India’s economic boom began around 1980, more than a decade before serious economic reforms were initiated. What was its cause? This paper by the International Monetary Fund suggests that rather than trade liberalisation, expansionary demand, a favorable external environment or improved agricultural performance, the trigger may have been an attitudinal shift by the government in the early 1980s. Crucially, this shift was pro-business rather than pro-market in character.
India has yet to catch up to China’s growth rates (or even to China’s level of income), but thanks to its solid democratic institutions and impressive performance in information technology, the country is increasingly vying with, if not displacing, China to be the country of the future. The improvement in India’s economic performance holds out hope for other poor countries around the world insofar as it sends the message that rapid economic growth is attainable under appropriate policies. But what exactly are those “appropriate” policies that made the Indian miracle possible? The conventional story is that, until recently, India had one of the most over-regulated and closed economies in the world and that the economic liberalisation of 1991 constitutes a watershed event for the Indian economy.
In fact, the trigger for India’s economic growth was an attitudinal shift on the part of the national government in 1980 in favor of private business. Until that time, the rhetoric of the reigning Congress Party had been all about socialism and pro-poor policies. This shift toward a pro-business orientation was the essential trigger that set off the boom of the 1980s.
India has very strong political and economic institutions for a country at its income level. It is a democracy where the rule of law generally prevails and property rights are protected adequately. Judged by cross-country norms, it ought to have a level of income that is several times higher. The implication is that relatively minor changes in the policy environment can produce a large growth impact.
- A relatively small shift elicited a large productivity response, because India was far away from its income-possibility frontier.
- Registered manufacturing, which had been built up in previous decades, played an important role in determining which states took advantage of the changed environment.
- Most observers have emphasized gradualism as the hallmark of the Indian approach to reforms. Equally important has been the approach to reforms adopted in the 1980s, the distinctiveness of which has arguably had less to do with their pace than with their manner and sequencing.
- In addition, even the internal reforms that favored business were slanted more toward pre-existing activities than facilitating new businesses.
- This approach had the political economy merit of avoiding the creation of losers.
It may well be that the performance of the 1980s would have run out of steam and that the “true” reforms of the 1990s were essential to keep the productivity growth alive.
- The reforms of the 1990s were, of course, triggered by the crisis of 1991.
- The quick rebound from the crisis has been almost entirely attributed to the decisive break from the dirigiste past.
- If the 1980s experience was successful, it is hard not to draw the conclusion that the quick rebound was also rendered possible by the strength of the 1980s performance.
