Market failure: A convincing case

The Market that Failed: A Decade of Neoliberal Economic Reforms in India by C.P. Chandrasekhar and Jayati Ghosh; Leftword Books, New Delhi, 2002; pages 192, Rs. 275.

THE period of nearly 11 years since the acceleration of the process of economic liberalisation in June 1991 by the then Congress government, which did not have a parliamentary majority, has seen an orchestrated attempt by successive governments, international agencies such as the World Bank and the International Monetary Fund (IMF), official economists, several of whom have divided their time between New Delhi and Washington, and almost the entire electronic and print media, to portray the policies of liberalisation, privatisation and globalisation (LPG) as both inevitable and desirable. In a closely argued and lucidly written book, Professors C.P. Chandrasekhar and Jayati Ghosh have demonstrated that such a portrayal is entirely inaccurate and unwarranted.

The neoliberal reform programme, Chandrasekhar and Jayati Ghosh point out, "...made curtailment of the fiscal deficit the fundamental task of fiscal policy. It accelerated trade liberalisation, which involved doing away with quantitative restrictions on imports and reducing customs tariffs, with attendant revenue implications. It dismantled controls on free operation of large industrial capital, domestic and foreign. It provided a host of direct and indirect concessions to industry, reducing the tax base of the government further. It provided a host of concessions to foreign investors in the hope that they would use India as a base for world market production."

The neoliberal reformers had argued that economic growth in India was being stifled by the intrusive role of the state as both regulator and participant; that large fiscal deficits crowded out private investment and undermined investor confidence. They argued that the excessive protection provided to Indian industry by the imposition of import restrictions and tariffs prevented the development of an efficient, competitive economy which would enable India to benefit from integration with the world capitalist economy. Their claim, then, was that liberalisation would enhance the growth rate. As growth occurred across the board, and the economy became more competitive through domestic deregulation and external opening-up, exports would surge and employment would expand rapidly. As a result, poverty would decline sharply as would unemployment. But what has been the record of the 11 years of reform policies?

The authors demonstrate convincingly that in terms of the indicators of growth, employment and poverty, the performance during the reform decade of the 1990s has been no better, and in some respects distinctly worse than in the decade of the 1980s. They also highlight the fact that even a decade after the reforms, the country faces the paradoxical situation of increased incidence of hunger and food insecurity among a sizeable proportion of our population. This is so even as the government is saddled with huge stocks of unsold foodgrains despite a rate of growth of foodgrains production that was lower than the rate of growth in population during the 1990s.

The average annual rate of growth of the country's gross domestic product (GDP) at constant prices was no higher in the 1990s than in the 1980s. The authors note that according to the Reserve Bank of India, the average rate of growth of the 'growth cycle' over the 1990s amounts to only 4.4 per cent. In the material-producing primary and secondary sectors, the growth performance was even worse. Thus the primary sector, which grew at the rate of 5.72 per cent a year between 1985-86 and between 1989-90, grew only at the rate of 3.77 per cent between 1991-92 and between 1994-95. A miserable growth rate of 1.95 per cent was recorded between 1995-96 and between 1999-2000. Similarly, over the corresponding periods, the secondary sector grew at the rates of 8.66 per cent, 8.04 per cent and 4.99 per cent respectively, reflecting a sharp decline in the rate of growth of industry since the mid-1990s. Even the much-hyped services or tertiary sector showed a decline in the average annual growth rate from around 8.7 per cent in the 1980s to 6.9 per cent in the 1990s. As the authors point out, the stagnation or decline in growth rates is not surprising since the key determinant of the overall growth rate of an economy - the ratio of investment to gross domestic product - increased only marginally from around 21.7 per cent in the 1980s to 24.5 per cent in the 1990s. In fact, after touching a peak of 26.8 per cent between 1995-96, this ratio declined, and has been stagnating at around 23 per cent.

The issue of growth rates apart, a decade of reforms has led to a crisis in agriculture, where "... agricultural investment and output, as well as food security were adversely affected". Also "...some important aspects of the reform process, such as the reduction of public investment in rural areas and the attempts to cut subsidies leading to higher input costs, actually worsened the conditions of cultivation." As for industry, except for the short-lived boom of the period 1993-95 and the spurt in demand arising from the implementation of the Fifth Pay Commission Award in 1999-2000, the overall tendency, sharply evident by the end of the decade, was towards deceleration and a distinctly lower rate of industrial growth. Analysing the growth of the services sector, the authors note that it can be plausibly seen "...as a reflection of accentuated dualism, with a proliferation of low-wage, low-productivity service jobs leading the growth in this sector, rather than more capital-intensive 'modern' service activities."

Turning to employment, using data from the National Sample Surveys and Census 2001, the authors show that while rural and urban employment grew at an annual rate of 2.03 per cent and 3.39 per cent respectively between 1987-88 and 1993-94, between 1993-94 and 1999-2000 the rates were much lower at 0.66 per cent and 2.27 per cent respectively. As they point out, the rural employment growth rate of 0.66 per cent between 1993-94 and 1999-2000 "... was not only less than one-third of the rate of the previous period 1987-88 to 1993-94, it was also less than half the rate of growth of the labour force in the same period. In fact, it turns out that this was the lowest rate of growth of rural employment in post-Independence history." Over the 1990s, the 'weekly status' unemployment rate was around 7 per cent for men and 10 per cent for women - exceptionally high for a country with little or no protection for working people by way of social security or unemployment compensation. Reduction in public investment, removal of quantitative restrictions on imports, squeeze on rural credit, sharply reduced expenditures on rural development and employment schemes, and the overall deflationary macroeconomic policies deriving from the obsession with the reduction of the fiscal deficit - all these contributed to the sharp decline in the growth rate of employment. Only a small part of the decline can be attributed to increased number of years of formal education for both males and females of the relatively better-off sections of the population.

WHAT has been the impact of the reforms on poverty? While poverty is a multi-dimensional phenomenon, data limitations make it difficult to evaluate the extent of poverty and the changes thereof in a comprehensive manner. Data are, however, available on income-poverty. The most commonly used official indicator of the extent of poverty is the "head count ratio," which tells us the proportion of households below a specified poverty line. The norm used to define the poverty line is the value of food expenditure necessary to ensure the intake of a specified amount of calories a day for a person. The details of how this is worked out need not detain us, since our focus is more on the changes in the extent of poverty, however defined, rather than the level per se. Since the data on poverty for the latest year available, namely 1999-2000, are not easily comparable with those for earlier years on account of definitional changes, the authors examine the data on the head count ratio of poverty between 1993-94, the first half of 1998, as well as the data over a longer period. Contrary to the expectations of the reformers that there would be a decline in the incidence of poverty because of higher growth and the rapid expansion of employment owing to reforms, there has in fact been a significant increase in rural poverty as measured by the headcount ratio.

In respect of the overall poverty ratio, the reform period is characterised by the disappearance of the trend of decline in poverty that was observed between the mid-1970s and the early-1990s. The authors suggest that "...the trend in aggregate poverty incidence... was strongly related to neoliberal economic policies, and consequent macroeconomic processes of the 1990s... these policies involved neglect of rural investment and of the food security system, resulting in slow agricultural growth, reduced employment opportunities in rural areas, and high food prices. All these would typically be likely to be associated with persistent, or even increasing poverty." One is inclined to agree with this observation.

The last point about food insecurity and high food prices deserves elaboration. The 1990s have been characterised by a sad paradox, which testifies to the utter irrationality of the LPG policy regime. This is a combination of the denial of access to foodgrain at affordable prices for a sizeable proportion of our population - amounting perhaps to about 350 million people - on the one hand, and the accumulation of unsold foodstocks with the government - to the tune of 62 million tonnes by the end of 2001 - on the other. The accumulation of a high level of foodstocks with the government occurred during a decade in which the per capita foodgrain availability to the public declined from an average of 510 gm a day in 1991 to 458 gm in 2000. This was despite a much lower growth rate of population in the 1990s than in the earlier decades. An even more glaring manifestation of the irrationality of LPG policies has been the refusal of the government to use the available stock of foodgrains to carry out a massive food-for-work programme, which would help build badly needed productive rural assets, stimulate industrial growth through its demand effects, and bring down the carrying costs for the Food Corporation of India. Such a refusal arises from an obsession with the fiscal deficit, the reduction of which is touted by the World Bank and the IMF as the panacea for all our economic ills, a proposition that is uncritically accepted and repeated as a mantra by our policymakers.

If the neoliberal reforms do not offer a solution to our paramount tasks of achieving a higher rate of economic growth in a manner that would expand employment, lower poverty rapidly, and democratise the growth process by ensuring a wider participation and a more just sharing of its benefits, is there any other way out? Contrary to the oft-heard chorus of TINA (There is no alternative), the authors argue that there are alternatives, and provide an outline of an alternative approach. It is not possible to do justice here to the alternative that they have outlined for reasons of space, but the broad philosophy can be stated briefly. They argue essentially for giving up the obsession with the fiscal deficit, and propose a proactive role for the state in terms of negotiating the challenges posed by the process of contemporary globalisation. They argue for a policy regime which includes appropriate restrictions on import of commodities and capital, a serious effort to mobilise resources through direct taxation of large capital, domestic and foreign, the rural landed gentry and the richer sections of the peasantry; thoroughgoing land reforms, a coordinated export thrust in which the state plays a key role in partnership with industry, and a more egalitarian asset distribution. They also emphasise the importance of democratic decentralisation, and the need to grant greater powers to elected local bodies and advocate the greater participation of ordinary working people in economic decision-making.

In the course of their exposition, the authors have also dealt extensively with the process of disinvestment of public sector assets, the external sector, fiscal policy, the role of foreign direct investment and its negative impact on balance of payments, and on the underlying basis for as well as the political economy of the reforms of the 1990s.

This is a must-read book for both specialists and laypersons who are interested in understanding India's economic problems and seek a democratic and equitable resolution of those problems.