Thirty years have now passed since the first thorough liberalization of the Indian economy was attempted. The reform was prompted by a balance of payments crisis that led to a recession. Probably the greatest outcome of these reforms was that more accountability was progressively infused in delinking the budget deficit from monetization. In a sense, it is the RBI that played a pivotal role in the reforms of the 1990s. The RBI shook up the financial sector, which was then nascent. Luck also played its part. The RBI had three governors who understood the need for such strategic reforms and were able to convince the government of the day that no adverse political consequences would flow from them. SEBI had not yet grown into the powerful regulator that it has now become, and RBI empowered the commercial banks by moving away from micro to macro regulation. The devil is in the details, and an entirely different financial system was gradually set up to accommodate the new realities.
A key realization of the past three decades is that successfully tackling poverty depends less on direct aid and more on the creation of effective institutions enabling vulnerable populations to push their representatives to implement redistributive policies. After all, a functional democracy requires far more than just the creation of an institution allowing the public to elect the government of their choice. The economic reform process subtly promoted this ideology. It made citizens relatively aware and impressed upon them the need to protect democratic institutions from corrosion. More transparency was infused into systems at all levels. Of course, some valid concerns in this regard pertaining to information asymmetry, data privacy, and market manipulation are still not addressed satisfactorily.
Covid has changed the rules of the game. But this crisis is also a unique opportunity for transformative reforms – to improve public services, boost governance, and to enhance domestic revenue mobilization. Simultaneously, we need to modernize our taxation system. Many Indians today are comfortable with technology, and so efforts on digital taxation need promotion. Three decades of reforms have taught us that Indians are open to socioeconomic experimentation. The government should seize this opportunity and take the logical path ahead, supporting the heavy lifting on recovery efforts and transformative reforms. The potential gains outweigh the risks.
Certainly, it hasn’t been smooth sailing throughout. There have been deviations too from the path of reforms ushered in with a bang in 1991. But one thing has become clear by now. Regardless of the government in power, both at the state and Central level, we are not going back to the licence-raj system that existed in the pre-1991 period. Thanks to the courage shown by some statesmen at the right time (well, better late than never) India now has a standing in the world which was almost unthinkable three decades ago.
The bold reforms of 1991 changed the course of policymaking in India. The broad contours of the evolving reforms have largely remained the same. But their trajectory and direction areshaped by the priorities of the government of the day. That is logical, as what matters mostin a democracy is the political leadership’s understanding of how the economy needs to be managed. Our economy has performed relatively well in the past three decades and there is no reason to believe it won’t fare even better in the next thirty years.Thanks to the 1991 initiative, India’s reform process has gained such a momentum that it is now practically impossible to reverse it.