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ThestoryofIndia'seconomicreformsinthelast25yearsRediff.com

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ThestoryofIndia'seconomicreformsinthelast25years
July13,201611:04IST

Theremarkablefeatureofthosereformsunveiledin1991isthatnoneofthosedecisionshasbeendisownedbysubsequent
governmentsinthelast25years,saysAKBhattacharya.

IMAGE:NogovernmentattheCentrehasquestionedtheroleandimportanceofreforms.Photograph:
Reuters

wentyfive years ago, this week, the government of P V Narasimha Rao had initiated the first round of reforms to rescue the
Indianeconomyfromanunprecedentedbalanceofpaymentscrisisandfiscalindiscipline.

WhatthegovernmenthadthenannouncedincludedatwostagedownwardadjustmentinthevalueoftheIndianrupeeagainstthe
US dollar and trade policy reforms that abolished all export subsidies and promised current account convertibility of the Indian
currencyinabouttwoyears.
Moredecisionsfollowedinthesubsequentweekswithliberalisationoftheindustrialpolicy,aplanofactionforfiscalconsolidation
andreformsinthefinancialsector.
The remarkable feature of those reforms unveiled in 1991 is that none of those decisions has been disowned by subsequent
governmentsinthelast25years.
Yes,therehavebeendebatesanddiscussionsontheneedforintroducinganexitpolicyforlabourorprivatisationofstateowned
undertakings,butthebroaddirectionofeconomicreformsinthiscountryhasremainedunidirectionalandirreversible,eventhough
theCentresincethenhasbeenruledbysixdifferentprimeministers.
Youcouldquarrelabouttheirslowpace,butnottheirdirection.
Lookingback,therefore,itwouldbeinterestingtoseehowthemajoreconomicindicatorshavefaredinthelast25years.
Thatassessmentrevealsquiteafewsignificanttrendsthatprovideamorenuancedunderstandingoftheimpactofthosereformson
theactualstateofthegovernmentseconomichealth.
Aquickanalysisshowsthatthereareafewmajorencouragingtrendsandseveralotherdisappointingones.
http://www.rediff.com/business/report/columnthestoryofindiaseconomicreformsinthelast25years/20160713.htm?print=true

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8/14/2016

ThestoryofIndia'seconomicreformsinthelast25yearsRediff.com

Thegovernmentsfiscaldeficit,forinstance,hasbeenkeptunderreasonablecontrol.
Itisimportanttonotethattwoyearsafterthelaunchofthereforms,thegovernmentsfiscaldeficitin199293actuallyrosetothe
highesteverlevelof6.8percentofgrossdomesticproductorGDPinthepostreformsera.
Thereafter,therewassteadycompressionofthefiscaldeficit.
Thoughtherewereyearsofslippagesandrecovery,thedirectionoffiscaldeficitwassouthwardandby200708itreachedarecord
lowof2.5percentofGDP.
Afterthatrecovery,however,thankstotheglobalfinancialmeltdownandthegovernmentsattempttoreducetaxratestoprovide
moremoneywiththepeople,thefiscaldeficitkeptrisingtoreach6.5percentin200910.
Since then, governments have reimposed fiscal discipline and brought the deficit down steadily to reach 3.9 per cent of GDP in
201516.
Similarsuccesseshavebeenregisteredintheareasofgovernmentdebtandinterestliability.
Thegovernmentsdebtwasestimatedatover63percentofGDPin199192.Lastyear,itdippedtoabout50percent.
Asaconsequenceoffiscalprudenceandafallingshareofdebt,interestpaymentstoodeclinedfromclosetofourpercentofGDPin
199192toaround3.2percentlastyear.
Whilethegovernmentsrecordintheareasoffiscalconsolidation,debtmanagementandinterestliabilityhascertainlybeenlargely
commendableinthelast25years,therearemanyotherareasofconcerninthisperiod.
Forinstance,directtaxeswereonlyabouttwopercentofGDPin199192andtheearlyphaseoftaxreformssawthisratiogoupto
6.2percentofGDPin200708.
Butsincethen,directtaxeffortsofsuccessivegovernmentshaveremainedsuboptimal.
Infact,theshareofdirecttaxesinGDPhasfallentobelowsixpercentnow,indicatinghoweffortstowidenthedirecttaxbasehave
madelittleheadway.
Thegovernmentsexpenditureonsubsidiesalsosuggeststhatitsearlysuccesshasbeennullifiedbysubsequentyearsofneglect.
Subsidiesexpendituredeclinedfrom1.8percentofGDPtoaboutonepercentby199596.
In spite of many schemes, including the launch of the direct benefit transfer programme and price reforms to keep a check on
subsidies,theexpenditureunderthisheadactuallyhasinchedbackto1.7percentofGDP.
Itisthereforelogicaltoaskifthegovernmentsofthepastfewyearshavelosttheirwilltoreformsubsidies.
Evenmoreworryinghasbeenthecompositionofthegovernmentsexpenditure.
ThegovernmentsrevenueexpenditureasapercentofGDP(largelyconsistingofspendingonsubsidies,interest,defence,wages
andpensions)hasstayedindoubledigitsforeachofthelast25years.
Whenreformsstartedin199192,revenueexpenditurewas12.21percentofGDPanditdippedmarginallyto10.89percentofGDP
in201516.
Butabiggercauseforalarmwasthefallinthegovernmentscapitalexpenditurefrom4.32percentofGDPin199192to1.71per
centin201516.
Ideally,thegovernmentscapitalexpenditureshouldbeboostedparticularlywhenitsrevenuespendinghasbeenrisingrapidly.
Whileitseconomiclogicisrecognisedatatimewhenpublicinvestmentshaveacquiredgreatercriticalityinrevivinggrowth,eventhe
presentgovernmenthasmanagedtoincreasecapitalexpenditureonlybyasmallmargin.
ThatinmanywayssumsupthestoryofIndiaseconomicreformsofthelast25years.
NogovernmentattheCentrehasquestionedtheroleandimportanceofreforms.
Yet,theironyisthatfewministersinthegovernmentwouldgoallouttodefendandpromotereformswithoutweighingthepolitical
costssuchpronouncementsoractionsmightincur.
Youmightdefenditaspoliticalpragmatism.Butinacountrywheretheoutcomeofthereformsinthelast25yearshaslargelybeen
positive(steadygrowth,neweconomicopportunitiesandmorechoicesareonlyafewofthoseadvantagespeoplehavebenefitted
from),itisironicthatitspoliticalleaders,onceinpower,becomeoverlycautiousabouttakingboldmoves.
ThatwayreformshavestillalongwaytogoinIndia.
Source:

http://www.rediff.com/business/report/columnthestoryofindiaseconomicreformsinthelast25years/20160713.htm?print=true

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