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Contents : EDRC POLICY BRIEFS Economics and Development Resource Center Indias Economic Reforms What Has Been Accomplished What Remains to Be Done Arvind Panagariya EDRC Policy Briefs are based on papers or notes prepared by ADB staff and their resource persons. They are designed to provide concise nontechnical accounts of policy issues of topical interest to ADB management Board of Directors and staff. Though prepared primarily for internal readership of the ADB EDRC Policy Briefs may be accessed by interested external readers. Feedback is welcome via e-mail (policybriefs@adb.org). The views expressed in Policy Briefs are those of the authors and do not necessarily reflect the views or policies of the ADB. EDRC POLICY BRIEF NO. 2 India's Economic Reforms What Has Been Accomplished What Remains to Be Done Arvind Panagariya* November 2001 *Director and Chief Economist Asian Development Bank. T hough economic liberalization in India can be traced back to the late 1970s economic reforms began in earnest only in July 1991. A balance of payments crisis at the time opened the way for an International Monetary Fund (IMF) program that led to the adoption of a major reform package. Though the foreign-exchange reserve recovered quickly and ended effectively the temporary clout of the IMF and World Bank reforms continued in a stop-go fashion. What has been accomplished and what remains to be done Is the glass half full or half empty The Good News: Achievements Thus Far India's reforms have been piecemeal and incremental giving the casual observer the impression that nothing has been happening. If one takes the totality of reforms over the last decade however the change is unmistakable. The analogy is with the hour hand of the clock which looks completely static and yet completes a full circle every 12 hours. To get an idea of the accomplishments begin with the industrial policy prevailing prior to the launching of the reforms. The heavy industry was a state monopoly. Other industries were either subject to strict industrial licensing or reserved for the small-scale sector. The tight control of the government on industry was aptly captured by a leading cartoonist in a 1980s comic strip showing the industry minister tell his staff "We shouldn't encourage big industry--that is our policy I know. But I say we shouldn't encourage small industries either. If we do they are bound to become big...." The reforms of the last 10 years have gone a long way toward freeing up the domestic economy from state control. State monopoly has been abolished in virtually all sectors which have been opened to the private sector. The License Raj is a thing of the past. The small- scale industry reservation still persists but even here progress has been made. Apparel with its large export potential was recently opened to all investors. In the area of international trade in 1991 import licensing was pervasive with goods divided into banned restricted limited permissible and subject to open general licensing (OGL). The OGL category was the most liberal but it covered only 30 percent of imports. Moreover certain conditions had still to be fulfilled before the permission to import was granted under the OGL system. Imports were also subject to excessively high tariffs. The top rate was 400 percent. As much as 60 percent of tariff lines were subject to rates ranging from 110 to 150 percent and only 4 percent of the tariff rates were below 60 percent. The exchange rate was highly over-valued. Strict exchange controls applied to not just capital account but also current account transactions. Foreign investment was subject to stringent restrictions. Companies were not permitted more than 40 percent foreign equity unless they were in the high-tech sector or were export-oriented. As a result foreign investment amounted to a paltry $100-200 million annually. Today import licensing has been completely abolished. This includes textiles and clothing which remain protected in developed countries through the multi-fiber arrangement. The highest tariff rate has come down to 45 percent (including the tariff surcharge and the so-called Special Additional Duty) with the average tariff rate declining to less than 25 percent. The foreign investment regime is as liberal as in other developing Asian countries. Ten years ago telecommunications services were a state monopoly and constituted a major bottleneck on the conduct of business activity. So callous was the attitude of the government that when a Member of Parliament complained about poor telephone service in Delhi during the early 1980s the then telecommunications minister went on to remind him that in a poor country like India the telephone was a luxury. The minister then added that if the Member was unhappy with the service he could return his phone since many customers had queued up for it for years! 2 / EDRC POLICY BRIEFS

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