Lessons from Indian economic reforms

Sri Lanka’s longstanding ally and big brother India, yesterday (15), celebrated its 75th Independence Day, as a country that has grown to be one of the most influential world powers, and as one of the biggest economies.

While Indo-Sri Lanka ties go back centuries and have been economic, cultural, religious, and even political, in the recent past, Sri Lankans heard more about India due to India-backed development projects and financial and in-kind assistance that it extended. In fact, in the context of the present economic crisis, India was the main ally Sri Lanka relied on. However, what Sri Lanka can obtain from India is not limited to loans and other forms of assistance. In terms of long-term economic recovery, there are a lot of lessons for Sri Lanka to learn from India.

Celebrating this year’s Independence Day, Indian Prime Minister Narendra Modi revealed his determined plans to make India a more developed country in the next 25 years. As a country that got back on its feet after a severe economic crisis – not as severe as Sri Lanka’s, but that took place in similar circumstances – Modi is not too optimistic, but India has potential.

In the early 1990s, India was facing a severe economic crisis. While the balance of payments situation got out of hand, there was a serious decline in foreign reserves due to a decline in capital inflows. India was facing an alarming situation, where it was close to a default.

While this situation led to a General Election due to the pressing need for a strong Government, the election was followed by many economic reforms. The Indian Government took measures to bring in policy reforms with the aim of expediting economic growth, as a solution to its liquidity issue. This also involved correcting exchange rates, or the devaluation of the Indian rupee to match the correct rates. In addition, these reforms entailed the transferring of tonnes of gold from the country’s reserve assets and from confiscated stocks to banks in England and in Switzerland, which made it possible for India to borrow money in United States dollars to help with the balance of payments issue.

In addition, as part of this reform process, India also went on to announce new industrial policies with the aim of liberalising its economy. This, according to economists, led to several positive changes, such as increasing employment and domestic production. It is noteworthy that the said policy reforms also deregulated industries, paving the way for more foreign investment. What is more, then-Finance Minister Manmohan Singh presented a Budget that paid attention to further addressing the balance of payments issue and structural changes.

Most importantly, these economic reforms, as well as the subsequent reforms they led to, were strengthened by successive governments, resulting in an economic recovery that came about faster than expected.

Sri Lanka thus has much to learn from India in this regard. One of the main challenges that was identified as an obstacle to India’s recovery during the said reform process was policies that kept that country’s industries from achieving their full potential, especially with regard to attracting foreign investors. Economists claim that taking measures to address this helped India kill two birds with one stone – encouraging more foreign investment, and developing industries including those that could draw foreign exchange. In other words, India utilised the limited financial resources it had towards supporting efforts aimed at gaining more financial resources, especially foreign currency. At the same time, as was stated, India did not hesitate to take the political decisions it had to take in order to support these policy reforms.

Most importantly, the then-Indian administration was farsighted enough to take the said measures before that country defaulted. They realised that defaulting would have stalled any international support that the country would have received in its recovery.

While the reality is that Sri Lanka is too late to take certain effective measures that India took, such as allowing the country’s currency to fluctuate as it should and preventing the country from defaulting, there are still measures that Sri Lanka can take in order to expedite the reform process. It can still prioritise and liberalise industries that can help attract foreign investments and foreign currency. Even though some of these measures have been identified as elements of Sri Lanka’s recovery process, when it comes to policy-level decisions and legal reforms, which laid the foundation for recovery in India’s case, Sri Lanka still shows a great lethargy in taking those measures.

Sri Lanka is not too late to save its economy. However, the clock is ticking, and fast. It is the duty of the Government, which keeps emphasising that it has plans and capabilities to reverse the economic collapse, to take the necessary measures at least now.