Waiting for a Big Push
There are some literal-minded folk who believe that India keeps its dates with economic crises with unerring regularity. Every 10 years the government goes bankrupt and the economy threatens to collapse.
There were such crises both in 1981 and in 1991, and they were followed by bailouts by the Inter-national Monetary Fund (IMF). Those were followed by spurts of economic reforms. Will that also be the case in 2001?
We put the question to a government economist, and he laughed it off. "The IMF gave us money in 1981 and 1991. This year they gave us nothing. Instead, we gave them Montek," he said, referring to former finance secretary Montek Singh Ahluwalia's recent appointment as the IMF's first independent evaluator.
He was not being merely facetious. This was his way of saying that the Indian economy has come a long way since the dark days of 1991, when the treasury was empty, inflation was raging, growth had withered away, and there were riots in the streets.
He is not merely parroting the official line. Even independent economists, each one we spoke to, made the same point: India is highly unlikely to slip into a full-blown economic crisis in the near future.
"We are distinctly better off than we were in 1991 - there is no comparison. Inflation is low, the external account is stable, we are less dependent on short-term capital flows. Yes, there are problems, especially on the fiscal side. There is also the lack of progress on reforms. But this is not 1991, " says S. S. Bhandare, economic consultant with Tata Services.
Our economy is a rock of stability amidst Asia's sea of economic troubles despite our problems of faltering growth, fiscal pressures, creaking infrastructure and a weak financial system.
There is a huge wreckage east of our borders. Countries such as Singapore, Taiwan, Malaysia, Thai-land and South Korea are either in recession or close to it.
The IMF itself believes that the world economy is close to recession, which, by its definition, means that world output will grow at less than 2.5% this year. In contrast, the consensus forecast for India's economic growth in 2001-02 is a respectable 5.6%.
A large part of the credit for this remarkable transition to a stable economy goes to the economic reforms launched in 1991 by the strange combination of a boring politician and a relatively-unknown bureaucrat - Narasimha Rao and Manmohan Singh. Finance Minister Yashwant Sinha and his noisy brigade would now like us to remember Manmohan Singh as the original sinner, the one who first led UTI towards the mess it is in now.
It's difficult to see the genial sardar as a rotten scamster, but there is perhaps a more interesting way to depict Manmohan Singh, as well as his two successors, P. Chidambaram and Sinha.
They could be said to represent the Hindu trinity. Manmohan Singh is the creator. He was the architect of economic reforms in India. Then came P. Chidambaram, the preserver. Though he was part of a rainbow coalition, Chidambaram did his utmost to keep reforms going.
And then came Yashwant Sinha, the destroyer. His is an utterly con-fused approach to economic policy. He chooses among his incarnations - a swadeshi ideologue, a champion of globalisation, a protectionist, and a believer in competition.
Of course, not too much must be read into this characterisation of the three finance ministers; it is too simplistic and it's also harsh on Sinha. After all, Manmohan Singh backed off under political pressure after 1993. Chidambaram actually increased import tariffs in this first Budget.
On the other hand, Sinha was the first finance minister to talk about big-bang reforms, when he was part of Chandrashekar's short-lived government in 1991. But the three of them have kept the flame of re-form alive over the past decade, often in the face of stiff political opposition.
What have they achieved together? Take a look at the table above. It shows that the Indian economy is better off on almost every count today than it was in 1991. A few explanations are in order.
Take economic growth. Has growth actually revved up over the past decade. A hurried answer would be: "No, it hasn't." The rate of growth in 1991 and in 2001 is almost the same. That is also the case with the average growth rate clocked over the two decades. Then what was all the fuss about?
Two important changes need to be noted to capture the correct picture. First, growth in the 1990s was far more stable, ranging between 4.5% (in 1992-93) and 7.5% (in 1996-97). On the other hand, growth in the 1980s fluctuated between 2.5% (in 1982-83) and 11.2% (in 1988-89). Of course, the 1.5% growth rate seen in 1991-92 has not been considered because the government was then focused on stabilising a crisis-ridden economy rather than growing it.
Secondly, growth in the 1980s was pushed by reckless domestic and foreign borrowing, a policy that led us into a crisis in the first place. On the other hand, growth in the 1990s was more conservatively financed. India's external debt has almost stagnated in the 1990s going up from $92 billion to $98 billion.
The other macro-indicators also tell a story of progress over the past decade. Incomes have gone up, inflation has come down, the balance of payments is under control and the forex kitty is brimming.
Yet, there are a few clear pressure points as well. Consider: there has not been too much progress in cutting the fiscal deficit. Whatever little the central government has managed (its deficit is down from 7.85% to 5.1% of GDP) has been cancelled out by the deteriorating fiscal situation of the state governments (whose combined deficit has gone up from 3.3% to 4.5%).
Second, there is no consensus yet on the key question: have reforms helped the poor? The data put out by the National Sample Survey (NSS) suggests that poverty rates have remained where they were five years ago. On the other hand, data put out by the National Council For App-lied Economic Research (NCAER) shows that poverty rates have plummeted. The issue is still a point of heated debate.
Third, growth has been unevenly distributed, especially in terms of regions. Some dynamic states such as Maharashtra, Gujarat and Tamil Nadu are sprinting ahead, while states like Bihar, Orissa and Uttar Pradesh have stagnated. This could lead to pressures on the federal system in the years ahead.
Finally, there are clear signs that the Indian economy's growth impulses are getting weaker. While there is still brave talk within the government about pushing the GDP growth rate to 9%, the harsh reality is that India seems to have become accustomed to a new Hindu rate of growth - between 5% and 6%.
Most of these problems can be traced back to the loss of momentum on the reforms front since 1994, and especially over the past two years. This is almost a repeat of what happened in the 1980s.
After the first IMF loan, Indira Gandhi's government started tinkering with the crazy system of controls that were choking the economy. Then came the first real push in 1984, after Rajiv Gandhi took over as prime minister.
Within two years, however, the reformist spirit had dimmed. It took the economic crisis of 1991 to reignite it.
There has been a huge debate raging for some time now about how to get reforms moving ahead. Will we actually see a repeat of the 1980s? Will it actually take another painful economic crisis to get the government moving again? One hopes not.
(20 August, 2001)
209 Ceremonial Boulevard
Mumbai 400 021.
Copyright © - New India Digest