Twenty years after India’s historic economic reforms, it’s time for another big effort

ON JULY 24th 1991 Manmohan Singh, then India’s finance minister, presented a budget to India’s parliament that would change his country and the world. It was an unlikely triumph wrested from a moment of national humiliation. Thanks to political turmoil, high oil prices and fiscal profligacy, India was left with barely enough foreign exchange to last a fortnight. Like an indigent household pawning the family jewels, its central bank was forced to airlift 47 tonnes of gold to the Bank of England as collateral for a loan, while it waited for more help from the IMF.

In that fraught summer, Mr Singh devalued the rupee, abolished most of the quotas and licences that dictated who could produce what, and opened some industries to foreign capital. His reforms ripped pages out of the Red Book of regulations with which customs inspectors tormented Indian businessmen. He commended his budget proposals to parliament by paraphrasing Victor Hugo: “No power on Earth can stop an idea whose time has come.”
That idea, Mr Singh suggested, was India’s emergence as a “major economic power in the world”. The years since have amply vindicated his confidence. India’s economy has almost quadrupled in size, growing by about 7% a year on average over the past two decades and by over 9% from 2005 to 2007. Given India’s sheer scale, its economic rise is bigger than any that came before, bar China’s, and far bigger than anything that will come after. And its demography, unlike China’s (see leader), will underpin future growth.

Some economists argue that the role of Mr Singh’s reforms has been overstated, pointing out that India grew almost as fast in the decade before the crisis as it did for ten years after it. Earlier, smaller, changes did create some passing momentum; but Mr Singh’s liberalisation was of more lasting significance. July 1991 therefore deserves its spot in the annals of economic history alongside December 1978, when China’s Communist Party approved the opening up of its economy, or even May 1846, when Britain voted to repeal the Corn Laws.

You forgot our anniversary
India is not, however, in a mood to celebrate. Although its economy sailed through the global financial crisis, inflation is rising and growth slowing. Price pressures have persisted long enough to cast doubt on the assumption that it can resume growth of 9% or more without overheating. Foreign investment has been patchy of late and even India’s indefatigable entrepreneurs seem disheartened.

When he became prime minister in 2004, serving at the pleasure of the Congress party’s head, Sonia Gandhi, Mr Singh took charge of an economy reaping the benefits of liberalisation. He thus found himself in the unusual position of inheriting his own economic legacy. But like the heirs to many family fortunes, he has turned cautious and conservative. Besieged by scandal, his government has squandered precious time staving off inquiries and defending indefensible ministers, two of whom have now resigned in disgrace. His presence at the helm provides some assurance that economic policy will not regress, but no guarantee of progress.

The government seems to think that a stout defence of past reforms is enough. It sometimes acts as if growth is a given: an expanding workforce and an impressive savings rate guarantee extra labour and capital. India’s ingenuity and entrepreneurialism will take care of the rest.
Such confidence is misplaced. The animal spirits even of Indian entrepreneurs can flag. And demographic momentum should inspire urgency not complacency. Every year over 25m Indians enter the world and the labour force swells by 10m or more. Each year that passes without progress on malnutrition, schooling and hiring thus consigns millions of youngsters to marginal jobs, with little chance of realising their potential.

The mahout’s last ride

Many of the reformers of 1991 have, like Mr Singh, resurfaced in this government. But the tasks they face this time round are quite different, in two big ways. In the 1990s they freed the market for outputs, allowing companies to produce what they liked, how they liked. But successive governments have failed to repair the markets for inputs like labour, land and power. Of its many delayed infrastructure projects, 70% are stalled because of problems acquiring land, a process still governed by an 1894 law Mr Singh’s government has been trying to amend for over three years. The government urgently needs to fix this problem, and to reform both the labour laws, which make it too hard to fire people, and the power market, which is haemorrhaging cash and unable to deliver enough electricity.

The 1991 reforms were enacted by an elite corps of committed reformers in the capital. But to improve education, health and nutrition requires motivating and monitoring the legionnaires out in the rural schools, clinics and outposts of officialdom, where the central government has little sway. Central government has, for example, increased spending on schooling and passed a law giving everyone the right to an education. Now it is up to state and local authorities to ensure that the money gets spent in the right places and teachers are held to account for showing up and teaching well.

If the tasks now facing India are different, so are its circumstances. In 1991 India reformed because it had to. Mr Singh made a virtue of this necessity, pushing through measures that were not strictly required to resolve the immediate crisis, although they did help ensure India never suffered a repeat.
Thanks to his efforts India is now a far more successful and resilient economy. It is not on the brink of another crisis. But its recent economic performance has been disappointing enough to provide an alibi for another bout of opportunistic reform, were Mr Singh bold enough to make the most of the opening.
“Let the whole world hear it loud and clear,” Mr Singh, a soft-spoken man, said 20 years ago, “India is now wide-awake.” In the last years of this government—and the final years of Mr Singh’s career—India’s politicians need to rouse themselves and give reform another powerful push.