India: a global economic power? Revisiting the past and contemplating the future.

Author:Panagariya, Arvind
Position::Report
 
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Seventeen years after publishing "India: A New Tiger on the Block?" in the Spring/ Summer 1994 issue of the Journal of International Affairs, Arvind Panagariya revisits his analysis of India's 1991 economic reforms and looks ahead to India's economic prospects in a changing world order.

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In the Spring/Summer 1994 issue of the Journal, I published an article entitled India: A New Tiger on the Block?" in which the concluding paragraph asked, "Will India accomplish in the next decade what China did in the previous one?" I stated that although it is overly optimistic to respond affirmatively, a 6 to 7 percent annual growth rate in India could not be ruled out. The world should not be surprised if, in a decade's time, it sees another tiger on the block. (1)

This prediction was made against the backdrop of a balance-of-payments crisis in the first half of 1991. That crisis had brought India's growth rate down to below 2 percent in fiscal year 1991-92. (2) According to the data available at the time I wrote the above-mentioned article, recovery from the crisis had begun but growth was still modest--4 percent in 1992-93 and 3.8 percent in 1993-94. (3) Therefore, it was far from clear that the liberalizing reforms that had been and were being introduced would succeed. I was out on a limb; no one else at the time seemed to stake a claim to India's growth matching the Chinese level within a decade.

Luckily for India, the subsequent events have fully justified the liberalizing reforms that had begun to be introduced stealthily and haltingly in the second half of the 1970s but that became bolder and more systematic beginning with the important package of 1991. India grew at an average annual rate of 6.2 percent during the decade spanning 1994-95 to 2003-04. And, beginning in 2003-04, within a decade after the publication of the article, it shifted to the 8 to 9 percent trajectory commonly associated with the tiger economies of East Asia. By 2008-09, correcting for inflation, the per capita GDP in India had reached 2.26 times its level in 1990-91. (4) Side by side, the proportion of population living below the poverty line had declined from 36 percent in 1993-94 to 27.5 percent in 2004-05. (5)

In this paper, I briefly discuss the key developments that have taken place since the systematic reforms of the 1990s. The gist of this discussion is that while India has made significant economic progress after having lost nearly three to four decades, it still has some distance to go before it is able to make abject poverty history. I argue that a much bigger transformation awaits India in the coming fifteen years. During these years, it will surpass China in terms of growth and begin to catch up with it in terms of GDR By 2025, India will turn into the third or fourth largest economy in the world. It will also become an ever-larger supplier of the highly mobile global workforce during these years. These expected developments in India will have far-reaching implications for the world economy.

THE CHANGING LANDSCAPE OF THE INDIAN ECONOMY

Prior to the reforms, India started at such a low level of income and with such vast poverty that somewhat paradoxically it is possible today to simultaneously argue that reforms have yielded unprecedented growth and poverty reduction and that despite the reforms, poverty remains pervasive and per capita incomes low. If you are cheering for the reforms, you emphasize the first and if you are nostalgic about the old order, you assert the latter.

Writing in 1980, only a decade before the 1991 reforms, Gary Fields, a leading expert on poverty at the time, described poverty in India in these dire terms:

India is a miserably poor country. Per-capita yearly income is under $100. Of the Indian people, 45 percent receive incomes below $50 per year and 90 percent below $150 ... India's poverty problem is so acute and her resources so limited that it is debatable whether any internal policy change short of a major administrative overhaul and radical redirection of effort might be expected to improve things substantially. (6) Yet, having grown at the average rate of 6.2 percent during three decades spanning 1980-81 to 2009-10 and at 8.3 percent during the last seven years of this period, India is now a far bigger economy and has lifted more than 200 million people out of abject poverty. (7) From the near basket case described by Fields in 1980, India is an increasingly confident nation, rapidly pulling itself toward upper middle-income status.

India's low per capita income and continuing high levels of poverty mask the major changes that have already taken place and that are at the heart of what is to come. It is important to recall that--irrespective of whether we choose 1980 or 1990 as the origin of reference--India began at very low levels of income and high levels of poverty. Therefore, the continuing low per capita income and high rates of poverty in relation to the income and poverty levels prevailing internationally are consistent with the vast transformational changes in the economy that have already taken place. This can only be appreciated by focusing on some of the specific structural changes and sectoral developments.

Even as late as 1990-91, India was nearly a closed economy. Exports of goods and services as a proportion of GDP stood at 7.3 percent and imports at 9.9 percent. Foreign investment was barely positive at $100 million. Remittances from overseas Indians were slightly larger at $2.1 billion. (8) In terms of policy, with the exception of a small proportion of products, imports were subject to across-the-board licensing and tariff rates that rose as high as 400 percent. Fewer than 4 percent of the tariff lines attracted a tariff of 60 percent or less. (9) The policy regime toward foreign investment was hostile, with such investments only permitted under extremely strict conditions.

Three factors contributed to a change of ethos in favor of liberalization. First, the government was increasingly reminded by businessmen that the command and control regime India had chosen was impeding economic progress. Second, the Soviet Union, which had served as the original inspiration for the policy regime India had embraced, collapsed. Finally, and perhaps most importantly, after liberalizing reforms beginning in the late 1970s, China took off economically. The leadership in India had often dismissed the favorable experiences of South Korea and Taiwan with outward-oriented policies as irrelevant for India since India was a much larger country. But that argument could not be applied to China since it was even larger than India. Systematic liberalization of trade and investment were launched in 1991, with the process continuing on a stop-and-go basis in the subsequent years.

As a result of the accumulated reforms over the years, today trade in industrial goods and services and foreign investment are as free in India as in China. Direct import restrictions including licensing for protectionist reasons are all gone. The only such restrictions are those permitted under WTO rules for reasons of health, environment, protection of human, animal or plant life and national security. Only in agriculture is India more protected than China. The highest rate on nonagricultural imports is set at 10 percent with some exceptions. Foreign investment has been opened in almost all sectors except multi-product retail. Sectoral caps remain on foreign investment but they are set below 51 percent in only a handful of cases, and go up to 100 percent in most cases/[degrees]

The response to these and other liberalizing policy changes has been quite dramatic. Figure 1 shows the export-to-GDP ratio from 1980-81 to 2008-09...

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