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Mainstream, Vol XLVII, No 37, August 29, 2009

Economic Reforms in India: Is there a Political Consensus?

Monday 31 August 2009, by Protiti Roy

Having lost almost all its wealth to the colonial overlords, the erstwhile Golden Bird was now afraid to allow any outsider to participate in its economy. However, a certain degree of liberal-capitalism was considered essential, and thus newly independent India adopted a “mixed economy”, in which features of both the capitalist model and socialist model were prevalent. The “mixed economy”, however, was not very well mixed, and had strong socialist tendencies.

The policy-makers adopted a planned economy approach to development, and advocated state run industries with just a few areas open to the private sector. This was largely due to the influence of the tremendous success of the USSR’s economy and the impact of the Great Depression of the 1930s.1 But given the capitalist history of the Indian economy, the government was keen to reconcile equity with the free market.2 The Government of India, while recognising private industries, declared that the functioning of this sector—establishments, products, capacities for production etc.—would be regulated by the government.3

This state run structure, though advocated by the Congress, and backed by Left-wing parties such as the Communist Party of India, was not supported by the Swatantra Party.4

This structure worked well for the first fifteen years, but thereafter started to decline as a result of, inter alia, political interference at top management levels and declining accountability which came with the security of employment. State owned industries were afflicted by diseases such as under-utilisation and poor management of resources, obsolete technology, wrong selection of products, to name a few.5 Such problems led to a downswing in the economy. The Licence Raj stifled India’s trade relations and deprived consumers of choice with regard to products for consumption.

Towards the beginning of the eighties decade, world oil prices doubled, resulting in a huge deficit in India’s current account which had so far bordered balance.6 An inappropriate exchange rate led to complete stagnation of exports during the phase 1982-1985, causing persistent current account deficits.7 Though the economy grew rapidly through the 1980s, the growth was not sustainable due to unstable fiscal conditions.8 Inflation surged to an all-time high by the end of the decade.9

This crisis forced India to open up its economy to the world and adopt the policy of Liberalisation, Privatisation and Globalisation. The new government that came to power in 1991 had to restructure the economy, but the greater need of the hour was to stabilise the economy—reduce inflation and reduce fiscal deficits.10 The fiscal deficits would have to be substituted by foreign borrowings. But the structural model of the International Monetary Fund (IMF) and World Bank involved India having to open up its economy and replace public institutions and investments by market determined investment and production decisions.11 Thus, the early attempts of Rajiv Gandhi to loosen state control over the economy finally found completion in the measures taken by the Narasimha Rao Government and the New Economic Policy (NEP) was adopted.

Once India had embraced the free-market system, economic reforms in the country were supported by a standby credit from the IMF. In 1991-92, this credit supported fiscal retrenchment and a credit squeeze in the economy. The rupee was devalued by 19 per cent. Import controls were instituted. The deflation and import compression helped improve the balance of payments to a large extent.12 The Indian economy has taken a definite upward swing since the 1991 reforms, and is now one of the fastest growing economies of the world.

However, globalisation leads to erosion in the state’s capacity. The ability of the government in its position as a welfare government is getting reduced to a large extent. The world over, welfare states are giving way to more minimalist states that perform only the core functions of governance such as maintenance of law and order.13

Free-market forces have become the prime determinants of economic and social priorities in the country. The appearance of multinational companies on the global economic platform has also led to a reduction in the capacity of governments to take their own decisions.14

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How favourably is this form of governance suited to the various political parties? This is a crucial question. Soon after assuming power in 1991, the Congress Government, headed by the then Prime Minister, P.V. Narasimha Rao, announced its decision to liberalise, privatise and globalise the Indian economy. The Opposition reacted strongly to this, describing Finance Minister Dr Manmohan Singh’s ideas as “far too radical for what the compulsions of democratic politics would allow”.15

The Indian National Congress, in its present Economic Agenda, has claimed that its policies have led to a substantial increase in the growth rate of the country and has brought a major segment of people above the poverty line.16 The Congress also claims that it was the manner in which the reforms were carried out that made a big difference to their rate of success.17 However, a major factor in the continuing success of the economic reforms, through the regimes of many different political parties, has been the “directional convergence” of all these parties towards the same economic goals.18 They all maintained the economy’s orientation towards the free market and encouraged globalisation.19

It is also true, however, that the parties in the Opposition lived up to their role of “opposing” the government. All parties, when in Opposition, vehemently criticise the policies of the government. Nonetheless, the debates in Parliament and the manifestoes of most major national parties have always argued over the minor details of economic policies, rather than objecting to the idea of reforms as whole.20

A comparison of the 2004 election manifestoes of the Bharatiya Janata Party and the Indian National Congress point out, interestingly, that both parties essentially guarantee the same things, though their promises are worded very differently. It is also interesting to note the acrimonious language in which each speaks of the other’s failures, while taking the very same steps themselves.21

The BJP had opposed the Congress Govern-ment’s policies of external liberalisation in the early 1990s, but after it came to power (from 1998 to 2004), it itself promoted external liberalisation and announced measures that aimed at attracting private foreign investment on a large scale.22

The Communists have passionately opposed liberalisation policies, and termed them as “abject surrender to the IMF”.23 However, when the United Front governments came to power from 1996 to 1998, the Left-wing parties supported them all through their policies regarding financial sector liberalisation, disinvestment, foreign investment etc.24

Thus, even though the powers of the state have been reduced to a large extent because of the open economy, economic reforms are still being favoured as compared to the earlier socialist model of development.

The evident reason for this is the fact that ever since the Indian economy was liberalised, we have seen phenomenal growth rates, touching the six-point mark in the 1990s.25 The inflow of better quality consumer goods satisfied the middle class of society and high foreign exchange stocks were beneficial to investors. Thus, such conditions proved satisfactory to most people. The other possible reason could be the fact that along with the collapse of the USSR, the rupee-rouble trading system collapsed as well. All over the rest of the world, the dollar was essential for carrying on trade. Thus, it was essential to have a large stock of foreign exchange, particularly in terms of dollars, in order to carry on trade relations with other countries.

The fact that all governments that have come to power post-1991 have followed and advocated the free market ideology without any hesitation, also requires explanation. One possible explanation is the fact that after the Narasimha Rao Government, all other governments till date have been coalition governments supported by a number of ideologically neutral regional parties.26

In a democracy it is the people who decide the rise and fall of a regime. They are the foundation on which the political superstructure is built. Also, the various policies pursued in order to effect the economic reforms, at the end of the day, have affected nobody but the common man. Even if political consensus is prevalent among various political parties, it is essential that the vote-bank of these parties also agree to the policies. “Political consensus”, therefore, cannot be complete if the consensus of the common man is not taken into consideration.

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The trouble is, what the people want, or even need, may not always be what the government considers before defining its policies. The external debt of the nation, while a major cause of concern for the government, is not something ordinary citizens would ever worry about.27 Similarly, the internal debt of the government, Budget deficit, balance-of-payments situation, financial losses of public sector enterprises, expansion of money supply etc. are economic issues which are of utmost importance to the government of a country, but themes that are very distant from the lives of the people.28

However, there is indeed a connection between the economic necessities of ordinary people and the economic compulsions of the state. A person belonging to the middle class of society would need a television, a refrigerator, a car, an air-conditioner, and so on. Economic liberalisation of the country meant that the government allowed foreign investment in and freer imports of consumer goods.29

But even among the people, there are differences in what different classes of people desire from the free market. The choice between better cars or better public transport system, cellphones or ploughs and pumpsets, soft drinks or safe drinking water is the choice that has to be made.30 Now, the production and supply of a product depend to a large extent on its demand and the price it gets in the market. The rich in society have more purchasing power, and thus, it is the cars and the cellphones and the soft drinks that get produced, not the ploughs and buses.31 Private investment would also, therefore, be attracted towards sectors producing goods to satisfy the needs of richer consumers.

Consensus for economic reforms, therefore, seems to be coming from political parties and the middle and upper classes. The interests of the poor are hardly being taken into consideration. Such a state of affairs is sure to have backlashes, particularly for the government in terms of votes secured. An example of such an incident was that of the Chandrababu Naidu Government. As reported in the Hindustan Times, “Though the state had made significant progress on the IT front and the reforms process had been initiated by the Chief Minister, the unrest in the interiors of Andhra Pradesh continued. Farmers were committing suicides and hunger and poverty had made life tougher for the common man.”32

It is but obvious that technological progress alone cannot help a country progress. Liberalisation, privatisation and globalisation may ensure availability of foreign exchange and high quality consumer goods, but it does not necessarily ensure a decent standard of living for the common man. On the other hand, it may lead to loss of livelihood, if policy implementation is not done with sufficient care and consideration.

The Deccan Herald reported on August 26, 2007 that the Central Government had approved of the iron ore mines in Bailadila, Chhattisgarh, to be opened up for steel giants Tata Steel and Essar to prospect for their steel projects.33 The Tatas plan to set up a five million tonne steel plant at Bastar, in Chhattisgarh, and the iron ore would be used for that purpose.34

Nearly four years before this article was published, The Times of India had come out with an article “Mining Plans Threaten Water Security: NGO”. The article spoke at length of a report by the non-governmental organisation, Kalpvriksh, about how mining activities are threatening some of India’s most ecologically sensitive places, including Bailadila.35 Such activity will also be interrupting drinking water supply to millions of people as many crucial catchments would be severely affected, including the Sankhini river at Bailadila.36 Kalpvriksh called for “a rethink of development policies and introspection on the wasteful ways in which minerals are used”.37

Counter Currents, an online journal which has articles on issues concerning common people, carried an article on how the mining industry is hurting not only the environment, but also human rights. “Refutation of the rights is characteristically multidimensional—one is the denial of the eligible rights of the people in mining zones, another is the flouting of law by the state machinery and third is the rights of the mineworkers,” said the article.38

More importantly, the article talked of how privatisation, and subsequent mechanisation of mining, has led to the loss of livelihoods, and in cases where the workers protested, of life itself.

The mechanisation goes to such an extent that in future it may need only two or three workers to run the plant. The prophets of industrialisation talk about prosperity and creation of jobs, but what is actually happening is shocking. In the Bailadila mines, 10,000 labourers were rendered jobless at one stroke. All resistance was crushed. Ten thousand huts were burnt down, numerous women raped, and labourers fired upon. The orgy of mechanisation forced 10,000 labourers to face the desperation of hunger.39

Similarly, the Government of India introduced Bt cotton to Indian farmers in March 1995.40 Though it initially met with some resistance, the farmers finally accepted the new variety of seeds, and took to it in a big way. And, to begin with, the effect was tremendous. The cotton acreage increased by 20 per cent.41

However, India being a monsoon dependent country, and irrigation not being up to the mark, there were soon problems with using this genetically modified plant variety. The technology was not well-suited for non-irrigated areas, and cotton is mostly grown in dry regions.42 Bt Cotton failed miserably for small farmers, in terms of both yield and expenses, and it also did not reduce pesticide use for them.43 The cost of cultivation rose to a great extent and the farmers earned no profit at all.44 In Vandana Shiva’s words,

The seeds aren’t tested, they aren’t adapted, the same seeds are sold across different climate zones, they obviously don’t perform well. Instead of 1500 kilograms per acre, farmers get 200, 300, sometimes total failure; add to this the fact that even if they have 300 kilograms of a bad cotton variety because its fibre is of a very inferior quality.45

The crop failure hit farmers in Vidarbha and Andhra Pradesh particularly hard, and incidents of farmer suicides rose at an alarming rate. Dr Suman Sahai, the Director of an organisation called Gene Campaign, conducted a study on the introduction of Bt Cotton in India.46 The results announce, in no uncertain terms, that the government’s zest to introduce private investment onto the agricultural sphere has cost the nation very dear. That the government has failed the people badly, is most evident through this incident. “Despite specific knowledge that Bt cotton would not work in rainfed areas, the government had introduced it in Vidarbha. The result was that in an area with a history of indebtedness, the high input costs of Bt cotton had increased indebtedness,” says a report about the study in The Hindu. It also says: “The study revealed that many farmers adopted Bt cotton because they believed it was a ‘government seed’ and did not know that it was privately produced and marketed. They also accepted it because the government was actively promoting the technology.”

Farmers have been committing suicide in hundreds. Their government failed them.

The government is the elected representative of the people and their policies, therefore, should be directed towards the benefit of the people. If privatisation leads to loss of livelihood, if liberalisation introduces such poor quality of industrial inputs, it is then meaningless to continue with such policies.

True, the economic reforms had their benefits —the life of a middle class consumer improved manifold, foreign exchange reserves skyrocketed, our GDP increased to levels unparalleled in the past. However, the poor just ended up being poorer. Development should be holistic, and should necessarily take all sections of society under its purview.

Politics in India stems from the people. Political consensus in our country cannot be taken to mean only the various political parties. It is true that the various political parties in our country agree that the economic reforms were essential. Most object to the stand taken by the government when they are in power, but they themselves further the same policies when in power. Thus, even if not in words, in deed there is a definite political consensus, so far as political parties go.

But as far as the people of this country are concerned, only a minuscule urban middle and upper class have benefited from the reforms. Most of India still lives in her villages, and even the cities have a large number of people living below the poverty line. How far the reforms benefit these people should be a matter of concern. They have so far not found any advantage in the New Economic Policies, and their consensus on them is definitely missing. Not just all political parties, but also all sections of society should have consensus on the reform policies before they are instituted in India. Regrettably that is not the case till date.

Footnotes

1. S. Palshikar and Y. Yadav, Politics in India since Independence (1st edition, New Delhi: NCERT, 2007), pp. 49, 50.

2. C.P. Bhambri, The Indian State: Fifty Years (Delhi: Shipra Publications, 1997), pp. 156-159.

3. Supra note 2 at p. 162.

4. Supra note 1 at p. 37.

5. San José State University, Department of Economics, “Economic History and the Economy of India”, available at <http://www.sjsu.edu/faculty/watkins...> (November 8, 2008).

6. V. Joshi and I.M.D. Little, India’s Economic Reforms 1991-2001 (New Delhi: Oxford University Press, 1996), p. 14.

7. Supra note 6 at p. 14-15.

8. Supra note 6 at p. 15.

9. Supra note 6 at p. 15.

10. Supra note 6 at p. 16.

11. Supra note 2 at p. 195.

12. Supra note 6 at p. 16.

13. Y. Yadav and S. Palshikar, “Globalisation”, Contemporary World Politics, (1st edn., New Delhi: NCERT, 2007), p. 139.

14. Id.

15. R. Jenkins, Democratic Politics and Economic Reform in India (Cambridge: Cambridge University Press, 1999), p. 12.

16. “Economic Agenda”, Indian National Congress, available at <http://www.aicc.org.in/economic_age...> (November 11, 2008).

17. Id.

18. S.D. Tendulkar and T.A. Bhavani, “Understanding the Post-1991 Indian Economic Policy Reforms”, Global Development Network, available <http://www.gdnet.org/pdf/global_res...> (November 11, 2008).

19. Id.

20. Ibid.

21. See generally “Vision Document – 2004”, Bharatiya Janata Party, available at <http://www.bjp.org/Press/mar_3104a.htm> and “Economic Agenda”, Indian National Congress, available at <http://www.aicc.org.in/economic_age...> .

22. Supra note 18.

23. Supra note 18.

24. Supra note 18.

25. C.D. Wadhwa, “India Trying to Liberalise: Economic Reforms Since 1991”, available at <http://www.apcss.org/Publications/Edited> (November 13, 2008).

26. Supra note 18.

27. A. Bhaduri and D. Nayyar, The Intelligent Person’s Guide to Liberalisation (New Delhi: Penguin Books India, 1996), p. 4.

28. Id.

29. Supra note 27 at p. 6.

30. Supra note 27 at p. 7.

31. Supra note 27 at p. 7.

32. H.T. Correspondent, “Andhra Elections”, Hindustan Times, available at <http://www.hindustantimes.com/Story...> (November 16, 2008).

33. DH News Service “Prospecting 250 MT iron Ore: Tatas, Essar get Centre’s Nod”, The Deccan Herald, available at <http://deccanherald.com/Content/Aug...> (November 9, 2008).

34. Id.

35. The Times News Network, “Mining Plans Threaten Water Security: NGO”, The Times of India, available at <http://timesofindia.indiatimes.com/...> (November 10, 2008).

36. Id.

37. Ibid.

38. Goldy M. George, “Mining to Destruction and Hijacking their Rights to Submission”, Counter Currents, available at <http://www.countercurrents.org/hr-g...> (November 10, 2008)

39. Id.

40. “Chronology of Bt Cotton in India”, Inida Resource Centre, available at <http://www.indiaresource.org/issues...> (November 11, 2008).

41. BS Reporter, “Bt Cotton Acreage Rises 20 per cent”, Business Standard, available at <http://www.business-standard.com/in...> (November 11, 2008).

42. Devinder Sharma, “Has the Bt Cotton Bubble Burst?”, India Together, available at <http://www.indiatogether.> (November 11, 2008).

43. Rhea Gala, “India’s Bt Cotton Fraud”, Institute of Science in Society, available at <http://www.i-sis.org.uk/IBTCF.php> (November 11, 2008).

44. Id.

45. Vandana Shiva, “Closing Address to the Soil Association Conference”, Transition Culture, available at <http://transitionculture.org/2007/0...> (November 16, 2008).

46. Special Correspondent, “Bt Cotton has Failed in Vidarbha: Study”, The Hindu, available at <http://www.hindu.com/2007/02/16/sto...> (November 11, 2008).

Protiti Roy is a student of the National Law School of India University, Bangalore.

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