Wednesday, May 18, 2011

‘Economic reforms have taken into account growth but ignored equity.’ Briefly explain this statement.

‘Economic reforms have taken into account growth but ignored equity.’ Briefly explain this statement.

Answer. Economic reforms were introduced in 1991 by the congress government led by P.V Narasimha Rao. India is the second fastest growing economy in the world. Only China grew faster than India. Last few years have witnessed growth rate above 7%. During the last two decades India has transited from a low-income to a middle income country. It would also mean a transition in the lives of the common people. Fast, efficient and sustained growth over two decades would be accompanied by a rapid and sustained growth of productive employment that would eliminate disguised unemployment and underemployment in agriculture and informal services. Associated with this would be elimination of poverty among families headed by able-bodied healthy persons. The challenge would be translation of these into reality.

The reforms in the 1990s in the industrial, trade, and financial sectors, among others, were much wider and deeper. As a consequence, they have contributed more meaningfully in attaining higher rates of growth but the benefits of growth have not percolated to weaker sections.

Reforms in India have failed to focus on the end objectives of development, namely, reduction of poverty and improvement in the quality of life of bulk of the population. The reforms pursued so far have bypassed the poor and benefited mostly the rich and the middle-class segments.

The rate of increasing disparity between the ‘haves’ and the ‘have-nots’, is hard to miss in tech centers like Bangalore, Chennai and Delhi. It is quite obvious that India’s recent economic growth has not trickled down to the bottom. The majority of the population has been sitting by the sidelines watching the buildings grow taller and the roads get wider. What’s concerning is that there doesn’t seem to be any concerted government effort to rectify the situation. For the poor, a severe lack of basic health, education and training opportunities mean that not only are they in a miserable condition today, there isn’t much hope for the future either. It is only a matter of time when they barter their spades for knives, in a desperate attempt to liberate themselves from the throes of poverty.

There are concerns over the slowdown in agriculture and employment generation, post-reform, as also the growing regional disparities and the rural-urban divide. The impoverishment of rural India is largely attributed to the big decline in public investment in agriculture as also the flow of institutional credit to the sector. There is no doubt that the economic reforms so far pursued have helped the country to overcome the severe foreign exchange crisis it faced in 1991 and gain significant resilience against any external shocks.

Similarly, Indian industry has improved its productive efficiency and quality of products significantly and is today better prepared to face international competition. Quite a few Indian companies have joined the billion-dollar club in terms of sales and market capitalization and are all set to become multinational companies by setting up shop abroad. However, the fiscal situation has witnessed a deterioration after some initial success, and employment growth has decelerated. The state has failed to protect the interests of the socially disadvantaged and weaker sections of society by empowering them through active intervention in social sectors to improve the rate of literacy, public health and nutrition.

While market-oriented economic reforms are no doubt important to step up the rate of growth of the economy, as the Nobel Laureate Prof Amartya Sen has pointed out: "The markets can be used by all fruitfully, rather than by a few selectively, if general healthcare is good, if land reforms have occurred, if micro- credit is widely available, and if initiative is encouraged even from underdogs of society."
In this context, the recent Asian experience suggests that to ensure increased social welfare along with economic growth, the major thrust will have to be on the development of human capital. India's record in this regard continues to be dismal.

The hierarchy of priorities of contemporary Indian policy-makers, for instance, privatization has gained ascendancy over poverty reduction. Measures to encourage savings and investment and to promote employment have been relegated to the background. There is no denying that the steps towards liberalization and globalization were obviously designed to enhance the rate of growth of the economy. However, growth alone is not enough. There is need to ensure that the fruits of growth are equitably distributed. Attention must be paid constantly to the social dimensions of growth by expanding social services and building a strong social infrastructure.

The priority should be eradication of illiteracy and covering the country with primary health care centres and access to safe drinking water. Evidently, all this cannot be done by the private sector; it would require active state intervention and state funding.

Economic reforms were `indeed' critical at the first phase of transforming the economy. However, neglect of agriculture during the reform period has resulted in an erosion of the growth base of the economy. During this period, public investment in agriculture declined, net addition to irrigated area decelerated, and the flow of institutional credit to the sector suffered a setback. Not surprisingly, in the 1990s the annual average growth rate of agriculture decelerated sharply to 2.6 per cent from 5.2 per cent in the 1980s and the share of agriculture and allied activities in the country's GDP declined from 32.2 per cent in 1990-91 to 24 per cent now. However, since 70 per cent of the country's population continues to depend on this sector for livelihood, reforms have failed to make a dent in rural poverty. If at all, the rural-urban divide has only widened because of the failure to create job opportunities outside agriculture both in rural and urban areas.

In our priorities, we should aim at elimination of hunger first and poverty later and suggest utilization of surplus foodgrains with the Food Corporation of India for undertaking massive food-for-work programmes.

The most suitable programme for the purpose could be micro-watershed development, which could be undertaken on a massive scale throughout the country and the bulk of the wages could be paid in kind, namely, foodgrains.

On the question of privatization of public sector units, Dr Mujumdar (former Principal Advisor, Reserve Bank of India) advocates a systemic approach instead of being unduly obsessive about it. According to him, the question to be posed is: Would privatisation in a particular segment lead to greater efficiency in the use of resources and promote faster GDP growth?

Further, what you do with the proceeds of privatization is as important as why you need to privatize a particular unit or segment of the public sector. The real economic issues are obfuscated because of the emotional and political undertones the debate has acquired.

So far, the Government has been using the proceeds from privatization to reduce fiscal deficit. This is counter-productive. Fiscal profligacy per se needs to be condemned. But the suggestion that such profligacy be balanced by using the proceeds of privatization needs to be condemned severely.

In an effort to replicate an American-style financial system in India, there has been mindless pursuit of a soft interest rate regime that may eventually affect the savings rate.

I am particularly critical of the gross neglect of agriculture by the public sector banks, post-reform: 1990s was a lost decade for agriculture and rural development generally, with shrinkage of the flow of resources to the rural sector, a misconceived interest rate policy which discriminated against agriculture. The rural credit delivery system became a victim of the emergence of a new banking culture and rural development and rural employment suffered a setback.

The casualties of the new banking culture also included the small borrowers, small-scale and tiny industries, micro businesses and the whole range of institutions involved in rural credit. If the reforms in the economy in the post-1991 period have come to acquire an anti-poor image, the way the financial sector reforms were implemented are also to be blamed for it.

For the banks now prefer to lend to corporate elite and high worth individuals and park huge amounts in government securities rather than lend to farmers and small and tiny industries.

More important, the moral pollution in contemporary society, adversely affects economic development. I emphasize the need for incorporation of a `development conscience factor' in growth models aimed at improving the quality of life of the bulk of the population. I advocate the need to sensitize the youth to the abject poverty, the squalor, disease, ignorance and illiteracy that surround us.

The first phase of reforms, which started in 1991, essentially concentrated on reforms at the Central government level. Now these have to be taken to the level of the States and district local bodies. Almost 40 per cent of our revenue and fiscal deficit are because of poor State finances. A number of reforms are required to improve the delivery system, too, since all social services such as education, health, and so on are delivered at the State level. The State-level reforms are of particular importance to promote regional equity, which is a matter of fundamental significance for a federal polity like India.

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