Second 1991 Moment – Significance & Challenges – Explained pointwise

‘1991’ marks an important year in Indian economic history because this is the year when the Indian policymakers adopted the LPG reforms which opened up the Indian economy. However, even though these reforms laid the foundation for the tremendous growth of the economy in the following decades, but still the experts on Indian economy asked for 2nd generation reforms to compliment them for helping the Indian economy to achieve its true potential. 

This article basically delves into the significance/need for 2nd generation economic reforms, what could be the challenges to them, what have been the government’s initiatives & what could be the way forward – particularly given the opportunity provided by the tariffs imposed by the Trump administration (Trump Tariffs) – which can be regarded as India’s 2nd 1991 moment.

What are the Economic reforms 2.0?

Economic Reforms 2.0 refers to the next generation of structural & policy reforms aimed at transforming the Indian economy for sustained growth, global competitiveness, and inclusive development. While the 1991 reforms primarily focused on opening up the economy, reducing government control, and promoting private sector participation to overcome a severe economic crisis, “Economic Reforms 2.0” has a broader and more nuanced agenda. 

Why do we need Economic reforms 2.0?

1. Reviving investment & economic growth: India economy has been growing at a moderate pace of 6% for the past few years – which is insufficient for India to overcome the Middle Income Trap & become a developed economy by 2047. Economic reforms 2.0 are required to achieve and maintain a high growth trajectory needed to to become the 3rd & potentially the 2nd largest economy in the world and to become a major global economic power.

2. Addressing Structural Bottlenecks: Economic reforms 2.0 will help in overcoming the persistent challenges in land acquisition, outdated labor laws, regulatory bottlenecks (Red Tapism), inefficiency in public institutions  etc that hinder investment and growth in India. The 2nd generation reforms will help in reviving the private sector confidence by improving the ease of doing business, providing opportunity for investment & enhancing the infrastructure. 

3. Enhancing Competitiveness: India’s Foreign Trade Policy 2023 aims to achieve the target of $1 trillion merchandise export target by 2040. To achieve this target, India needs reforms that promote innovation, entrepreneurship & integration with global value chains. Economic reforms 2.0 are required to make Indian businesses more competitive globally and boost exports.

4. Creating Quality Jobs: Jobless growth has been the biggest criticism of the 1991 reforms. Thus, the 2nd generation reforms are required to generate sufficient high-quality employment opportunities for India’s large and growing workforce (quantitative & qualitative job opportunities). India has the largest workforce in the world & it is currently enjoying the advantage of demographic dividend which is expected to last a couple of decades more – Economic reforms 2.0 are expected to take advantage of this opportunity & prevent this demographic dividend from becoming a demographic catastrophie. 

5. Inclusive Growth: One of the biggest challenges of Economic reforms 1.0 was the skewed growth pattern that they had induced. 2nd generation reforms will ensure that the benefits of economic growth reach all sections of society and reduce the inequality in the country by improving the access to quality healthcare & education as well as expanding the scope of social security benefits in the country.

6. Adapting to Global Changes & Challenges: The global economic order has been rapidly changing since the last decade particularly in the wake of COVID19, Russia-Ukraine war & now the protectionist trade policies like the Trump Tariffs. Also, the Western world is betting on India to stand up to the Chinese rising hegemony. Thus, to respond to the evolving global economic trends, technological advancements (e.g. AI), and geopolitical shifts – India needs to step up by introducing the economic reforms 2.0. 

What are the challenges to such reforms?

1. Complacency: India has not adopted the 2nd generation reforms for such a long time because of the ‘deep comfort’ among the policymakers with the mediocre level of economic growth. China, after the financial crisis of 2008, decided to move up in the global value chain & leave the lower value manufacturing space to other players – which was quickly occupied by countries like Vietnam, Indonesia, Mexico, Bangladesh – while India remained complacent because of its ‘deep comfort’. 

2. Political Consensus: Achieving broad political consensus on reforms, especially those that are politically sensitive, can be challenging. For e.g. resistance shown by the political parties & pressure groups to the farm laws introduced in 2020-21. 

3. Resistance from Vested Interests: Incumbent players and beneficiaries of the existing system may resist changes. For e.g. major industrialists in India are not in favour of the reforms because these reforms would provide competition to them & dent their existing easy profits. 

4. Implementation Capacity: Effective implementation of reforms at the ground level across a diverse country like India is a significant challenge.

5. Balancing Growth with Social Equity: Ensuring that reforms lead to inclusive growth and do not exacerbate inequalities is crucial. For e.g. Industrial Revolution 4.0 is expected to generate higher skills jobs but it could also trigger unemployment in semi-skilled & unskilled labour sectors. 

6. Centre-State Relations: The federal structure of India creates coordination challenges between the central and state governments, particularly in areas like taxation (e.g., GST), agriculture, and infrastructure development. Lack of incentive sharing or trust between Centre & States can delay or dilute the reforms. 

7. Global Economic Headwinds: External factors like global slowdowns, protectionist measures, trade wars, conflicts like Russia-Ukraine war or climate change related tariff measures like EU’s Carbon Border Adjustment Mechanism (CBAM) can impact the effectiveness of domestic reforms.

What have been the government’s initiatives in this regard?

1. Labor Reforms: The government has introduced several labour sector sector reforms like consolidating and simplifying complex labor laws into 4 labour codes – Code on wages, Code on social security, Code on industrial relations & Code on occupational safety. Skill development of workforce by establishing a separate Ministry of Skill Development, introducing Skill India Mission etc. 

2. Land Reforms: Digitalization of Land Records by introducing Digital India Land Records Modernization Programme (DILRMP) that aims to modernize land records, improve transparency, and reduce disputes. Enacting Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 to speedup the process of land acquisition in a fair & transparent manner.    

3. Financial Sector Reforms: The government has introduced several reforms  to strengthen the public sector banks, develop the bond markets, and improve the regulatory frameworks such as Project Shashakt, National Asset Reconstruction Companies, Mission Indradhanush etc.

4. Agricultural Reforms: The government has made attempts to liberalize the agricultural markets by introducing the farm laws in 2020, promoting private investment in the sector by promoting contract farming, introducing reforms in agriculture markets such as e-NAM etc.

5. Manufacturing sector reforms: Introducing “Make in India” initiative which is a broad program aimed at boosting domestic manufacturing, attracting foreign investment, improving infrastructure, and simplifying business processes. Production Linked Incentive (PLI) Scheme that aims to boost manufacturing, attract investments, and create jobs in strategic sectors. 

6. Digital India Initiative: Promoting digital payments (UPI), e-governance, and digital infrastructure.   

7. Infrastructure development: Large-scale investment in infrastructure projects such as Bharatmala, Sagarmala, introduction of National Infrastructure Pipeline, Dedicated Freight Corridor etc. 

8. Logistic efficiency: Providing efficient logistics by introducing National Logistic Policy that aims to provide an integrated logistics ecosystem to reduce costs & improve export competitiveness. PM Gati Shakti which is a strategic initiative to enhance logistics efficiency through multimodal connectivity infrastructure, promoting economic growth and sustainable development

9. Taxation reforms: Introduction of Goods and Services Tax (GST), reduction in corporate tax rate, digitalisation of tax system etc. 

10. Ease of Doing Business: Improving Ease of Doing Business by introducing Insolvency and Bankruptcy Code (IBC) that aims to strengthen the framework for resolving insolvency. Strengthening the legal framework for commercial dispute resolution to improve contract enforcement by establishing Commercial Courts & Arbitration Centres. 

What could be the way forward?

1. Building Political Consensus: Engage in extensive consultations with all political parties, industry associations, labor unions, farmer groups, and civil society organizations to build a wider understanding and consensus on the need and direction of reforms.

2. Phased Implementation: Implement reforms in a phased manner, carefully assessing the impact and making necessary adjustments along the way. Avoid “big bang” approaches that can lead to significant disruptions.

3. Enhancing Ease of Doing Business: Reduce the regulatory burden by simplifying the regulations at all levels of government, focusing on reducing compliance costs and improving transparency. Leverage technology for online portals and single-window clearances. Improve the efficiency and speed of the judicial system for commercial dispute resolution. Promote alternative dispute resolution mechanisms.

4. Boosting Manufacturing and Exports Competitiveness: Negotiate Favorable Trade Agreements to enhance market access for Indian goods and services. Invest in export-oriented infrastructure, including ports, airports, and special economic zones. Further strengthen the PLI scheme by focusing on value addition & technological upgradation. 

5. Strengthening the Financial Sector: Introduce Banking Sector Reforms that improve the governance, efficiency and financial health of Public Sector Banks. Deepen and broaden Indian capital markets to provide diverse sources of funding for businesses. Promote the development of the corporate bond market in India. 

6. Investing in Human Capital and Social Infrastructure: Fully implement the National Education Policy (NEP) and strengthen vocational training programs to create a skilled workforce that meets the demands of a modern economy. Increase investment in healthcare infrastructure and improve access to quality healthcare services to enhance productivity and well-being. Strengthen social safety net programs to protect the vulnerable populations during periods of economic transition and ensure inclusive growth.

Conclusion:
The next generation economic reforms are required for India to achieve not only a sustainable & inclusive economic growth but also to become the next economic superpower. The Trump Tariffs provide the right opportunity for India to introduce these reforms that have been long delayed and to achieve the economic progress & social welfare that it long desires.