and Roberto Zagha
Achievements and the
Until recently, India was known for a highly
regulated, closed economy that discouraged foreign
investment. However, in June 1991 in the midst ofa
serious economic crisis, a new government began to
reform India's economy. If fully implemented, the
reform program could make Indians economy one of
the worlds most dynamic, and considerably reduce
the incidence of poverty, Shirazi and Zagha describe
the crisis of 1991, review the measures taken to
liberalize the economy, and outline what, in their
opinion, still needs to be done.
Two years after Prime Minister Rao assumed office
in the midst of the June 1991 crisis, the Ministry of Finance issued a "Discussion Paper" assessing the accomplishments
of the new government and charting a new course.' This
cogently argued paper finds that, "The fundamental
objective of economic reform is to bring about rapid and
sustained improvement in the quality of life of the people of India," and that "the only durable solution to the curse of
poverty is sustained growth of incomes and employment."
Secondly, the paper notes that an important lesson from the
international development experience is that "good
economic environment combines the discipline of competitive markets with efficient provision of key public services, such as primary education, primary health care, transport
and communication." Thirdly, the paper emphasizes that
reforms will be arduous and take time to achieve, but the
alternative, characterized by poverty, inflation, and
stagnation, is unacceptable.
Javad Khalilzadeh-Shirazi is the Division Chief of the
Country Operations Division ofthe World Bank's India
Roberto Zagha is the Principal Economist in the Country
Operations Division ofthe World Bank's India Department.
The views expressed in this paper do not necessarily reflect the official views ofthe World Bank.
These conclusions signal a fundamental break with
India's centrally planned approach to development. They
imply considerable awareness of the time dimensions of the
reform process, and may help explain the success achieved
thus far. In less than three years, a minority government in the world's largest democracy overcame an acute financial
crisis and has significantly liberalized one of the world's
most closed and regulated economies. At the same time,
inflation has been reduced and positive growth maintained.
In June 1991, the immediate challenge facing the new
government was to restore macroeconomic stability on both
the internal and external fronts. Culminating a decade of
unsustainable macroeconomic imbalances, the central
government fiscal deficit for the Indian fiscal year 19901991 (April 1, 1990 to March 31, 1991) reached 8.5% of GDP and, if uncorrected, would have exceeded 10% of
GDP m 1991-1992. India's historically low inflation rate
increased gradually hut persistently to reach 17% on a
point-to-point hasis in August 1991. At U.S. $10 billion,
3.5% of GDP in 1990-1991, the current account deficit of
the balance of payments reached an all-time high. In June
1991, with foreign exchange reserves at about U.S. $1
billion, the country was on the verge of defaulting on its
external debt. To maintain minimal external liquidity and
the country's impeccable debt servicing record, the
government transferred abroad on a temporary basis a part
of the country's gold stock.
On the structural front, it had become evident that the
development strategy pursued since the 1950s had run its
course. Since the 1950s, India had developed all the basic
institutions of a modern capitalist society, including a strong entrepreneurial class, but had also given a central role to the state in resource allocation. Allowing private firms and
markets to operate while using them to pursue the goals of
a planned growth process had required...
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