August 04, 2020
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What If Reforms Had Taken Off 13 Years Earlier?

It wouldn't have made us a developed country by now. But from refusing-to-develop country (RDC) we would have moved to the willing-to-develop country (WDC) category.

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What If Reforms Had Taken Off 13 Years Earlier?
Madhu Kapparath
What If Reforms Had Taken Off 13 Years Earlier?
China started liberalising in 1978. What if India had liberalised then, since increasingly in the late ’70s, it was becoming clear that costs of state intervention exceeded the benefits? And there was the Alexander committee in 1977, the Dagli committee in ’78, the first Tandon committee in ’80 and the second Tandon committee in ’81, all wanting liberalisation. What if we had followed those recommendations then? Beyond ibm and Coca Cola not exiting, what if we had liberalised 13 years earlier than we did?

One must be careful. In asking this question, there is a presumption that reforms began in 1991 and everything before that was a deluge of state intervention. That’s not really true. Reforms did begin in the second half of the 1970s and gathered momentum in the second half of the ‘80s. There is continuity to the reform exercise, although what has happened since 1991 is undoubtedly more comprehensive.

There is a second problem. Reforms are a bit like sex. People talk about it and think about it all the time. But not too many people do very much about it. In the post-1991 world, barring the external sector, the financial sector and removal of entry restrictions in manufacturing, how many reforms have actually been implemented as opposed to being talked about? How many reforms that benefit the poor, including public sector delivery in physical and social infrastructure, have happened?

Having said that, we know economists are fallible about predicting the future. Their track record in predicting the past is better. So it’s fun to indulge in reverse crystal ball gazing. Reforms have an external sector component and a domestic one, although the two are linked. Suppose we had liberalised imports, exports, exchange controls and foreign investments in 1978; scrapped the rupee payment system as having outlived its utility; and, not introduced the draconian fera of 1973?

For a start, we wouldn’t have stuck out like perpetual outsiders at the Uruguay Round (1984-86) of trade negotiations, if not at the Tokyo Round (1973-79) itself. More importantly, India’s exports would have done significantly better. This is despite the information technology, outsourcing and software (or services) export boom being due to exogenous circumstances and impossible to replicate in the early 1980s.

A comparison with China’s manufacturing export success is pointless, because we wouldn’t have removed small-scale sector reservations. Nevertheless, exports would have done better. They didn’t do badly towards the fag end of the 1970s. But most of the ’80s (except the very end) were a lost export decade and so were the first few years of the ’90s. That wouldn’t have happened and India would presumably have said no to aid without waiting for the 1990s. Our share in world exports of goods would today have been 1.5 per cent.

The picture doesn’t improve as much if we look at the GDP, which people relate to more easily. Real GDP has grown at around 5.5 per cent since the Sixth Plan (1980-85) and there is no evidence to indicate it has increased post-reform. The Eighth Five Year Plan (1992-97) did better at 6.7 per cent, but after the Ninth Plan’s (1997-2002) 5.6 per cent, that seems to have been an aberration. There is thus a temptation to argue that nothing would have changed even if we had reformed in 1978.

However, as a general proposition, we can argue that the slowdown happened during the ninth plan because reforms decelerated. And if we are talking about reforms starting in 1978, we hopefully have in mind reforms without deceleration. Ipso facto, the trend would have been higher than 5.5 per cent—6.5 per cent at least, if not higher. Over a 24-year period (since 1980), that one percentage difference is not to be sneezed at. Assuming the same population trends and the same exchange rate, India’s per capita income today would have been $650 rather than $500.

Break that 24-year period into eight years of 6.5 per cent, eight years of 7 per cent and eight years of 7.5 per cent, and you have a per capita income figure of almost $725 or Rs 33,000 at current exchange rates! That’s the opportunity cost of lost growth.

Actually, it gets worse. The exchange rate wouldn’t have remained the same. The rupee would have appreciated against the US dollar. The relationship between population growth and economic development is generally complex. The rate of population growth has slowed in the 1990s, at least in parts of India, and it would have slowed down faster. Factoring these in, we probably would have been around $800 (Rs 36,000). But still short of China’s $1,000. Poverty ratios depend not only on per capita income growth, but the composition of growth and other things. But with that higher growth, the poverty ratio today would have been a far better 15 per cent, not the 26 per cent shown in official figures for 1999-2000. The literacy rate would have been 75 per cent, and not 65 per cent. Instead of 67 per thousand, the infant mortality rate would have been 40.

But in domestic reforms, we would have continued to dither. For instance, had FDI in media been opened up way back in 1978, the media scene today would have been transformed. However, such large-scale liberalisation was improbable, though not impossible. India isn’t China. The satellite generation, driving part of the demand for liberalisation, would also have been missing. Nevertheless, India would have been further ahead on development.

Not reforming in the late 1970s meant India became a refusing-to-develop country (RDC). Reforming in the late 1970s wouldn’t have made us a developed country by now. But from RDC we would have moved to the willing-to-develop country (WDC) category.

(Bibek Debroy is the editor of the just-published Agenda for Improving Governance.)

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