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Off The Shelf : Ila Patnaik

A job half done
Business Standard, January 14, 2002

Economic Reforms

Development and Finance

M Narasimham


428 pages/Rs 425

The book consists of a collection of selected lectures delivered by M Narasimham over the last 15 years. Its significance is mainly historical because it reveals the thinking of policymakers in India before the reforms of the 1990s.

The book is divided into three parts. The first deals with the need for and direction of reforms in a broader sense; the second with reforms in specific sectors such as agriculture, small-scale industry and IT.

The third part of the volume consists of the author’s lectures on financial sector reforms. As the chairperson of the committee on financial sector reforms, the author deals with this sector much more elaborately. This section gives the reader the rationale for the reforms undertaken in the financial sector.

The first part of the book, titled “Planning and Reforms for Development”, is the one of the more interesting parts of the book. Especially if the reader puts it in the context of the debate that India implemented her reform process along the one-size-fits-all model at the behest of the IMF, and not as a response to indigenous rethinking among policymakers in India.

The lectures that were delivered before the 1991 reform package reveal that the need for reform and its direction were already preying on the minds of policymakers. There was a realisation that though the gross savings rate was quite impressive for a low-income country with an unregimented society, savings were not being used efficiently.

In the three decades since the inception of planning, while India was adding to capital stock at a rate of about 4.7 per cent per annum, GDP growth averaged a full percentage point lower at 3.7 per cent.

This represented rising capital-output ratios, a result of the declining efficiency of capital, something a poor country could ill-afford. The system of central planning led to an inefficient allocation of resources because of intensive control on investment, production and prices.

There was thus a realisation that there should be some rethinking of policies, based both on the logic of our experience and comparisons with other countries such as those in East Asia. A committee chaired by the author recommended industrial delicensing and replacement of quantitative import restrictions by an appropriate tariff regime.

The rationale for this reform was to address the issue of development beyond mere economic growth and “eradicate poverty, inequality, ignorance and disease.” It was argued that in order “to contribute directly to better living conditions, the growth in incomes should be in the material product sectors of agriculture and industry so that the aggregate consumption level of essential goods goes up.”

And that “it is equally important to emphasize demand for these goods through creation of incomes to generate demand.” Further, it was felt that “we need positive, direct, affirmative action in the direction of poverty amelioration” and “a redirection of investment towards the expansion of public expenditures and provision of public consumption goods and services in the area of education, health, sanitation and housing which would be relevant for ensuring better living standards.”

A reminder of the rationale of the reform process thus reminds us that while the reforms have seen success in controlling budget deficits and money supply, privatisation of industry and liberalisation of trade, the objectives for which these were sought — “to redeploy resources of money, material and administrative personnel from other sectors” to essential social services — have not been met. Indeed, data for health and education statistics reveals that instead of witnessing an acceleration, their rate of improvement in the 1990s was slower than in the 1980s.

As almost every lecture in the book indicates, there is still a long way to go before the goals of the Indian reform process are accomplished.

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