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Eight Lectures on Indian Economic Reforms

Nov 1999
Stanford King Center on Global Development Working Paper
45
The paper is on the economic liberalization of reforms in India since July 1991. After independence in 1947, India had chosen an inward-oriented development strategy with the state playing a dominant role in the economy. This strategy, whose foundations were laid in the pre-independence era, had the support of political parties across the entire spectrum from left to right. State control was extensive, and covered foreign trade, investment (domestic and foreign), prices of essential commodities and internal trade. Government was also actively involved in provision of goods and services, not only of the traditional type of economic and social infrastructure, but others (e.g. hotel services) as well. The economic performance until the 1980's under the strategy was poor with per capita income growing at an annual average rate of 1.5 percent and the proportion of the poor population fluctuating around 50 percent with no time trend. In the 1980's macroeconomic prudence that was the hallmark of policy until then was abandoned in favor of an expansionist policy financed by borrowing at home and abroad at increasing cost. This expansionism, coupled with relaxation of some irksome state controls, delivered faster growth of per capita income at about 3.5 percent per year and also a significant reduction in poverty. But based as it was on an essentially unchanged development strategy and on accumulation of domestic and foreign debt, it inevitably led to a macroeconomic and balance of payments crisis in 1991. Not only the severity of the macroeconomic crisis, but also the collapse of the Soviet Union in 1991 and the spectacular growth of China since her opening in 1978, led to a disenchantment with the earlier development strategy.