Three Decades of Economic Reforms in India and the COVID-19 crisis

In 1991, the then Indian Finance Minister, Dr Manmohan Singh, in the government of the Prime Minister Late P.V. Narsimha Rao, radically changed the path the Indian economy was on by ushering the era of liberalisation. Though, we know that his hand was forced due to the then-ongoing Balance of Payments crisis and the gold pledged by India to get a loan from the IMF. Since then, it has been almost three decades, and India has emerged amongst the top 5 economies across the world in terms of it’s GDP and amongst the top 3 in terms of GDP based on PPP. This journey of reforms is a continuous and ongoing process, it may get slowed down by crises like the 2008 financial crisis or the current ongoing COVID-19 crisis, but it will be resumed again eventually.

One of the most important steps taken in 1991 was the removal of the industrial licencing system in India. This led to a healthy competitive environment. Earlier, the industries could have been fined if they exceeded their “quota” of production, which essentially meant to reprimand an industry for increased productivity. This is not the case now.

The ‘Narasimham Committee’ recommendations mainly drove the banking sector reforms. Now, the private and foreign banks could compete with the Indian nationalised banks, which, amongst other things, led to a vast improvement in the banking services and the products offered.

Now, the RBI has a uniform definition to classify a loan as NPA. The 90 days norm is the commonly followed one which states that if the interest on the loan is not received for the said period, the loan classifies as an NPA. Though there are many other clauses to this definition too, this is the general idea of an NPA. Gross NPAs in the banking system reduced from 14.4% in 1998 to 7.2% in 2004 to 9.3% in March’19.

‘Malhotra Committee’ drove the insurance sector reforms, which led to the sector being open to private players too.

After the 1991 reforms, the country first moved to a Value-Added Tax (VAT) system. Then, an even more significant indirect tax reform came in the form of the introduction of the Goods and Services Tax (GST) which came into effect from 1st July ’17. GST is a destination-based tax, and it absorbed the following taxes into it: Central Excise Law, Service Tax Law, VAT, Entry Tax, Octroi, etc. No other reform signalled the opening up of the Indian economy as much as the trade sector reforms did. These reforms increased the capital flow into the country. It also began the process of turning India into an exporter of goods and services rather than an importer.

We moved towards a market-based exchange rate system, FEMA replaced FERA, a considerably open capital account came, and the external commercial borrowings by the private sector was liberalised. The liberalisation of the foreign investment policy attracted more foreign investments and eased restrictions on capital inflows. India’s share in the global trade and services increased due to these measures. Also, now India has enough Forex reserve cover of 10 months as against barely seven days in 1991. Though the process of removal/restriction of foreign exchange restrictions began in the mid-90s, 2003–04 to 2007–08 witnessed India’s emergence as a significant player in the world economy. Also, it witnessed the highest average growth rate ever achieved by India during this period that contributed through domestic saving and investment and the lowest average inflation since independence.

Another aspect of the reform is that India is now a net-lender to the IMF. In just about three decades, India has become the second-fastest growing economy of the world after China. India ranks 68 in the Global Competitiveness Index 2019 and 63 in the Ease of Doing Business 2019. These improved rankings are a direct result of the economic reforms in the last three decades. Six Indian companies are now in the Fortune 500 list. Also, India was able to withstand the 2008 crisis and maintain its growth rate because of these economic reforms.

A significant area of concern which needed reform but did not get much attention from the government is the labour reforms. Labour reforms provide a much-needed link between growth and employment opportunities. Under the Indian constitution, labour is a subject in the concurrent list. A few reasons that no government has done any significant labour reform despite it being an essential component of the economic reform process are: the lack of consensus among various state and central governments, the overtly sensitive nature of these reforms and the possible fallout of these reforms. However, as our economy grows, it will become imperative for the government to look into this sector, taking into account all the significant stakeholders.

Finally, at the time of writing this article, all the governments across the world, are focussed on dealing with the COVID-19 crisis. It cannot be predicted with certainty that how this pandemic will unfold. What we do need is greater co-operation amongst all the Indian states for India to tackle this challenge effectively and efficiently. Across the world, all sorts of trade are disrupted due to this pandemic. The USA, the world’s largest economy, has invoked the defence production act, which means that all it’s industries can now manufacture critical medical equipment, to tackle this COVID-19 crisis. There have been layoffs across the world, and the unorganised sector is the worst affected by it. China is supplying medical equipment to many countries across the world. Auto companies across the world are manufacturing medical equipment such as ventilators and researching on ways to help cope with this crisis. This is an unprecedented scenario, and now the IMF has also said that this will lead to recession. More reliable and robust economies will get through this challenge with fewer bruises than many others who are going to need support during this time. We must prepare for the worst while hoping for the best. When this crisis is under control it needs to be seen how it would have changed the world economy and what can be done to get the best result out of that. We must always remain focussed on learning from such crisis to become better prepared for the future.

Note: Some parts of this article were taken from a few internet resources.