Parsa Venkateshwar Rao Jr | Time To Dispel The Myths Over Liberalisation Of 1991

The last week of July went virtually unnoticed by many. It marked 35 years of economic liberalisation. It was on July 24, 1991 that the P.V. Narasimha Rao government announced a new industrial policy which away with licensing for the majority of industries, which meant that no permission was needed to set up new enterprises, or for expanding and upgrading the existing ones, allowing for import of foreign technology, foreign collaboration and foreign funds. This is what is generally celebrated by the naïve enthusiasts of liberalisation, naïve because they do not see the gradual shift in the Industrial Policy Resolution of 1948, 1956, and the Industrial Policy statement of 1973, 1977 and 1980. The propaganda that in 1991, the chains of the licence-permit raj were broken is inaccurate, to the say the least. For example, the 1991 statement said the 1973 Industrial Policy Resolution “identified high-priority industries where investment from large industrial houses and foreign companies would be permitted”. This was a shift from the 1956 Industrial Policy Resolution, which “gave primacy to the role of the State to assume a predominant role and direct responsibility for industrial development.” So, the image of the long, dark ages of socialism from 1947 to 1991 is an intellectual myth. And 1973 is generally identified as the high noon of Indira Gandhi’s romance with socialism. Perhaps the honest question to ask, and which has not been asked, is how closed was the Indian economy at the end of the 1980s. It was not the socialist dystopia that the “andh bhakts” of reforms make it out to be. Economists Suresh D. Tendulkar and T. Bhavani, in their 2007 book, Understanding Reforms Post-1991 India, introduce without elaborating “economic nationalism” along with socialism as an inhibiting factor. It is to be recalled that the fringe organisation called Swadeshi Jagran Manch was a vocal opponent of liberalisation in the early years.

Looking back to 1991 with rose-tinted blinkers even after 35 years is not an intelligent thing to do, but it is what market-friendly economist stalwarts continue to do. There have been honourable exceptions. In 1996, five years after Annus Mirabilis, economists Amit Bhaduri and Deepak Nayyar in their book titled The Intelligent Person’s Guide to Liberalisation, write: “The mood of the moment, among those who make decisions and shape opinions in India, is such that economic liberalisation is perceived as both virtue and necessity. But to the citizen it is obvious that economic liberalization is no panacea. And only the dishonest or the naïve can think of it as a magic wand.”

This observation holds good even today in the middle of rising oil prices, inflation and scarcity of jobs.

Such has been the socialism intellectual hangover that no one paused to ask questions about the challenges that a market economy poses. It is common sense that if the State-controlled Soviet-style socialist economy is held back by inertia, market economies are rocked by volatility in trade and finance, leading to squalls and crises. The first market crisis came with the dotcom bust in 2001.

This was followed by the financial meltdown of 2007-08, which hit India in 2011. As a matter fact, the global markets have not recovered from the 2007-08 shocks, and growth rates everywhere declined, with China moving to the new normal of six per cent growth rate from the 10 per cent average of two decades and more, and Europe is stuck in the low growth rate orbit. One of the ardent, even fanatical, advocate of market economics threw his hand up in bewilderment when faced with the issue of financial derivatives, which led to the fall of investment banks in the United States.

More interestingly, the economic reforms evangelists are not able to make up their mind whether Prime Minister Narendra Modi’s State-driven market economy is a happy model of a free market, and whether this is the reason for sluggish private investment of the last decade. Many of the market-loving economic pundits have gingerly expressed their reservations about the Modi approach, but they have not laid their exact diagnosis of the slow growth of seven per cent, which paradoxically happens to be the fastest among major economies, on the table. The reason is a certain intellectual timidity because the government is still the powerful institution which doles out rewards.

It is also interesting that not many economists are ready to accept that reforms in India have been ushered in stealthily. It is only Bhaduri and Nayyar who point this out, while Tendulkar and Bhavani say that coalition governments with no consensus on reforms pursued the policy from 1991 to 2007. The economists can rightly argue that it is not their business whether the reforms policies were implemented through stealth or transparently.

There is also no interest by a majority of economists to analyse the policy potholes that gave birth to the Rs 4,000-crore stock market scam of Harshad Mehta in 1992, or the scandalous collapse of Enron in 2001 and the liabilities that were laid at the Maharashtra government’s door and debt restructuring had to be arranged. It was a perfect case study of how markets can go astray.

Instead of recalling with a bleary eye the liberalization dawn of 1991, there should be a thorough examination of how the markets performed in India in the past 30 years. There have been enough danger signals on the way, which need to be highlighted. There are enough hidden scandals behind the irrational exuberance about the startups and unicorns. Sebi, the market regulator, should indeed be on alert because of the unusual market valuations of the so-called startups.

But no one really wants to rock the markets’ boat, as it were, or break the lotos-eaters’ reverie that all is well with the markets. The Indian markets are thriving and there is no need to be protective about them.

There is room for tougher scrutiny of how the markets are operating, whether they are fair and following the rules. Markets do better when there are clear ground roles, and the market regulators do a good job. To question the workings of the market economy does not mean that one has to be an unrepentant socialist or a Communist. A well-wisher of a market economy would want its clean functioning.