US-India Global Review

57 US-INDIA GLOBAL REVIEW JANUARY-MARCH 2018 I n 1991 India embarked on major reforms to liberalize its economy after three decades of socialism and a fourth of creeping liberalization. Twenty- five years later, the outcome has been an outstanding economic success. India has gone from being a poor, slow-growing coun- try to the fastest-growing major economy in the world in 2016. The World Economic Outlook for 2016 says that the United States and India are the two pillars of strength today that are helping hold up a sagging world economy.1 Once an object of pity, India has become an object of envy among developing countries; it is often called a potential super- power and is backed by the United States for a seat on the UN Security Council. Yet those successes have been accompanied by significant fail- ures and weaknesses in policies and institutions. The past 25 years of liberalization are largely a story of private-sector success and gov- ernment failure and of successful economic reform tarnished by institutional erosion. Even as old controls have been abolished, new ones have been created, so what leftist critics call an era of neoliberalism could more accu- rately be called neo-illiberalism. The quality of government serv- ices remains abysmal, and social indicators have improved much too slowly. The provision of public goods — police, judiciary, general administration, basic health and education, and basic infrastructure — has seriously lagged improve- ments in economic performance. Political appointees and govern- ment interference erode the inde- pendence and quality of institu- tions ranging from the courts and universities to health and cultural organizations. India’s economic reforms have been highly suc- cessful in moving the country from low-income to middle-income sta- tus, despite little improvement in its institutions and quality of public goods. To sustain rapid growth and to become a high-income country, India will need major reforms to deepen liberalization and build high-quality institutions. A Brief History of the Indian Economy It is difficult for youngsters today to grasp that until 1990, India was famous (or perhaps infamous) as the biggest beggar in the world, seeking food aid and foreign aid from all and sundry. It was hamstrung by a million con- trols, imposed in the holy name of socialism and then used by politi- cians to create patronage net- works and line their pockets. On attaining independence in 1947, Indian politicians were worried that imperial foreign rule would return in the guise of economic domination through trade and investment. So India sought “economic independence” to buttress political independence, and that took the form of aiming for economic suffi- ciency, along with a variation on soviet-style five-year plans. India’s share of global trade fell steadily from 2.2 percent at independence to 0.45 percent in 1985, and that was actually hailed as a policy tri- umph by Indian socialists. The public sector was supposed to gain the commanding heights of the economy. Nothing could be manufactured without an industrial license or imported without an import license, and those licenses were scarce and difficult to get. Any producers who exceeded their licensed capacity faced pos- sible imprisonment for the sin of violating the government’s sacred plan targets. India was perhaps the only country in the world where improving productivity (and hence exceeding licensed capaci- ty) was a crime. Twenty-Five Years of Indian Economic Reform Swaminathan S. Anklesaria Aiyar ECONOMIC POLICY

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