The lessons of reform

Gamal Abdel-Gawad
Saturday 16 Sep 2023

Egypt can learn lessons from the Indian experience of introducing reforms in the wake of an economic crisis.


Reform only emerges in the wake of a crisis. Reform means change. Individuals often embrace change, even if only as a means to alleviate boredom, but nations and institutions are generally averse to change, seeking to avoid risks. There is no need to take risks as long as things are running smoothly, for attempting reform may inadvertently worsen a situation.

Reform becomes a necessity when a nation faces a crisis. While crises are inevitable – this is not the issue – what matters is how one responds appropriately to emerge from them unscathed. 

Some developing countries seem to perpetually oscillate between economic crises as if caught in an unending loop, with Argentina and Venezuela being examples. On the other hand, some other countries are able to gather their resolve and execute profound reforms to escape a crisis once and for all, setting the course for a long and stable future. 

This article will not delve into crisis-ridden countries as we are all well-acquainted with such cases. Instead, it will focus on India, an economic giant with a remarkable success story behind it after years of stumbling and failure.

After gaining independence from Britain in the late 1940s, India followed socialist policies akin to those implemented in Egypt in the 1950s and 1960s. The state heavily intervened in the economy and exerted control over it. By the 1970s, signs of economic stagnation had become apparent in India, and in the 1980s India initiated partial reforms similar to those Egypt introduced in the 1970s. 

However, by the end of the 1980s India was facing deficits on every economic indicator. This happened while the former Soviet Union, India’s most important trade and military partner, was disintegrating. Meanwhile, China, India’s main competitor and strategic threat, was experiencing a remarkable resurgence after implementing reforms in 1979.

Fear of comprehensive reform and pressure from powerful interest groups within the Indian bureaucracy and the ruling Congress Party hindered the enactment of comprehensive reform in India. Consequently, the country entered a crisis in which old and partial solutions were no longer effective. 

The crisis reached its zenith in 1991, when, in January of that year, India’s foreign reserves were only sufficient to cover imports for a mere 13 days. This occurred after capital had fled the troubled economy, and various types of deficits had reached catastrophic levels.

India had to deal seriously with this new situation, where security, strategic, and economic risks loomed large. It realised that comprehensive reform was the only way forward, as the challenges were too great for piecemeal fixes and patchwork solutions. It had no choice but to seek a loan from the International Monetary Fund (IMF) accompanied by the traditional reform prescriptions applied to borrowers. 

The Indian rupee was devalued, interest rates were raised, significant cuts were made in government expenditure, and subsidies to state-owned enterprises were eliminated. The Indian stock market was reactivated and reformed, state intervention in the economy was curtailed, and the complex licensing system that impeded the establishment of new ventures was abolished.

Globalisation was on the rise, and ample funds were available in global markets for investment and lending, providing the right conditions were met. Large markets and affluent consumers in the West were eager for cheap products, an opportunity China had already seized. India had to catch up.

India’s new economic policies began in July 1991 with the relaxation of restrictions on industrial licenses and measures to attract foreign direct investment (FDI). Foreign investors were allowed to own up to 51 per cent of a project, up from the previous limit of 40 per cent. Investment in government debt instruments, such as treasury bills and bonds, was encouraged. Customs duties were reduced to lower the cost of production inputs and machinery, as India’s customs duties, once as high as 400 per cent, were now brought down to less than 10 per cent.

The role of the public sector was reduced, with government control limited to three sectors: aircraft and warship production, nuclear energy, and railways. Restrictions on industrial projects were eased, and previous restrictions on establishing factories in certain areas were lifted. Before the reforms of the 1990s, India was not known for excellence in any specific industrial field. However, after the reforms, it became a key player in software, pharmaceuticals, and chemicals.

The Indian bankruptcy laws were reformed, making it easier to recover dues from defaulters. This reform was crucial because when recovering dues becomes challenging, lenders are highly reluctant to extend loans, fearing that borrower defaults could stall businesses. The golden rule in investment is that when exiting a market is made easy, it encourages people to enter it without fear of getting stuck, unable to profit, or exit.

In this comprehensive package of reforms, currency devaluation became a blessing, not a curse. The devaluation of the national currency lured back capital flight, benefitting the export capacities of Indian industry and its competitiveness in the global market. The positive effects of these reforms were evident, and India’s currency devaluation became an incentive for growth, not a tool for impoverishing its citizens.

The opportunity for reform is ever-present, and the timing for reform is not to be missed. There are many lessons that Egypt can learn from the Indian experience.

* The writer is an adviser to Al-Ahram Centre for Political and Strategic Studies.

* A version of this article appears in print in the 14 September, 2023 edition of Al-Ahram Weekly

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