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Students Corner - A Decade of Economic
Reforms in India - A Review

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The heuristic description of the growth experience of the Indian economy since the initiation of the reform measures in the early 1990s brings out a number of empirical regularities. At a broad aggregate level, there is evidence of a distinct, but not necessarily substantial improvement in growth of the economy during the reform period. Nevertheless, the silver lining of improved growth loses some of its gloss in view of the deceleration in the growth witnessed since the mid-1990s. The achievement of higher economic growth hinges on the attainment of both higher saving and investment. While saving in general and household saving in particular have exhibited rising trend during the reform period partly emanating from relatively higher income growth (despite the downward alignment of interest rates), public sector saving has fallen dramatically and has become negative. It is the poor performance of the public sector saving as a whole that has eroded the investment capacity of the country for generating higher economic growth. The deteriorating saving has led to erosion in public sector investment and deterioration in the availability and quality of public infrastructure services including transport, railways and electricity. Thus, the major challenge to economic growth in future is the reversal of the public sector dis-saving to achieve the level of saving recorded in the late 1980s. This requires action on two fronts. First, a major improvement has to come about in the tax-GDP ratio which has deteriorated during the 1990s. Second, large-scale improvement in the operation of the public enterprises would be required by rationalising user charges on the services rendered. It would then be possible to invest adequately on provision of such infrastructure services which are necessary for higher growth. Another concern for achieving higher growth emanates from the indications of declining productivity growth in the latter half of the reform period (as reflected in the ICOR). This reinforces the need for accelerating the pace of structural reforms.

The growth performance of the commodity producing sectors is critical for improving overall growth rate of the economy. It is apparent that the agricultural sector in the 1990s witnessed slowdown but at the same time recorded unprecedented accumulation of foodstocks due to persistent price distortions. While there have been successive increases in MSPs of rice and wheat, their international prices have witnessed declining trend, thus reducing the export competitiveness of Indian rice and wheat. These factors together have led to higher procurement. As against higher procurement, the off-take has remained low due to rise in CIPs on the one hand and shifts in the consumption pattern away from cereals to non-traditional food items, on the other. The cumulative impact has been burgeoning food stocks, with attendant fiscal and monetary implications. This predicament of mounting foodstocks has occured despite a deceleration in agricultural growth. It is quite possible that the problem would have been more serious in terms of piling of stocks, had there been higher growth in agricultural production. Notwithstanding the current reduced export competitiveness of Indian cereals and the piling up of foodgrain stocks, Indian cereals could still be competitive, provided the AMS in the US and European countries is reduced. The subdued growth of agricultural sector could be attributed to limited reforms directly affecting this sector. Furthermore, within the limited reforms in this sector, while the foreign trade was liberalised, the inter-state restrictions prevailed. This reflects the lack of proper sequencing of reforms. At the same time, lack of technological improvements is manifested in plateauing of yield gains across crops.

A higher growth in agriculture, thus, needs a comprehensive revamp of agriculture policy with reorientation towards rapid diversification of this sector. A progressive correction is required in the incentive structure for agriculture so that the excessively high minimum support prices do not continue to distort resource allocation in agriculture. This will ensure that farmers diversify towards high value added segments of agriculture in response to the new demand structure. As the non-foodgrain commodities have inherent heterogeneity, policies regarding these have to be regionally more dispersed and market responsive. Agriculture growth will be hampered further unless the current approach to input subsidies, particularly relating to fertiliser, power and water is reoriented. Rationalisation of subsidies and economically viable user charges would be required to augment resources for productive investment in rural infrastructure. The lack of adequate storage facilities acts as a major bottleneck in the development of food processing industry. Furthermore, lack of standardisation of product quality hampers export competitiveness. The supportive rural infrastructure can be best developed in a decentralised private sector framework which would need appropriate policies and financing facilities.

Responding to the structural reforms introduced in the industrial sector during the initial years of the 1990s, the industrial sector grew at a remarkable rate. However, there was marked deceleration since the mid-1990s. The package of reforms carried over the past decade was expected to lead to significant restructuring in the industrial sector. The slow pace of industrial restructuring and the resultant loss of competitiveness in a liberalised trade environment, thus, led to current protracted manufacturing slowdown. The signs of reduced competitiveness are thus, observed in declining productivity growth, more particularly in the latter part of the 1990s. An overall growth impulse in the industrial investment, exports and employment can be generated provided coordinated reform measures are taken allowing rapid bankruptcy procedures, faster transformation of urban land use and flexibility in labour market. Further, existing restrictions on small scale sector in the form of size and scale of operation need to be removed to ensure new investments and technology upgradation in this segment to withstand competition.

It is apparent that the industrial performance continues to suffer from physical infrastructure bottlenecks with demand-supply imbalances persisting during the reform period. The deteriorating infrastructure services have been a direct fall-out of shrinkage in infrastructure investment in the context of inadequate internal resources of public infrastructure entities and dwindling Plan outlay for infrastructure.The declining public investment in infrastructure has not been offset by private investment, primarily on account of inadequate institutional reforms; there are, however, signs of improvement for a few sectors, like communication. The adequate response of the private sector in basic infrastructure would primarily require economically efficient user charges to ensure the reasonable return on investment.

Apart from infrastructure, lack of adequate credit is often cited as a factor behind the slowdown. While the nominal interest rates have fallen, the real lending rates continue to remain high. The development has adverse implications for the industrial sector as interest cost-sales ratio remains much higher as compared to many emerging economies. Given the downward rigidity of medium and long-term interest rates and real GDP growth from industry falling much below the real interest rates, industrial investment becomes increasingly unsustainable over a longer horizon. It may be noted that in a liberalised interest rate scenario, policy measures have limited role to influence the cost of credit. While the credit flow to industry from both the banking system as well as the AFIs has significantly slowed down in the recent past, it is not clear whether the reduced credit flow is an outcome or the cause of industrial deceleration. Notwithstanding the unsettled status of the alleged "credit constraint" facing the industry, there are some concerns about the credit delivery mechanism. All these continue to pose challenges for achieving the much needed higher growth in the economy.

The services sector stands in a somewhat isolated position. Not only did it improve its performance during the reform period, to a large extent, it withstood the onslaught of deceleration. Furthermore, a sector-wise analysis of growth in the services sector has revealed that much of the alleged misgiving about its unsustainability is misplaced, as its growth performance was indeed robust and not necessarily dependent on 'Government services', like 'public administration and defence'. Nevertheless, the emergence of producer services as an important source of services growth, reflecting strong inter-linkages with commodity producing sectors, raises questions about the continuance of services growth, in the absence of an industrial revival. Although the services sector can continue to grow at higher rates, the acceleration in the overall growth rate of the economy over a medium term would necessitate a distinct improvement in the growth performance of the commodity producing sectors from their present levels.