Indian Economy: Current Problems and Future Prospects

Nearly twelve years ago, we were in the midst of a severe macroeconomic and balance of payments crisis. The government of Prime Minister Narasimha Rao that had just come to office took some immediate steps to address the crisis, including seeking the assistance of the International Monetary Fund and the World Bank. But the Prime Minister and his Finance Minister, Dr. Manmohan Singh, realized that it would not be enough to take whatever actions were necessary in the short run to tide over the crisis and return to the pre-crisis policy regime thereafter, but systemic reforms and rethinking of the pre-crisis policy regime, and even more importantly our development strategy, were called for. This realization led Dr. Singh to initiate systems reforms. In my view, these reforms would not have been initiated but for two external events. First was the collapse of the Soviet Union and its economy, whose central planning was the model for our own development. Second was the phenomenal success of China since the opening of its economy to foreign trade and investment in 1978. It brought home the message that, unless there was a systemic change in economic policies and management, India would be left behind by its chief economic and political adversary in Asia, namely China. My emphasis on the contribution of external events to the initiation of systemic reforms is not to suggest that there was no rethinking earlier of our economic policies. Indeed, several high level committees had reviewed some of the policies (for example, the Abid Hussein Committee on Trade Policy in 1984, the Narasimham Committee on Controls in 1985). Of course, Rajiv Gandhi and some young economists from the World Bank he recruited for his staff did attempt to relax some of the most irksome controls. It is possible that he might have introduced systemic reforms had he not been stymied by his own party and not been distracted by the Bofors scandal.