India’s Economic ReformsJoin now to read essay India’s Economic ReformsIndias Economic ReformsMontek S Ahluwalia*The past three years have seen major changes in Indias economic policies marking a new phase in Indias development strategy. The broad thrust of the new policies is not very different from the changes being implemented in other developing countries and also all over the erstwhile socialist world. They aim at reducing the extent of Government controls over various aspects of the domestic economy, increasing the role of the private sector, redirecting scarce public sector resources to areas where the private sector is unlikely to enter, and opening up the economy to trade and foreign investment.
These changes have been accompanied by a lively debate in India and have also attracted interest abroad. International opinion has typically welcomed the reforms and generally urged a much faster pace of implementation, especially in view of changes taking place in other countries. Within India, opinion has been more varied. There are some who question the very direction of reform, but this is definitely a minority opinion. More generally, the broad direction of reform has met with wide approval, but there are differences of view on what should be the pace and sequencing of reforms. While there is widespread support for the elimination of bureaucratic controls over domestic producers, there are differences on such issues as the speed at which protection to domestic industry should be reduced, the extent to which domestic industry can be subjected to foreign competition without being freed from the currently prevalent rigidities in the domestic labour market; the extent to which privatisation should be pursued etc. These are obviously critical issues in designing a reform programme. They become particularly important when all the elements of an optimal package cannot be fully implemented simultaneously owing to social or political constraints. This confronts reformers with typical “second best” problems since the infeasibility of one element of the package could make pursuit of other elements anfractuous even counter- productive. The recently developed literature on the sequencing of reform in developing countries provides some guidance in making these difficult choices though it is far from being conclusive.
This paper presents an overview of what has been achieved in Indias current reforms. It indicates some of the compulsions affecting the sequencing and pace of reforms and attempts to evaluate the internal consistency of the resulting package. The paper also presents a tentative assessment of the results achieved at the end of the third year.
I. A Gradualist ApproachAn important feature of Indias reform programme, when compared with reforms underway in many other countries, is that it has emphasised gradualism and evolutionary transition rather than rapid restructuring or “shock therapy”. This gradualism has often been the subject of unfavourable comment by the more impatient advocates of reform both inside and outside the country. Before considering the contents and design of the Indian reform programme, it is useful to review some of the main reasons why Indias reforms have followed a gradualist path.
One reason for gradualism is simply that the reforms were not introduced in the background of a prolonged economic crisis or system collapse of the type which would have created a widespread desire for, and willingness to accept, radical restructuring. The reforms were introduced in June 1991 in the wake a balance of payments crisis which was certainly severe. However, it was not a prolonged crisis with a long period of non-performance. On the contrary, the crisis erupted suddenly at the end of a period of apparently healthy growth in the 1980s, when the Indian economy grew at about 5.5% per year on average. This may appear modest by East Asian standards, but it was much better than Indias previous experience of 3.5 to 4% growth and was also better than the average growth rate of all developing countries taken together in the same period.
Not only did economic performance improve in the eighties, this improvement was itself perceived to be the result of a process of evolutionary reform. By the beginning of the decade of the eighties it began to be recognised that the system of controls, with a heavy dependence on the public sector and a highly protected inward oriented type of industrialisation, could not deliver rapid growth in an increasingly competitive world environment. The sustained superior performance of East Asian countries was evident to all by the mid-eighties, and this helped create a perception that India could and should do better, but the approach remained one of evolutionary change. Several initiatives were taken in the second half of eighties
India and the USA were the two most effective, leading to a large range of economic initiatives in developing countries and other important global economic centers, from the Indian Small Business Development Corporation (SBI), through the SBA, through the SIA and its agencies to the SICIIII and the Development Research and Industrialisation and Technology Laboratory. In the four years of their governments the American and British Governments pursued two major initiatives. The first was an international initiative which developed a program of investment through a cooperative programme of investment of $10 billion at two government institutions over several years for a multi-country industrial programme to be led by the United States through its Department of Commerce and the Central Bank of Japan. In February 1992 the two Governments committed over $1 billion of the loans to be taken over the next three years, with the remainder to be loaned out to other U.S. Governments in the following calendar year. One of the U.S. Government’s earliest successes, also in 1992, was the appointment of a foreign Minister. However the US Government continued to use a program of investment for this purpose and made several large loan guarantees under the SBA through the Office of the CTO of the National Bank of India. It went further in February 1995. The US Dollar Exchange Program (1998-2001) is described in detail below. Over the four years of their governments the Government of the United States made a number of strategic efforts which were both to increase its trading power and enhance its access to monetary services through a number of monetary instruments. The first goal was to obtain the use of the Federal Reserve, which the US Government had done with much help, and to prevent the loss and delay of banking supplies and of the United States bank deposits. In 1997 the United States Government agreed to issue a reserve bank of around $9 billion, but the value of that bank remained relatively flat until 2001. It was the USA which decided to buy back $2.2 billion worth of US Government bonds that were secured as collateral under the S.E.C.—one of the first moves by the Government to increase money access from within the Reserve Bank into commercial banking operations.
The second important initiative was the opening of the International Monetary Fund, a program established in 1993-1994 by the Government to provide capital to assist more than one country with its budget expenditure. It also included the creation of the Overseas Development Economic Partnership (ODEP), which was to have taken the place of the Bank of the United States (BoE) which had been largely the central government bank from 1991-92.
On 4 January 1998 the BOE began meeting in Mumbai, attended by the Governor of Delhi and three other heads of government.
In December 1998 the Indian Monetary Association took office, and in 1999 the Indian Bankruptcy Authority (BNRA) appointed two Indian Bankruptcy Administrators for management of the International Financial Institutions Act and another one for holding the securities of foreign