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How Liberalisation Destroyed India’s Economy

Instead of unleashing the animal spirits of private enterprise, structural reforms helped India Inc corner public resources and government assets.
How Liberalisation Destroyed

Our family got its first TV set in 1982, when I was 10 years old. Every evening, after I had come back from playing one-tip-one-hand cricket in the neighbourhood, completed my homework, I was allowed to tune-in to the idiot box. Those were the glorious days of Doordarshan, where babus planned content for the wider population. So, my evening began with Krishi Darshan, a show that taught me how to grow okra and save crops in the winter frost. It was, incongruously, meant for farmers, at a time when hardly anyone in villages owned a TV set.

In a sense, Doordarshan’s programming plan was a mirror-image of the Indian state, with its top-down plans on how to run the economy and even society. But, the 80s was also the decade when this structure was being gradually dismantled. DD reflected that change – it increasingly became middle-class focused. Grammy Awards, the Oscars, Miss Universe contests, Grand Slam tennis – all began to be telecast live. Along with that, came the first soap operas – Humlog, Buniyaad and Yeh Jo Hai Zindagi. Finally, in 1988, came The World This Week, a window for the middle-class, which allowed it to catch up with what was happening in the developed world.

The state was finally encouraging the middle-class to enjoy itself. Maruti and Maggi had already arrived in the early 1980s, and they were to be followed by a wider range of consumer goods and durables – from higher-end shampoos and soaps, to mixer-grinders and air-conditioners. The stage had been set for a radical break with four decades of state-capitalism – what is popularly, and erroneously termed ‘Nehruvian socialism’.

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The Rao-Manmohan reforms—liberalisation, globalisation and privatisation—might have been a long time in the making, but they did mark a radical break in terms of the government’s self-image. The state decided to withdraw from directing the economy to facilitating the unfettered operation of private capital. Pink paper pundits, pro-market politicians and US-returned policy wonks, told us that these structural reforms will transform India into an industrial powerhouse, generate wealth and reduce poverty by taking people out of the farm, into the factory.

Three decades later, we know none of this happened. Liberalisation has failed to strengthen the factory sector. Its share in gross value added continues to hover around 15%, as it did in the 1980s. In terms of jobs, factories added 2% new jobs every year in the 1980s. This dropped to 1.6% in the 1990s, rose marginally to 1.9% in the 2000s and then dropped to 1% between 2010-11 and 2015-16.

Instead of unleashing the animal spirits of private enterprise, structural reforms helped India Inc corner public resources and government assets. The state reoriented its policies from producing goods and services to creating an infrastructural edifice that would enable the operation of private capital. The new focus on ‘infrastructure’ resulted in a construction boom, which was largely executed by private construction companies.

Where the licence-quota raj had given an undue advantage to a few business houses, the ‘opening up’ of India’s economy led to a mad rush for contracts and control over sectors vacated by the retreating public sector. This was fertile ground for the emergence of an army of middle-men and power-brokers who acted as go-betweens for corporates to influence politicians and babus. So, what was supposed to end corruption, actually multiplied it. And big-ticket corruption ended up providing a second engine for India’s construction sector.

Corruption meant black money and the best place to park it was real estate. Those with unaccounted cash started buying farmlands near metros and compliant state governments changed land-use laws. This created an asset bubble in real-estate, which in turn encouraged private real estate companies to launch housing projects and construct commercial buildings.

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Liberalisation and globalisation also rerated India’s middle-class. As private profits expanded, multinational corporations opened exploratory offices and India’s IT outsourcing sweatshops flourished, middle-class professionals started to get handsome pay packages. This small section of India—at best 10% of the population—began buying cars, washing machines, microwave ovens, flat-screen TV sets, air-conditioners. They began taking foreign holidays and eating regularly at high-end restaurants. Their urge to buy a home also contributed to the real estate bubble.

These three strands—public investment in infrastructure, black-money in real-estate and the middle-class housing boom—made construction the single biggest source of jobs in post-liberalisation India. From a 4% share in all jobs in the 1990s, the construction-sector’s share crossed 10% in 2010-11. And, in the first half of the 2010s, it accounted for 12% of all jobs in the economy.

But, these were low-skilled, low-paying, unstable jobs. This can be seen from the fact that labour’s income share in gross output in the construction-sector has remained at just 28%, since the 1980s. The bulk of these construction workers were migrant labourers, who left their families behind in the village. They lived at construction sites in hovels with zero urban amenities. They had one foot in the village, going home to help during sowing and harvest season. The reason they accepted these back-breaking jobs was because shrinking farm sizes meant farming could no longer sustain them.

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India’s construction boom might have been physically impressive, but it was no great shakes when it came to gross output. The share of construction in overall gross output remained at about 10% throughout the 1980s and 1990s, rose to 13% in the boom years of the 2000s and then dropped to 11% between 2010-11 to 2015-16. And, the share of labour-income in gross output was marginally lower in the 2010s when compared to the 1990s. In fact, value added by each person employed in the construction sector dropped from about Rs 2 lakh in 1980-81 to Rs 1.3 lakh in 2015-16, in constant 2011-12 prices.

While the poor barely eked out a living, the affluent middle-classes thronged shops and malls. This boosted trade, transport and storage, which became the second big employer in the post-liberalisation years. From an employment share of 9% in the 1980s, trade, transport and storage accounted for 14% of all jobs by the 2000s. Much of these jobs were, again, low-paid, usually manned by migrant males. But, it also enriched the traditional trading castes, who became respected members of the new-middle class.

This is the big problem that India’s economy faces today. An overwhelming majority of people are unable to consume beyond the basics that keep them alive. And, the top 10% of Indians, who constitute the buying classes, cannot generate significant additional demand for goods and services – at best they can sustain a replacement demand. This is showing up in the slowdown in the sale of cars, houses, white goods, and even fast-moving consumer goods.

This is not a mere business cycle, but a deep structural slowdown. The private sector cannot take us out of this crisis, because it sees no clear road to making profits in this scenario. The only way it will get reversed is if policy makers recognise that 29 years of following neo-liberal economics has failed India. But, that will require a different kind of class politics, and the will to take on finance capital. That is the last thing the Modi government can be expected to do.

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