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Impending bankruptcy drove India's reforms: World Bank

Impending bankruptcy in 1991 drove the reform process in India, changing the state's role from principal investor to that of facilitator of entrepreneurship, says a new World Bank report.

The Bank's World Development Report 1997 says India's foreign exchange reserves were virtually exhausted by mid-1991, when a new government headed by P V Narasimha Rao came to power.

The report also says that rising interest payments on India's foreign debt meant that neither the central nor the state governments could continue to finance both subsidies and heavy public investment. The report deals with India's reform phase (1991 to the present).

The shift was expected to free up government finances for more social spending, but in practice the fiscal crunch prevented a significant increase.

The report lists Rao's reforms including abolition of most industrial and import licensing and devaluation of the rupee and says the new coalition that came to power in 1996 has by and large sustained these reforms. And, the 1997 Budget takes very positive steps in that direction.

The document, however, says formidable challenges remain. Most parties agree on the need for reform yet no party is eager to retrench surplus labour, close unviable factories or reduce subsidies.

The reforms so far are a positive step, but should be extended and accelerated if India is to catch up with the East Asian Tigers, it adds.

When India became independent in 1947, the WDR recalls, income per capita had been stagnating for half a century and modern industry was minimal.

Unlike most East Asian countries which used State intervention to build strong private sector industries, the report says India, under Jawaharlal Nehru, opted for State control over key industries.

Dealing with the Indira Gandhi era, the report says two major shifts took place in the role of the State. First, the neglect of agriculture was reversed and the green revolution took off and, by the middle of the 1970s, India was self-sufficient in grain.

The second shift was the tightening of State control over every aspect of the economy. Under the garibi hatao (abolish poverty) programme, the State achieved a stranglehold on the economy. Yet growth of gross domestic production failed to accelerate, remaining stagnant during this period at 3.5 per cent a year, the report says.

Between 1977 and 1991, most stringent controls on imports and industrial licensing were gradually relaxed, stimulating growth.

The report says the government expanded anti-poverty schemes, especially rural employment schemes, but only a small fraction of the rising subsidies actually reached the poor. Competition among political parties drove subsidies up at every election.

The resulting large fiscal deficits (8.4 per cent of GDP in 1985), it adds, contributed to a rising current account deficit.