Book Review: The road of excess leads to wisdom

India’s Economic Reforms 1991-2001
By Vijay Joshi and I. M. D. Little 282pp.
Oxford: Clarendon Press £25

The decade of the 1980s was a historical watershed. The twentieth century has been dominated by collectivism – the planning and control of economic life by governments. In the 1980s, collectivism collapsed, both as a project and as a working system. This collapse has been global. The command economies of the Soviet Union, Eastern Europe and China are gone; governments in developed and developing countries alike have been privatizing their public sectors and shredding their instruments of intervention and control. The aim of economic reform is remarkably similar everywhere: a market economy based on private ownership, with accountable governments limited to relatively few functions.

With its corollary of a world economy integrated by trade and capital flows, the new political economy represents a return to the liberal cosmopolitan ideal of the nineteenth century.

The new political economy is not simply an ideological adaptation to events.

The dirigiste consensus had started to crack before events made reform inevitable. In the 1960s and 1970s, older critiques of the over-ambitious state were revived in the new language of monetarism and public-choice theory. These critiques were confirmed by “stagflation” in the industrialized countries and growing entropy in the centrally planned economies. Finally, as a result of technical innovations in finance and production, economic life spontaneously began to escape from government control, making collectivism unviable.

In practically all cases, the catalyst of reform was what Marxists called “the fiscal crisis of the State”. As economic performance deteriorated, state revenues fell, while expenses soared. For a time, the gap was plugged by borrowing and printing money. But in the end, borrowing governments ran out of lenders, and populations found ways to avoid paying the inflation tax. What gave the fiscal stabilizations of the 1980s and later their revolutionary character was the realization that fiscal imbalances had their roots not in wrong policies, which were merely symptomatic, but in the wrong relationship between the State and the economy. Governments could no longer compel people to pay taxes to underwrite a grossly inefficient allocation of resources or achieve a more egalitarian income distribution. To save itself, the State had to let go of the economy.

India’s fiscal crisis of 1991 came to a head later than in other developing countries. Its centrally planned economy had long been becalmed, with GDP per capita growing by only 1 per cent annually from 1947 to 1980. But until 1980, the Indian Government had been fiscally conservative. In the 1980s, it went on a spending spree, borrowing heavily at home and abroad. The budget deficit rose from 4.5 per cent to 10 per cent of GDP, the public-debt-to-GDP ratio from 35 to 60 per cent, inflation from 6 per cent a year in the early 1980s to 12 per cent and rising, and the current account deficit from near zero in 1978 to 40 per cent of exports. Rapid export growth after 1986 was insufficient to offset rising interest payments on external debt and rapid growth of imports induced by fiscal deterioration. With the Government close to default early in 1991, loans from the IMF were obtained, conditional on firm action being taken to reduce the deficit and undertake structural reforms. It was realized that there could be no permanent (“sustainable” in the jargon) fiscal consolidation, unless the economy was set free to meet market demand.

Vijay Joshi and Ian Little have provided an exemplary survey and critique of the reforms undertaken since 1991. The strength of India’s Economic Reforms

1991-2001 lies in its detail – much of it heavy going for the non-specialist – but the broad picture is allowed to emerge from the introduction and helpful summaries. The main conclusion is that macrostabilization has been carried as far as it can be (especially on the revenue side) within the limits of the rather modest structural reforms. A start has been made on these, with the deregulation of much of domestic production and investment and foreign trade.

Banking reform has started with the re-capitalization of the banks and partial de-regulation of interest rates. But there has been almost no privatization, imports are still heavily controlled, much of the economy – the public-sector utilities and agriculture – is still heavily regulated and subsidized, and obsolete labour and company laws “cry out for reform, in vain”.

In the authors’ view, the main obstacle to reform is political. The political base for reform is still very narrow, while the opposing vested interests of farmers, the bureaucracy, public- sector trade unions, the small-industry lobby, etc, remain powerful. The only persistent reformer has been the (now deposed) Finance Minister, Manmohan Singh. The Prime Minister, Narasimha Rao (who resigned in June 1996, and has been replaced by H. D. Deve Gowda), gave him discreet support, but declined to mobilize public opinion in favour of change. The authors are clear as to what needs to be done, but doubt that “the Indian political system (can) deliver governments which are strong and cohesive enough to avoid fiscal excesses and promote difficult reforms”. They are silent about what kind of political system is needed to achieve these aims.

In the absence of “strong and cohesive government”, events, not politicians, take control. Change comes through crisis. The crisis of 1991 was not severe enough to dislodge the tradition of “exclusive bourgeois socialism”, but, if the Joshi-Little analysis is right, there are bound to be further fiscal crises, which will force further changes.

The only question – and here India is not dissimilar from China – is whether the necessary changes will be controlled by the centre, or whether they will come about as a result of a weakening, or even disintegration, of the centre.

Ideally, there should be a succession of non-lethal crises which would give those politicians who have assiduously read Joshi and Little political space for further sensible reforms. But reflection suggests that controlled de-collectivization is very hard to achieve, especially in a large non-unitary state with a corrupt, but more or less accountable, central administration, and a plethora of overlapping central/state jurisdictions. So the likeliest outcome is uncontrolled change – a prospect which our authors are too sensible to contemplate.