Indian Economic and Political

History

Term I Pre-
Pre- Mid
Mid--Term
2019--20
2019
Session 9

Rajesh Bhattacharya
Email:
Office: C-306, C-Block
Office Hours: Monday/Wednesday: 4:15 --5:45pm
or by appointment

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Reasons for Liberalization in the
1980s
 The disillusionment with socialism
 The experience of East Asia and Latin
America
 Support for market friendly policies among
the middle classes
 Pressure from international agencies

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Economic Performance in the 80s
 The economy performed better in the 80s
compared to the sixties and the seventies
 GDP grew by 5.8 percent and industry by 7.8
percent on average per during the decade
 This was in comparison to growth of 3.0
percent in the 1970s
 However, like the fifties, higher growth was
largely the outcome of factors that were
unsustainable, especially in times of crisis

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Economic Performance in the 80s
 Exports did not grow significantly in the first half of the 80s
because industry was not yet competitive

 However, growth remained high because of positive external factors

which made increased imports possible

 The rapid increase in domestic oil production because of new oil

discoveries meant that outflow of FE for oil imports was relatively
less

 There was also an increase in remittances from expatriate workers

 Concessional external funding, especially from the World Bank and

the IMF kept debt service obligations down in the first half of the
decade
 In the second half of the decade though exports increased it could
not cover for increasing imports and competitiveness remained a
problem for industry
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Negative aspects of growth in
the 80s

 Large fiscal deficits

 Poor competitiveness

 Large current account deficits

 Rapid rise in external debt

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Large Fiscal Deficits
 Reforms were carried out within the
constraints of a democratic environment
 There was an emphasis on carrying out
reforms that directly and immediately
benefited some sections
 The harder reforms that might have alienated
electoral constituencies, but could have
resulted in better quality growth, were put off

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 .

 Reduction in taxation was popular, but there

was no emphasis on preventing tax evasion
 Tax collection did not go up significantly
 Revenue expenditure increased during the
eighties both because of a hike in salaries of
government employees and, later in the
eighties because of increase in subsidies and
liberal grant of unsecured loans

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Competitiveness in Indian Industry
 Competitiveness continued to be a problem
for Indian industry
 Industry could nor respond as quickly as
the government expected to external
competition
 Private industry tried to get continued
protection arguing that the government
was liberalizing too quickly and tried to
stall liberalization measures

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Dealing with the CAD
 Dealing with the current account deficit
was critical if import intensity was to
continue
 The shortfall was made up by two sources
of external funding
◦ NRI Investments and Deposits
◦ Commercial borrowing abroad

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Rapid rise in external debt
 External debt doubled from US $ 35 billion
in 1984-85 to $ 69 billion in 1990-91
 NRI deposits rose from $ 3 billion in 1984-
85 to $10.5 billion in 1990-91
 Short term external debt grew sharply to $ 6
billion
 The increasing reliance on external short-
term debts made the country vulnerable to
external shocks
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Immediate Causes of the Crisis of
1991
 The Iraqi invasion of Kuwait in August 1990
and its financial impact
 Political Instability
 Downgrade by international credit-rating
agencies
 Repayment of short term debt and the decline
of foreign reserves

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The Impact of the Gulf War
 The price of oil nearly doubled
 Value of petroleum imports increased from
US $ 3.5 billion in 1989-90 to $ 5.7 billion in
1990-91
 Workers remittances from the Gulf were
sharply reduced
 There was a loss of some export markets in
the Gulf region
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 Fearing rupee depreciation import payments
.

were brought forward by firms and export

proceeds held abroad leading to negative
impact on foreign reserves
 NRI inflows turned to outflows as NRIs,
fearing a moratorium on payments in
denominated currencies, withdrew deposits
and took funds out of the country

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The Political Crisis
 The Congress Party lost the election in November
1989 and though it emerged as the largest single
party, it refused to form a coalition government
 The second largest party the Janata Dal formed a
non-Congress Government under V.P.Singh
 The V.P.Singh government fell apart in December
1990 because of internal divisions within the party
and also within the coalition supporting it.
 A caretaker government was set up prior to new
elections in May 1991.
 The political uncertainty was heightened by the
assassination of Rajiv Gandhi in May 1991

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Lowering of credit ratings
 Increased political uncertainty, along with the
negative effects of the Gulf War, led to a
downgrading by international credit rating
agencies
 Additional commercial borrowing abroad was
not possible
 Low ratings also meant that many international
banks refused to roll-over short term debt and
demanded immediate repayment

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The Crisis of 1991
 By June 1991 official reserves fell to the equivalent
of just a few weeks imports
 Inflation reached double digits
 Lack of foreign exchange was starving domestic
industry of crucial imported inputs
 Poor credit-rating meant that gold reserves had to be
transferred abroad as collateral for loans
 The country was finally forced to go the IMF for a
stand-by loan in order to stabilize the situation

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The reforms of the 1990s
(i) the abolition of industrial licensing and the narrowing of the scope
of public sector monopolies to a much smaller number of
industries
(ii) the liberalization of inward foreign direct and portfolio investment
(iii) sweeping trade liberalization including the elimination of import
licensing and the progressive reduction of nontariff barriers
(iv) major financial sector liberalization, including the removal of
controls on capital issues, freer entry for domestic, and foreign,
private banks and the opening up of the insurance sector
(v) liberalization of investment and trade in important services, such
as telecommunications.
Areas that remained largely untouched by reforms in the 1990s were
the labor market privatization of firms and and further agricultural
sector reforms.

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Table: Growth Performance in the Five
Year Plans
(per cent per annum)
------------------------------------------------------------
Target Actual
------------------------------------------------------------
1. First Plan (1951-56) 2.1 3.61
2. Second Plan (1956-61) 4.5 4.27
3. Third Plan (1961-66) 5.6 2.84
4. Fourth Plan (1969-74) 5.7 3.30
5. Fifth Plan (1974-79) 4.4 4.80
6. Sixth Plan (1980-85) 5.2 5.66
7. Seventh Plan (1985-90) 5.0 6.01
8. Eighth Plan (1992-97) 5.6 6.78
9. Ninth Plan (1997-2002) 7.1 6.8
10. Tenth Plan (2002-2007) 8.1 7.7

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Indian Growth Story

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Post-1980 Indian Growth: Two
Post-
major Points
 Economic growth in India started
accelerating a full decade before
liberalization of 1991.
 Industrial production in India—a key
object of reforms—did not accelerate after
the liberalizing reforms; if any change is
observable, it is in the opposite direction

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