30 years later, severe underemployment remains our biggest problem

Thirty years have passed since India, under the Narasimha Rao-Manmohan Singh duo, embarked on the path of economic liberalisation in 1991. Looking back, what are the main achievements and failures?

The most important changes were the virtual abolition of industrial licensing (which had restricted investment, production, technology, expansion and location of business firms in India) and (gradual) reduction of taxes and removal of restrictions on imports and exports of goods, services, capital and technology. These policy changes put an end to the so-called ‘licence-permit raj’ and allowed a much greater role of prices (including international prices) and markets in allocation of resources.

Since Independence, India’s GDP growth rate had hovered around 3.5-4% until the 1980s. The average growth rate clearly accelerated in the post-liberalisation period, averaging over 6% a year. However, the economy has begun to come down from this high growth path, and this happened even before the Covid pandemic hit us. This has made some economists believe that, after three decades, the efficiency and growth-inducing effects of the initial economic reforms may have started to peter out.

The rate of inflation (CPI) – a major concern for common people -- which in many years during the pre-liberalisation period exceeded the 10% mark, has slowed to an average of 5-6%. This is a direct result of self-sufficiency in food grains production, a better distribution network, and an abundant supply of manufactured consumer goods from both domestic production and imports at relatively stable prices.

The biggest gain has been in terms of the availability of a much greater variety and quality of consumer goods for an increasing number of people, legally, at internationally competitive prices. The days when a person had to wait for years for a landline telephone connection, LPG gas connection, a Bajaj Chetak scooter or a Maruti 800 car are long behind us. Today’s generation is spoilt for choices in cell phones, colour TV sets, motorbikes and cars.

The global perception about India has changed a lot. India has already proved its prowess in several areas, like IT and ITeS (IT-enabled service), pharmaceuticals, auto components and financial services, in a highly competitive global marketplace. But in consumer electronics, first Japanese, then Korean and now Chinese firms have set up factories in India where indigenous Indian firms have largely failed to establish their brand images. However, Indian workers have gained jobs, to the extent that manufacturing is taking place in India (even if by foreign firms).

The stigma of ‘Made-in-India’ has largely vanished as a result of the much-improved quality of Indian goods, thanks to stiff competition from world-class products and collaboration arrangements with MNCs. Foreign investors (both portfolio funds and FDI) have started believing in the growth potential of India, leading to a booming stock market and a steady rise in foreign exchange reserves. Currently, our forex reserves have exceeded $600 billion, which stands in sharp contrast to only $1.5 billion in June 1991, which could cover only 15 days’ imports. At the same time, we must recognise that, unlike China which has earned their huge forex reserves through trade surplus, much of our forex reserves are ‘borrowed’ funds and hence less reliable and more volatile.

In the post-liberalisation era, higher growth rate has brought about a faster reduction in the percentage of people below ‘the poverty line’, whichever way it is measured. Growth has reduced poverty in two major ways -- by creating new jobs and by generating more tax revenues that is used to finance various anti-poverty programmes.

Along with these successes, there are several areas of concern.

First, the growth rate of employment has been slowing down. This ‘jobless growth’ is a global phenomenon which has more to do with automation and labour-saving technological progress. A modern steel or automobile plant uses less than 10% of the workers that a 1960s plant would do. Moreover, modern plants require workers with specific skills, who can work with sophisticated machines which further reduces the need for unskilled workers. To compensate, an economy has to grow at a much faster rate, like 9-10%, over several decades (as in China), instead of around 6% that India has been able to achieve.

Second, there is rising inequality in distribution of income and wealth. To a large extent, this is inevitable in a liberalised economic regime which creates more market opportunities, which people with better endowments of physical, financial and human capital are able to make use of. That is why China and India -- two of the fastest growing big economies of the world but having vastly different political systems -- have both experienced sharply rising inequality of income and wealth, along with reduction in the poverty ratio. To counter this inevitable tendency, we need a more progressive tax-subsidy regime than we currently have.

Third, the poor state of our infrastructure -- bad roads, congested ports and airports, slow-moving trains, power shortage, unreliable and slow internet connectivity, insufficient irrigation and water supply, particularly in the rural areas. We have huge problems in acquiring land, getting myriad clearances from the slow-moving government machinery and clogged judicial courts taking decades to resolve legal disputes. In addition, the education, health and skill levels of our workers need a lot of upgrading. These infrastructural bottlenecks are holding up the development of large-scale labour-intensive manufacturing and modern agriculture, both of which are required to improve the incomes of the vast majority of poor Indians.

We need to move workers from low-productivity agriculture to higher-productivity manufacturing and service industries. Here, progress has been much below the required pace. As a result, jobless rural migrants flock to cities in search of jobs, further straining the urban infrastructure, or are forced to take up, as a last resort, low-income self-employment as street-hawkers, vegetable sellers or fast-food vendors. Severe underemployment, rather than open unemployment, continues to be our biggest problem, despite 30 years of economic liberalisation.

Changing economic policies on paper is the easier part. Improving the implementation machinery by reforming the political and administrative culture, along with the associated incentive and accountability systems, is a far more daunting task. This is all the more so when reforms supported by political parties in power are almost invariably opposed by the same when sitting in the Opposition.

(The writer is a former professor of economics at IIM Calcutta, India, and Cornell University, USA)