Indian Statistical Institute, May. Ashok Kotwal, Bharat Ramaswami, and Wilima Wadhwa (2010)

This article reviews India’s economic development and reforms since the 1980s and concludes with arguments about what India must do next, including focusing on agricultural development to reduce poverty.

Before 1991, India’s economy was held back by the restrictive license permit quota raj.  Some of the highest tariffs in the world, red tape in the domestic and foreign sectors, state control of banking and insurance, and public sector monopolies held the private sector back.  A dramatic slew of pro-business reforms in 1991 “completely changed the direction of economic policies,” in the words of Kotwal, Ramaswami, and Wadhwa (17).  The traditional understanding is that as a result of these reforms, India “moved away from a state-led closed economy framework in favor of greater integration with the world economy, lesser controls on private business activity especially in manufacturing, and substantially lower entry barriers to prospective entrants, whether domestic or foreign” (17). 

Many scholars have attributed India’s growth to its pro-market reforms in 1991, but in fact, economic growth predates these reforms.  When Indira Gandhi returned for a second position as prime minister in 1980, she came into office friendlier to business than she had been in the past.  This “attitudinal change” was an important signal to the private sector and partially explains structurally higher growth rates beginning in the mid-1980s—predating the 1991 reforms.  Other scholars point to a series of small reforms going as far back as 1975 that gradually weakened the license raj.

Between 1973 and 2005, India’s urban and rural poverty rates both halved.  Interestingly, the majority of the decline in rural poverty over this period occurred in the first half of the period. 

The authors conclude that the growth India has experienced since the 1980s “is not another instance of State driven growth in Asia” (43).  Instead, they argue, “it is the co-incidence of the ready availability of new technologies and having the skilled manpower that would be necessary to take advantage of these new technologies.  Technology transfers in the 1980s and early 1990s took place mostly through easier and cheaper access to imported machinery that was made possible by trade liberalization.  Improved communications (especially cell phones) and the diffusion of internet were other technologies that played a big role in driving growth from the mid-1990s on.  It is inconceivable that without the breakup of government monopolies and the advent of competition in the communication sector, there would have been a revolution in communication technology in India.  And, without such a revolution, the fastest growing sectors (e.g., business services) would not have taken off in India.  The sustained growth that we have seen since the mid 1990s would clearly not have been possible without the liberalizing reforms of 1991.  …At the same time… it should be acknowledged that some aspects of the earlier economic regime played a positive role in the pattern of development later.  For example: the creation of a diverse set of skills through import substitution, an emphasis on tertiary education creating a pool of university graduates for sophisticated service sector jobs and a government induced expansion of banking network that helped in mobilizing savings” (43).

The authors draw several lessons from India’s experience.  Besides identifying the necessity of improving India’s educational and legal systems, they argue that “One important lessons from the Indian experience and especially from its comparison with other Asian countries is that a country can neglect agriculture at its own peril” (45).  While India has created a class of educated managers, it still has a large, undereducated population employed in the informal sector, particularly agriculture.  To raise them out of poverty, India will have to improve agricultural productivity, credit and technology access, and rural institutions.  The authors conclude that “India’s future will depend a great deal on how these institutional improvements shape up” (46).