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India in the 1980s and 1990s: A Triumph of Reforms

Arvind Panagariya∗ January 3, 2004



The author is a Professor of Economics at University of Maryland, College Park, MD 20742. Email: panagari@econ.umd.edu. I am grateful to Jagdish Bhagwati and Kalpana Kochhar for numerous helpful comments and to T.N. Srinivasan for extended email exchanges that led to many improvements in the paper. I also thank Rajesh Chadha, Satish Chand, Douglas Irwin, Raghav Jha, Vijay Joshi, Vijay Kelkar, Ashoka Mody, Sam Ouliaris, Jairam Ramesh, Jayanta Roy, Ratna Sahay, Kunal Sen, N.K. Singh, and Roberto Zagha for helpful suggestions on an earlier draft of the paper. The paper was completed while I was a Resident Scholar at the International Monetary Fund and has benefited from comments made at the IMF-NCAER

Conference, “A Tale of Two Giants: India’s and China’s Experience with Reform,” November 14-16, 2003, New Delhi.

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Table of Contents 1 2 3 INTRODUCTION..................................................................................................... 1 THE FRAGILITY OF GROWTH IN THE 1980S................................................ 9 CONNECTION TO LIBERALIZATION............................................................ 14 3.1 3.2 4 5 REFORMS DURING THE 1980S ............................................................................ 17 IMPACT OF THE REFORMS .................................................................................. 25

UNSUSTAINABLE BORROWING ..................................................................... 30 A BRIEF LOOK AT THE 1990S .......................................................................... 33 5.1 5.2 5.2.1 5.2.2 5.3 DEREGULATION OF INDUSTRY ........................................................................... 34 EXTERNAL TRADE ............................................................................................. 36 Merchandise Trade Liberalization ........................................................... 36 Liberalization of Trade in Services........................................................... 38 IMPACT OF LIBERALIZATION .............................................................................. 41

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LOOKING AHEAD: WHY INDIA LAGS BEHIND CHINA ........................... 42 SUMMING UP AND CONCLUDING REMARKS ............................................ 45

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Introduction
While public opinion in India continues to move toward the view that

liberalization has been good, that more of it is needed, and that its pace must be accelerated, the view in some scholarly and policy circles has turned skeptical. It is being argued that average annual growth rate of Gross Domestic product (GDP) had hit the 5.6 percent mark in the 1980s, well before the launch of the July 1991 reforms. Moreover, growth rate in the 1990s was not much higher. Therefore, liberalization cannot be credited with having made a significant difference to growth in India.1 The key contribution expressing this skepticism has come from economic historian J. Bradford DeLong (2001, pp. 5-6) who writes in an article on growth in India: “What are the sources of India's recent acceleration in economic growth? Conventional wisdom traces them to policy reforms at the start of the 1990s… Yet the aggregate growth data tells us that the acceleration of economic growth began earlier, in the early or mid-1980s, long before the exchange crisis of 1991 and the shift of the government of Narasimha Rao and Manmohan Singh toward neoliberal economic reforms.” DeLong (2001, p. 6) continues: “Thus apparently the policy changes in the mid- and late-1980s under the last governments of the Nehru dynasty were sufficient to start the acceleration of

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While the documentation below is limited to scholarly writings, many opponents of reforms in the political arena, including some in the Congress party, share this view.

growth, small as those policy reforms appear in retrospect....
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