Personality: Dr C Rangarajan
Thank God! The ten year itch on SAP ended in 1991…
We had an interesting interaction with Dr C Rangarajan (CR), part of the team that worked with the principal architects of the 1991 liberalisation – Prime Minister P V Narasimha Rao and Finance Minister Dr Manmohan Singh. The renowned economist CR, passionate, empathetic, humorous and even-toned, was a former Governor of the Reserve Bank of India and Chairman of the Economic Advisory Council of Prime Minister Manmohan Singh during 2004-14. He explained in lucid terms the substantial achievements post-liberalisation in terms of economic growth, management of current account deficit and poverty reduction and stated that high growth and equity can go together. Excerpts:
In a humorous vein CR described the resort to IMF assistance under the structural adjustment programme (SAP) in 1971, 1981 and 1991 as a 10 year itch. The resort was made to tide over the crisis created by huge current account and trade deficits. Of course, such loans came with conditions as would be stipulated by a lender; these related to fiscal policy issues like containing deficits and market orientation.
There was a move towards reforms in the 1980s. But the decade witnessed the ballooning of deficits leading to extensive resort to deficit financing. These culminated in the crisis of 1991 when foreign exchange reserves thinned to less than two weeks’ needs. Gold had to be pledged and a resort to a much larger quantum of loans from the IMF had to be made, recalled CR.
CR pointed to the reforms programme effectively putting an end to the 10 year itch. Happily, over the next 30 years the country did not suffer the SAP problem. Reserves have been growing and are now at a record $ 621 billion. (There is a welcome spurt in exports: after stagnating at a level of around $ 300 billion a year, there are prospects of exports through the year reaching the level of $ 400 billion.)
REFORM. RESTRUCTURE…
CR said the objective of the liberalisation programme was confined not just to attend to the balance of payments problem but to reform, restructure and modernise the economy. The objectives were:
- To step-up growth and alleviate poverty. These were attempted to be achieved by ending licences, controls and permits of the earlier regime.
- To take a series of measures to expand resources by ending the dominant role of the state and permitting the private sector freedom to operate.
- There were wide-ranging reforms of the trade policy by opening up for imports and investments.
These measures had a direct impact on the reduction of poverty.
CR pointed to the spectacular changes that ensued. “The focus until 1991 was not so much on growth. Measures like Garibhi hatao had wide popular appeal. But growth rate was poor at around 3.5 per cent till the end of the 1970s. There were some attempts towards market orientation in the 1980s. But momentum for growth gained after 1991.”
TRICKLE-DOWN EFFECT OF HIGH GROWTH
Post-1991, for a decade, GDP growth was at an average of 6.20 per cent p.a. Through the next decade, it grew by 7.69 per cent and was at an average of 6.51 per cent during 2011-12 to 2019-20. CR pointed to growth increasing to almost 9 per cent during 2005-06 to 2010-11.
Such high growth had a direct impact on the reduction of poverty. Millions were raised above the poverty line. CR mentioned the variations in the method of computing the impact on poverty: in India, the metric is based on national sample surveys on per capita expenditure; we do not have a reliable method of assessing per capita incomes. He pointed to the British method of computing living standards with a much wider set of norms like housing and other assets. High economic growth is estimated to have resulted in the poverty ratio reduced by more than half, estimated at 21.9 per cent in 2011-12, over 18 years since liberalisation. Post-2011, with growth rate declining, there was reversal of the numbers with an increase in those below the poverty line. Had the growth continued at a high rate post 2011-12, it would have had an equally great impact of reforms on poverty alleviation, said CR.
Reforms are only a necessary condition. Growth requires more than reforms. Growth is driven by investment. The decline in investment rate of nearly 5 percentage points over the last decade has led to a progressive decline of the growth rate, CR said.
There are vast differences in the approaches to growth and welfare. There is a trickle-down effect of high growth on poverty reduction. But there is also increasing demand for a direct assault on poverty through a wide range of welfare schemes like rural employment guarantee, food security… Emphasis on social welfare measures has a
beneficial impact on the average standards of living. These relate to education, health, sanitation, water supply… But their impact would take time to quantify.
CR held that growth and equity must go together. They are truly interdependent.
By Anu Oza and S Viswanathan
