Remembering the impactful legacy of wise leadership Premium

The passing of Manmohan Singh should be an occasion for evaluating the lasting legacy of the work initiated in the 1991 economic reforms and continued during his term as Prime Minister

The passing of Manmohan Singh should be an occasion for evaluating the lasting legacy of the work initiated in the 1991 economic reforms, by him as the Finance Minister, and his team of high-calibre economists, Ministers and professionals (Montek Singh Ahluwalia, C. Rangarajan, P. Chidambaram, Shankar Acharya, and many others), and continued during his term as Prime Minister. Much has already been written on the animal spirits released by the 1991 economic reforms. But the period 2004-14, and the decade that followed, stand in such contrast that it is worth investigating them using verifiable government data — not views that reflect the observer’s ideological predilections.

Five outcomes stand out, affecting citizens’ lives, and which laid the foundations of a hastened pace of structural change that could have led India to become a high-income/high-human development index country by the 2040s.

First, the savings rate had begun to rise ever since the demographic dividend set in in the early 1980s. The rise in savings/GDP ratio — and corresponding growth in the investment to GDP rate — was the basis for the ensuing rise in the GDP growth rate. Thus, by 2003-04, the savings rate had risen to 23% of GDP and investment to 24% of GDP. However, appropriate macroeconomic policies enabled this to be translated into raising the investment to GDP from 24% to 38% over the next six years. This was the highest ever that India had achieved — nearing, though still below, Chinese investment rates. The resulting growth averaged 8.5% per annum over 2004-05 to 2008-09 (under the United Progressive Alliance I). Although helped by a booming international economy, export growth (15%-18% per annum) could not have been maintained without real effective exchange rates being maintained at stable levels.

Despite the global economic crisis of 2008-09, GDP growth dipped for a few quarters before recovering quickly, because of a well-designed fiscal/monetary policy stimulus so that the 2009-14 period also saw 7.5% p.a. Thus, the overall growth rate over 2004-14 averaged 7.8% p.a., which was unprecedented in India’s history.

Second, the growth encompassed all sectors — the unorganised and organised. Not surprisingly, aggregate demand was sustained, as all growth engines were firing (public and private investment, final consumption, exports, and government). Hence, non-farm jobs grew at a rate of 7.5 million p.a., which itself was unprecedented. Except agriculture (where workers fell, a good thing), all sectors generated jobs. Construction jobs grew from 26 million in 2004 to 51 million in 2012 (or nearly doubled); manufacturing jobs increased by 8 million, especially, but not only in the labour-intensive sectors (that account for half of all manufacturing employment) from 52 million to 60 million; as did jobs in modern services (telecom, sale/distribution of cars, financial intermediation/banking, insurance and pensions, airlines, railways, and health and education). Structural change in the economy, slow for half a century, really gathered momentum.

Third, until 2004-05, non-farm jobs had grown so slowly that although migration from farm to non-farm occurred, never did the absolute number of workers in agriculture fall. But, for the first time in India’s post-independence history, the absolute number of workers on farms actually fell after 2004, as non-farm job growth was high. This had the effect of tightening the labour market in rural areas over the entire period till 2014, helped by the government emerging as employer of last resort through the Mahatma Gandhi National Rural Employment Guarantee Act in 2005.

Fourth, the combined effect of new non-farm jobs and tightening rural labour market was to raise real wages, which rose all the way till 2015. This was true for casual wage work as well as regular/salaried work.