India on the Move
Why did India experience relatively slow economic growth from independence until 1991?
India became an independent country in 1947 and from that moment until the first years of the 1990’s, the government adopted the Import Substitution Industrialization model (ISI) in order to protect the economy against foreign competition. The model was based on regulations in the private and public sector, trade and foreign direct investment that made the economy very closed compared to other economies in the world. The system was not sustainable in the long term because it encouraged inefficiency in the industry performance. For instance, the average GNP per capita at that period of time was as low as $2301. Moreover, India’s growth performance plan has been written in a five year scope in which the actual growth from the periods of 1956-1961, 1961-1966, and 1969-1974 did not surpass the target (see Exhibit 1). The “Hindu rate of growth” around 3.5% prevailed in the period of 1950-1980 and then with oriented market reforms the growth rate change to approximately 6-8%2.
Why did Rao adopt the post crisis, “Washington Consensus” strategy? How is it working?
The Prime Minister Narasimha Rao, elected in 1991, had to ask for urgent help to the International Monetary Fund (IMF) as a result of a balance of payment crisis due to high interest rates, inflation driven by the fall of its principal trading partner: the Soviet Union. The IMF authorized the loan under the condition of adopting ten prescribed reforms. These policies were focused to stimulate growth and reach a stable macroeconomic environment; but most important, to minimize the role of the government in economic decisions. One of the most important results from these market reforms was the reduction of India’s fiscal deficit from 9.4% of GDP in 1990-19913 to 6.5% of GDP in 1998 (Vietor and Thomson, 2008). On the other hand, the average inflation rate dropped from 7.5% in the 1980’s, to 6.3% in the 1990s, and from
India became an independent country in 1947 and from that moment until the first years of the 1990’s, the government adopted the Import Substitution Industrialization model (ISI) in order to protect the economy against foreign competition. The model was based on regulations in the private and public sector, trade and foreign direct investment that made the economy very closed compared to other economies in the world. The system was not sustainable in the long term because it encouraged inefficiency in the industry performance. For instance, the average GNP per capita at that period of time was as low as $2301. Moreover, India’s growth performance plan has been written in a five year scope in which the actual growth from the periods of 1956-1961, 1961-1966, and 1969-1974 did not surpass the target (see Exhibit 1). The “Hindu rate of growth” around 3.5% prevailed in the period of 1950-1980 and then with oriented market reforms the growth rate change to approximately 6-8%2.
Why did Rao adopt the post crisis, “Washington Consensus” strategy? How is it working?
The Prime Minister Narasimha Rao, elected in 1991, had to ask for urgent help to the International Monetary Fund (IMF) as a result of a balance of payment crisis due to high interest rates, inflation driven by the fall of its principal trading partner: the Soviet Union. The IMF authorized the loan under the condition of adopting ten prescribed reforms. These policies were focused to stimulate growth and reach a stable macroeconomic environment; but most important, to minimize the role of the government in economic decisions. One of the most important results from these market reforms was the reduction of India’s fiscal deficit from 9.4% of GDP in 1990-19913 to 6.5% of GDP in 1998 (Vietor and Thomson, 2008). On the other hand, the average inflation rate dropped from 7.5% in the 1980’s, to 6.3% in the 1990s, and from