Anurag Jain's Blog on Bangalore Events, Travel, IIM Bangalore, IIM, IIMB, Management

Tuesday, December 16, 2003

Posted 9:55 AM by Anurag

Free Market Reforms in India

Sometime back, I wrote about Chilean free market reforms. Todya, lets talk about Indian economy reforms. I would like to put forth an argument in favour of Free Market Reforms.

Some people say that globalization of Indian economy is bad because it is hurting poor most. Now, I know in India, people are suffering due to reforms, (at least some poor are getting poorer) but that's short-term structural adjustments and in the long-term, gap shud get bridged. Even if you take employment as an indication, PSU jobs are shrinking (by a million in last decade) and organized privare sector has not created propotionate jobs (probably added a million jobs in last decade). But then again, beneficiary of reforms in India (so far) has largely been Services sector where multiplier effect on employment is not as big as it is in manufacturing. Manufacturing is just now hotting up and we hope to see benefits acrruing to the masses then.

Moreover, my take on the poor-are-worst-hit argument is that well, yeah, Free Market Reforms have contributed to increasing income gaps everyewhere, I agree. But go a layer beneath and see the anatomy of this divide: Its mainly due to the increasing incomes of a section of society (which have inherent advantage [even pre-reform] in terms of access to opportunities) and not so much due to the decrease in the income levels of the poor. If you see the statistics, poverty numbers (%) have been going down only, right? So the mechanism behind increasing income chasm due to market reforms works not so much by making the poor poorer as much as it does by making the rich richer. Hence, in relative terms yes, poor are getting poorer. But in absolute terms, no. So are we better-off post-reforms AS A NATION? Definitely yes!

Has any country benefitted 'conclusively' from the introduction of free market reforms? No, I must admit. But you can always take the example of what China did with its economy by introducing wide-sweeping reforms while India kept the dragon and 'other barbarians' at the bay by keeping its doors shut for larger part of its independent history. Why China appears in almost any discussion about India's future (QED!) today is precisely because of their success so far in introducing free markets! (China also has negatives in its reforms which I wont dwell upon here.)

Remember that while introducing free-markets, it has to be a balanced act. But the point is that by blaming free markets without specific evidence might be blaming one and only one factor while ignoring others, such as political management of reforms. For example, closer home in India, we celebrate the success of the IT industry. In Bangalore, we have a saying that IT industry got to where it is today only because Bangalore is so far from Delhi! Why is it that even after 10 years of kicking off of the reforms, there was no substantial disinvestment? Why did it take a Arun Shourie to start it 'really'? Over-focusing on one side while ignoring other can lead to economic imbalances, or worse, disasters. For instance, in India, we have been emphasizing on reforms in financial markets whereas leaving labor markets untouched! And you can see the signs of problem already!

The point is that saying free markets are be all and end all of everything is a big claim. And I am certainly not saying that. Because that, my friend, I dont think even Chicago Boys (GSB) would claim!

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