Links between Crisis and Economic Reforms

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Synopsis:

The 1991 economic crisis indicates that the crisis is a good opportunity for economic reforms. But that is not true, specifically in the case of 2021 crisis. Thus, not all crisis results in economic reforms.

Introduction:

2021 marks 30 years of 1991 economic reforms. The 1991 reforms permanently altered the production and distribution structures of the Indian economy. But during the pandemic, the government introduced few reforms as well.

Both 1991 and 2021 have one thing in common. Both reforms came after the economy faces a severe growth crisis. This raises a few important questions.

  1. Is the crisis a prerequisite for reforms?
  2. Are reforms capable of stimulating the economy?
The link between Crisis and economic reforms:

Big economic policy reforms often face hurdles in terms of rules and routines. This is because these reforms generally depart from existing economic policies. So the fundamental shifts will always face criticisms.

But the Crisis situation provides an opportunity for the government to introduce radical economic reforms due to the following reasons,

  • The crisis situation challenges the legitimacy of existing policy. So, many experts suggest new proposals and possibilities to overcome the crisis.
  • Delivery of services will also face challenges during the crisis. So to meet the societal expectations institutional reforms are necessary.
  • For the policymaker, crises can generate increased demand for changing the policy.

However, not all crises end in reforms. But all crisis will provide an opportunity for reforms.

Converting a crisis into an opportunity:

Reforms can be feasible during a crisis on three factors.

  1. During a crisis, the economic modes of interactions will change and set a suitable background for economic reforms
  2. In a crisis situation authority replaces rules. (Authorities will change the rules frequently to tackle the crisis situation). This makes it easier for authorities to push the economic policies in a short time span.
  3. During the crisis period, the legitimacy of prevailing rules and routines diminish. This will make it easier for the government to depart from them.
Difference between two crisis:

Even though the existent of crisis in 1991 and 2021, both the crisis have differences in terms of character and consequence.

1991 Economic crisis:

  • Cause:  The 1991 crisis was a product of India’s economic policies(Internal).
  • Effect: The economy was forced to adjust to the internal shock.
  • Policies: 
    • India specific policies are implemented. The world never went through any drastic policy shift.
    • There was also a semi-fixed template for reforms available. These generic measures were the result of various economies experienced external sector imbalances. So, a tried, and tested policy was available to India.

2021 Pandemic crisis:

  • Cause:  The 2021 crisis is a product of a pandemic. This is outside the economic system.
  • Effect: The economy is forced to adjust to this external shock.
  • Policies: The economic effect of the crisis is global in nature.
    • This makes policy responses very challenging.
    • India specific policies have tempered with the dynamics of the rest of the world.
    •  Availability of a semi-fixed template for reforms was not available to the global community.
The challenges of 2021 crisis:

Two uncertainties pose serious problems in creating economic reforms.

  • Firstly, the uncertainty with regard to the government’s own revenues. A prolonged pandemic limits the government revenue. This will limit the policy interventions of the government. Further, the government cannot practice Expenditure reduction. As the government has to enhance the demand of people and also invest massively to create necessary health infrastructure.
  • Secondly, Unpredictability of global factors. India’s dependence on the global economy has increased manifold after the 1991 reforms.

Both these uncertainties have the potential to jeopardise the implementation of any strategic changes.

The intensity of 2021 crisis:

The magnitude and intensity of the crisis of 2021 are manifold compared to the 1991 economic crisis. According to Pew Research Center,

Conclusion:

The difference, intensity and challenges show the non-suitability of this crisis for radical reforms. In conclusion, all crises do not inevitably lead to reforms, despite creating opportunities.

  • So to turn crisis into opportunities requires an in-depth understanding of the factors that led to the crisis.
  • Apart from that, all crucial agents in the policy process need to have a shared vision. This includes political leaders, policymakers, implementers and stakeholders.

Source: The Hindu

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