The reforms experience
S L. RAO
ASPECTS OF INDIA'S ECONOMIC GROWTH & REFORMS:
R. Nagaraj; Academic Foundation, 4772-73/23 Bharat Ram Road
(23, Ansari Road), Daryaganj,
New Delhi-110002. Rs. 795.
This is a clearly written and well-argued book, with a section at the end of each chapter summarising the involved arguments, a rare and welcome feature.
Nagaraj's book is influenced by the writings of K. N. Raj, of an earlier generation of political economists. The references are mostly before 1986. Similarly, most of the data used in the book relates to 1997 and earlier years.
Nagaraj shows that faster GDP growth commenced in the period between 1980-81 and 1987-88. After 1991, there is a statistically significant decline in growth rate. (Recent figures show this trend reversing since 2002). He argues that the improved fiscal balance was due to deep cuts in public investment and public spending. Revenue deficits — borrowing for consumption — have risen. Nevertheless, there was practically no fall in social sector spending ratios.
Growth rate
The author commends the growth trend between 1980 and 2000 of 5.7 per cent, with greater stability, but finds no statistically significant acceleration in India's growth rate after 1991. Decline in poverty commenced before the growth rate improved in the 1980s. Hence, he sees no easy association between poverty reduction and improved growth or economic reforms. He finds no sustained reduction in unemployment rates. Inequality has increased. Despite a favourable climate for industrial investment, growth in capital formation in registered manufacturing sector is relatively low, with strong regional imbalances. He recognises that reforms increased domestic and import competition. There has been no shift to labour intensive production and exports.
He also debunks the view that public enterprises caused high fiscal deficits and therefore questions the need for diluting public ownership. He identifies the decline in the power of organised labour, to employment shifting to the unregistered sector and smaller-sized registered factories.
On capital markets, he concludes that the shift from bank deposits to shares and debentures has not increased domestic savings rate or its share in financial assets. On foreign investment, he commends a strategic policy stance as in China to access the external market for labour-intensive manufactures and securing know-how.
Impact of reforms
The assessment of the impact of economic reforms in this book might have been better if it had data for more years under reforms. It displays nostalgia for centralised planning and direction as in China for channeling private domestic and foreign investment in desired directions. The change in employment away from the large organised sector that he identifies is to be expected and welcomed. Indeed, overall employment will increase, but through more in `casual' employment, as employers outsource work not crucially linked to their core activities.
The 1980s broke out of the limited growth till the 1970's. The opening up of the economy under Rajiv Gandhi from the mid-1980s was a precursor to subsequent developments. Nagaraj could have said also that the `reforms' of the 1990s were not essential to overcome the balance of payments crisis of 1990-91 but were political decisions to free Indian enterprise from its shackles.
Performance
His analysis of public enterprise performance and dilution of government ownership misses the point. Many public enterprises (e.g. oil companies, AAAI) owe their apparently good profit performance to monopoly positions, state preferences, poor service quality, high prices and hidden subsidies. The poor performance of the electricity sector due to populist pricing, grave inefficiencies and lack of a commercial approach are due to state ownership and lack of political consensus for improving availability. The crux is the lack of freedom to public enterprise managers to perform because of their total subjugation to bureaucrats and politicians. Private ownership would avoid these.
He does not recognise the importance of institutions in growth and poverty reduction. He does not mention independent regulation in infrastructure (since 1998), which has brought transparency and consultation to decision-making. While results have been slow in electricity, they have been much quicker in telecommunications and financial markets. Increasing reliance on panchayats is another institutional change. He does not also refer to the administrative incapacities that make for very ineffective execution of social and infrastructure expenditures.
While inequalities have increased, poverty ratios appear to have declined, confirmed also by the increasing importance of rural markets. His analysis of foreign investment could usefully have discussed the volatility that portfolio investments have brought to the economy.
This is a book worth reading. It is not sufficiently complete in its coverage and at times, brings to its analysis, the command and control mindset of the 1970s.
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