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The author is a Bhagwati Professor of Indian Political Economy and Professor of Economics at Columbia University, New York, NY 10027. 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 and Growth,” November 14–16, 2003, New Delhi.
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.
This is not unlike the stop-go reforms in China though the latter did go much farther during the 1980s, especially in the Special Economic Zones and Open Cities.
Among skeptics, Joseph Stiglitz too seems to have bought into the DeLong-Rodrik story, though with a different twist. Thus, in an exchange with economist Kenneth Rogoff published in the Wall Street Journal Europe (October 18, 2002), he is reported to have said, “The two countries that have the most impressive economies now are China and India. They happen to be the two that bought the least into the globalization story that the IMF and others are selling.” But there is little basis for such a claim. All the reforms undertaken by India, described below, are those that reform-minded economists and the IMF would recommend. The pace of reforms has been slower but this is to be attributed not so much to conscious choice as to the country’s democratic political process that demands consensus that is slow to build. It is true that India has chosen not to embrace capital-account convertibility to-date but many reform-minded economists, especially from India including the author, have advocated caution in this area.
Specifically, Joshi and Little (1994, p. 190) note, “It appears that “Keynesian” expansion, reflected in large fiscal deficits, was a major cause of fast growth.” In personal correspondence, Vijay Joshi has recently changed his mind, however. Commenting on an earlier draft of this paper, he writes, “Joshi and Little did point to the importance of the mildly liberalizing reforms in the 1980s but in retrospect we should have put greater stress on them exactly as you have done.”
Wallack (2003, p. 4314) herself is careful to recognize this fragility. Thus, she notes, “Although the evidence for the existence of a break is strong, the data are more ambiguous on its exact timing in the early and mid-1980s.”
We could include 1980–81 but the 7.2 percent growth during this year was preceded by a 5.2 percent decline in GDP in 1979–80 and was, thus, artificially high.
We may ask which sector among agriculture, industry, and services predominantly accounts for the higher variance in the 1980s. For each sector, the null hypothesis of equal variances across the 1980s and 1990s fails to be rejected even at 10 percent level of significance. Difference in the variances of total GDP growth between the 1980s and 1990s arise largely from movements in covariance terms between growth rates of individual sectors.
In passing, the role of excellent agricultural performance in yielding the high overall growth rates during 1988–91 may also be acknowledged. Whereas the years 1986–87 and 1987–88 were a disaster for agriculture due to bad weather, the subsequent three years, especially 1988–89, proved unusually good. According to the data in the Economic Survey 2002–03 (Tables 13 and 16), agriculture and allied activities (forestry and logging, fishing, mining and quarrying), which accounted for a little more than one-third of GDP, grew at an annual average rate of 7.3 percent during 1988–91.
Bhagwati and Srinivasan (1975, Chapter 10) offer a fascinating political economy analysis of the 1966 devaluation. In a key concluding paragraph on page 153, they note, “The political lesson seems particularly pointed with regard to the use of aid as a means of influencing recipient policy, even if, in some objective sense, the pressure is in the ‘right’ direction. The Indian experience is also instructive for the political timing of devaluation: foreign pressure to change policies, if brought to bear when a government is weak (both because of internal-structural reasons and an impending election, which invariably prompts cautious behavior) can be fatal.” This is an important lesson in the political economy of reforms.
Jagdish Bhagwati, who, upon his return from study abroad in the early 1960s, initially shared in the intellectual attitudes that helped India turn inward but quickly changed his mind in light of the realities on the ground, tells an anecdote that aptly captures the deleterious impact protectionist policies had on the quality of the Indian products. In one of the letters to Harry Johnson, written during his tenure at the Indian Statistical Institute in the early 1960s, Bhagwati happened to complain about the craze he observed in India for everything foreign. Harry Johnson promptly responded in his reply that if the quality of the paper on which Bhagwati wrote his letter was any indication of the quality of homemade products, the craze for the foreign seemed perfectly rational to him!
The decline in the share of canalized imports was due to increased domestic production of food grains, cotton, and crude oil and reduced world prices of canalized imports such as fertilizers, edible oils, nonferrous metals, and iron and steel. Good weather and discovery of oil were partially behind the increased domestic output of food grains, cotton, and crude oil.
Of these, 16 industries had been out of the licensing net since November 1975 while some were reserved for the small-scale sector.
This view of the government taking an activist role, shared by the author, is in contrast to the view taken by Srinivasan and Tendulkar (2003, p. 23) as quoted in the introduction.
In the data used by Joshi and Little, real GDP is measured at 1980–81 prices. As such their growth rates differ from those computed from real GDP measured at 1993–94 prices as in this paper. Growth rates for the two periods when 1993–94 is the base year are 3.7 and 4.8 percent, respectively.
Imports such as offshore oilrigs and defense expenditures that do not go through the customs but do enter the balance of payments presumably account for the discrepancy.
There is a tendency on the part of the analysts such as Das (2000) to ignore the changes made in the 19980s and attribute them to the July 1991 reform. When one considers the facts that 20 percent of the tariff lines were already under OGL, that another 30 plus percent tariff lines including all consumer and agricultural goods were not freed until the end of 1990s, and that the top tariff line was still 110 percent, the July 1991 reform by itself seems less sweeping than it may seem at first blush.