This week marks the twenty-fifth anniversary  of the budget that launched a major  liberalisation process for the Indian economy.  This  budget and related announcements about trade and industrial policy were done to secure  international  support to manage the foreign exchange crisis that hit us after the oil shock of August 1990.  But they were an idea whose time had come, as Dr. Manmohan Singh said in his budget speech. .

The key theme of the 1991 reforms was deregulation to let markets for tradeable manufactured products function more freely. But besides the bonfire of foreign trade and industrial licensing controls and devaluation, a series of reform measures transformed the capital market, and  played a huge role in the positive impact of the 1991 liberalisation.  Trade and investment deregulation and capital market reforms benefited primarily the private corporate sector.  The massive expansion of corporate capital spending is one measure that captures this.  Corporate savings grew more than ninety-fold between FY90-91 and FY14-15 and as a percentage of GDP rose from 2.6% to 11.3%  driving a vigorous expansion in investment.(Caveat: Data are not fully comparable).

The removal of bureaucratic controls on capital issues, the establishment of SEBI, the opening of banking, insurance, mutual funds and asset management to the private sector, the radical transformation of share markets with scrip-less and screen-based trading and competition between the newly established NSE. and the BSE led to a massive expansion of the capital market. Stock market activity increased from an average of around Rs.  100 crores in the cash segment  in the early nineties to around Rs. 15000 crores today. Add derivatives and the turnover goes up to several lakh crores. Foreign investment inflows (direct and portfolio) have shot up from barely $1 billion or so in the early nineties to an average of around $45 billion in the past five years.

The Indian corporate sector has met the challenge of liberalisation reasonably well. Companies have restructured, cut costs, become more efficient and managed the greater competition from abroad. A heavy reshuffling of leader boards in indices like the Sensex has taken place with new firms displacing the companies belonging to the old business houses. These newcomers fall into two basic categories - those who have made most of comparative advantage in sectors like infotech services, pharmaceuticals, auto components,  and those  who exploited successfully the opening of infrastructure sectors like telecom, ports, highways and airports.

But all is not well in the manufacturing, services and infrastructure sectors as is evident in the accumulation of loan defaults and bank NPAs which reflect mainly short-sightedness on both sides during boom times. There is still no market for corporate control and incumbent managements are too secure.  Family controlled companies need a transition to independent professional management as public and institutional ownership increases. Corporations also need to do much more on R&D than what they are doing now. There is also a huge deficiency in job creation and addressing this requires greater dynamism in the small scale sector and in skill development, which the present government seems to have recognised more clearly than before.

A second area of positive impact has been in fiscal management with he move away from automatic financing of government deficits, the statutory imposition of limits on fiscal deficits, the steady improvements in centre-state fiscal relations, the simplification of the income tax rate structure, the informatisation of tax administration and, hopefully soon, the GST. Of course here too there is a continuing reform agenda particularly on subsidies and rationalisation of tax concessions.

So much for these areas of positive impact. What about the unfinished business?

Markets for agricultural commodities remain fragmented except for  rice and wheat, where public procurement integrates the national market and for milk where a nation wide cooperative network plays a similar role . Pushing through the announced changes that provide wider marketing options for farmers and improving marketing logistics is essential.

Mineral products like coal are traded on a bilateral basis with nothing that could sensibly be described as a market  price.  The recent moves to move from discretionary allotments of resource rights (a lucrative source of corruption) to transparent auctions is a correct first step. But the goal must be to evolve a genuine wholesale market in minerals with credible market clearing price discovery.

A third area for major reform initiatives is the power sector.  The immediate task is to rescue the public sector discoms from bankruptcy. Yet another debt adjustment scheme has been launched. But the real reform required is tariff rationalisation and the development of a wholesale market in power.  This is essential particularly for integrating decentralised renewables into the power system.

Factor market liberalisation has been restricted to capital. There is much talk of labour market reforms. But the record suggests that labour laws have not hindered the private sector corporate restructuring that has taken place. The real problem is in the public sector where strong unions and political patronage have led to over-paid and excessive staff strengths. The one factor market that requires radical reform is for land, particularly in urban areas.

Given the huge economic and social inequalities in India no government can be a market fundamentalist and market oriented liberalisation cannot be the organising principle of all reform. In areas like education and health such liberalisation has led only to a high cost private universities and schools and super speciality hospitals while  education and health facilities for the masses have not improved significantly, despite many nice sounding schemes.  Nor can the huge challenges of affordable housing  and  urban services be left to the market.

The organising principle of policy reform now has to be the transformation of public systems to make them less corrupt and burdensome and more transparent and efficient. This is particularly important for promoting job-creating small enterprises .  Even in areas like agriculture, minerals, services and urban land markets where market forces need to be given greater play,  the real challenge is the restructuring of public institutions and regulatory systems. 

The policy pronouncements of the present government do reflect such an orientation. But implementing them will require the political commitment both at the Centre and in the States.  Will we get this with the rising acrimony in our political discourse and an almost permanent atmosphere of electoral competition?