Five years ago, just after Mr Narasimha Rao came to power, I was asked by St Stephen’s College to debate the prospects of the new economic reforms with Abhijit Sen, a prominent Left-wing academic. I told the college that the financial crisis of 1991 had left India facing a great chasm which could not be crossed in a series of small jumps, it required a great leap. And so, I said, we needed radical reform, not the incremental sort which Rajiv Gandhi had attempted.
Mr Sen agreed that India faced a great chasm. But, he declared, the lessons of history showed India could not take a great leap. And so, he said, India should not even attempt the big leap, since it would end in a downward plunge into disaster.
Five years later, I think it is quite clear which of us was right. India did indeed make a big leap forward, did indeed cross the chasm, and so moved from bankruptcy to unprecedented economic growth. If you don’t believe me, just look at the United Front government’s updated Economic Survey, presented to the Parliament on Friday. It declares, in stronger terms than I would, that India has broken new records in economic growth. The parties of the United Front which initially condemned the reform process as surrender to the IMF, as a recipe for impoverishment and misery, are now hailing the actual outcome.
Back in 1991, a cavalcade of Left intellectuals came out with long articles and memoranda saying India was heading for the sort of tragedy that had beset Latin America and Africa after listening to IMF-World Bank advice. Now, I remarked at the time that this was an extraordinary ‘Discovery of India’ which placed the country somewhere between Latin America and Africa. Most of us are under the impression that India lies in Asia. And in Asia, country after country that has adjusted to market-friendly economic structures with loans from the IMF and World Bank has broken records in economic growth. Why did the critics keep predicting that India would follow the African path rather than the Asian one? Because that fitted their preconceived notions better. Sadly for them (but luckily for the country), history soon confirmed what geography has always taught us, that India lies in Asia.
The United Front’s updated Economic Survey points out that, after tightening its belt in the first crisis year, India’s GDP growth has averaged a very rapid 5.9 per cent over the next four years. Growth touched 6.3 per cent in 1994-95, accelerated to 7 per cent in 1995-96, and is projected at 6.6 per cent in the current year. So, maybe India might have moved to a new growth path of over 6 per cent per year, which would be by far the highest in Indian history.
The survey says that 7 per cent GDP growth has been achieved in the past only during a recovery from a drought, when agriculture has improved by 10 per cent or more. But in 1995-96, this level of GDP growth was achieved despite a deceleration of agriculture to just 2.4 per cent. The driving force this time was manufacturing, which rose stridently by 13.9 per cent. Fast growth now depends not on luck with the rains but on manufacturing muscle, and that is certainly an achievement.
Will this be sustained? I have my doubts. Infrastructure bottlenecks are worsening, and there are no clear, transparent policies yet to let private investment to flow into this area quickly. There is no sign of reform of the public sector, labour laws, urban land ceiling laws, or liquidation procedures. Politicians continue to insist on huge subsidies which mainly go to the non-poor, and keep the Central and state governments on the verge of bankruptcy. We have a political consensus only on half-baked reform, and I wonder if this can produce more than half-baked results.
Still, the outcome has been better than I once thought possible. In 1991, I believed the reform process would stumble and maybe fail unless it included reform of labour laws and the public sector. I thought that the increased competition resulting from liberalisation would create many more bankruptcies, and hence make it essential to have arrangements for redeploying labour, capital and land from sick units to new, more productive ones. I also pointed out that the public sector accounted for perhaps two-thirds of the country’s industrial stock, and argued that India could not grow rapidly without new ways of energising the public sector (including autonomy and privatisation).
In the absence of such change I doubted if the economy could grow faster than 5.5 per cent per year. It now appears I was too pessimistic, and had insufficient faith in the ability of Indian business to respond to liberalisation.
But at least I did not suffer the total blindness of those that had dominated intellectual life in the preceding socialist era. Those people declared after the IMF loan to India in 1981 that the country would, in effect, be stricken by plague, fire and flood. The very opposite happened: India’s economic growth accelerated and poverty declined at record rates in the 1980s. This should have taught them a thing or two, but some intellectuals are knowledge-proof. So in 1991, they once again made exactly the same dire predictions of disaster. They were wrong again. Yet I have no doubt they will keep predicting doom.
Will they ever prove right? Occasionally, yes. No country has uninterrupted success and occasional setbacks are inevitable.
From this follows the real lesson of history. If you always predict disaster, you will sometimes be right. But your value as an analyst will be roughly equal to that of a roadside astrologer.