Economic reforms and growth prospects in India

Abstract

Introduction: Global economic environment is changing rapidly in the last 10 years. This change is reflected in widening and intensifying international linkages in trade and finance. It is being driven by a near-universal push toward trade and capital market liberalisation. Not only have production processes spread to many countries, but also the service sector has increasingly become dominant in many countries. The global strategic and political environment has also been changing rapidly in recent years (after collapse of the Soviet Union and the end of the cold war) with moves towards regional trade and security blocks. In this context, India is on the move. India has seen its influence in world affairs wane in part because its economic clout has not been able to match the leading posture it assumed. Until recently, India was striving for self-reliance in a highly controlled, centrally planned and closed economy. India’s trade with the rest of world has been insignificant. Today, India is trying to break with the economic policies that underpinned Nehruvian thinking, and to open itself to world trade. Starting in June 1991, the Indian government introduced a number of liberalising measures, including significant tariff reduction, abolition of all quantitative restrictions on nonconsumer goods, unification of the exchange rates, and adoption of a liberal set of rules for FDI, and introduction of current account convertibility. While the industrial reforms seek to bring about a greater competitive domestic environment, the trade reforms seek to improve international competitiveness. The private sector is allowed in many industries that were earlier exclusively reserve d for the public sector. In these areas, the public sector will have to compete with the private sector, even though the public sector may continue to play a dominant role. These reforms are not meant to diminish the role of the state, but to redefine it, expanding it in some areas and reducing it in some others. Basically its aim was to have a better mix of ‘market’ and ‘State’. Due to advancement of science and technology and consequent upon productivity growth, the average time needed for reaching economic maturity has been declining steadily. While Great Britain took nearly 150 years for the evolution of its industry, US did it in about 100 years, and Japan and other East Asian countries1 were able to compress this time to 30-40 years. The big question is can India do it in about 30 years? If India sets course on a 7 % GDP growth rate, it will have to wait about 68 years to be on par with the GDP of the developed world. Therefore, India is trying to accelerate its annual growth to exceed 7 % over the next few decades. In this regard, one of the key questions asked has been whether it is possible to accelerate and sustain a higher growth rate over a long period. Against this background, this paper first review India’s development strategies including recent economic reforms and then discusses economic performance and its outlooks. It also reviews policy options to increase India’s overall performance.