Policy Analysis No. 554

The Triumph of India’s Market Reforms: The Record of the 1980s and 1990s

By Arvind Panagariya
November 7, 2005

Executive Summary

India is popularly viewed as having initiated the process of liberal reforms and the embrace of outward-oriented trade policies starting with the adoption of a major reforms package in July 1991. Subsequently, from 1992 to 2002, India’s gross domestic product grew at the impressive annual rate of 6.1 percent. That rate contrasted with the so-called Hindu rate of growth of approximately 3.5 percent during the first three decades of India’s economic development. There was also a substantial reduction in poverty during the 1990s. As such, observers have generally seen the Indian experience during the 1990s and beyond as strong evidence that outward-oriented trade polices and pro-market reforms generated large benefits for the people of that country.

A skeptical view has emerged recently, however, which argues that the growth rate in India had shifted in the 1980s, making it impossible to credit reforms with the improved performance of India. If those skeptics were right, it would be a major blow to liberal trade and market-friendly policies, not only with respect to India but to developing countries around the world. But a closer look reveals that the story is more complex than the skeptics would have us believe.

Three specific points emerge from a detailed analysis. First, growth during the 1980s was patchy, with the last three years contributing 7.6 percent annual growth. Without those three years, growth in the 1980s would look, at best, marginally better than that of the previous three decades. Second, the high growth in the last three years of the 1980s was, in fact, preceded or accompanied by significant liberalization under Prime Minister Rajiv Gandhi, who had vowed to take India into the 21st century when he first took office in 1984. Finally, growth was stimulated partially by expansionary policies that involved accumulation of a large external debt and that ended in an economic crisis. In the end, it was the 1991 market reforms and subsequent liberalizing policy changes that helped sustain growth.

India can still do much to improve its economic performance. For example, India lags behind China largely because India’s relatively small industrial sector is hobbled, a problem that must be fixed through a further reduction in tariffs, privatizations, and other liberal measures.

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