into banned, restricted, limited, permissible and those
subject to open general licensing. The OGL category was the most liberal
but it covered only 30 per cent of the imports. Moreover, certain
conditions had still to be fulfilled before the permission to import was
granted under OGL system. Imports
were also subject to excessively high tariffs. The top rate was 400 per
cent. As many as 60 per cent of tariff lines were subject to rates ranging
from 110 to 150 per cent and only 4 per cent of the tariff rates were
below 60 per cent. The exchange rate was highly over-valued. Strict
exchange controls applied to not just capital account transactions but
also current account transactions. Foreign investment was subject to
stringent restrictions. Companies were not permitted more than 40 per cent
foreign equity unless they were in the high-tech sector or export
oriented. As a result, foreign investment amounted to a paltry $100 to 200
million annually. Today,
import licensing has been completely abolished. Even as developed
countries continue to protect textiles and clothing sector through the
multi-fibre arrangement, India has done away with quantitative
restrictions in this sector. Our highest tariff rate has come down to 35
per cent with the average tariff rate declining to approximately 25 per
cent. Our foreign investment regime is as liberal as in other developing
Asian countries. Ten
years ago, telecommunications services were a state monopoly and
constituted a major bottleneck on the conduct of business activity. So
callous was the attitude of the government that when a Member of
Parliament complained about poor telephone service in Delhi during early
1980s, the then telecommunications minister proceeded to remind him that
in a poor country like India, telephone was a luxury. The minister then
added that if the Member was unhappy with the service, he could return his
phone since many customers had been queued up for it for years. Today,
private sector has become an active participant in the telecommunications
sector and the New Telecom Policy, issued in 1999, sets the target of
providing telephones on demand by the year 2002. In many cities, this goal
has already been achieved. The provision of cellular mobile as well as
fixed service is now open to private sector including foreign investors.
As a result of these changes, telecommunications services in India are
fast leapfrogging. Progress
has also been made in many areas that were previously off limits to
reforms. Insurance has been opened to private investors, both domestic and
foreign. Diesel oil and gas prices have undergone some increases. At least
symbolic reductions have also been made in fertiliser and food subsidies.
The value-added tax has undergone a substantial rationalisation. These
reforms have paid handsomely. We have been able to achieve a growth rate
of more than 6 per cent with full macroeconomic stability. The rate of
inflation has been low and foreign exchange reserves are sufficient to
finance imports for more than eight months. But
the greatest change in the last ten years has perhaps been in the attitude
towards reforms. As Vijay Kelkar, Executive Director, IMF, puts it,
whereas the reforms in early 1990s were crisis driven, today, they are
consensus driven. Initial fears that changes in governments will bring the
reform process to a halt have turned out to be unfounded. Governments have
come and gone but reforms have stayed. We
now have a prime minister who actively seeks the roadmap of reforms from
his Economic Advisory Council so that he may double the country's
per-capita income in the next decade. We have a commerce minster, who
boldly refuses the demands for a firewall of tariffs by the industry. And
we have a finance minister who is keen to push ahead with reforms with
each successive budget. Prior
to the launching of the 1991 reforms, in a speech at the World Bank, Abid
Hussain joked that while pessimistic Indian economists thought things
could not get any worse, optimistic economists thought they could. Today,
our optimism need not be so muted. Of
course, much remains to be done. But that is the subject of future
columns. Economic
Times, July 18 2001 |