Indian reforms spark gains, but more are needed to sustain higher growth and reduce poverty
| Author | Patricia Reynolds |
| Position | IMF Asia and Pacific Department |
| Pages | 170-172 |
Page 170
India has been among the fastest growing economies in the world over the past two decades. It has achieved trend improvements in growth, literacy, mortality, and poverty rates (see chart, top panels, this page). In recent years, India’s deft handling of monetary policy has helped it successfully weather the Asian crisis while maintaining low inflation and a comfortable external position. Yet despite these gains, poverty rates remain high, with more than one-third of the population still living below the official poverty line. This uneven progress raises questions about the impact of recent economic and structural reforms and about what more can be done to reduce poverty.
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In the three decades following independence in 1947, per capita GDP in India rose only 1!/2 percent a year (see table, page 171). Throughout this period, the country’s economy was characterized by a high degree of government planning and regulation and pervasive industrial controls. Increasingly, restrictions on private credit, the role for the public enterprise sector, and subsidy programs also expanded. Strict controls on foreign direct investment, an elaborate import licensing system, and—from the 1970s—high tariff rates further stifled the economy’s growth potential.
In the 1980s, liberalization of import and industrial controls and improved agricultural performance helped accelerate real per capita GDP growth to an average rate of 3#/4 percent. But this expansion also reflected other developments, notably increased fiscal stimulus and a debt-financed consumption and investment boom that became unsustainable toward the end of the decade.
A balance of payments crisis ensued in 1991, reflecting a deteriorating fiscal position, rising external debt (especially short-term debt), a surge in world oil prices, and a sharp decline in remittances from Indian workers in the Middle East. As capital flight accelerated and official reserves rapidly declined, the Indian government entered into a Stand-By Arrangement with the IMF and embarked on a program of fiscal and structural reforms.
Corrective policy measures successfully restored macroeconomic stability. The central government deficit declined to 4#/4 percent of GDP in 1996/97 from 8 percent before the crisis through tax reforms, cuts in subsidies, and reduced defense and...
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