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Mainstream, VOL XLIX, No 1, December 25, 2010 (Annual 2010)

Two Decades of New Economic Policies

Rising Inequalities, Marginalisation of The Marginals And Growing Social Crisis

Friday 31 December 2010, by Arun Kumar


I. Introduction

The New Economic Policies (NEP) were initiated in June 1991 by the Narasimha Rao Government within days of its taking office. There was little hint in its manifesto drafted to fight the elections in May 1991 that anything like this would be initiated by it if it came to power. Dr Manmohan Singh was chosen to be the Finance Minister of this government. In the past two decades of the working of these policies, the basic parameters of the economy and society have undergone a complete transformation. The Nehruvian, and, to a lesser extent, Gandhian roots of the post-1947 policy framework have been decimated.

The transformation is so complete that to the younger generation, the earlier policies appear to be meaningless. This is not surprising since the very party whose inspiration was Gandhi and later Nehru has itself largely disowned the thinking of these founders. Senior leaders have referred to those espousing the Nehruvian (not to talk of the Gandhian) framework as being fossilised or belonging to the Jurassic age—this amounts to implicitly disowning the national independence movement. Further, they have sought to invite foreign capital to come to India and stay for the next two centuries and praised the contributions of the British colonial rule, thereby denigrating the nation’s colonial experience, weakening the national spirit and leaving the citizens confused.

II. Exploding Number of Scams and the Marginalisation of the Marginals

THE nation is witnessing a free for all. Major scams involving those at the helm of the nation’s affairs are erupting by the month. We even forget what was in the national news just a few months back. The latest scams are with regard to food for the poor in UP, the allocation of 2G spectrum, Adarsh Society flats, the Radia tapes, the accusation by a judge of the Chennai High Court of application of pressure by a Central Minister on the judiciary, the CWG scam. They have come in such quick succession that we have forgotten the huge scams involving Madhu Koda, the Bellary Brothers, IPL and BCCI and the Satyam which were the talk of the town just a little while back. The rot is so deep that many more scams are waiting to be exposed in the coming days. The possibility of this has increased since apart from the usual political battle now corporate wars have broken out to get a larger share of the loot and information is being leaked out to embarrass the opponents. It is a good thing since the public is learning of the true character of its rulers and hopefully this would build the pressure for a complete reform of the system. No piecemeal reform will work.

These scams reveal that a massive loot of the nation is going on today and that every section of the elite class is involved in this. This loot is draining the nation of its resources since a large part of it is going out of the country to tax havens. A recent report by Global Financial Integrity suggests that the nation has lost $ 462 billion through flight of capital over the last 62 years. This is a gross underestimate and it is likely that the figure should be a multiple of this sum. The consequence of the resources being lost to the nation is a lower rate of growth of the economy than is potentially feasible (Kumar, 2005) and a higher rate of inflation, both of which adversely affect the poor. The distinction between the colonial rulers draining the nation’s wealth and the new rulers resorting to flight of capital on a large scale is minimal.

The recent scams reveal that the topmost businessmen, Central Ministers, Chief Ministers, Chief Justices of the highest courts and the highest in the bureaucracy, the military, the police, the media and other professional groups are complicit. In the last four decades, the names of the PM down to the lowest levels have come up in the context of various scams. The CWG scam suggests that the country’s elite has become shameless and for its profit, it does not mind if the nation is shamed. Since wrong-doing is deliberate and not accidental, it is denied till the last, till the last nail in the coffin. It is like a movie showing someone falling from a height in slow motion.

Having financially honest politicians at the helm of affairs is immaterial since honesty is indivisible. One has to also be politically and socially honest. Being personally honest financially while tolerating scams all around is tantamount to political dishonesty. Manipulating to let the rich get richer while asking the marginals to be patient amounts to social dishonesty. The NEP have undermined all three aspects of honesty in the system. There were only a handful of scams before 1991 but they increased dramatically in number after that and now almost a hundred are being revealed every year. Before 1991, the biggest scam was Bofors involving Rs 64 crores while after 1991, the scale went up to thousands of crores and now it seems to be touching over a lakh of crores. Thus, both the numbers and the per scam amount of money involved have increased exponentially after 1991. (Kumar, 1999)

Under the NEP, in the name of encouraging businesses, a cosy relationship has developed between the businessmen, the politicians and the executive. The government has become India Inc. In the name of promoting the private sector the government has overlooked all manner of illegality and softened the earlier regulations, like FERA and capital movements. This has encouraged those wanting to commit illegality, whether in government or outside it in the private sector. Greed has been raised to a new high pedestal. It has become legitimate to earn money in any possible way, however socially undesirable it may be. Thus journalists who were expected to be fiercely independent, have been cosying up to those with political or money power and in the process getting compromised.

It is not that earlier there was no cosy relationship between those with financial and political power. The difference is that earlier it was under wraps and not on the present scale. Now, it has become far more open and a much closer relationship. For instance, now the businessmen have direct and open contact with the PM and Ministers since they are in the PM’s Advisory Councils that earlier had experts who could be more objective about the national interest. Now individual interests of businesses are being directly plugged into policies. Seats in the legislatures are being bought by the highest bidders so that they can get close to power and influence policies in their own favour. Competition from the market has spilled over even more than earlier to policy manipulation. As the Radia tapes reveal, who becomes a Minister of a particular Ministry is a subject of intense pressure. It has been known that posting of favourite bureaucrats to key Ministries is manipulated. Has the honest PM not been complicit in these manipulations? Is his continuation in his post not due to his known tendency to keep his counsel on such grave matters of national importance? Is he there to provide legitimacy to a terribly corrupt system and thereby enable the loot to go on?

Today, the race is to grab the natural resources of the nation, the common heritage of all citizens. Land, water, forests, air waves and all are being privatised rapidly in a relentless grab. New kings, samants and landlords are emerging five decades after zamindari was abolished. The self- centredness and non-responsiveness of the rulers—businessmen, politicians and the executive —is leading to growing violence of various kinds, organised and unorganised. The marginals pushed to a corner—displaced and without their traditional resource base—are hitting back in the cities and in the rural and tribal areas,
in the hinterland and at the periphery of the nation.

II. Background to Implementation of NEP

THE nineties started on a note of growing national crisis. The government of V.P. Singh took over in end-1989, in the midst of an economic crisis, continuing crisis in Punjab and Kashmir, and growing Hindutva assertion on the Ram Janmabhoomi issue that aggravated the communal divide in the country. The internal divisions within the ruling National Front proved to be too much to tackle and the government started to collapse in 1990 on minor issues (compared to the big ones mentioned above).

In 1991, India faced an unprecedented economic crisis and was about to default on its international obligations. In fact, it had to send its gold abroad as collateral to raise small loans. The various IMF tranches of assistance it received in 1989-91 disappeared quickly due to the flow of funds out of the economy because of speculative activity by businessmen trying to make a quick buck and those with substantial black incomes who resorted to the flight of capital. At this stage, the country panicked into adopting policies (had to accept conditionalities) dictated by the IMF and World Bank in June 1991 as a new coalition government took office. It did not have any chance to build a consensus or to go for a wider debate before embarking on the widespread changes it introduced. It resorted to the TINA (There Is No Alternative) argument to push through the policies.

Dr Manmohan Singh had returned after serving as the Secretary-General of the South Commission under Julius Nyrere. In the report of the Commission, authored by him, he wrote the following about the conditionalities (that he so readily implemented in 1991):

Grave doubts exist concerning the theoretical validity of the key prescriptions now involved in conditionality. Their economic and social effects have in a number of cases been highly adverse. Monetary programming has frequently led to excessive idle capacity and rising unemploy-ment. Financial liberalisation in condition of inflation has led to aggravation of inflation. Insistence on the elimination of selective economic measures has aggravated the maldistribution of income. Insistence on import liberalisation in periods of pressure has led to aggravation of balance of payments deficits and frequently to devaluations to a degree greater than would be needed otherwise. Insistence on indiscriminate expansion of exports of primary products in many countries simultaneously has led to more than proportionate price declines and thus to declines in the value of primary exports of developing countries as a group. Insistence on free trade irrespective of country conditions has led to many conflicts with national development strategies. (Fernandez, 1991)

III. Paradigm Shift in Policy

POLICY, that had seen a paradigm shift in 1947 when the British rule ended, again saw another big change in 1991 with the launch of the NEP. This was no minor or sectoral change in policy but a total change in the philosophy underlying the policies. (See for instance, Kumar, 1994a, GOI, 1992 and Williamson, 1989) Slowly, every sector and policy was affected. In 1947, with the experience of colonialism, the leadership believed that poverty, illiteracy, ill health etc. had a social basis and required social intervention for their eradication. The individual was not to blame; so the remedy lay in social action. Consequently, the state was given a large role in the economy. Under the NEP, the philosophy was made to stand on its head and now the individuals were to be responsible for their problems and they need to take care of them individually and the state was not going to be responsible for alleviating their problems. So, for instance, poverty removal or employment generation was to occur through individual effort for which the person would have to go to the market to find a solution.

Consequently, the state retreated from the economy and the individual had to go to the market for employment, education, health etc. The state’s role was limited to helping the markets function efficiently—characterised by the World Bank as ‘market-friendly state inter-vention’. This was patterned after the success of the South-East Asian economies and maybe called the ‘strategic retreat of the state’. It is not a withdrawal of the state from the economy but a selective retreat in favour of capital. In this scheme of things, the public sector and the idea of commanding heights has been diluted to the point of becoming ineffective and planning has been downgraded. The private sector has been given the leading role and offered more and more incentives by the government. So, direct taxes have been cut, restrictions like licensing have been removed, MRTP, FERA and reservations for have been either scrapped or diluted. The Rightward drift in economic policies, that had been going on since the mid-seventies, was completed by the launch of the NEP.

Growth started to be emphasised for its own sake and distribution not even paid lip-service. Socialism and equity were de-emphasised. India from a caged tiger was supposed to become a roaring tiger due to the implementation of the NEP. Reports of a huge middle class were circulated by interested parties (figures of 150 to 300 million were mentioned) and consumerism was promoted all around, and especially amongst the well-off sections. Automobile production, which was 35,000 per annum in 1983, was supposed to rise to one million by 2000—a thirty-fold increase. A narrow class, bigger than most of the European countries, was supposed to drive the Indian growth story. Foreign capital was encouraged to come into India with offers of concessions like in the case of the failed Enron. If Enron had not collapsed, then it would have created a huge dent in the budget of the Maharashtra Government and some analysts feared that even the Central Government could be in difficulties because of the likely outgo. (Kumar, 1994a)

Graph 1

Source: RBI, Handbook of Statistics on Indian Economy 2004,
p. 470 and 2009, p. 454

The attitude of the rulers (parties and leadership), as represented in their support to the NEP, is akin to that of the British rulers during the colonial rule—for both, people hardly mattered. The actors and form of exp-loitation have changed. The current leadership of the nation is elitist in character and acting in its own narrow interest. For the sake of politics, it claims to act in the name of the people while the British did not make any such claim—there is a lack of transparency about the real intent. Up to 1991, the leader-ship claimed to favour equity as a policy goal. This pretence was dropped after 1991 and it can be said that there is less of hypocrisy. Apparently, the recent loan waiver scheme, implementation of the NREGA, the right to education and food and so on are pro-poor schemes but they are the front which provide the cover for more anti-people policies. The lot of the poor deteriorates far more through the tenor of the general policies than the benefit they get from the above mentioned policies. The suffering of the people is constantly rising in different ways and the only advantage in the situation is that the real face of the rulers is more clearly visible. The pretences are exposed more easily so that people are acting more consistently against the anti-people policies being pursued by the Central and various State governments. This has been visible in Nandigram, Singur, POSCO, Plachimada and so on.

IV. Macro Economic Performance under NEP

AS far as openness of the economy is concerned, India was not closed in 1991. At that time, its ratios of exports and imports to the GDP were similar to those of the USA, Japan and China though much less than those of Sri Lanka or Germany. (Kumar, 1991) Thus, greater or lesser openness in itself is not a panacea for eliminating the ills of an economy as claimed by the supporters of the NEP. Before 1947, the Indian economy was open because that suited the colonial masters and it was crisis-ridden.


Graph 2

Source: RBI, Handbook of Statistics

Table 1

The launch of the NEP in 1991 was accompanied by a fall in the rate of growth of the economy (Graph 1) while the rate of inflation rose substantially (Graph 2). Later the average rate of growth in the nineties recovered to the average levels achieved in the eighties. The rate of inflation also came down after 1996. The situation changed after 2002-03 with the rate of growth going up sharply and reaching a record eight per cent per annum over five years and then again declining due to the global financial crisis. The rate of inflation has also seen sharp— periodic upswing from 2005 onward. The government and the pro-NEP lobby have claimed that India has reached a new growth path and are predicting a double digit growth in the coming decade and more.

However, this seems to be doubtful because there is large scale environmental damage and resistance to the current set of policies, both of which are likely to adversely impact the growth rate. Even otherwise to claim a new growth path on the basis of a temporary five-year spurt seems to be methodologically incorrect. Further, this growth was based on the rapid growth of consumption of the well-off sections and of exports. The latter depends on the world economy doing well and the signs are that this is faltering after a temporary revival over the last year. The dangers of a double-dip recession are growing rapidly as the conservative lobbies in the advanced economies are pressing for a reduction of government intervention while the private sector has not picked up steam in those economies. Consumption of the well-off sections is dependent on their expectation of growth and this can take a plunge quickly as the economy slows down. Already, the Chinese economy is reported to be slowing down in the last quarter. Finally, the real growth rate of the Indian economy is in doubt. As shown in ASG (2006), the rate of economic growth has many elements of overestimation while inflation is under-estimated.

The investment rate in the economy initially fell sharply in spite of all the concessions granted to the private sector. (Table 1) The fiscal deficit initially fell only to rise again to the levels of 1991 and has been fluctuating since then. Creative accounting by the Finance Ministry has been often used to show lower deficits. India’s foreign exchange reserves rose sharply as capital began to flow into the country. The NRI deposits, FII and FDI inflows all grew. Software exports and IT enabled services contributed to increased earnings of foreign exchange. Employment generation in the organised sector declined since the emphasis shifted to capital intensive industries to meet the challenge of globalisation and entry of the MNCs and a more open economy. The traditional small scale sector has suffered a decline due to more liberal imports and dilution of reservations meant for them and this has adversely impacted employment gene-ration in the economy. The modern small scale sector that has come up is also highly capital intensive and generates few jobs.

Since 1991, disparities have been allowed to rise rapidly so as to encourage consumption but also to raise the savings rate in the economy. (Table 1) This has been especially true since 2000-01 with the share of the corporate sector in the GDP rising dramatically. (ASG, 2007) To accelerate investments, large scale concessions to businesses have been granted. The tax expenditures (mostly concessions to businesses) have risen sharply to the level of about Rs 5 lakh crores. (Union Budget 2010-11) Contrast this with the government’s constant refrain of shortage of resources for expenditures on schemes designed to benefit the poor and common man. Expenditure on health and education has consistently remained much below the desired levels (like six per cent of the GDP for education). The pro-business sentiments of the government since 1991 are apparent from their consistent discounting of possibilities of achieving higher growth through redistribution. No wonder, India has remained at the bottom of the ladder of development in the world. (ASG, 2010)

With free-market policies and decline of the public sector, investment became market driven and has increasingly gone to the corporate sector and the developed parts of the country. (ASG, 2007) Backward areas and agriculture have been marginalised further so that their rate of growth has lagged behind and resulted in increased disparities. Thus, the corporate sector and business community is seen as the dynamic sector of the economy and consequently they are able to get more concessions and this has resulted in the vicious circle of disparities leading to more disparities. (Kumar, 2010)


Food Consumption per capita (gm. per day) 1985 to 2008

Source: Economic Survey 2010

The pattern of agriculture has changed to cater to the markets and exports. So floriculture, horticulture and pisciculture have received pre-cedence over coarse grains and what the poor required. Per capita food consumption has dropped sharply from its peak levels in 1991. (Graph 3) The differential in the rate of growth of agriculture and non-agriculture (see Table 1) has increased leading to growing disparities between agriculture and non-agriculture. This has become an important cause of rise of all forms of disparities—across States, between the rural and urban areas, organised and unorganised sectors and so on. In brief, while the average rate of growth remained more or less the same in the eighties and nineties and went up slightly in the first decade of this century (Graph 1), disparities have increased substantially. (ASG, 2005)

Acceptance of the NEP package was facilitated by the lack of an indigenous alternative worked out by the Indian ruling elite. The rulers’ inability to devise such an alternative even in 1947 gave way to complete surrender in 1991. While in 1947, due to the pressures of the national move-ment there was a strong anti-colonial streak so that there was a focus on self-sufficiency and indigenous development, in 1991, there were no qualms about copying the dominant Western model devised by the global powers and propagated through the multilateral organi-sations like the World Bank and IMF. With the collapse of the Soviet model and East European block, there was no balancing factor to the market economy propagated by the advanced capitalist countries and it was swallowed hook, line and sinker by the Indian ruling elite. It suited them since they wanted to join the global elite—that is what globalisation means for them and the rest of the country does not count in their reckoning.

The middle classes had been prepared for the changes because of the obvious failures of the pre-1991 policies and India’s falling behind in comparison to China and the South-East Asian economies. They were enticed by the assurance of a good life with the promise of availability of all manner of consumer goods which were allowed to enter the Indian market. They could ape the Western consumerist life-style openly rather than through smuggled goods at high prices. Consumer credit was allowed to grow rapidly to enable them to buy goods even if they lacked savings. Salaries of the organised sector were liberalised. Till 1991, there was an upper limit of Rs 3,12,000 on annual managerial salary in the corporate sector; this was done away with and the salaries of this class rose by hundreds of times to touch crores by the end of the decade. In contrast, the minimum wage only went up by a factor of around three. This is only one of the indications of the rapidly growing disparities.

V. Marginalising the Marginals

THE UPA Government, during its tenure from 2004, has brought in important legislations on the Rural Employment Guarantee Scheme (NREGS) and Right to Information (RTI). This was strongly resisted by the pro-NEP lobby in the government but was carried out under pressure from the civil society and the Left. However, reports of corruption reducing their effectiveness and many whistle-blowers have been killed. The imple-mentation of the RTI is largely in the hands of (former) bureaucrats heading the Commissions —who have no accountability to the people but to their peers. They know how to stall and delay so that the functioning of the RTI has become complex and its impact reduced. The bureaucracy has resisted the crucial revelation of the file- notings; neither does the judiciary want to be in its purview nor do other important dignitaries and powerful segments of society.

There is a mindset problem with the political leadership of the UPA. It has been pro-corporate sector and anti-people. Its recent victory has emboldened it to follow more unequal policies and marginalise the marginals. Farmers’ suicides have continued and aggravated during its rule. It has gone in for loan waiver but this was more for electoral reasons than due to any conviction that it needs to help the farmers. It has been talking of corporatising agriculture, commercia-lising it and going for high-cost genetically modified (GM) technology. It is not moved by the aggravation of disparities in the country due to its strategy of ‘growth at any cost’—the ‘hand’ has not been with the common man. The various governments have claimed that poverty has been on the decline but it has taken on newer forms which the four-decade-old definition does not take account of. According to the official data for 2004-05, 77 per cent of India lives at less than Rs 20 per day. (GOI, 2007) There is an attempt to gloss over this by translating this amount into PPP terms but that does double injustice to the poor. PPP is higher than nominal dollars due to poverty and then the poor are told that they are less poor because of PPP. (Kumar, 2008a) Finally, per capita food consumption and mal-nourishment amongst 50 per cent of women and children does not support the idea of a decline in poverty.

From 2008, the Indian economy has been adversely affected by the global economic crisis. (ASG, 2009) Industry, services, exports, imports, foreign exchange reserves, employment and investment have been adversely affected. While the well-off sections have lost the value of their assets, the impact on the lives of the poor has been no less even though they may appear to be insulated from the financial sector or marginal to it. They lost employment on a large scale and their wages were depressed in a period of high food inflation. The government went into a denial mode by first arguing that there would be decoupling between the Indian economy and the advanced economies. There were grand claims that India (along with China) would be the new growth engine in the world. Then it kept arguing that because our banks are regulated, there would not be much of an impact and the economy would grow at eight to nine per cent. This claim has been brought down to 7.1 per cent. However, the economy perhaps did not grow at all but due to the elections in 2009 the govern-ment was not willing to admit this reality.

The black economy has continued to grow throughout this period and set back economic development. More and more cases of lack of accountability and possible corruption have surfaced against the judiciary. Cases in courts have been pending and undertrials have been in jail far longer than any punishment they may have been awarded, if convicted. All this has undermined the sense of social justice in the country. Poverty, disparity and lack of social justice have resulted in the growing impact of the Maoist movement over large swathes of India. While in 1991, 55 districts were supposed to be affected, this number has increased to about 170 districts by 2007, according to official sources.

VI. Conclusion

THE disjuncture between the leadership and people has meant the end of ideology, ideas and principles in party politics in India. A party can take any stance convenient to it to get to power. So, socialists can be anti-BJP one day and then team up with it another day and form a government. The CPI-M can be pro-Congress at one point of time on the plea that the communal forces have to be kept out of power and then oppose it at another time even if that means that the communal forces may get to power. The Congress can claim to be secular but consistently practises soft Hindutva. The BJP can claim to be Swadeshi but when in power invites foreign capital. The CPI-M can oppose SEZs at the Centre but implements them in West Bengal.

Today, what matters to leaders and parties is money and power and for that they are willing to make any compromise. Naturally then ideologies and principles are worthless and individual and family interest dominates over that of the people. Gandhi (1909) had criticised the British Parlia-ment precisely for these reasons and today the situation in the Indian legislatures is far worse than it was in the British Parliament in 1909. The public in India feels helpless and cheated and has reacted by becoming increasingly apolitical and sectarian which has turned out to be of advantage for the vested interests in society.

[Based on the author’s forthcoming book, Indian Economy since Independence: Tracing the Impact of Colonial Disruption in Society, Har-anand, New Delhi]


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17. Williamson, J., 1989, ‘What Washington Means by Policy Reform’ in: Williamson, J (ed.): Latin American Readjust-ment: How Much has Happened?, Washington: Institute for International Economics.

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