Serious Economic Reforms in India in 1991 - Case Study Example

Reforms in India after 1991 have generated rapid rates of growth but risk leading to increasing levels of inequality Serious economic reforms in India began in 1991, following an extremely critical balance of payments situation. The need for a change in the economic policy was felt much earlier and India had started working on restructuring her economic policies since the 1980’s. Many countries in south-east Asia had achieved greater economic stability in terms for high growth and poverty reduction through policies focused to support the private sector and encourage exports. In 1991, the Indian Government reformed the countries economic policy to reflect a greater confidence on the private sector that included much foreign investment. At the same time, the country increased its reliance on the market and restructured the role of government to achieve economic stability (Dreze & Amartya, 1995). India witnessed a change for the better in her economic performance after implementation of policy reforms in 1991. An average growth rate of 0.6 percent was experienced in the decade of 1992-93 to 2001-02, putting the country among the fastest growing, developing nations in the 1990’s. Though, this growth figure was only slightly higher than the average of 5.7 percent in the 1980’s, but it was more stable. Growth in the 80’s was characterized by a built up of external debt which eventually resulted in the crisis of 1991. In comparison, growth in the 1990’s was accompanied by notable external stability; in spite of the economic crisis is East Asia (Dreze & Amartya, 1995). The continued economic growth in India of over 7 percent per annum, despite high international oil prices and consecutive coalition governments, both at the provincial and federal level, has built confidence in the previous attitude towards the reforms. With the exception of a few issues regarding privatization of public enterprises, the reforms are generally appreciated across different political parties of the country. There are however strong apprehensions over the possible influence of the apparent reforms-driven economic growth on the prevalence of poverty (Datt & Ravallion, 1997). There have been arguments that the economic growth observed immediately after the 1991-92 reforms had not played a part in reducing poverty. According to the arguments presented by Datt and Ravallion (1997), while a sharp increase in poverty was witness as the result of the 1991 crisis, the reforms caused poverty to fall back to the pre-1991 levels, thus contradicting the assumption that the reforms brought an organized change in the country’s poverty plane. This argument was supported by the official statistics published by the Government of India in 2001 that represented a decline in the country’s poverty level from 38.9 percent in 1988 to 26.1 percent in 1999. It was further observed that rate of decline in urban India was more or less the same as that of rural India. 38.8 percent to 23.6 percent and 39.1 percent to 27.1 percent, respectively. It has been further suggested that economic growth has an inverted U relationship with inequality. This implies that some degree of inequality is bound to be experienced at the beginning of economic development. However, in the long run, the concept of inequality tends to be harmful for growth. This phenomenon is particularly evident in democratic political environments as it leads to the formation of policies that may not fully protect property rights and allows for inadequate requisition from investment. It is therefore important to classify sources of income disparity while at the same time exploring possibilities of reducing the income gap as far as possible by adopting appropriate reforms (Datt & Ravallion, 1997). Though customarily a lower incomer inequality was observed in India than most other developing countries, the consumption disparity in the country increased during the 90’s decade. This increase in inequality could have resulted from the household income of the high upper income percentile groups during the 1980’s and 1990’s. A comprehensive study that compared the income disparity among male urban workers during the 1980’s and 90’s suggested that there was an unequal distribution of observed skills in the 80’s decade, while the 1990’s witnessed a disproportion due to unequal return on observed skills. Similar research has explored differences in returns due to gender and education (Gang & Sen, 2002). The two most common characteristics of the Indian political scene are caste and religion. These have come to surface as most significant since the later part of the 80’s decade. Since the time of independence, the Indian political environment has been traditionally controlled by the upper caste Hindus. They had had considerable importance, particularly in the centre that accounted for the majority of the Indian Parliament seats. The implementation of the recommendations included in the Mandal Commission Report, published by the Government of India in 1990 prompted a coalition of politics both at the state and federal levels. This resulted in a considerable transfer of power to the lower castes at the state and regional level (Gang & Sen, 2002). In India, people falling in the highest earnings groups are professional who are comparatively fewer in number. All people belonging to the high income, education group benefits from the highest return, regardless of their caste of religion. In contrast, people belonging to the lowest income groups have lower educational benefits. Consequently, they compete for jobs that do not require specific specialized skills. Therefore earning is determined by market value and varies significantly across caste and religion. People falling within these extreme ranges, have varied educational quality and are associated with diverse enterprises (Persson & Tabellini, 1994). It is therefore possible that an individual with a degree in commerce from a well reputed university may get hired as a bank official; gets a pretty generous salary along with associated perks, while a graduate in humanities from a relatively unknown university ends up as an office assistant in a small company with an income that is just enough to make ends meet. The above mentioned scenario has twin implications. First of all, the difference in earning would be lower for individuals with very low or very high educational level, regardless of their religion or caste and higher for people falling in the average education level. Secondly, degree of difference between the high income and the median income level could be due to factors such as the people belonging to various caste and religion with a certain level of qualification (Persson & Tabellini, 1994). A comparison of the average income of people with different education qualification and different castes and religions, suggest that earnings definitely increase with the level of education, irrespective of caste and religion. This strong association between earning and education levels implies that income disparity can result if inter-caste and/or inter-religion differences are allowed to take root in the right for educational of the people (Kuznets, 1955). Inter-caste and inter-religion differences cannot be taken as the only defining characteristic that plays a role in the differences in returns to education. As mentioned above, differences in educational returns are most noticeable among individuals with middle levels of income. If the level of education is an important cause for income difference, by controlling the level of education it will be observed that the income disparity would be lowest for illiterates and those with specialised education. Individuals falling between the extremes would have higher income inequality (Banerjee & Piketty, 2003). The delays in implementation and the failure to perform are most often attributed to the concept of gradualism as part of the strategy by most critics. Gradualism requires a clear and precise definition of the goal to be achieved and a planned decision to extend the time take to reach the goal so as to reduce the stress of transition. This approach was however not followed in most areas. The goals were often unclear and pointed to the general direction of the outcome. The expected result and the time taken to accomplish it were often left unspecified to limit opposition and if necessary to provide an opportunity to pull back (Durajsamy, 2000). Though this approach decrease political controversy while at the same time allowing an agreement to be evolved, but it also depicted that the consensus reached was the outcome of a compromise. Since many groups united, believing that the reforms would not pull through, the end result was more irregular and opportunistic than gradual. Progress was made, but only when and where it was politically correct. Since the goals were not precisely defined and outcomes not clearly indicated, many people were uncertain about the kind and quantity of change that would be expected. This may have result in an insufficient adjustment (Deaton & Dreze, 2002). Alternately, it would have been more feasible to thoroughly examine the objects to get an accurate understanding for the benefit of all concerned to get the full scope of the required change. This would have allowed a focused implementation. However, it is not certain, whether this approach would have returned optimum results or would have brought the highly pluralist Indian democracy to a standstill. In reality India experienced a stumbling development process. The reforms opposed by political parties when in opposition were pushed forward when they came to power (Datt & Ravallion, 2002). Works Cited Dreze, Jean, and Amartya Sen, “Economic Development and Social Opportunities,” Oxford University Press, New Delhi (1995). Banerjee, A., Piketty, T. (2003) Indian top incomes, 1956-2000. Mimeo. Massachusetts Institute of Technology. Datt, G., Ravallion, M. (1997) Macroeconomic crises and poverty monitoring: A case study for India. Review of Development Economics 1, 135-152. Datt, G., Ravallion, M. (2002) Why has economic growth been more pro-poor in some states of India than in others? Journal of Development Economics 68, 381-400. Deaton, A., Dreze, J. (2002) Poverty and inequality in India: A re-examination. Economic and Political Weekly of India 37, 3729-3748. Duraisamy, P. (2000) Changes in returns to education in India, 1983-94: By gender, agecohort and location. Working paper no. 815, Economic Growth Center, Yale University. Gang, I.N., Sen, K., Yun, M.S. (2002) Caste, ethnicity and poverty in rural India. Discussion paper no. 694, IZA, Bonn. Kuznets, S. (1955) Economic growth and income inequality. American Economic Review 45, 1-28. Persson, T., Tabellini, G. (1994) Is inequality harmful for growth. American Economic Review 84, 600-621. Read More