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India's New Economic Policy

Paper Type: Free Essay Subject: Economics
Wordcount: 2669 words Published: 8th May 2017

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Shaw, in his famous quote in the preface to the play 'Major Barbara', was talking about the culpability behind and the actors responsible towards committing the crime of bringing about poverty. A combination of paradoxical global policy making centred around liberalisation and protectionism promoted by international financial institutions like the World Bank (WB) and the International Monetary Fund (IMF) is responsible for bringing about disparities in the global agricultural trade and production framework and global commodity trade. A major part of the commodity trade of developing countries constitutes agricultural products. The structural adjustment programs empower subsidies and protection in the North and pose a threat to the livelihood and food security of Third World farmers.

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In earlier literature on structural adjustment and democracy a commonly held assumption (by both advocates and opponents of adjustment) was that democracy would hinder adjustment.(ref) Democracies, it was said, would capitulate to the pent-up demands of the newly mobilised social forces that had borne them to power. They would thus be unable to pursue the tough austerity measures necessary for structural adjustment and would also tend to resort to "macroeconomic populist" strategies, inducing fiscal laxity (running high deficits and subsidies), insisting on price controls (e.g. food subsidies, minimum wages) and promoting nationalisation measures (Dornbusch and Edwards 1992). (ref) However the adoption of orthodox stabilisation and structural adjustment programmes by democracies like India proved otherwise.

Structural Adjustment in India was a response to the macro-economic crisis that erupted in early 1991.The reforms and policy changes suggested as a part of these adjustments in terms of trade policies and import liberalizations were meant to have a significant effect on Indian agriculture and help it to become a part of the international trading market. However the trends in Indian agricultural export during the adjustment period shows a steep decline from the pre adjustment periods (from as large as varying between 31.7%-30.7% during the decade of 1970-1981 to as low as varying between 16.6%-20.4% during 1990-1997).(ref)

Agriculture is at the core of Indian economy with a population over one billion people and distortions caused due to loan conditionality of the IFIs has lead to 'farmer suicides, reports of starvation and erosion of biodiversity all of which brings about the horrors of India under colonial rule' (ref) Contrary to popular belief therefore a democracy does not necessarily assure the alleviation of poverty but it is the developmental strategies that a country undertakes that ensures it's success in eradicating poverty.

What is essential to find out at this juncture is what actually leads to a democratic nation like India to adopt neoliberal ideas and be unsuccessful in eradicating poverty. Is it because

Democratic deficits are induced on countries like India by the hegemony of Formal institutions like the World Bank and the International Monetary Fund thus damaging the capability of such nations to enhance their levels of agricultural production and /or productivity

Or the democratic leaders of this country do not have adequate organisational-political skills to form coalitions that would not hinder their pursuit of equity and social welfare enhancing schemes in a free market neoliberal context.

The Case in Question:

In 1991 the congress government in India under P.V. Narasimha Rao introduced the New Economic Policy as a shift from the statist strategy incorporated under the realm of India's first Prime Minister Jawaharlal Nehru with a promise of economic liberalisation.The NEP reflected the strident economic liberalism of the 'Washington Consensus' model of economic reform along with its underlying assumption of a benign global order.(ref) The specific reforms included devaluation of the rupee, convertibility of the rupee on the current account, reduction in tariffs, abolition of industrial licensing, easing of entry requirements for direct foreign private investment etc. Pre 1991 India was considered to be a Dirigiste Economy where the state played and interventionist role and a multi-party parliamentary democracy propounding freedom of expression and a commendable public sector particularly in infrastructure and basic industries was in being. The 1991 crisis was largely due to rise in inflation and acute pressures on balance of payments. However it has been argued that this could have been effectively brought under control and the currency could have been stabilized with a low-conditionality loan from the IMF rather than incorporating the entire spectrum of structural adjustment policies. 'The reason that India went for structural adjustment was not because of any objective necessity being faced by the economy but because the liberalisation body consisting of both IMF and the World Bank as well as elements within the Indian overnment and business class considered this a heaven sent opportunity to tie down the country to structural adjustment,to jettison altogether,and not just rectify the dirigiste system which had prevailed since Independence'.(Indian Economy under structural adjustment by prabhat patnaik and c.p chandrashekhar economic and political weekly vol.30, no 47 (nov 25th 1995) pp 30001-3013 Url: www.jstor.org accessed 17/12/2009). The two most noticeable effect of the structural adjustment program was the moving up of the rural poverty levels and revenue deficit as a percentage of GDP. (table 1 and table 2

The government of India renouncing the dirigiste philosophy succumbed to the marketist ideology stemming from the structural adjustment conditionality that discouraged the nation state from from getting involved in production process of the country as far as possible and dispose of it's profit making asset and ignore the political compulsion of democracy to ignore the subtle coercive actions of the International financial instituitions.


Policy-leveraging mechanisms of the International Financial Institutions in India: The New Economic Policy adopted by India in 1991 was continued even after the structural loans were paid off. The reason behind the sustained existence of the adjustment programs of the Bretton Woods Institutions (IMF and the World Bank) stems from their hegemonic ambitions and the displacement of the role of the state by these formal institutions. The policies of the reforms advocated by these policy bodies was a reflection of the ideologies of the Washington consensus due to their patient and all pervasive lobbying to gain access into the closed doors of the Indian economy.Initially conditionality was the only method by which the BWI's influenced countries to borrow and floow their structural policies.However as lietaratures on 'politics of adjustment' propounded that only conditionality was too much of a toothless tiger(Killick 1995:121) to bbe considered as the the BWI's primary instrument of leverage(ref) So by 1980s conditionality was being complemented by a stategy of creating 'prior domestic commitment' to the reforms of the BWI's and was a more subtle and long term means of sustenance strategy. The major objective of this strategy was to imbibe a sense of trust and support of policymakers and elites in borrowing governments towards the intentions of the institutions in welfare schemes for the state prior to conditional lending. The institutions are in a power position where they can provide incentives to officials and business elites who their market reform policies. These incentives are usually in the form of invitations to lectures seminars and conferences in Washington D.C and are transposed by honorary rewards and positions as consultants in these institutes or in multilateral organizations (ref mitu sengupta) . Infact non governmental organization the Independent People's Tribunal on the World Bank Group In India estimated that around 2008 approximately 100 central government officials had employment links with the World Bank and the IMF in one form or the other. The number of bureaucrats at the state level was possibly larger. India is a country where government officials inspite of their erudite capabiltities are not valued in terms of monetary compensation and hence the reward forms of BWI's in form of prestigious and lucrative jobs was undeniably an appealing factor. This was accompanied by World Bank employees shifting to key government positions especially in the ministry of finance,even as they were drawing pensions from the Bank or even as they kept open the option of moving back to the bank. This network of bureaucrats and managerial personnel worked in tandem towards the ;liberalisation cum structural adjustment strategy pushing the country into a trap where these policies became inevitabele" (ref) 440385.

IMF mechanism and Poverty: The IMF is essentially a balance of payment instituition and influences poverty and distribution of income through four major channels : currency devaluation, reductions in budget deficit, changes in growth rates and changes in inflation rates. Currency devaluation is essentially taken up to reduce the price ratio of tradable to non tradable goods (ref killick) If the poor in a society are considered to be rural farmers producing goods for export then devaluation will reduce poverty by increasing the value of those goods in the national currency and improve distribution of income however if the poor are farmers producing goods for domestic consumption then devaluation would most certainly lead to a worsening of income distribution.(ref) India was primarily an agrarian economy pre implementation of adjustment policies. Structural adjustment encourages globalization of trade in an atmosphere of liberalization.Export promotion is an important feature of the globalization efforts. Therefore post implementation of the adjustment policies exprt-led growth became the pivotal strategy for Indian policymakers to correct the balance of payment status and bringing India to participate in International Trade. The government undertook a number of liberalisation policies post 1991 to promote exports including that of agricultural commodities. A critical analysis of of the patterns in exports of agri products and India's share in World agricultural trade and value and volume of major agricultural commodities post liberalisation is disappointing. Share of major commodities of exports have been on the decline even when compared to the period pre implementation od the structural adjustment programs : spices - 14.5% in 1980 to 9.3 % in 1995, tobacco and manufactures 4.4% in 1980 to 0.6 % in 1995, vegetables and fruits 1.1% to 0.9% in 1995 etc all of which points out to the insignificant impact of the adjustment programs on benefitting exports of agricultural commodities.

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b)'Liberalization and subsidies: Liberalization is always accompanied by intense social change and industrial change which induces policymakers to provide high subsidies to ailing firms or sectors within the economy. These 'protectionist' measures are often extremely expensive and one of the mail actors behind fiscal deficits. Producer subsidies of such nature in developing countries also result in budgetary costs. In India the impact is felt on the tariff reduction procedures on imports of foodstuff. The chairman of the Commission for Agriculture of Costs and Prices Abhijit Sen had noted in 1994 'if tariffs are dismantled, the Commerce and Finance Ministries will have to intervene with a stronger package of subsidies. But there is no money for that!"(ref)

Structural adjustment policies encompass actions that have a direct effect on rural producers. They are mainly import liberalisation, dismantling of state marketing boards and procurement processes and the reduction or elimination of subsidies. Investigative studies by the Food and Agriculture Organization (FAO hereon) of the United Nations gave evidences to the significant liberalisation of agricultural imports by developing countries as a response to the IFI conditionality rather than the Agreement of the WTO. The FAO book, "trade reforms and Food Security'( 2003: p 75) states:

"Structural adjustment programmes implemented over the past few decades have resulted in radical reform of the agricultural sectors of many developing countries, a period during which the majority of OECD agricultural sectors have continued to be heavily protected. Whilst it is generally acknowledged that unilateral reforms were often required, it has also been concluded that the process adopted has, in many cases, severely damaged the capacity of developing countries to increase levels of agricultural production and/or productivity. These unilateral reforms tend to have been reinforced by multilateral agreements.

Unilateral trade liberalisation has been undertaken in developing countries under pressure from international financial institutions as part of structural adjustment programmes. By contrast, agricultural trade has only recently been impacted by multilateral agreements (for example the AoA). WTO rules constrain the extent to which countries can protect themselves from increased competition. This has resulted in a number of NGOs suggesting that the more negative aspects of unilateral liberalisation in developing countries have been compounded by double standards in commitments to multilateral agreements, and maintaining the "you liberalise, we subsidise" attitude is extremely damaging."

The FAO report adds:

"The opening of markets in developing countries, in the context of a global agriculture still characterised by high levels of protection in developed countries, left the reforming developing countries less able to prevent (a) the flooding of their domestic market (import surges) with products sold on the world market at less than their cost of production; and b) the displacement of local trading capacity which was intended to, and in some circumstances initially did, fill the void left following the deregulation of local markets and associated dismantling or parastatals

The promotion of export policy propensated by the adjustment programs does nothing for the Farmers in India or for the financial stability of the State. The government in accordance with the adjustment context dismantles public food distribution because they are considered to be subsidies to the people of the country and are supposed to distort trade.

The 1995 establishment of World Trade organization (WTO hereon) and it's Agreement on Agriculture (AOA) was supposed to act as an effective tool in improving India's agricultural trade within the realms of it's three major contexts ofmultilateral,transparent and non-discriminatory trade. India was shielded from the subsidy reduction feature of the agreement as agricultural subsidy was less than 10 per cent which was the ceiling.agricultural exports were supposed to be more profitable for india when compared to other developed countries who had 30-40 per cent subsidies. Moreover the subsidies were non applicable to consumer products buffering the Public Distribution System and the weaker sections of the society(ssrn id 333025) . Initially these reforms lead to improved statuses of agricultural trade but based on the Structural Adjustment Program of the IMF and World Bank the government had been reducing it's investment in agriculture and were forced to reduce the rates of bound tariffs well below the WTO bound rates because of the loan conditionality. India's tariff binding was zero for 11 commodities (including sensitive items like rice and some coarse grains) (ref mk global agric paper).



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