San Diego Union Tribune, May 21, 2004
Knight-Ridder/Tribune Information Services - May 19, 2004
Electoral shockwaves in India this past week have caused concern among many analysts and observers that voters in the world's largest democracy have done themselves a disservice. The vote against the Bharatiya Janata Party (BJP) and its ruling National Democratic Alliance coalition is widely seen as a rejection of the governing party's "pro-market" reforms. According to the conventional wisdom, these reforms -- including international trade and financial liberalization, privatization, and encouraging foreign investment -- have been very successful in increasing India's economic growth.
To reinforce this message, the Indian stock market fell by 11 percent on the news, and the Mumbai Sensex stock index saw its biggest drop in 12 years.
But the markets are not always right, and in this case, neither is the conventional wisdom. It is true that India more than doubled its rate of growth after 1980. From 1980 to 2000, income per person grew at an annual rate of 3.8 percent, as compared to 1.7 percent from 1950-1980.
This is a considerable improvement; over time, a jump in growth rates of this magnitude could potentially make a big difference in a country where more than 35 percent of the population -- more than 350 million people -- struggles to survive on less than a dollar per day.
But this improved economic performance cannot be attributed to the economic reforms, which began in 1991. The simple reason is that India's economic growth spurt began in 1980, more than a full decade before the reforms. This is especially true of the 1990s "neoliberal" reforms, as they are often described in India: reducing restrictions on foreign trade and investment flows, and privatization. Tariffs actually increased in the 1980s, and the liberalization of investment flows, as well as privatization, have picked up considerably in just the last five or six years.
A case can be made that some of the 1980s reforms, which made it easier for people to start and operate businesses, contributed to the growth spurt. But India's growth improvement is clearly not a "free-trade" or "globalization" success story.
And perhaps even more importantly, it was not a success story at all for the large majority of Indians, who still live in rural areas. According to Indian economist C.P. Chandrasekar, the reforms were particularly damaging to the agricultural sector, where the government cut back on vital public investment such as irrigation, drainage, flood control, and rural transport and electrification. "Per capita food grain production and availability actually declined in the 1990s," he said. Access to the public health care system was also reduced. Chandrasekhar, a Professor of Economics at Jawaharlal Nehru University, also notes that many farm families ended up with large debts to pay for health care, and that this contributed to the thousands of suicides by indebted farmers that became a national symbol of economic cruelty in the 1990s.
Some of the government spending cuts resulted from the loss of tariff revenue. This is a cost of trade liberalization that economists often ignore. But in a country like India, where more than a quarter of government revenue came from tariffs, it is foolish to liberalize trade without having a plan to replace the lost revenue.
The failure of economic growth to trickle down to most Indian citizens is also evident from available information on social indicators. For example, the United Nations Development Program reports that the percentage of undernourished people moved only from 25 to 24 percent in the 1990s. Progress in reducing infant and child mortality was also considerably slowed in the 1990s, as compared to the 1980s.
Looking forward, the most recent liberalization of capital flows poses new dangers to India. There has been a record inflow of foreign capital over the last year or two, most of which has had nothing to do with productive investment. This "hot money" can flow out just as easily as it came in. That helps to establish a system where government policy is held hostage to the whims of investors -- who may not know or care what is best for the country.
The recent elections and financial market reactions are a case in point. The people have clearly voted for economic change; it remains to be seen whether the new government will hear their voices above the roar of disapproval from the financial markets.