Not all crises are opportunities for reforms

This year marks 30 years of the landmark economic reforms that permanently altered the production and distribution structures of the Indian economy. Swayed by the success of the 1991 reforms, albeit, at the macroeconomic level, there has been a growing clamour from economic commentators for some more doses of reforms in 2021. Both 1991 and 2021 have one thing in common: an economy facing a severe growth crisis. This raises two fundamental questions. First, is crisis a prerequisite for reforms? Second, given the magnitude of economic contraction, in 2021, are reforms capable of rejuvenating the economy or will they push the economy towards growth fatigue?

Crises and reforms

It is not very common to depart from initiating incremental policy changes to making fundamental shifts in economic policy. Big-bang policy reforms often face hurdles in terms of rules and routines. Overcoming these requires effort and conviction. Crises provide opportunities for radical changes as they break down the legitimacy of existing policy approaches. Crises thus create a space for new proposals and possibilities, which could have far-reaching consequences for the economy and society. Viewed from a sectoral perspective, during a crisis, the services delivered by some sectors do not meet societal expectations, which in turn sets the stage for institutional reforms to enhance the credibility and legitimacy of those sectors. For the policymaker, crises can generate increased demand for change and that could be the opportunity for which they would have been waiting. However, not all crises create conditions for widespread acceptance of reforms, as they could generate other by-products. Thus, to posit a linear causal relationship between crises and reforms could be erroneous.

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Crises cause the breakdown of established structures leading to instability. They create uncertainty as the prevailing behaviour and choices of actors change. This combination of uncertainty and instability sets the stage for a reorientation of policies, packaged and delivered under the banner of reforms. The argument for converting a crisis into an opportunity to reform arises due to three factors. First, during a crisis, group relations and modes of interactions change, which sets a suitable background for change. Second, at times of crises, authority replaces rules, which makes it easier to push the polices in a short time span. Third, during periods of crisis, the legitimacy of prevailing rules and routines diminish, which makes it easier for actors to depart from them.

2021 is not 1991

The character and consequences of the crisis of 1991 and 2021 are different. In 1991, the crisis of the economy was the product of endogenous factors, that is, factors which were operating within the economic system. The crisis of 2021 is different, as it is the product of a pandemic, which is exogenous to the economic system. The cause-and-effect relations are entirely different in the latter, as the cause originates from outside the economic system and the economy is forced to adjust to this external shock. Further, in 1991, the crisis was limited to the Indian economy, while the present calamity has engulfed most global economies with varying intensities. This makes policy responses very challenging. In the former case, we could have India-specific policies, assuming that there would not be drastic changes in the rest of the world, while in the latter case, India-specific policies will have to be tempered with the dynamics of the rest of the world, as all affected economies are formulating policy responses at the same time.

The availability of a semi-fixed template for reforms eased the matter in 1991. The template, which had some generic measures for all the economies experiencing external sector imbalances, was a tried and tested one. This gave policymakers some headroom to anticipate the likely consequences in the post-implementation phase.

Two uncertainties

However, in 2021, the challenge is to evolve a country-specific package. Two uncertainties pose serious problems in charting such a set of measures. The first is the uncertainty with regard to the government’s own revenues which would limit the policy space for interventions. Expenditure reduction is not a viable strategy for expanding the scale and scope of policies in a situation of demand contraction due to the pandemic. The second is the unpredictability of global factors, as India’s dependence on the global economy increased manifold after the 1991 reforms. Both these have the potential to jeopardise the effective implementation of strategic changes.

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The magnitude and intensity of the crisis of 2021 is manifold compared to that of 1991. There is also a lag effect in the unravelling of the scale and extent of the crisis, which is surfacing slowly. To highlight this point, I use only one piece of empirical data. In its recent research report, Pew Research Center observes that a large section of India’s population would be pushed into poverty as a fallout of the economic crisis driven by the novel coronavirus. To quote: “…. the number of people who are poor in India (with incomes of $2 or less a day) is estimated to have increased by 75 million because of the COVID-19 recession. This, too, accounts for nearly 60% of the global increase in poverty. Perhaps not surprisingly, media reports from India point to a spike in participation in its rural employment programme – originally intended to combat poverty in agricultural areas – as the many who have lost jobs in the reeling economy seek work. The number now participating is setting record highs in the programme’s 14-year history”. The enormity of the crisis is appropriately captured in the research cited above, which throws light on the circumstances of 2021 and its non-suitability as a year for radical reforms.

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All crises do not inevitably lead to possibilities for reforms, even though some do create opportunities for fundamental changes. However, to gauge whether a crisis can be turned into an opportunity for reforms requires an in-depth understanding of the factors that led to the crisis. Further, all the three clusters of actors who are crucial agents in the policy process — political leaders, policymakers and implementers, and the relevant stakeholders — need to have a shared vision. In 2021, the call for reforms leaves out the stakeholders, which might undermine the very purpose of reforms itself.

M. Suresh Babu is professor of economics at IIT Madras. Views expressed are personal

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Printable version | Jun 22, 2021 7:53:20 AM |

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