An Example of Economic Reform in South Asia:India 1991-2004

For its May 4, 1991 issue, the Economist chose the image of a tiger in a cage for the cover of an in-depth survey of the Indian economy.¹³ The Indian economy was indeed in deep trouble. There were both short run problems of stabilization related in particular to problems of external balance and lack of reserves, and medium and long term issues of structural reforms including trade and financial liberalization.

In 1991, after the balance of payments crisis hit India, Dr. Manmohan Singh, a professional economist and an economic administrator, was appointed Finance Minister. Manmohan Singh is undoubtedly the architect of the most far reaching reforms in India since independence in 1947. Despite initial resistance, his personal integrity was a big factor in the eventual acceptance of some major policy shifts. However, from the mid-90s, there was increased criticism of both the results of the reforms---particularly on the distributional side--- and their inadequate formulation(Virmani 2004). In response, government economists such as Dr. Arvind Virmani took upon themselves the task of clarifying the goals, objectives and methods of the reform package.

Acoording to these Indian economists, there were two main objectives. One was to promote competition by eliminating protection. The other was to "…simultaneously" increase "… the ability of producers to meet such competition by removing policy barriers and distortions."¹⁴ Clearly, trade liberalization was and remains an important plank of these reforms.

Although 1991 is convevtionally given as the year when big changes began, the reform process itself was begun in the 80s.¹⁵ However, the emergency in 1991 led to both a painful stabilization package to handle the short run external balance problems and also to the longer term reform agenda of dismantling the 'licence raj', giving market forces a bigger role to play.

Focusing on trade liberalization in particular, a considerable increase in exports took place with tariff reduction and removal of other barriers. Prior to the reforms all imports were either submitted to licensing or prohibited altogether. All bulk items such as cereals, petroleum, mineral ores, metals, fertilizers etc. could be imported only by specified government agencies. Hence the market structure was close to being a monopsony. There was also a massive increase in tariff rates in the 1980s.

As Joshi and Little(2001,pp64-65) argue forcefully, there were not good reasons for the level of protection that the inefficient manufacturing sector had enjoyed historically. As they also note, the really significant change on the import side was the introduction of a 'negative'list. Any item not on the list could be imported freely except for some bulk items still controlled by the government agencies in mid-90s.

In accordance with trade theory the import of consumer goods in line with consumer preferences should enhance welfare. The long standing official Indian attitude towards foreign made consumer goods seems to have reversed itself. After making the people to suffe through many homemade goods of lower quality produced inefficiently, the trade policy liberalization has led to an increase of imported consumption goods.

On the export side, quantitative export restrictions came under attack. The list of restricted items has indeed shrunk as a result. Export promotion schemes are also being pursued with more than usual vigor. However, many export promotion schemes still carry large administrative costs are quite complex in practice.

India's main success in trade reform has been in the area of tariffs. In 1990-91, the unweighted average tariff was 125 per cent. That figure came down to 71 percent in 1993-94. The peak tariff rate in 1990 was an unbelievably high 355 percent. The peak rate in 1993-94 came down to 85 per cent. In 1995 the highest rate of tariff was further reduced to 50 percent. Today the average tariff rate is only 18 percent with the peak rate below 30 per cent. For this reason, in the policy experiments that follow in section 7, I concentrate on exploring the effect of tariff reduction on poverty reduction.

One last observation relates to the elections of 2004 and the replacement of the BJP government with the Centrist government headed by Dr. Manmohan Singh and supported--- with occasional criticisms--- by the left from outside the government. Initially there were great fears in the financial markets that a more populist regime will undermine the reforms if not reverse them altogether. That fear was calmed when Manmohan Singh became the prime minister with Mr. Chidambaram as the finance minister. However, the government has honestly admitted the failure of reforms to benefit the poor and the ruaral sectors in general. Along with the continuation of reasonable reforms, the government seems to be sincerely committed to the goal of poverty reduction.¹⁶

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