Macroeconomics of Post‐reform India

Date01 May 2018
Published date01 May 2018
DOIhttp://doi.org/10.1002/pa.1684
BOOK REVIEW
MACROECONOMICS OF POSTREFORM INDIA
This book has very precisely covered the journey of the Indian
economy from the period of prereform to postreform era. The
economic reforms which took place in the year 1991 are very
significant for India. It brought about a lot of socioeconomic
changes which changed India's economy completely.
This book has been divided into two sections. The first section
deals with the theoretical framework and approaches (a brief
understanding of the Indian macro economy), and the second
section deals with the behaviour of the Indian economy. The
second section is a more comprehensive section as it discusses
about topics likeinflation, serviceled growth, balance of
payment crisis, and some macroeconomic puzzles.
The author concisely explained the different phases of the Indian
economy, right from prereform to post reform, from manufactur-
ing to service, and from food to oil inflation. The book is a
thorough revision of the Indian economy at hand, and it gives
the readers a clear overview of the country.
1|THE PREREFORM INDIAN ECONOMY
While we discuss about the nature of the Indian economy in the pre
reform era, what comes to our mind is the build up to the balance of
payment crisis. However, first we take a look at the external account
in the 80s. There was a decrease in the trade deficit ratio to gross
domestic product (GDP), and the current account also showed a
declining trend in this period. The external debt problem, however,
was a major source of imbalance to the economy. The external debt
as a ratio of GDP increased from 12% to 27% in a period of 10 years.
The level of the current account deficit and the interest rates are two
deciding factors on which the external debt will be measured. As
interest rates go up or the current account deficit level rises, there will
be an increasing external debt for the India economy. Apart from just
focussing on interest rates and current account, we need to look at
other factors involved. When the external borrowing increased in the
80s, much of it was used for financial consumption and not for capital
accumulation.
The exchange rate regime too was not conducive to the balance of
payments problem. The rupee was pegged to a basket of currencies
and the Nominal Effective Exchange Rate was brought down
significantly.
After much speculation, it was studied that an important means of
tackling the Balance of Payments problem is to hold sufficient amount
of foreign reserves. The amount of foreign reserves should be around 4
to 5 months of the import bill. It is also important to note that if the
country has a lot of short term accumulated liabilities, then the
country's central bank should also hold enough of large reserves to
stop a crisis from happening.
2|INDIA'S MACROECONOMIC PUZZLE
The behaviour of the Indian macro economy has been rather strange
and unique as compared to the rest of the economies. This chapter
focuses on the uniqueness of the economy over the years. First, it
was seen that with the high fiscal deficit, the current account balance
was positive. Second, it was studied that in spite of debt financing by
the government, both the interest rate and inflation showed a negative
trend. Third, as interest rates declined, private capital investment
started to decline instead of increase. Lastly, it was seen that in spite
of public and private investment falling, India's GDP continued to grow.
It was noticed that during this period, the agricultural sector,
which composed of around 75% of the GDP, had a lot of excess
capacity. Most analysts failed to understand the driving force behind
the Indian macro economy. They mostly focussed on variables like
revenue deficit to GDP, which primarily do not constitute the primary
instruments to the government policy.
Another starking feature noticed was that the major cutback in
public investment in infrastructure was one of the major reasons for
a decelerating growth. This cutback in public investments also had an
externality effect where private investment also saw a drop, depress-
ing agricultural growth. However, increase in consumption from
government sector help revive the economy a bit.
Some of the major macroeconomic variables were also a major
root cause for India's macroeconomic puzzles. It was studied that the
interest rate and fall in growth was primarily due to the slow growth
in the public and private investment. This fall in public investment
coupled with an increase in government consumption increased the
fiscal deficit for the economy. Thus, the major underlying lesson to
be learnt is that it is not important to focus only on the intermediate
target, but also to keep the long term goals in mind, and thereby set
the right policy instruments. This could help the economy from
negative consequences. Another important point to keep in mind is
that the prerequisites ready for a high investment should be ready.
That is to say that there should be skilled supply of labour, there should
be adequate level of infrastructure, and no demand deficiency. Other
such measures would include removing entry barriers, globalisation
of the economy, and ensuring healthy competition.
Received: 14 September 2017 Accepted: 17 September 2017
DOI: 10.1002/pa.1684
J Public Affairs. 2018;18:e1684.
https://doi.org/10.1002/pa.1684
Copyright © 2017 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of3

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