Reform experiences: Bangladesh and India in the 1990s

Thirty years ago, India liberalised its socialist-style economy through reforms in investment and trade. A mammoth trade deficit and plunging foreign exchange reserves necessitated a loan from the IMF. The then Indian Finance Minister Manmohan Singh, an Oxford-trained economist with a doctoral dissertation in trade policy took on the steering wheel of reforms. On July 24, 1991, he announced major steps to cut tariffs and encourage trade, essentially opening up the economy to the outside world. The reform eventually pulled about 300 million out of poverty, fueling one of the biggest wealth creations in history.

Following the liberalization, the economy boomed and growth rate crossed 8 per cent. Technology giants like Infosys were born and start-ups worth billions are now mushrooming in Bangalore. A new middle class emerged. Apple iPhone assembling plant has been set up. India has become the world’s biggest supplier of generic medicines and the Serum Institute of India became the world’s biggest vaccine maker. National Stock Exchange India Ltd (NSE) have introduced trading in exchange traded Currency Derivatives based on Euro(EUR)-INR, Pound Sterling(GBP) - INR and Japanese Yen (JPY) - INR exchange rates in addition to the existing USDINR contracts.

Within this decade, India was expected to become the world’s most populated nation, taking that mantle from China, which for years drove global growth. But the Indian economy is grappling with big threats due to conservative policy of the Narendra Modi government and also the ongoing Covid-19 pandemic, even as it becomes home to the kind of young, working-age population that drove lengthy booms in other nations. The Bangalore-based Azim Premji University calculates that more than 200 million have gone back to earning less than minimum wage, or $5, a day. The middle class, the engine of the consumer economy, shrank by 32 million in 2020, according to the Pew Research Institute. That means India will be regressing on vital fronts just as its global importance
is growing.

Arvind Subramanian, a fellow at Brown University and a former chief economic advisor to Prime Minister Narendra Modi’s administration admitted setbacks suffered by the Indian economy. He further said “Unless there are some big reforms and fundamental changes in the way economic policy is done, you’re not going to be anywhere close to what we saw in the boom years. A lot needs to happen in order to get back to the 7 per cent, 8 per cent growth that India desperately need”. The economy has faced other hurdles in recent years including Modi’s 2016 demonetisation move, which hit the informal sector hard, and a hurriedly implemented new tax system.

Bangladesh started reform of its economy by 1990s and opened up the financial sector for private investments, dis-invested few nationalized industries and most importantly liberalized trade regime by reform and reduction of customs tariffs and para tariffs. The reforms have again slowed down except a recent bold decision of privatization of jute industries under Bangladesh Jute Mills Corporation. The nation is fortunate that the slowdown of economy is not visible due to foreign exchange remittance and more or less stable export earing from RMG, although FDI, growth of credit to private sectors has slowed down.

In India, policy of present government and Covid-19 pandemic has offset some of the benefits of the reforms initiated in 1990s. The inequality in India has surfaced remarkably. Two of the richest men in Asia, Mukesh Ambani and Gautam Adani -- are Indians, and their net worth has surged as stocks rallied on the back of cheap liquidity worldwide and tax cuts for companies even as economic growth slumped. Meanwhile, overall Indian wealth -- or the value of financial and real assets owned by households minus debts -- fell by $594 billion, or 4.4 per cent, in 2020, according to Credit Suisse Group AG.

In Bangladesh, there is a change in the economy. The Gini coefficient is close to 0.50 and inequality is widening very fast. Big conglomerates are growing very fast but the growth of MSMEs is very slow. The contribution of MSMEs is 25 per cent to our GDP but have the potential to contribute more. SMEs contribute 45 per cent to India’s manufacturing output and 40 per cent of India’s total export. In a way, they form the backbone of the Indian economy.

Researchers have found wealthier people in urban areas and from upper castes were predominant in India, a sign of development favoring groups that were already advantaged. The percentage of women joining the workforce fell from 30.3 per cent in 1991 to about 21 per cent in 2019, according to data from the ILO. Indian government spent less than 2 per cent of GDP on healthcare before the pandemic. A report by the World Health Organization stated that the average healthcare expenditure in most countries is 2.3 per cent of their GDP, while Bangladesh had less than 1 per cent in FY19-20.

Unlike the dynamic Finance Minister Dr Manmohan Singh in 1991, Modi has turned the economy more inward, focusing on self-reliance and homegrown companies. Despite championing free trade in global forums, India raised tariffs on goods including electronics and medical equipment, partly reflecting global trends.

Some of those decisions came back to haunt India when citizens struggled to import life-saving products like oxygen concentrators during the pandemic. Top economists approached Modi, asking him to reverse protectionist duties imposed on key items needed to study the coronavirus and its variants including the delta one, which now threatens the globe.

Bangladesh government has tried to follow the same policy of Modi government and focused on old policy of protection of local market for local industries. The budget 2020-21 reflected such changes in the policy. Bangladeshi policy makers also have ignored the failed policy of promotion of “import substitute industries” ignoring the export led growth of last 3 decades supported by liberalized trade policy.

Bangladesh economy is performing well because of dynamic private sector and new generation entrepreneurship. During the 1990s bureaucrats are well influenced by donor agencies because at one stage the development programs are totally depended on aid committed by Paris Consortium of donor countries and donor financial agencies ADB, IMF and WB. Their financial support was conditional to reforms in economy. But now donors have no such influence on Bangladesh policies.

Key Indian expatriates, bureaucrats and technocrats working with donor agencies extended support such reforms during their time at international institutions such the WB, IMF and UN bodies, and began introducing them to India in the 1980s and 1990s.

Bangladesh bureaucracy is now in their previous form after refusal of World Bank to finance Padma Bridge and courageous decision of Sheikh Hasina’s government to construct the bridge with own funds. It has given the nation a pride and confidence. But the confidence of bureaucracy has backfired and Bangladesh virtually stopped the process of reforms except a few reforms pushed by giant trade bodies like BGMEA, bankers association and some giant business conglomerates.

Bangladesh and India need further reforms to put the economies on the right tracks. Bangladesh has relatively in a better position because of a dynamic leader like Sheikh Hasina. Both the governments in Bangladesh and India need to recall the experience of 1990s. Both the countries need finance ministers like Shah AMS Kibria and Manmohan Singh.

The writer is a legal economist. He can be contacted at mssiddiqui2035@gmail.com