How will 2020 be remembered 30 years from now? Annus horribilis seems to be today’s unanimous view, globally. For India, however, that view may be tempered, even revised, at least by economic historians. Of course, there is little doubt that 2020-21 will see a record contraction of the Indian economy, the first year of negative growth since 1979. However, it is worth pointing out that India’s second worst annual growth performance in the period post 1979 was in 1991, when the economy registered a measly 1% growth.
In our collective consciousness, 1991 is perceived as the year in which India’s economic fortunes changed. At the time, there was as much trepidation and uncertainty, even pessimism, about the country’s economic future. Indeed, the uncertainty lasted until at least 1993 when the economy began to show some signs of a decisive revival. The reason 1991 is historic is because the policies which were implemented then led us to a more prosperous future.
The context of 2020-21 is totally different from that of 1990-91. Then, India had a balance pf payments crisis, borne out of reckless debt-fuelled growth of the 1980s and the stalling of a highly protected, uncompetitive economy. Now, India has a robust balance of payments, considerable fiscal rectitude (even during an unprecedented crisis) and an economy which is more market-oriented than 30 years ago.
Yet, there are common threads. By 1990-91, it had become clear that India needed deep structural reforms to create a high growth, low inflation economy and lift its people out of poverty. Thirty years on, even before Covid-19 struck, there were signs (manifested in the slowing rate of growth) that India needed a fresh round of radical structural reforms to return to high growth and to deliver prosperity to its people. And just like the balance of payments crisis prompted domestic reforms then, a pandemic-induced crisis has nudged reforms now. What is better this time around is that the reform is on India’s own terms and not monitored by lenders from abroad. It may yield better outcomes than 1991.
The 1991 reforms sparked a dramatic transformation in the services sector of the economy and in a small segment of manufacturing. Overall, they certainly increased the welfare of consumers, who got goods and services of very good quality at lower prices with assured supply, a far cry from the scarcity economy of the 40 years before then. However, where they failed was in transforming the other two engines of the economy: agriculture and manufacturing. The most telling outcome of that twin failure 30 years hence is the fact that 40% of India’s workforce continues to depend on agriculture, which produces just 13% of GDP. The lack of a thriving manufacturing base has meant that not enough good jobs have been created, exports have not been quite the engine of growth they have been for other Asian countries and economic growth has not been as inclusive as it might have.
The 2020 reforms are path breaking because they are focused on transforming agriculture and manufacturing which are necessary for a pathway to inclusive growth in the years ahead. The principles that underly the three farm legislations are the same that were applied to other sectors of the economy 30 years ago. Like all sellers in the economy, farmers should have the right to choose and not be compelled to sell to a single buyer, namely the APMC mandi. Now, the farmer can choose between the existing mandi, new mandi, national e-market, retailers, corporate buyers. With intermediaries marginalised (they are the primary source of resistance), farmers will get a better price and so will consumers, who otherwise suffer from the impact of non-cereal food inflation.
It is a folly to believe that the new laws spell the end of government assistance to farmers. Subsidies and support prices are bound to continue, but should they be designed in a way that helps all farmers or only large farmers producing cereals?
That the government is still acutely aware of its support role in the economy is evident from the reforms for manufacturing which not only involve deregulation and simplification of laws which govern business (including labour laws and FDI) but also have an element of incentives. The newly rolled out Production Linked Incentive Scheme will do for manufacturing what the 1991 reforms failed to do. They are well targeted, performance-linked and with sunset clauses. They will provide a level playing field for manufacturing with foreign manufacturers, while the Government continues to work to implement other reforms which will create a truly cost competitive economy.
In addition, hitherto closed sectors like commercial coal mining and passenger train operations are being opened to the private sector, creating new avenues for growth. If the government manages to successfully privatise one PSU before 31 March 2021, it will be a truly transformative 12 months of economic policymaking.
Probably, nothing can ever erase the misery, sickness and death of 2020, but if it leads us to something much better, it may yet find redemption. Certainly, the government of Prime Minister Narendra Modi has not wasted this crisis.
Dhiraj Nayyar is Chief Economist, Vedanta.