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

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India is popularly viewed as having initiatedthe process of liberal reforms and the embrace ofoutward-oriented trade policies starting with theadoption of a major reforms package in July 1991.Subsequently, from 1992 to 2002, India’s grossdomestic product grew at the impressive annualrate of 6.1 percent. That rate contrasted with theso-called Hindu rate of growth of approximately3.5 percent during the first three decades ofIndia’s economic development. There was also asubstantial reduction in poverty during the 1990s.As such, observers have generally seen the Indianexperience during the 1990s and beyond as strongevidence that outward-oriented trade polices andpro-market reforms generated large benefits forthe people of that country.

A skeptical view has emerged recently, however,which argues that the growth rate in Indiahad shifted in the 1980s, making it impossible tocredit reforms with the improved performanceof India. If those skeptics were right, it would bea major blow to liberal trade and market-friendlypolicies, not only with respect to India but todeveloping countries around the world. But acloser look reveals that the story is more complexthan the skeptics would have us believe.

Three specific points emerge from a detailedanalysis. First, growth during the 1980s was patchy,with the last three years contributing 7.6 percentannual growth. Without those three years, growthin the 1980s would look, at best, marginally betterthan that of the previous three decades. Second, thehigh growth in the last three years of the 1980s was,in fact, preceded or accompanied by significant liberalizationunder Prime Minister Rajiv Gandhi,who had vowed to take India into the 21st centurywhen he first took office in 1984. Finally, growthwas stimulated partially by expansionary policiesthat involved accumulation of a large external debtand that ended in an economic crisis. In the end, itwas the 1991 market reforms and subsequent liberalizingpolicy changes that helped sustain growth.

India can still do much to improve its economicperformance. For example, India lagsbehind China largely because India’s relativelysmall industrial sector is hobbled, a problem thatmust be fixed through a further reduction in tariffs,privatizations, and other liberal measures.

Arvind Panagariya