The 1991 reforms are considered by many to be the launching pad for the Indian economy. In his Budget speech on July 24, 1991 – 35 years ago today – Manmohan Singh quoted Victor Hugo, who said: “No power on earth can stop an idea whose time has come,” and added: “I propose to this august House of Representatives that making India a major economic power in the world is one such idea.”
Thirty-five years later, what is clear is that the dismantling of industrial and trade controls that day contributed to the acceleration of India’s economic growth rate, as well as the rate of poverty reduction. However, it should be added that the 1991 promise has only been partially fulfilled. Indeed, the country is once again on the verge of a financial crisis, facing new challenges to economic security, technological adequacy and an inclusive growth model that have no easy answers in a less than hospitable global climate.
In the 40 years before 1990-91, the economy grew fivefold. As the population grew two and a half times during this period, per capita income barely doubled as a result. By comparison, in the 35 years since 1990-91, the economy grew eightfold. And since the population grew by 70 percent during this time, per capita income increased more than four and a half times.
It goes without saying that the achievements of the second period were built on the foundation laid in the first. However, India largely lagged behind other countries in the first period but has a record growth rate in the second period that few countries can match.
China and Vietnam show that much more could be done. Based on a similar point, the former is on the verge of achieving high-income status. Vietnam started with less than half the per capita income of India in 1991 and is now 80 percent higher. This places it in the upper-middle-income group, while India, which was a low-income country in 1991, is still only in the lower-middle-income group.
Three-quarters of all countries rank above India in per capita income. India’s figure is less than a quarter of the world average. As much as we may praise ourselves for the achievements of the last 35 years, they have not been enough and much remains to be done.
However, absolute poverty has fallen sharply. In 1991, poverty affected 37 percent of the population; that’s a reduction of up to 5 percent. But the criterion for this is only survival. Based on broader indicators, the results are more qualified. According to the composite multidimensional index (which includes health, education and other indicators), one sixth of the population still lives in poverty. The UN Human Development Index ranks India two-thirds lower on the list of 192 countries.
However, there is now much improved (though not universal) access to many basic goods and services, such as clean cooking fuels, purified tap water, toilets, affordable financial services and household electricity. In addition, the country’s physical infrastructure has improved markedly in recent years.
Although some of the achievements in the international context are modest, India is enjoying popularity like never before. This is primarily due to the size of its population, the largest in the world. As the sixth largest economy, India has one of the world’s largest markets for a wide range of goods and services. This reflects the birth of a large middle class with money to spend.
There is no single way to define this class, but a widely used income criterion limits the minimum per capita income to $10 per day, using purchasing power parity to compare Rs. A rough estimate would be that this would include 30 to 40 percent of India’s population of 1.45 billion, creating a vast middle class (or rather upper echelon) larger than the entire population of all countries except China.
The existence of 80 to 100 million households in this category explains the annual sales of 20 million two-wheelers, 25 million refrigerators and 150 million smartphones (plus another 250 million feature phones). Every day, more than half a million people take off and land at the world’s busiest airports. Now, in two weeks, the same number of cars are sold as were sold in all of 1991. Products have become more affordable relative to income, of better quality and with more choice.
It’s not just the size of the markets. Over these 35 years, India has gained recognition for its advanced capabilities – such as in software and manufacturing of low-cost pharmaceuticals, which have become useful around the world during the pandemic. Ultra-low-cost digital infrastructure packages and technological sophistication are also recognized in oil refining, specialty chemicals and some engineering products, and healthcare. Dozens of countries further up the income ladder cannot qualify for either this or the massive deployment of solar and wind energy capacity. Based on how these opportunities are reflected in a country’s export mix, India ranks in the top third of 145 countries in the Harvard Growth Lab’s Economic Complexity Index.
Much more could be achieved if the country followed the basic logic of the 1991 reforms: leave to the private sector and markets what they can provide, open up to the world, and focus government efforts on what only governments can provide: law and order, justice, public health, quality public schools, protecting the environment, and properly regulating markets.
On each of these issues, India faces difficulties. The country has 2.2 million police officers and four times as many private security guards. Delays in court are widespread. Half of all schoolchildren now go to private schools, and 40 percent of hospital beds are provided privately—both of which involve considerable expense when incomes are still modest (although there is now a government-funded hospital insurance program). Poor nutrition levels are reflected in widespread stunting and wasting.
Tax revenues are not enough to change this picture, and public debt has become uncomfortably high since the pandemic. A decreasing share (relative to the whole) is spent on both education and defense, and virtually nothing is spent on purely civilian research and development. Moreover, the informal economy continues to overshadow the smaller formal sector. The Reserve Bank’s tracker thus shows marginal improvement in performance.
Agriculture remains largely unreformed, with productivity lagging significantly behind global averages. Production remains stagnant despite many policy initiatives. Over the past decade and a half, this has been reflected in a sharp decline in the ratio of merchandise exports to GDP, despite rising protective tariffs and other barriers.
Unimplemented reforms are reflected in alarming trends. The middle class is no longer growing as it once was as quality jobs have become harder to finance. The top half of the population is leaving the country in large numbers, while net capital inflows have fallen and domestic private investment has fallen in recent years, although companies and banks are flush with cash.
The hardest hit is the core population, which falls between the middle class of 400-450 million and the multi-dimensional poor of 250 million. Some have called this category aspirational. In fact, as Thoreau said in another context, most of them lead lives of quiet desperation due to low and unstable incomes in the informal sector.
Some of this group have appeared at the Jantar Mantar protest zone in New Delhi over the past month. These are young people from age cohorts in which unemployment rates range from 25 to 40 percent. Since 1991, the intake of higher education graduates has almost quadrupled to include half of all school leavers, but many of their degrees and diplomas are of little value and so they face a bleak future.
The political class has kept economic hardship at the lower rungs in check through an expanding array of cash handouts, as well as free food grains, free electricity in many places for poor consumers and huge subsidies that are not fully accounted for in government budgets. But they are unlikely to quell the grievances of the cockroaches, many of whom must feel excluded in a country with gross and growing inequality. It is easier for the system to offer identity-based politics as an opiate than what matters most to millions of people in dire straits: hope for a better future.