Social Impact of Reform and Non-Reform

What has been the social impact of the economic reforms? What have they done for education, health, employment, poverty alleviation? Many observers look at the data before and after 1991 and make comparisons, some of which are favourable to the government and some not.

But surely this entire methodology is wrong. Reforms are not a magic wand that change a country instantly-they take time to yield results. The grim austerity in Mr Narasimha’s first two years was a consequence of the spending spree of the 1980s that ended in bankruptcy, not of liberalisation

The boom in spending in the pre-1991 decade greatly ‘ improved social outcomes, but was based on an unsustainable quadrupling of foreign debt from $ 20 billion in $ 980 to $ 81 billion in 1990. The bankruptcy and social tribulations that followed were as much a result of the borrowing spree as the temporary improvement it produced. For at least two years after the financial crisis of 1991, bankruptcy deepened poverty and slowed social standing. These negative outcomes should logically be attributed to pre-1991 policies, not the reforms.

To assess the social impact of reforms, we should really look at data since 1993. Unfortunately we have very little data for the post-1993 period, so no firm assessment is possible. All we can say is that social outcomes improved during the spending spree, worsened during the two years of austerity, and then improved somewhat again.

The second major flaw in most analyses is their unstated assumption that the only thing affecting social outcomes since 1991 is economic liberalisation. In fact at least three factors are at work- bankruptcy, non-reform of faulty policies, and reform. These are inter-related Non-reform leads eventually to bankruptcy, and bankruptcy leads eventually to reform. Of the three, bankruptcy has had the greatest social impact, reforms the least.

The Central government has recovered from the bankruptcy of 1991, but most states are sliding into it. Many cannot pay their bills, some (like Bihar) cannot even pay wages on time. And with the Pay Commission award likely to impose an additional burden up to Rs 10,000 crore, their financial condition will worsen. Inevitably, many will slow down developmental spending, with adverse results.

Mr Manmohan Singh often points out that the Centre has raised social spending sharply since 1993 as a percentage of GDP. But education, health and rural development are state subjects, and additional Central spending should not cloak the crisis in state spending. Semi-bankruptcy in the states looks like lasting through the 1990s, and will slow social improvement.

Next, look at the impact of non-reform. This covers many areas, including a plethora of unsustainable subsidies from the Centre and states. now) subsidies that alleviate poverty are a good thing. But the bulk of subsidies go to the non-poor, and are now as large as the country’s whole tax revenue. This is unsustainable, and eventually will lead to cuts in developmental and social spending, slowing economic growth and the development of human capital, which alone can eradicate poverty in the long run.

But who cares? The interesting thing is that, in the short run, non-reform does indeed Alleviate poverty. No matter how high the leakages or inefficiency of subsidised schemes, they will improve living standards temporarily. Maybe this is unsustainable, maybe in the longer run development will do more for the poor than subsidies. But politicians have short time horizons and so do most voters. So the political economy of the country favours such non-reforms, and never mind if it leads eventually to bankruptcy.

Non-reform stares you in the face in sector after sector. By law, state electricity boards are supposed to earn a return of 3 per cent, but in fact their returns are massively negative. Few politicians want .to reduce subsidies in rural power rates, or canal water rates, or bus fares. Most want additional subsidies for consumption.

Many other reforms are needed to speed up economic growth which alone can raise living standards sustainably. We need to restore the rule of law, reduce corruption, and ensure that government delivery systems actually function. We must reform the public sector, which accounts for over half the country’s capital stock. We must reform the Urban Land Ceiling Act, company law and labour laws that benefit the labour aristocracy at the expense of other workers, and small-scale industry reservation, to mention only a few areas.

Unfortunately there seems to be a consensus across all parties on non-reform. No party is keen on reforming the police, administration, public sector, labour laws, company law or subsidies. The social impact of such non-reform is going to be adverse: it will slow down economic growth, and could plunge many states into tribulations of bankruptcy.

Finally, look at the social impact of reforms. I have long said that the reforms are half-baked. But on reflection, it seems to me they are only quarter-baked. In most areas non-reform is more apparent than reform. Just go to rural areas and talk to villagers. Many neither know of nor care about issues like industrial and import, deregulation. The face of the government seen by villagers is that of revenue officials, copies PWD and electricity babus, all of whom look as corrupt and, unreformed as ever. The quality administration and justice has not? been reformed at all, although this should rank high on any reform, agenda.

What, then, has been reformed? Most industrial and import licensing has been abolished. This has increased private investment and dynamised exports. Its impact on wages and employment would have been positive, but too modest to materially change a country where 73 per cent of the population is still rural. Financial sector reforms have recapitalised semi-bankrupt banks, improved. professional skills, deregulated most interest rates. Here again the net social impact would have beam positive but too small to affect the nation.

Agriculture remains fundamentally un-reformed. Some trading curbs on agriculture have been removed, but many others stay in place. Public investment has fallen. Public sector research and extension spurred the green revolution, but both have deteriorated since. New high yielding varieties have not been developed fast enough. The National Seeds Corporation has become notorious for selling spurious or adulterated seeds. The only saving grace is that private’ companies have come up since that new seeds policy of 1988, and now supply more than half the country’s hybrid seeds.

The overall social picture, then is not very bright. Of the three main factors affecting social outcomes, the impact of bankruptcy and non-reform is large and adverse, while that of reform is positive but small. This implies that even if economic.

Growth in the 1990s turns out to too faster than in the 1980s, social outcomes will not improve as rapidly. The deceleration is regretable. But please do not blame this in reform. Blame the non-reform of policies that lead eventually itch bankruptcy.

What do you think?