30 Years of Economic Liberalization reforms

News: Recently, on the 30th anniversary of the economic liberalization reforms, former Prime Minister of India, Manmohan Singh, raised concerns over the macro-economic stability of the country. According to him, the current economic crisis triggered by the Covid-19 pandemic is more challenging than during the 1991 economic crisis and the nation would need to recalibrate its priorities to ensure a dignified life for all Indians.

Background:

  • In 1990-91, India faced a severe Balance of Payments (BOP) crisis, where its foreign exchange reserves were just adequate to finance 15 days of imports. There were many factors that led to the BOP crisis:
  • The fiscal deficit during 1990-91 was around 8.4% of GDP.
  • In 1990-91, the situation was aggravated by the rise in the price of oil due to Iraq’s invasion of Kuwait.
  • The inflation rate increased from 6.7% to 16.7% due to a rapid increase in money supply and the country’s economic position became worse.
  • In order to get out of the macro-economic crisis in 1991, India launched a New Economic Policy, which was based on LPG or Liberalization, Privatization and Globalization model.
  • Then Finance Minister, Manmohan Singh, was the prime architect of the historic 1991 liberalization.
  • The broad range of reforms under the LPG model included:
    • Liberalizing Industrial Policy: Abolition of industrial license permit raj, Reduction in import tariffs.
    • Beginning of Privatization: Deregulation of markets, Banking reforms, etc.
    • Globalization: Exchange rate correction, liberalizing foreign direct investment and trade policies, Removal of mandatory convertibility cause, etc.
  • These reforms are credited and applauded for the high economic growth seen from 1991 to 2011 and substantial reduction of poverty from 2005 to 2015.

Present crisis:

  • The World Economic Outlook Report 2021, states that the Indian economy is expected to grow by 12.5% in 2021 and 6.9% in 2022. However, the pandemic has massive unemployment in the informal sector and poverty is increasing after decades of decline.
  • The social sectors of health and education have lagged behind and not kept pace with our economic progress.
  • Too many lives and livelihoods have been lost that should not have been, during the pandemic.
  • Inspector Raj is set to make a comeback through the policy for e-commerce
  • India is back to the old habits of borrowing excessively or extracting money (in form of dividends) from the RBI to finance the fiscal deficit. The migrant labour crisis has laid bare the gaps in the growth model.
  • India foreign trade policy is again suspecting trade liberalization, as India has already decided to opt-out of the 16-nation Regional Comprehensive Economic Partnership (RCEP)trade deal.