The year 1991 is considered to be a turning point in India's economic history. An apparently drowning economy was saved by Dr. Manmohan Singh and Narsinha Rao by implementing the principle of Liberalisation-Privatization-Globalisation. The situation in 2013, according to many analysts, is worse than 1991. The free falling rupee tried to touch 70rs/1 $ rate and huge current account deficit of $85 billion i.e. 4% of India's GDP make Indian economy look on the verge of a black hole. So, the demand for reforms is gaining a lot of attention.
But there are not many, who believe, the current situation is worse than 1991. And 'big bang reforms' of the same kind of 1991is not the only solution that India has!
First of all one has to understand that the two situations – one in 1991 and other in 2013 – are completely different. According to D. Subbarao, ex RBI Governor, fundamentals of the economy have changed over the time.
In 1991, India was a closed economy with 'Red tape mafias'. Now Indian economy follows the principles of LPG. In 1991, India had the foreign exchange reserves that could cover the imports for two months only whereas now we can provide for eight months import cover.
In 1991, rupee was depreciated by 20% but today exchange rate is largely dependent on market and therefore able to absorb shocks. External sector vulnerability indicators of 1991 had much more deteriorated than that of the 2013.
The most important factor which defies any need of reforms is the condition of the western economies. In 1991, western economies were looking for expansion. They were thriving to catch new markets from Africa and Asia region. Their economies were healthy. But today, western economies are looking inward. The subprime crisis of 2008 has been severe attack on developed economies. Most of the developed economies have faltered after 2008. They are not enthusiastic in investing in other countries as they were in 1991. EU, US and Japan are trying to lift themselves up.
India has to understand that even if India gets financial help from the global economies, it is going to be a double edged sword. Unless it is used effectively to increase the domestic production and export, the foreign financial help will be a foreign trap. Government should learn that this trap will become more complex with time. Industrialists which use the cheaper global finance and scarce resources like spectrum, coal, land, iron should also try to stop falling into the trap and playing the stock games with the help of political class.
India should work towards insulation, not isolation, from the global financial ups and downs. This could easily be done with the help of domestic sources. India's coal and iron extraction can easily be increased by $20 billion by allowing higher coal and iron extraction. Over last five years, India's coal imports swell up by $10 billion. This unnecessary outflow of dollars can be easily avoided because India has the largest coal reservoir in Asia. Government should convince the Supreme Court the benefits of allowing coal extraction in Goa and Karnataka. Under the supervision of the Supreme Court the coal exports can easily fetch India few important foreign exchange.
India should look to make Food Security Bill more rounded. Food Security Bill will make the poor insulated from rising food inflation. This would make RBI's work easier and less complicated as RBI would get more space to focus on manufacturing inflation. RBI would, then, take manufacturing inflation as the basis for structuring monetary policies and ease the interest rates for industry.
Government should also take steps to regulate the import of gold. Curtailing gold imports by $20 billion i.e. to the level of 2011-imort will surely ease the pressure on economy.
There's no need of 1991 like reforms at all. 67% of the economy is covered by service sector which is less, more stable. Financial markets are more mature, diverse and deep.
And as D.Subbarao says, regulatory system and crisis management mechanisms are robust and sophisticated. All India needs is good governance and a cooperative bond between politics, industry, bureaucracy and judiciary.
Nikhi Ramchandra Jathe