Why India can’t repeat its 1991 miracle

Exactly 30 years ago, a looming balance of payments crisis finally convinced India's leaders to dismantle its socialist economy, ushering in private enterprise and years of higher growth. Those pundits and policy makers hoping that Prime Minister Narendra Modi might use the country's Covid-induced slump to launch similarly dramatic reforms, however, are likely to be disappointed.

That's not because Modi is afraid of bold initiatives or lacks the political capital to see them through; his popularity remains unmatched, as does his flair for the dramatic gesture. The real issue is that his government and the Indian bureaucracy, unlike in 1991, aren't set up to develop a consensus behind liberalising reforms.

It's important to remember that the 1991 reforms didn't come out of the blue, purely in response to the crisis. They had been fermenting for more than a decade, prompted in part by the success of India's more open Asian neighbors. Growth miracles in countries such as South Korea and China defied the post-World War II consensus that poorer countries needed to shield their infant industries from outside competition. A program of fiscal discipline, deregulation, currency and trade liberalization, and privatization — familiarly known as the Washington Consensus — became the leading prescription for developing countries.

Key Indian technocrats grew to support such reforms during their time at international institutions such the World Bank, the International Monetary Fund and the United Nations, and began introducing them to India in the 1980s. While those initial efforts didn't produce immediate change, the ideas percolated through the bureaucracy and found their way into parliamentary and expert committee reports. By 1991, after years of consultation and debate, they were ready to be implemented under pressure of the crisis. They found the perfect shepherd in then-Finance Minister Manmohan Singh, an Oxford-trained economist with a doctoral dissertation in trade policy.

Two things have changed in recent years. First, among elite development economists, the academic emphasis has shifted from chasing prosperity through free trade and economic growth to redesigning poverty alleviation and redistribution programs. Much research focuses on what government interventions are most effective, using methods such as the randomised controlled trials that won Michael Kremer, Abhijit Banerjee and Esther Duflo a Nobel Prize in 2019. While few economists disagree about the need for India to liberalise its land and labour rules, implement tax reforms, and privatise banks and other state-owned enterprises, those ideas no longer have the same cachet.

Second, the bureaucratic system is no longer functioning as it once did, vetting proposals and building cross-party consensus. In Modi's first term, only a quarter of the bills introduced in Parliament were referred to expert committees — far below the 71% and 60% rates of the previous two governments. In his current term, that figure has declined to roughly 10%. Nor has the process of pre-legislative consultation introduced by the Modi government worked as advertised: In his first term, only 44 out of 186 bills were treated to such back-and-forth.

In recent years, India has also taken to helicoptering in influential academics such as former central bank chief Raghuram Rajan rather than building a cadre of homegrown economists within the bureaucracy. Their ideas have had limited buy-in from the permanent bureaucracy, always resistant to outside opinions. Modi's government, too, is now seen as increasingly skeptical of foreign or elite influence, in part because of criticism from former advisers who have returned to the West.

What India had 30 years ago and lacks now is an infrastructure where good ideas can be refined and rise to the top levels of government. In his July 1991 budget speech announcing liberalisation, Singh paraphrased Victor Hugo: "No power on earth can stop an idea whose time has come." But ideas can only come of age in an environment conducive to nurturing them. Until India regains that, the prospects for sensible economic reforms appear bleak.  

Shruti Rajagopalan is a Senior Research Fellow at the Mercatus Center at George Mason University.

Disclaimer: This opinion first appeared on Bloomberg, and is published by special syndication arrangement