What's Changed 25 Years After 1991?

Wed, 13 Jul Pre-Open

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This year, India celebrates its 25th anniversary of economic liberalization since 1991. Sure many things have changed since then for good. Liberalization marked the end of License Raj. The economy was opened to the private sector as well as foreign players.

The fruits of liberalization materialized in 2006, when India recorded its highest GDP growth rate of 9.6%. With this India became the second fastest growing major economy in the world, next only to China.

As of today, we are the fastest growing economy in the world. We have certainly come a long way since then. However, there are still many matters on which we are worse off than in 1991. Let's go through some of those.

One being, the share of manufacturing in the gross domestic product (GDP). In 1989-90, the share of manufacturing in the GDP was 16.4%. Whereas in 2015-16, even after myriad new manufacturing policies the ratio stood at 16.2%. That's worse off than in 1989-90.

The weak share of the manufacturing sector in GDP is partly on account of weak labour laws. It is often argued that Indian entrepreneurs do not expand beyond a certain point because it is very difficult to fire workers once they have been taken on. The Chapter VB of the Industrial Disputes Act, 1947, makes it very difficult for companies with 100 employees or more, to fire an employee without the permission from the government. Such laws prevent entrepreneurs from expanding.

Not only this but inadequate credit, marketing opportunity, erratic power supply, wretched roads, bureaucratic regulations etc has played its part too in dampening the manufacturing sector.

The other being fiscal deficit. In 2014-15, the combined fiscal deficit including that of center and states was more than that as seen in 1995-96. Fiscal deficit is the difference between the government's expenditures and its revenues.

The government revenues have not met expectations. In spite of robust economic growth, tax revenues especially direct tax collection is not buoyant. In the assessment year 2012-2013, only 1.25 crore individuals paid any income tax. Data from the World Bank shows that in 2011 the population of India was 124.7 crore. This basically means that in assessment year 2012-2013 around 1% of India's population basically paid income tax. Now, this reflects tax department's inefficiency to collect taxes.

To add to this, the fiscal deficit has remained low in the preceding year partially on account of soft crude oil prices. Since, crude oil prices have recovered from their lows it will be interesting to see if the government is able to maintain the ambitious fiscal deficit target of 3.5%. Further, inefficiently managed loss making public sector undertaking has added to the burden of the fiscal deficit.

Though we have come a long way from the manner in which we operated before 1990-91, there are many structural issues which still needs to be addressed to sustain the tag of the world's fastest growing economy.

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