Growth needs steps beyond reforms-Sanskriti IAS

(Mains GS 3 :Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.)

Context:

The Indian economy has travelled through an eventful period through the last three decades.
In the post-independence economic history of our country, 1991 stands out as a watershed year as the economy was faced with a severe balance of payments crisis.

Crisis converted into an opportunity:

In response to the crisis of 1991, the government launched a wide-ranging economic programme, not just to restore the balance of payments but to reform, restructure and modernise the economy.
Thus, the crisis was converted into an opportunity to bring about fundamental changes in the approach and conduct of economic policy.
A near tragedy was averted and a new path was laid out before the country.

The shift and the key players:

It is important to recognise in what way the new regime was different from the earlier one.
The break with the past came in three important ways: in dismantling the vast network of licences, controls and permits that dominated the economic system; in redesigning the role of the state and allowing the private sector a larger space to operate within, and in abandoning the inward looking foreign trade policy and getting integrated with the world economy and trade.
The integration with the world economy was particularly important because it was the opposite of what we normally did when faced with a balance of payments crisis.

The metrics:

There is a common thread running through the various measures introduced since 1991.
The objective has been to improve the productivity and efficiency of the system by creating a more competitive environment by removing barriers to entry and growth.
It is therefore appropriate to look at three broad parameters to judge the performance of the economy after liberalisation — growth rate, current account deficit and poverty reduction.

Growth rate of the country:

Between 1992-93 and 2000-01, GDP at factor cost grew annually by 6.20%. Between 2001-02 and 2010-11, it grew by 7.69% and the growth rate between 2011-12 and 2019-20, was 6.51%.
The best performance was between 2005-06 and 2010-11 when the GDP grew by 8.7% showing clearly what the potential growth rate of India was.
This is the highest growth experienced by India over a sustained period of five to six years despite the fact that this period included the global crisis year of 2008-09.

The Foreign reserves:

The balance of payments situation had remained comfortable.
There were three years in which the current account showed a small surplus; however, most of the years showed a small deficit.
The exceptions were 2011-12 and 2012-13 when the current account deficit exceeded 4%.
Foreign exchange reserves showed a substantial increase and touched $621 billion as of last week.
The opening up of the external sector, which included liberal trade policy, market determined exchange rate and a liberal flow of external resources, has greatly strengthened the external sector.

Poverty ratio in the country:

Besides growth, the other major objective of economic policy is to reduce the number of people living below the poverty line.
There are many problems associated with the definition of poverty and the kind of data required to measure it.
Going by the procedure adopted by the erstwhile Planning Commission using the Tendulkar expert group methodology, the overall poverty ratio came down from 45.3% in 1993-94 to 37.2% in 2004-05 and further down to 21.9% in 2011-12.
The per year reduction in percentage points in poverty ratio between 2004-05 and 2011-12 was 2.18.
The post-reform period up to 2011-12 did see a significant reduction in poverty ratio because of faster growth supplemented by appropriate poverty reduction programmes such as the Rural Employment Guarantee Scheme and the Extended Food Security Scheme.
With the decline in growth rate since then and with a negative growth in 2020-21, this trend might have reversed, i.e. the poverty rate may have increased.

Reforms with growth in investment needed:

Economic growth requires more than reforms and reforms are, in the words of economists, only a necessary condition.
In a developing economy, growth is driven by investment.
It is the decline in investment rate of nearly five percentage points since 2010-11 that has led to the progressive decline of the growth rate.
Reforms normally create a natural climate for investment but ‘animal spirits’ are also influenced by non-economic factors such as social cohesion.
Thus reforms supplemented by a careful nurturing of the investment climate are needed to spur growth again.

Need for continuity:

The reform agenda must continue as it will be incremental in character.
Policymakers should identify the sectors which need reforms in terms of creating a competitive environment and improving the performance efficiency.
From this angle, stakeholders need to take a relook at the financial system, power sector and governance where centre and States must be joint partners in this effort.
In terms of government performance, there should be increased focus on social sectors such as health and education.
In terms of the provision of services, the emphasis must be not just on quantitative expansion but also quality.

Conclusion:

Reforms are necessary to improve the productivity of the economy and achieve higher growth.
But stakeholders cannot ignore equity considerations as growth and equity must go together.
It is only in an environment of high growth, equity can be pushed aggressively.

Growth needs steps beyond reforms