Economic Policy Reforms and the Indian Economy
edited by Anne O. Krueger
University of Chicago Press, 2002
Cloth: 978-0-226-45452-8 | Paper: 978-0-226-45453-5 | Electronic: 978-0-226-45454-2
DOI: 10.7208/chicago/9780226454542.001.0001
ABOUT THIS BOOKAUTHOR BIOGRAPHYTABLE OF CONTENTS

ABOUT THIS BOOK

India is the second most populous country in the world and also one of the poorest. From the late 1940s to 1980, India's per capita income grew at an average annual rate of only two percent. Expansionist economic reforms during the 1980s boosted economic growth but also unfortunately resulted in high inflation and a balance of payments crisis. As a consequence, in 1991 the government announced sweeping new changes in economic policies.

Economic Policy Reforms and the Indian Economy evaluates the effects of those changes and identifies areas of the Indian economy still in urgent need of reform. After an overview of Indian economic policies and development since independence, papers focus on the country's fiscal situation, the environment for private economic activity, education, the reservation of certain activities for small-scale industry, and determinants of differentials in rates of growth across the different Indian states. Contributors include respected academic specialists on India and policy reform, high-level Indian administrators, and present and past policymakers.

AUTHOR BIOGRAPHY

Anne O. Krueger is currently the first deputy managing director at the International Monetary Fund. While editing this volume, she was the Herald L. and Carolyn L. Ritch Professor in Humanities and Social Sciences and director of the Center for Research on Economic Development and Policy Reform at Stanford University. She is the author, editor, or coeditor of over a dozen books published by the University of Chicago Press.

TABLE OF CONTENTS

Foreword

Acknowledgments

Abbreviations

Chronology of Major Political and Economic Events

- Anne O. Krueger
DOI: 10.7208/chicago/9780226454542.003.0001
[India, fiscal policy, monetary policy, Indian government, living standards, Parliament, coalitions]
The low growth rate in India persisted into the 1970s despite its government's continuing rhetoric that a central goal of policy was to reach enhanced living standards for the majority of the people. By the 1980s, fiscal and monetary policy became significantly more expansionary. But by the mid-1990s, India met a period of frequent changes of government, as no single party could command a majority in Parliament and coalitions were short-lived. Since independence, the government of India has sought to attain increases in living standards, especially for the poor. For that purpose, several policies are particularly important. It is evident that increased educational opportunities and attainment for young people will be crucial. Finally, an overview of the chapters included in this book is shown. (pages 1 - 6)
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I. Current State of the Economy

- Anne O. Krueger, Sajjid Chinoy
DOI: 10.7208/chicago/9780226454542.003.0002
[Indian economic policies, Indian export growth, economic growth, balance-of-payments crisis, schooling, Indian economy, Indian economic performance]
This chapter reports a brief overview of Indian economic policies and development over the period since independence. Indian export growth was dull when the world economy was expanding rapidly in the 1950s and 1960s. Overall economic growth was sharply decreased during the balance-of-payments crisis of 1966–67. There was a vital enhancement in access to schooling. The stabilization aspects of policy in 1991 bore short-term success. As of 2000, it was clear that the Indian economy had changed markedly over the post-crisis years. Quite clearly, the reforms to date have ameliorated the functioning of the economy and permitted a higher rate of economic growth than was regarded as attainable on a sustainable basis in earlier decades. All of the reforms presented will enhance Indian economic performance and growth. (pages 9 - 46)
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- T. N. Srinivasan
DOI: 10.7208/chicago/9780226454542.003.0003
[Indian fiscal affairs, state finances, tax, expenditure reform, subsidies, disinvestment, capital spending, fiscal policy]
This chapter discusses the current state of Indian fiscal affairs. After the crisis of 1991, there was a period during which the fiscal deficit was somewhat decreased, but it has since increased, and prospects for its reduction without further policy measures are quite bare. It specifically examines the state finances, tax and expenditure reform, reduction of subsidies, and disinvestment. The current precarious fiscal situation of states is the result of increasing implicit and explicit subsidies on goods and services supplied by the government (electricity, irrigation water, transport, education, health) with virtually no attempt to raise revenues to finance them. A significant part of the fiscal correction in the early 1990s was through reductions in development spending, particularly capital spending, which could jeopardize growth. Increasing the tax capacity of the states and reducing transfers from the central government to the states as much as possible will enhance fiscal policy-making in India. (pages 47 - 71)
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Comment

Comment

Comment

- Montek S. Ahluwalia
DOI: 10.7208/chicago/9780226454542.003.0004
[Indian states, growth rates, economic reforms, private investment, public investment, state plan expenditure, infrastructure, trade, payment]
This chapter reports new evidence on differentials in growth rates among the Indian states, and a preliminary analysis of the reasons for these differentials. The performance of the major states in the postreform period 1991–92 to 1998–99 is reviewed and compares it with performance in the previous decade. The influence of economic reforms at the national level on the growth rate of individual states depended on the net effect of forces. Private investment is one of the principal drivers of growth. Public investment and state plan expenditure are not nearly as obviously correlated with growth as many would have expected. The central government has a major role in developing infrastructure in the poorer states by influencing its own expenditure on infrastructure to help overtake infrastructure bottlenecks in the poorer states as quickly as possible. It noted that trade, payment, industrial, fiscal, and financial policies affected growth of states. (pages 91 - 126)
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Comment

II. Private Economic Activity

- Naushad Forbes
DOI: 10.7208/chicago/9780226454542.003.0005
[private firms, Indian industry, liberalization, technology, innovation]
This chapter evaluates the changes in the environment in which private firms operated between the period just prior to reforms and the late 1990s. It also explores how technology and innovation have changed in Indian industry. The slowdown has been particularly important as a driver of change in industry. Through 1991, Indian industry is becoming normal. The success of liberalization for Indian industry will finally lie in the emergence of internationally competitive firms. The criteria for success in Indian industry have changed from capturing industrial licenses through acquaintance with Rajiv Gandhi, bribes for bureaucrats, or liaison men in Delhi. The changes since 1991 have unleashed a new dynamic in Indian industry, a dynamic that is forcing change in every sector as firms are finally compelled by new firms and by the availability of imported products to provide consumers with products, prices, and service that begin to approach internationally competent levels. (pages 129 - 168)
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- AnnaLee Saxenian
DOI: 10.7208/chicago/9780226454542.003.0006
[Indian software industry, Bangalore, Silicon Valley, policy reforms, information technology, National Association of Software and Service Companies]
This chapter addresses the growth of the Indian software industry, and provides some contrasts between Bangalore—the center of software in India—and Silicon Valley. India's software industry has grown so rapidly that it evokes frequent comparisons between Bangalore and Silicon Valley. The policy reforms of the 1980s facilitated the emergence of an export-oriented software industry in India. The industry of Indian software as a whole remains significantly less productive than its global competitors. Information technology (IT) presents possible efficiencies in a wide range of private-sector activities, from distribution and marketing to banking to agriculture. The industry association, National Association of Software and Service Companies, has accelerated the policy reform process through its aggressive lobbying while helping to define a minimally interventionist model of industrial promotion. It is noted that Bangalore is not Silicon Valley, and IT is not going to solve all of India's problems. (pages 169 - 193)
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Comment

Comment

III. Government Activity

- Rakesh Mohan
DOI: 10.7208/chicago/9780226454542.003.0007
[small-scale industry, India, educational policies, small-scale firms, capital market, Indian industrialization, Indian manufacturing, product reservation]
This chapter investigates that the educational policies were planned to promote new entrants and to protect small-scale firms from what was believed would be unfair competition from established firms. The Indian attempt at correcting for capital market distortions through administrative means has met with perverse results, and a whole new approach is called for. Some of the policies reviewed may have been useful in the earlier stage of Indian industrialization and in the context of a highly controlled and closed economy. The unchanging share of manufacturing employment that has been found over three decades in India is atypical, demanding explanation and meriting concern. The Indian manufacturing sector had been confined by the various antigrowth policies encouraging the small-scale sector, particularly that of product reservation. There has to be a new approach considering the problems underlying the difficulties faced by small-scale industry enterprises in attaining adequate access to credit. (pages 213 - 297)
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Comment

- Anjini Kochar
DOI: 10.7208/chicago/9780226454542.003.0008
[school attendance, education policy, school quality, households, schooling attainment, schooling inequality, governmental investments, parental schooling, private schools]
This chapter investigates the supply-side factors that influence the decision to extend children's school attendance to longer periods. The differential effect of school quality on households from different socioeconomic backgrounds indicates that low school quality may increase inequality in schooling attainment. It also provides evidence of the correlation between schooling inequality and governmental investments in the schooling sector. Educationally backward households and regions pay the costs of poor school quality to a far greater extent than do better-schooled households. Furthermore, data shows that states spending relatively more on schooling have experienced more rapid growth in private school enrollments. Low school quality affects poorer households, characterized by low levels of parental schooling. A decrease in regulation may promote the growth of private schools. (pages 303 - 328)
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- Andrew D. Foster, Mark R. Rosenzweig
DOI: 10.7208/chicago/9780226454542.003.0009
[schooling infrastructure, schooling investment, educational polices, economic growth, human capital, wealth, rural secondary school, school construction, agricultural productivity]
This chapter investigates whether low levels of schooling infrastructure and low schooling investment are solely the product of failed educational polices or whether they reflect instead, or at least in addition, inadequate economic policies and consequently low school demand. Augmenting and sustaining the rate of economic growth is a powerful policy tool for increasing the human capital of the population. Land prices seem to be a moderately sensitive and statistically substantial predictor of yield growth. The increase in wealth has a significant but less powerful effect on rural secondary school construction compared with raising the expected growth rate and thus the returns to schooling. Furthermore, the expected growth rates in agricultural productivity have had significant effects for given wealth levels on school construction and on enrollment rates, while wealth effects, for given productivity increases, have on average had negligible effects on enrollment. (pages 329 - 354)
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- Anne O. Krueger
DOI: 10.7208/chicago/9780226454542.003.0010
[economic policy reform, India, economic growth, small-scale industry, labor market, education, health]
This chapter describes the current state of economic policy reform, the key areas where further reform is urgently needed if India is to sustain a 6–7 percent annual rate of economic growth, and some topics for further research. Indian economic policy reforms of the 1990s are best marked using the good news/bad news format. The first short-run threat to the sustainability of Indian economic growth—even at the 6 percent level—is the fiscal situation. Dereservation of small-scale industry (SSI) would surely enhance the functioning of not only the labor market but also the entrepreneurial market. Government delivery of education, health, agricultural research and extension, the judicial system, and other services can be greatly streamlined. It is noted that, as is befitting an academic conference, there are a large number of areas in which additional research could greatly inform the policy reform process. (pages 355 - 362)
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Conference Participants

Contributors

Author Index

Subject Index