Economic development

25 years after liberalisation: India must realise that wealth isn't development unless it is shared

If India stops inequality from rising, it could end extreme poverty for 90 million people by 2019.

Twenty five years ago, on July 24, 1991, Finance Minister Dr Manmohan Singh rose in Parliament to present a budget speech that was to alter the destinies of India and its people in fundamental ways. He spoke in his characteristically gentle, low-key and self-effacing manner disguising a steely resolve. His words were memorable even if debatable.

Quoting Victor Hugo – "no power on earth can stop an idea whose time has come" – he declared that "the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome."

The legacy of that moment remains highly contested. A quarter-century later, India is indeed a major economic power, altered in fundamental ways from the country that Singh helped steer in new directions. With a GDP of $2 trillion, it has edged itself among the ten largest economies of the world. But in what ways have the economic reforms launched with this historic budget speech contributed to changing the lives of India’s dispossessed millions? As we look back, it is important today to draw up a careful balance sheet of what the promises were and what was actually accomplished after India changed course so fundamentally 25 years ago.

The "structural reforms" that Singh announced, and which every successive Union government with varying urgency and priority has since advanced, made way for global private enterprise to enter and increasingly occupy the commanding heights of the Indian economy. Until then, these were dominated by the state. The reforms package opened the economy to global competition; it stressed on fiscal consolidation and discipline for macro-economic stability; it liberalised trade and capital markets; it dismantled the notorious licence-permit raj that stymied local enterprise by rent-seeking; and it facilitated and expanded competitive private provisioning of public goods like health, education, public transport and infrastructure.

Three promises

There were three main promises of economic reforms. The first was that these would unfetter the economy and spur economic growth and development. The second was that growth would crank up manifold the creation of wealth and jobs, and through this would erase poverty, hunger and want. And the third was that reforms would significantly reduce corruption and rent-seeking by ending licensing and bureaucratic regulation of private enterprise.

Let us take each of these promises, and assess with the hindsight of a quarter-century what indeed was accomplished and what were the intended and unintended consequences of these reforms.

There is no doubt that reforms did hasten economic growth to rates that were double, and even at times three times the pace of growth that the country had settled into until then in four decades since India’s freedom. Twenty five years later, India is the fastest growing economy in the world. It has also created unprecedented levels of wealth (however unequally distributed), so that today India is home to the third-largest population of dollar billionaires in the world. The ranks of middle-class Indians have grown, as they have transitioned from lives of customary austerity to substantial improvements in their material well-being, from habitual thrift to unrestrained consumption.

This massive enlargement of wealth has also meant that governments in India at all levels – Union, state and local – have far greater resources in absolute terms available to them for public investment and spending than they did in the past (although because of official reluctance to expand India’s direct tax base significantly, public spending as a share of gross domestic product remains one of the lowest in India among comparable countries).

This is however where I feel that the good news of economic reforms ends. Reforms did stimulate high economic growth and yield greater wealth creation. But this wealth was very unequally distributed, raising sharply levels of economic inequality in a country that was already historically profoundly unequal. Levels of absolute poverty have no doubt declined, as have malnourishment and hunger. But the question to ponder is whether these have declined fast enough. Even neighbouring Bangladesh with half India’s per capita income has been able to eliminate want and malnourishment far more successfully than India.

Wage growth

In India, from two resident billionaires with an income of $3.2 billion in the mid-1990s, the number grew to 46, with a combined wealth of $ 176 billion in 2012. Their share of GDP rose from 1% to 10%. A recent report by Oxfam titled Even It Up observes that income concentration at the top fell in the first three decades after Independence, but since then for the top 0.01%, real wages grew annually at 11%. By contrast, the rise in real household expenditure for the rest of the population rose by only 1.5%.

In agriculture, growth in real wages was 5% in the 1980s, but fell to 2% in the '90s, and virtually zero in the 2000s. If judged by the median developing-country poverty line of $2 a day on purchasing power parity, more than 80% rural and just below 70% of India's urban inhabitants continue to be impoverished.

As Oxfam Director Byanyima observes, "A child born to a rich family, even in the poorest countries, will go to the best school and will receive the highest quality care if they are sick. At the same time, poor families will see their children taken away from them, struck down by easily preventable diseases because they do not have the money to pay for treatment."

The unfairness of this unequal world is indeed enhanced because the majority of richest persons are born into their wealth. Children and grandchildren of the rich will largely replace their parents and grandparents in the steep economic ladder, as much as children and grandchildren of the poor will remain impoverished, regardless of their potential and hard work.

In India, the burdens of unequal birth weigh heavily on those born into disadvantaged castes, gender, religion and tribes. In the countryside, poverty rates are 14% higher for Adivasis and 9 percent for Dalits, compared to non-scheduled groups. In urban areas likewise, the poverty of Dalits and Muslims is 14% higher than the others.

Looking away

I worry not just about the rapid pace of growing inequality. Even more worrying is the indifference, the absence of outrage, among people of privilege about the monumental levels of preventable suffering that surrounds them. As I argue in my recent book Looking Away: Inequality, Prejudice and Indifference in New India, historical ideas of caste and class that justify inequality have been topped up in neo-liberal times with the belief that greed is good. This has resulted in a particularly uncaring middle-class, and the exile of the poor from their conscience and their consciousness.

The Oxfam report calculates that if even a tax of 1.5% was imposed on the wealth of all the world’s billionaires, it could get every child into school and deliver health services in all the poorest countries of the world, saving an estimated 23 million lives. It estimates that if India just stops inequality from rising, it could end extreme poverty for 90 million people by 2019. If it reduces inequality by 36%, it could eliminate extreme poverty.

One promise of reforms that has been most belied is that reforms and galloping growth would unleash millions of jobs. If they actually did so, it is claimed by reform votaries, this would do more than just lift people out of poverty: it would also make increasingly irrelevant the withdrawal of the state from supplying basic public goods like health and education, because people would be able to buy these competitively in the market.

However, the reality of what was accomplished in the years of high noon of economic growth in India was certainly the accelerated but unequal expansion of wealth – as observed – but not the expansion of decent work for India’s poor. On the contrary, we had seen the reverse: the shrinking of decent work in the sunshine years of high growth. As Coen Kompier establishes in the India Exclusion Report 2013-'14 undertaken by the Centre for Equity Studies, very few jobs have been added, mostly of low quality, whereas employment opportunities in public enterprises, the formal private sector, and agriculture actually declined (my emphasis).

In the decade 1999-00 to 2009-'10, "while GDP growth accelerated to 7.52% per annum, employment growth during this period was just 1.5%, below the long-term employment growth of 2% per annum, over the four decades since 1972-'73. Only 2.7 million jobs were added in the period from 2004-'10, compared to over 60 million during the previous five-year period."

Increasing informalisation

It is significant that employment in the organised sector actually fell after 1997, while that in the unorganised sector rose. The 2009 report of the official National Commission for Enterprises in the Unorganised Sector finds that the "vast majority of jobs created in recent years have been in the informal sector, in the absence of a legal framework for labour protection and social security. Out of every 100 workers, the report revealed, around 90% work in the informal economy producing half of India’s economic output. This implies that out of a current total workforce of around 475 million, around 400 million workers, considerably larger than the total population of the USA, are employed with little job security or any formal entitlements to call upon the protection of the labour law regime."

The third big promise of economic reforms – that the dismantling of the proverbial license-permit raj would help greatly reduce corruption and rent-seeking – has also been belied spectacularly. Far from reducing corruption, official malfeasance has risen incrementally. In the '80s, the Bofors scandal alleging a kickback of around Rs 80 crores for the purchase of Swedish weapons had fatally shaken the Union government of the time led by Rajiv Gandhi. Today we routinely observe crony capitalism involving losses to the public exchequer sometimes of amounts that have so many zeroes that it is confusing to even count.

The culture of public life has changed dramatically. For the first half-century after Independence, accepted norms for probity in public life required that public officials kept a careful public distance from private business. Today they are so closely bound together by the hip that it is routine for people in high office to benefit from and share the opulent life-styles of the super-rich, and they pass this off as contributions to nation-building.

One particularly tragic outcome of this contemporary era of crony capitalism is the highly accelerated dispossession, actively facilitated by state authorities, of India’s most impoverished tribal communities, by big industry hungry for the coal and mineral reserves over which thedisinge forested habitations lie.

The price of crony capitalism

Another outcome of the new age of crony capitalism is very high public subsidies for big business, reflected for instance in the over Rs five lakh crore of revenues foregone to industry in every budget, and this at the expense of adequate public funding of health care, education, water, sanitation and social protection, and the farm sector. This has led development economist Jean Dreze to describe India as a world champion of social under-spending.

In particular, out-of-pocket expenditure on health care is twice the levels of public spending, a disgraceful record unmatched by most countries. Our public schools are shamefully under-resourced with trained and motivated teachers and basic infrastructure, and only seven per cent people are still able to complete their college graduation. Nine in ten persons are in informal employment, and they are deprived of any or adequate pensions in their old age.

Many believe that the retreat of the Indian state away from the principle of primary public responsibility for health, education and social protection of its disadvantaged populations, and from redistributive taxation since the 1990s, was part of the package of economic reforms driven by the Washington Consensus of the World Bank and the International Monetary Fund. But even these institutions have begun to acknowledge that they may have been drastically wrong.

In 2014, the president of the World Bank, Jim Yong Kim, admitted that the assumption that people in poor countries should pay for healthcare was wrong: "There’s now just overwhelming evidence that those user fees actually worsened health outcomes. So did the bank get it wrong before? Yeah. I think the bank was ideological."

In any honest assessment of economic reforms in India, it is imperative that we admit that the movement away from public provisioned health and education has been a mistake that has resulted in enormous avoidable human suffering and loss for millions of our people. But there is little evidence of such soul-searching.

Economy of exclusion

In a similar self-critical tone, Christine Lagarde, managing director of the IMF has said, "In far too many countries, the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability." She went on, "Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential."

She compares rising inequality in the US and India. "In the US, inequality is back to where it was before the Great Depression, and the richest 1% captured 95% of all income gains since 2009, while the bottom 90% got poorer. In India, the net worth of the billionaire community increased twelvefold in 15 years, enough to eliminate absolute poverty in this country twice over."

She argues that distribution of wealth matters, and contrary to prevailing economic orthodoxy until now, redistribution policies are not counterproductive for growth, "because if you increase the income share of the poorest, it has a multiplying effect on growth…but this does not happen if you do so with the richest."

A fair and sober assessment of the impact of 25 years of economic reforms in India therefore requires on the one hand an acknowledgment of its contribution to unleash the potential of the economy for growth and the creation of wealth. But at the same time, it is both callous and disingenuous to ignore the evidence that growth by itself is no guarantee of a better life for people of social and economic disadvantage, which surely should be both its primary objective and the paramount yardstick for evaluation of its success.

The unequal distribution of wealth, crony capitalism, low public investments in health, education, social protection and infrastructure, and the chronic neglect of small-farm agriculture continue to shackle millions into hunger, want, low-end uncertain employment, distress footloose migration, damaged health and survival chances, and denial of quality education that could harness young people’s full potential.

New orthodoxies

Twenty five years ago, when Dr Manmohan Singh spoke to the nation of an idea of which he was convinced the time had come, he called for freeing ourselves from one set of orthodoxies. But his prescriptions have had mixed results, many of its promises are unrealised, and millions still live wretched lives of avoidable suffering with oppression and want.

In the long dark shadows of the glitter of economic reforms are the unequal distribution of wealth, crony capitalism, low public investments in health, education, social protection and infrastructure, and the chronic neglect of small-farm agriculture. These continue to hamper many millions of young people, still trapped in Rohith Vemula’s haunting description of the "fatal accident" of their births.

The radical prescriptions of 1991 have become the powerful new orthodoxies of today, canons which have conquered not just India but most of the world. New voices in many parts of the world – such as of Bernie Sanders in the United States – are speaking out against these orthodoxies. Today in India we need to summon even much greater courage than 25 ago to liberate ourselves from these new dogmas. Only then will we muster the political and moral will to change course once again, to recognise that all people deserve decent work, health care, education and social protection; that markets cannot assure them these; and that wealth is not development unless it is shared.

But to change course, more than courage we need compassion.

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