After Three Decades of Market Reforms, Where Does India Stand Compared With Bangladesh and China?

Former finance minister Manmohan Singh’s landmark budget speech made on July 24, 1991 had come amidst a serious balance of payments crisis and double-digit inflation engulfing the Indian economy that year. That single speech made 30 years ago, introduced a gamut of structural changes, along with short-term macroeconomic stabilisation, which completely changed the direction of economic policies and set a new trajectory for the following decades.

The marketist U-turn in India’s economic policymaking came against the backdrop of sweeping changes within the advanced economies, inaugurated by the Thatcher and Reagan regimes in the 1980s. The post-war consensus around Keynesian demand management was abandoned in favour of supply-side economics and neoliberal policies. By the end of the 1980s, the collapse of the socialist bloc had also commenced with the disintegration of the USSR and the Dengist reforms gathering momentum in China. In this milieu, economic planning and import-substitution under ‘Nehruvian socialism’ in India gave way to market-oriented reforms. Liberalisation, privatisation and globalisation became the new mantras.

The economic reforms initiated in 1991 were hailed as a liberation of the Indian private sector from the fetters imposed by the ‘license-permit-quota raj’ of the Nehruvian era. Now, after three decades, success is being claimed by the key architects of those reforms, on the basis of India’s evolution as “one of the fastest-growing emerging markets” and decline in poverty.

How robust are such claims? To delve deeper into the impact of market-oriented reforms on the economy, we undertake an evaluation of India’s long-term macroeconomic performance and human development record, including trends in income distribution, over the past four decades, in comparison with two of India’s neighbours, China and Bangladesh.

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Macroeconomic performance

It is difficult to find many countries with which India’s long-term economic performance can be justifiably compared over multiple dimensions, given the size of its economy and population, as well as its political-economic history. China becomes an obvious benchmark, given its similarities with India in terms of population size and economic history as well as its emergence as the second largest economy in the world (by nominal GDP) over the past few decades.

Among India’s large South Asian neighbours, Bangladesh, since its independence in 1971, has pursued an economic policy course much similar to India’s. All the three labour surplus economies started off with dirigiste, post-colonial regimes. They changed course later – China and Bangladesh in the late-1970s and India in 1991, after following a gradualist approach to economic transition in the 1980s. Since then, all the three countries have increasingly integrated with the global economy, uninterruptedly, through the past three decades.

China experienced remarkable growth acceleration since the 1980s, with annual real GDP growth remaining over 10% on average for two decades between 1991 and 2010, before falling to 6.8% during 2011-2020 (See Chart 1a). China’s unique growth story has enabled its economy to expand phenomenally, from 4% of the world GDP in 1990 to over 18% of the world GDP in 2020. The Indian economy’s share in global output has expanded too, but far less remarkably; from 3.5% to 6.8% of the world GDP between 1990 and 2020. Bangladesh’s share in the world GDP has doubled, from 0.3% to 0.7% in three decades (See Chart 1b).

Chart 1a: Annual Growth of Real GDP (%) — Decadal Averages. Source: Source: International Monetary Fund

Chart 1b: GDP (PPP) as a Share of World GDP (%). Source: International Monetary Fund

After remaining at the same level of 5.6% in the 1980s as well as 1990s, the decadal average of India’s annual real GDP growth accelerated to 7.6% in the 2000s, only to fall again to 5.2% between 2011-2020. Excluding the sharp contraction in 2020, India’s average GDP growth between 2011 and 2019 was around 6.6%, similar to the average annual real GDP growth rate of Bangladesh in the same decade. While Bangladesh has caught up with India in terms of real GDP growth, in terms of GDP adjusted for purchasing power parity (PPP), Bangladesh’s average growth rate between 1990 and 2020 has been faster than India’s.

In contrast, the growth experiences of China and India have been quite divergent. Rather than India being able to catch up with China in three decades, the Chinese economy, which was only slightly larger than India in 1990, has grown to 2.5 times the size of the Indian economy by 2020.

This has been possible because the investment rate in China has gradually risen from around 35% of GDP in the 1980s to 44% in the last decade, and the savings rate has risen even faster from 35% to 46%. India’s investment and savings rates, as shares of GDP, have grown from a much lower base than that of China’s and have not yet been able to surpass the levels, which prevailed in China even in the 1980s (See Charts 2a and 2b).

Chart 2a: Investment (% of GDP) — Decadal Averages. Source: International Monetary Fund

Chart 2b: Savings (% of GDP) — Decadal Averages. Source: International Monetary Fund

Moreover, it is noteworthy that despite a deceleration in the economic growth rate in China between 2011-2020, in the aftermath of the global financial crisis and the Great Recession, the investment rate has continued to grow, which has laid a stronger foundation for growth in the next decade. The savings rate in China has also remained over the investment rate since 1991, which reflects massive mobilisation of domestic resources for investment, which could not be achieved without active interventions of the state, like the belt and road initiative. Bangladesh has also witnessed growth acceleration between 2011-2020, accompanied by significant improvements in its investment and savings rates.

As far as India is concerned, the investment rate did improve from the decadal average of 24% in 1991-00 to 32% in 2001-10 (See Chart 2a). This was driven by significant increases in private investments financed by credit from the public sector banks, particularly in infrastructure projects under public-private partnerships. While this continued for a while after the global financial crisis and recession of 2008-09, it could not be sustained for long. After the credit bubble burst in 2011-12, massive amounts of bad debts accumulated in the banking system, which continues to hang like an albatross around the neck of public sector banks and delinquent corporates.

Therefore, stagnation in the investment and savings rate has accompanied India’s growth deceleration between 2011-2020. Policy actions undertaken in the past few years like demonetisation, introduction of the goods and services tax (GST) and the recent lockdowns imposed after the outbreak of COVID-19 pandemic have also delivered successive supply and demand side shocks, contributing to the slowdown in private investment activity. The savings rate in India has also remained below the investment rate, pointing towards dependence on foreign savings, which cast a shadow over the possibility of significant growth acceleration in future.

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Fiscal and external balances

Despite the marketist turn in their economic policies, fiscal support has continued to play vital roles in the growth processes of China and India in the last few decades. While public debt as a share of GDP ratio has declined in Bangladesh from 55.2% in 1995 to 38.9% in 2020, it has increased over the decades both in China and India (Chart 3c).

In China’s case, government revenues and expenditure first fell as a proportion of GDP in the 1990s, then rose in the 2000s decade and increased even more sharply in the 2010s (Charts 3a and b). In India, neither was the fall in government revenues and expenditure in the 1990s decade very significant, nor was there any sharp rise in government revenues and expenditure in the subsequent decades.

Chart 3a: Government Revenue (% of GDP) — Decadal Averages. Source: International Monetary Fund.

Note: India’s Revenue and Expenditure data for 1981-90 is sourced from the RBI’s Database on Indian Economy.

Chart 3b: Government Total Expenditure as Share of GDP (%) — Decadal Averages. Source: International Monetary Fund.

Note: India’s Revenue and Expenditure data for 1981-90 is sourced from the RBI’s Database on Indian Economy.

Chart 3c: General Government Gross Debt as Share of GDP (%). Source: International Monetary Fund

Note: Bangladesh’s Public Debt and GDP data for 1995 and 2000 are sourced from Bangladesh Bank.

India’s fiscal balance has remained in a considerably worse state than China’s over three decades. Following the fiscal stimulus amidst the pandemic-induced recession, the public debt to GDP ratio is projected by the IMF to increase to almost 90% for India and around 67% for China, in 2020. India’s inability to increase revenue mobilisation has been a key factor behind its ballooning public debt, which has also constrained the interventionist capacity of its state.

Alongside a prolonged slowdown culminating into a deep recession, sharp cuts in the corporate tax rates, inability to plug tax evasion and retrieve illicit wealth, as well as a shift towards greater revenue mobilisation through indirect taxes on items like fuel under the present regime, have all contributed to sluggish revenue growth in the recent years.

The trajectory of external balances further reveals the divergences between the growth stories of China and India (See Chart 4a). China has run trade and current account surpluses for three decades since the 1990s, with the current account surplus peaking at over 5% of GDP between 2001-2010. This reflects a successful export-oriented strategy, which has also enabled China to attract high levels of foreign direct investments (See Chart 4b).

Chart 4a: Trade & Current Account Balances (% of GDP) — Decadal Averages. Source: World Bank Open Data

Chart 4b: Net FDI and Private Remittances (% of GDP) — Decadal Averages. Source: World Bank Open Data

Note: Net FDI Inflows data available till 2019 only.

India, in contrast, has experienced chronic trade and current account deficits over the past three decades, with the trade balance worsening over time (Chart 4a). Bangladesh’s trade balance has improved since the 1980s, but the trade deficit as a proportion of GDP has remained higher than India. While exports in specific sectors, like IT services, gems and jewellery, pharmaceuticals and minerals in India or textiles and leather in Bangladesh, have registered significant successes, a multi-sector export boom has evaded both India and Bangladesh in the past three decades.

In India’s case, the import intensity of output growth has also increased in the post-reform period, on account of the growing dependence on imports of oil as well as capital goods. Such weaknesses in domestic industrial development have not been reversed despite the ‘Make in India’ initiative. Thus external imbalances have persisted, which in turn has driven up external indebtedness and brought downward pressure on the rupee.

The last two years have seen some improvement in India’s external balances and indebtedness, but only because of the collapse in imports owing to the negative demand shocks inflicted by the pandemic and lockdown. In the absence of any structural change, external imbalances would reappear along with economic recovery.

Inflows of foreign direct investments (FDI) have risen in India and Bangladesh since the 2000s, but the levels have remained significantly below that of China’s. Rather, inflows of private remittances have played a much larger role (as a share of GDP) than FDI in India and even more so in Bangladesh (Chart 4b). It can thus be said that while China has benefitted more because of capital mobility under globalisation, India and Bangladesh have benefitted more out of the international migration of labour.

In sum, market-oriented reforms have brought about a massive transformation in the Chinese economy in the last four decades. This is reflected in accelerated economic growth, rising investment and savings rates, increased government revenues and public expenditures, export surpluses and FDI.

India’s macroeconomic performance has lagged way behind that of China in all those relevant indices. Considering China as a benchmark, India’s growth acceleration has been both delayed and short-lived, with investment and savings rates as well as government revenues and public expenditures stagnating in the last decade.

While Bangladesh has been able to reduce its public debt to GDP ratio over the decades, India’s public debt has also grown, particularly against the backdrop of the COVID-19 pandemic and recession. Neither has India been able to match China’s export successes nor attract comparable quantum of FDI, especially of the greenfield variety. Like in the case of Bangladesh, private remittances have surpassed FDI inflows in India in the post-reform decades.

Human development and income distribution

While India’s macroeconomic performance in the post-reform period looks quite modest in comparison with China’s, the record vis-à-vis human development reveals further weaknesses (Table 1). Real per capita income in China (2017 PPP dollars) was below that of India and Bangladesh in 1990. Between 1990 and 2019, China’s per capita income has increased over ten times, while the increase was only around 3.2 times in Bangladesh and 3.7 times in India.

The manifold increase in per capita income in China in the last three decades has also been accompanied by improvements in other indices of well-being like increasing life expectancy, declining infant mortality and rising mean years of schooling, which remain much above those of India or Bangladesh. Despite having a higher per capita income, India has lagged Bangladesh in indices like life expectancy and infant mortality. While 35% of India’s total population used the internet in 2018, much higher than Bangladesh’s 15%, the proportion in China was even higher at over 54%.

The International Labour Organization (ILO) estimates suggest that open unemployment in India has remained at over 5% through the past three decades, which has been much higher than the unemployment rates of China or Bangladesh (Table 1). India’s unemployment rate has remained remarkably stable though, while unemployment has risen both in Bangladesh as well as in China in the past three decades.

The high proportion of informal labour within the labour surplus economies like India, Bangladesh or China makes accurate estimates of unemployment quite difficult. ILO estimates suggest that around 80% of the total workforce in India and over 90% in Bangladesh comprised informal workers. Comparable estimates for China are unavailable but informal sources suggest that it is not less than 50% of the existing workforce.

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The persistence of huge reserves of informal labour in these economies reflects an inherent weakness of the post-reform growth process, across these economies. Higher rates of economic growth in the post-reform period have not led to enhanced rates of labour absorption, especially in the formal sector, a phenomenon characterised as ‘jobless growth’.

The most unambiguous outcome of the post-reform growth process over the past three decades, common across all the three countries that we examine, is the steady rise in income inequalities. Data from the world inequality index show that the shares of pre-tax national income of the top 1% as well as the top 10% of the population has risen in Bangladesh, China and India between 1989 and 2019, while the shares of the bottom 50% has declined (Table 2). The widening of inequalities, however, has been the least in Bangladesh where income shares have not undergone very significant changes in the past three decades.

While the share of the bottom 50% has declined in tandem in China and India in the past three decades, the income share of the middle 40% has declined by a much lesser extent in China than in India. The top 10% population in India has gained a much greater share in national income than the same cohort in China, with the Indian top 1% doubling its income share in the past three decades. Thus, while both India and China have seen increasing inequalities in the post-reform period, incomes have been distributed in a more skewed manner in India than in China.

Conclusions

Although the early, alarmist prognoses about economic reforms, which anticipated economic disaster in developing countries, have not actualised, the economic performances of China, India and Bangladesh in the post-reform decades bust several economic myths. First, the way China has been able to comprehensively outrun India, Bangladesh and all other developing countries shows that mere implementation of market-oriented policies were not enough to achieve macroeconomic success. Rather, geo-strategic factors, industrial policies and state interventions, seem to have played a larger role in ensuring access to markets, capital and technologies for economic development than what the laissez faire prescriptions would suggest. Initial conditions shaped by the dirigiste regime also mattered.

Second, there is mounting evidence to indicate that while improved macroeconomic performance may be necessary, it is certainly not sufficient to ensure better human development outcomes, especially in the sphere of education and health. This is also true in the context of unemployment and underemployment. The weakening link between economic growth and employment implies that faster economic growth would also not solve the core problems of under-development and informality within the labour surplus economies.

Finally, the incidence of growing income inequalities, coupled with crony capitalism and elite-consumerism, raises serious questions regarding sustainability of the growth processes in the emerging economies, both political and environmental. This is as much true of China, as it is vis-à-vis the other developing countries. Even as millions of people lost their jobs and sunk into poverty amidst the pandemic-induced recession, the number of dollar billionaires in 2021 rose across most countries in the Forbes Billionaires list from 2020.

With liquidity-driven equity market bubbles raising the net worth of big business owners everywhere, India overtook Germany to claim the third spot in the Forbes list with 140 dollar billionaires in 2021 and China finished second with 626 just behind the United States’ 724. Bangladesh did not figure in the Forbes list yet.

Three decades after the inauguration of market-oriented reforms in India, this hideous spectacle of the super-rich growing even richer amidst large-scale socio-economic distress caused by the pandemic and economic recession should lead to deeper introspection and soul-searching, rather than inane celebrations.

Prasenjit Bose is an economist and political activist.