First Generation Indian External Sector Reforms in Context

Abstract

India's first generation external sector reforms are a fascinating case study of emergence from a post-Independence socialist-style economy to the world’s largest free market democracy. Part I of this article reviews the Indian license Raj system that prevailed after the 1947 Partition of India until the decade of the 20th century. Part I explains the hallmarks and inefficiencies of that system. Part II discusses the reforms that began in earnest in 1991.

Part II focuses on reforms in the external sector, foreign direct investment, and the financial sector. Unfortunately, those reforms lost momentum by the early 2000s.

Thus, Part III analyses what happened, namely, backsliding on tariff cuts, persistent tariff escalations, and difficulties in the banking sector and in attracting FDI. Part III points out that India fared poorly as a result relative to its neighbours on the Sub-Continent.

Part IV concludes that the economic challenges India still faces in pushing ahead with reforms so that it remains not just the world's biggest free market democracy, but so that it becomes the most exciting and dynamic one, are largely political. Get the politics right, and India's future is bright.