Stalled Economic Reforms in India: Reasons and Solutions

India, after Independence, followed socialist development plans. It emphasised self-reliance and state investment in heavy capital-intensive industries. Everything required government approval starting from imports to investments in India. As a result, India’s average tariffs were relatively higher than today’s standards.

In the 1980s, India was a closed economy whose large yet inefficient industrial sector contributed 95 percent of domestic demand for manufactured goods and 100 per cent of all consumer goods. Moreover, the overvalued rupee kept exports at bay. Thus, it severely constrained India’s foreign exchange earnings for purchasing new technology and capital goods from world markets.

Things changed in July 1991, when Finance Minister Manmohan Singh introduced new socio-economic reforms in India. The Indian market opened up for trade and foreign investment through these reforms. As a result, it dramatically improved India’s economic performance. 

What are Economic Reforms in India?

Economic reforms in India in 1991 went through a fundamental change for liberalising the Economy and quickening the economic growth rate. The socio-economic reforms in India by the Narsimha Rao Government aimed at rebuilding internal and external trust in the Indian Economy.

The reforms brought in considerable cooperation from the private sector. The Government introduced changes in policy concerning technology up-gradation, industrial licensing, restriction removal on the private sector, foreign investments and foreign trade. The most important feature of the socio-economic reforms was Privatisation, Liberalisation and Globalisation.

Current Scenario of Socio-Economic Reforms in India

Today, the Indian Economy is facing severe challenges. The GDP growth was 4% in 2019-20, which is very low compared to 8.3% in 2016-17. Moreover, the quarterly output estimates have fallen dramatically from 8.1% in January-March 2018 to 4.5% in July-September 2019. Though the numbers tell a different story, the Government believes it is a cyclical and temporary problem that will vanish with the initiated policy measure.

However, the reality is grimmer and different as the Economy has poorly slumped after the 2000s boom. In a few years, India’s economic status has shifted from the fastest-growing, export-driven, IT outsourcing Economy to a protection-seeking laggard.

Reasons Behind India’s Stalled Economic Reforms

The Socio-Economic Reforms in India 1991 had both pros and cons. In the middle of the 2000s, the exploitation of land, labour and scarce natural resources opened up. The Indian judiciary system put up an end to these exploitations. Even though having an incredible economic trek record, the court cases against corrupt business houses for getting rare natural resources at low prices and land acquisition led the Government out of the parliament doors.

These crises decreased economic growth instantly. Investments, Domestic Savings and Capital inflows also trended downwards. Moreover, the US imposed taxes on outsourcing, and with technological changes, IT exports tapered off. 

On the other hand, Inflation ruled high because of fluctuating international oil prices, and the balance of payments deficit got unstable.

The corporate earnings and their ability to service huge debts accumulated during the boom reflected downward growth. Such obligations translated into the banking sector’s non-performing assets (NPAs) because the firms could not pay loans. As a result, it restricted banks from offering new loans.

The new Government pumped in with the development schedule, eradicating corruption and enforcing the rule of law.

In 2016, they started by demonetising the extensive value currency notes of Rs 1000 and Rs 500, accounting for around 86.4% of the total currency in circulation. Their motto was to eradicate black money and encourage the use of digital transactions. However, it was a macroeconomic shock, shattering the unorganised sector that employs 90% of the workforce and contributes half of the domestic output. It contributed heavily to the contraction in economic activity. As per the RBI Report, the policy shocked and inched back GDP to its pre-demonetisation level.

Another major setback to the economy during the NDA government was to replace various indirect taxes with Goods and Service taxes. The Economy had not yet stabilised from its previous step when GST was introduced. However, the citizens of India principally welcomed it, but its implementation and poor design were criticised. It also adversely affected the tiny and informal enterprises that possess no resources for complying with numerous computerised filings and procedures of GST. Thus, a severe shortfall in tax collection affected government finances and revenue sharing between the states and the centre.

The Solution To Stalled Socio-Economic Reforms In India

To uplift the Indian Economy, the Government should prioritise investment growth revival. Even though the interest rates have declined, the private corporate sector is not in a position to make new capital investments due to low aggregate demand. Moreover, the banking crisis due to NPAs, the private corporate sector’s high debt level, and the collapsing large shadow banks halted the new landing for capital investment. Thus, public investments for crowding in private investment can boost the overall domestic demand level and revive growth.

Rural unemployment and poverty have increased and need public assistance. Even after 70 years of Independence, it is disgusting to know that a motorable road does not connect over 20% of India’s 6 lakh villages. Hence, the Government can address the two shortfalls with public expenditure on large infrastructure projects (highways and railways) and rural road connectivity. After all, no policy is better than addressing rural misery than pushing the National Rural Employment Guarantee Scheme (NREGS). 

Today, when the interest rates are low, aggregate demand is under constraint, and the private sector cannot make new investments, investment in public infrastructure can positively affect output and employment growth. 

Another possibility lies in temporarily suspending the fiscal deficit target and devising unorthodox means for turning around the Economy. Many economists would also endorse a rise in domestic currency public debt held by residents of India for use on product purposes.

Conclusion

The economic reforms in India began in 1991, further improved by recent Modi administration tax reforms. However, the pace of reform is languid. The Economy is still stifled by the Red Tape, which is further battered by the COVID-19 pandemic. The Government is also unable to pay sufficient attention to the problems of disease control, rural poverty, pollution and impaired social services such as education and healthcare. On the other hand, they have been reluctant to partner with others in more profound trade agreements. Thus, India has missed many significant opportunities to improve its economic performance. Even the country’s once poor neighbour has surpassed India in per capita income. However, India is not the only one to find these in short supply. It is time to Reform.