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Twenty years to an economic miracle
June, 22nd 2011

Twenty years ago, on June 21, 1991, Narasimha Rao became head of a weak minority government grappling with a terrible financial crisis. Yet he initiated economic reforms that eventually transformed India, and even the world. India in 1991 was a poor, misgoverned country, derided as a bottomless pit for foreign aid. Today it is called a potential economic superpower, backed for UN Security Council membership by the US, and set to overtake China to become fastest growing country in the world.

When economic reforms began, critics warned that India would suffer a "lost development decade" like African and Latin American countries in the 1980s that supposedly followed IMF-World Bank advice. Critics said fiscal austerity would cause mass unemployment and shatter safety nets, while economic opening up would enable multinationals to thrash and oust Indian business. All three criticisms stand exposed today as nonsense. Far from suffering a lost decade India has become a miracle economy: social and welfare spending are at record levels: and Indian businesses have not only held their own but become multinationals themselves. India has averaged over 8% GDP growth in the last decade. Its savings rate has shot up from 22% to 34-36% in two decades.

So, with just modest foreign capital inflows, India can sustain an investment rate of 36-38% of GDP, which can sustain 8-9% GDP growth. Per capita income has shot up from $300 to $1,700 in two decades. Fast growth has created a shortage of not just skills but even casual labour. Salaries have gone through the roof, and casual wages have shot up by 40% in the last year in Bihar and Orissa. Fast GDP growth has yielded a tremendous revenue bonanza -central revenues are rising by over one lakh crore per year.

This has helped finance record spending on education and health, on welfare schemes (such as NREGA and Sarva Shiksha Abhiyan), and on Bharat Nirman. However, these areas are still dogged by massive corruption and waste, and badly need reforms China) based fast growth on labour-intensive exports. This was impossible in India because the very incomplete reform process excluded any labour reform.

To everybody's surprise, India instead developed skill-intensive exports - computer software, business services, autos and pharmaceuticals. This skill-intensive path was totally novel, unrelated to any IMF-World Bank model, and arose spontaneously when economic reforms allowed Indians to innovate in unanticipat ed ways. However, this pattern is now threatened by a serious skill shortage which the highly flawed educational system is struggling to solve.

India has become world leader in frugal engineering, a concept that didn't exist a decade ago. Frugal engineering cuts costs by not just 10-15% under western levels but by 50-90%. One example is the Nano, the world's cheapest car. Indian telecom has the cheapest call rate of one rupee per minute. Narayan Hrudalaya and Aravind Netralaya perform heart and eye operations at a tiny fraction of the cost overseas.

Innovation has improved productivity so dramatically that merchandise exports are growing faster than 30% annually despite substantial real appreciation of the rupee. China and some other Asian countries have manipulated exchange rates to create large mercantilist trade surpluses. But the RBI has aimed at a modest current account deficit financed by capital inflows. This is more sustainable than the Chinese approach. Critics claim that fast growth gions. This is simply false.

Poverty has declined from 45.3% in 1993-94 to 32% in 2009-10 according to the NSSO. But NSSO consumption data now capture only 43% of consumption measured by the national accounts, so the actual fall in poverty is probably steeper. We now have politicians offering free TV sets and laptops at election time. If poverty were really deep, such ploys would lead to Marie Antoinette-style derision. Cellphone penetration is approaching 70% of households. These are signs of falling poverty.

The hunger ratio has fallen from 17.5% in 1983 to just 2.5% in 2004-05. Research by Devesh Kapur and others has demonstrated an astonishing improvement in the living standards and social status of dalits in UP since the reforms began. Literacy has improved by 21.8% in the last two decades, against just 13% in the previous two decades. In 2001-11, female literacy has outpaced overall literacy, and both have grown fastest in the poorest states. Bihar recorded an improvement of over 20% and 16% respectively in female and overall literacy. Nutrition indicators, however, remain terrible.

GDP growth has doubled or tripled since 2004 in six large, poor states - Uttar Pradesh, Bihar, Orissa, Chhattisgarh, Jharkhand and Madhya Pradesh. But for this, the national GDP rate could never have risen to 8%. Fast growth has trickled up from the poor states to the national level. These states are affected by Maoism, which is widely held to be evidence of extreme deprivation. In fact, it is more indicative of ethnic tension between tribals and non-tribals, especially over land and mining rights.

The unfinished agenda is huge. Crony capitalism rather than free competition prevails in many sectors, especially real estate, natural resources and government contracts, making politicians millionaires on an unprecedented scale. Government services - subsidised food, employment programmes, education, health - are dogged by massive absenteeism, corruption and leakages. The police-judicial system is corrupt and moribund, and simply does not combat crime or redress public grievances. Criminals have entered politics in unprecedented numbers.

Much economic reform is still needed. India ranks only 134th of 183 countries in ease of doing business, according to the Doing Business series of the World Bank/IFC. But even more urgent are reforms to improve governance. After all, economic reform has sufficed to create miracle growth. Governance, alas, still needs a miracle.

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