South Asia: Journal of South Asian Studies

ISSN: 0085-6401 (Print) 1479-0270 (Online) Journal homepage: https://www.tandfonline.com/loi/csas20

Political economy of post‐1991 economic reforms

in India

Charan D. Wadhva

To cite this article: Charan D. Wadhva (2000) Political economy of post‐1991 economic
reforms in India, South Asia: Journal of South Asian Studies, 23:s1, 207-220, DOI:
10.1080/00856400008723409

To link to this article: https://doi.org/10.1080/00856400008723409

Published online: 08 May 2007.

Submit your article to this journal

Article views: 2814

View related articles

Citing articles: 2 View citing articles

Full Terms & Conditions of access and use can be found at

https://www.tandfonline.com/action/journalInformation?journalCode=csas20
South Asia, Vol. XXIII, Special Issue (2000), pp. 207-220

POLITICAL ECONOMY OF POST-1991

ECONOMIC REFORMS IN INDIA

Charan D. Wadhva
Centre for Policy Research, New Delhi

HIS PAPER PROVIDES AN EVALUATION OF THE POLITICAL ECONOMY

T of economic reforms in India since June 1991. It identifies the major

domestic political factors which have constrained the pace of India's
economic reforms. It is organised under four sections. Section I provides the
highlights of the rationale and the content of economic reforms implemented
between mid-1991 and mid-1999. Section II evaluates the gains (and losses)
from these reforms. Section III focuses on the urgency of launching a second
wave of economic reforms in India. It outlines the major contours of these
required reforms. Finally, section IV discusses the nature and critical role of
appropriate political leadership in launching the process of the next
generation of economic reforms to achieve the objective of making India into
a super Asian economic power in the twenty-first century.

I
The Indian economy had many positive achievements to its credit during the
forty years of centralised development planning based on the import
substituting industrialisation strategy (1951-91). India was widely regarded as
the role model of development planning until the mid-1960s. However, it
became increasingly clear to many observers both in India and abroad that
this model was not in tune with the changing times. India needed to rethink
its inward looking development strategy, particularly after the astounding
successes achieved by several East Asian and Southeast Asian countries in
achieving sustained high growth with better development of human resources
and improved distributive justice.
208 SOUTH ASIA

By absolute standards, India did well in terms of achieving fairly high

growth rates of output in the 1980s (at an average annual rate of 5.8 per
cent). However, high population growth (at around 2.1 per cent per annum)
acted as a drag on improving the growth rate of per capita income. Towards
the end of the 1980s, it also became clearer that this relatively high growth
rate was unsustainable. This was due to the unsound financing pattern of this
growth based as it was on the excessive fiscal (especially revenue) deficit as a
proportion of GDP. Fiscal problems were compounded by the ballooning of
direct and indirect subsidies; the rapid growth of domestic public debt and the
soaring bill of interest payments nearing an internal debt trap; very low rates
of return on huge investments made in the public sector; and excessive
growth of external debt especially of a costlier short term nature, requiring
short periods of repayment.
The over-regulatory economic regime extended to virtually all sectors of
the economy (especially the overprotected industrial sector and an overvalued
exchange rate), and had perpetuated shortages and created a non-competitive
industrial sector. The economic system under the regime thrived on activities
involving directly unproductive rent seeking/sharing by various lobby groups
and political patronage. Through micro level state intervention, this regime
had a clear anti-export bias and imposed binding constraints on the growth of
the real sector of the economy, including the agricultural sector.
The beneficiaries of the prevailing regulatory system (politicians,
bureaucrats and big industrialists), were quite comfortable with quick and
assured returns. They did not want a change to a different (East Asian) type
of system with uncertain, long-term returns. To these dominant classes,
following Bardhan1 and Dhar2, we must add the rich farmers and the
organised trade unions. Taken together these pressure groups were quite vocal
and exerted great influence in the formulation of the national economic
policy thereby weakening the autonomy of the state in acting strictly in the
interests of the consumers and the public at large.
Rampant corruption was a regular feature in the over-regulated
economic system particularly among the grassroot levels of bureaucracy. The
'licence-permit-inspector' raj added to delays and to the harassment of
citizens and investors alike. Like anywhere else, corruption acted as a damper
on the growth of the economy to its full potential. India's longer term

1 Pranab Bardhan, The Political Economy of Development in India (Oxford, Basil Blackwell,
1984) and his book chapter, 'A Political Economy Perspective on Development', Bimal Jalan
(ed.), The Indian Economy; Problems and Prospects (New Delhi, Penguin, 1992).
2 P. N. Dhar, 'The Political Economy of Development in India', Indian Economic Journal, Vol.
22, no.l (Jan-Jun. 1987).
 POST 1991 ECONOMIC REFORMS IN INDIA 209

economic crisis, as I have analysed elsewhere, originated from the

'overpoliticisation, over-bureaucratisation and undermanagement of India's
economy'.3 The Economist had aptly described India as a 'caged tiger'.4 In
fact the cage was of India's own making and not the act of any foreign
power. India finally got into an unprecedented balance of payments crisis in
1990-1.
The economic crisis of 1990-91 was turned by the new government of
Prime Minister P. V. Narasimha Rao and Finance Minister Dr Manmohan
Singh into an opportunity for introducing far reaching economic reforms.
Politicians in ruling parties as well as in opposition did not understand much
of the economic mess the country had fallen into. These politicians, therefore,
wanted to give time to the new Finance Minister to prove his worth. In the
early days of the economic crisis Dr Singh, with the full support of the Prime
Minister, found it relatively easy to get his prescriptions accepted by the
Union Cabinet. At Cabinet meetings other politicians kept quiet, only to wait
and watch the evolving policy measures being formulated by Dr Manmohan
Singh.
Dr Singh as the prime architect of economic reforms preferred to take
the road of substantive and sustained liberalisation of the economy. This was
in sharp contrast to the several earlier episodes of hesitant liberalisation
launched in India since the 1960's - the most notable having been launched
by then Prime Minister Rajiv Gandhi in 1985 without any conditions of
economic crisis. Dr Singh was convinced that India not only needed to
achieve macroeconomic stabilisation but also simultaneously needed structural
reforms. He believed that economic reforms under Indian democratic polity
had to be gradual and incremental in nature, politically feasible without
arousing too much protest from the vested interests, and without generating
undue social tensions. The first task had to be the formulation of an
appropriate macroeconomic policy.

Dr Singh therefore negotiated a eighteen-month stand-by loan of t.2.3

billion from the International Monetary Fund (IMF), ending March 1993, for
balance of payments support to the Indian economy. This loan was considered
necessary to facilitate India's transition to a private sector led, more open and
competitive market oriented economy through structural reforms. The
conditions imposed by the IMF in this stand-by loan to India were cleverly
used by Dr Singh to his political advantage as the politicians had to accept
them. He also used the conditions to correct some of the structural distortions

3
Charan D. Wadhva, Economic Reforms in India and the Market Economy (New Delhi, Allied
Publishers Ltd., 1994).
4
'Survey of India', The Economist, 4 May 1991, p. 5.
210 SOUTH ASIA

which had plagued the Indian economy for a long time and led to the
economic crisis which climaxed in June 1991.
The first action taken by Dr Singh towards restoring macroeconomic
stability and external confidence was to devalue the Indian rupee in two steps,
in 1991, aggregating 18 per cent against Special Drawing Rights. This was
ably supported by the Reserve Bank of India through a tighter monetary
policy. Fortunately generally controversial measures like devaluation and
tighter monetary policy (unpalatable to business investors) do not require
either prior Parliamentary approval or inter-ministerial coordination.
Simultaneously, tougher measures towards import compression and reduction
of the fiscal deficit, as a proportion of GDP, were adopted in the early phase
of reforms with all sincerity, knowing full well the contractionary effects and
social costs of such IMF-variety austerity measures.

With economic skill and little political interference, India succeeded in

overcoming its macro-economic crisis in about two years. This was probably
the fastest and least painful recovery under the stabilization package agreed
with the IMF by any developing country.
Serious efforts were made in the first two years of economic reforms to
reduce the fiscal deficit. The fiscal deficit of the Central government as a
proportion of GDP had admirably been brought down from a high of 7.7 per
cent in 1990-1 to 5.2 per cent in 1992-3. This fiscal consolidation had been
achieved by eliminating export subsidies, reducing some fertilizer subsidies
but mainly through drastically cutting planned public investment for
developmental purposes. The forced cuts in public investments clearly
depressed aggregate demand, private sector investment, and future growth
especially in the critical infrastructural sectors.

Dr Singh, as the Finance Minister, could raise fertilizer prices only part
of the way to what he had planned for the fast growing fertilizer subsidy. As
expected, he faced stiff resistance from the farmers' lobby for his move to
reduce the subsidy on fertilizers. It is due to the electoral vote bank power of
the farmers (led by rich farmers), that no Finance Minister in post-
Independent India has had the political courage to bring rich agriculturists
into the net of direct taxes for the much needed widening of the tax base.
With the subsiding of the economic crisis in India by March 1993,
politicians preferred to revert to 'business as usual'. Unfortunately, India has
gone through too many (over twenty) elections at the central and state levels
during the last five years. The established lobby groups became stronger
every time elections were called at the centre or at the state level, and this
clearly led to a slowing down of further economic reforms. It is ironic that
 POST 1991 ECONOMIC REFORMS IN INDIA 211

the pressure of competitive politics and appeasing government employees for

their vote banks had in fact led to raising the wage and dearness allowance
bills of the Centre and the States significantly in 1992-3 and 1993-4, when
austerity was the need of the hour.
This trend of rising wages for government employees has intensified in
later years. It climaxed in early 1998 with the over generous granting by the
United Front government, headed by Former Prime Minister, Mr I.K. Gujral,
of even higher wage increases to government employees (particularly the top
echelon of bureaucracy, the Indian Administrative Service) than had been
recommended by the Fifth Pay Commission. It has also not been possible for
governments of the day to link wage increases with productivity increases.
The salary bill and pension payments of Central (and State) governments
have consequently risen sharply straining the already worrisome state of fiscal
deficit (especially revenue deficit) of both the Central government and, to a
greater extent, of the State governments. The Economic Survey 1998-99 of
the government of India states that expenditure on salaries and pensions now
absorbs more than one fifth of the total revenue receipts of the Central
government.5

Yet another significant illustration of the dominance of the short term

politics of vote banks over long term good economics in India lies in the
relative inaction on raising user charges on utilities and other such services
supplied by the government.
Structural reforms have been carried out largely in the areas of industry
(including infrastructural industries), trade and financial sectors (details are
listed below). These reforms have by and large bypassed several other major
sectors like agriculture, cooperatives, education, etc. The general approach to
such reforms in the post-1991 period for the industrial sector has been in
three major directions. These are: (i) substantive deregulation and allowing
free participation by private enterprises for industrial development; (ii)
opening of the industries to greater international competition through far
more liberal imports combined with tariff cuts, and through foreign
investment in various industries; and (iii) disinvestment in incremental steps
of selected Public Sector Undertakings (PSUs). In addition, sector-specific
reforms have been put in place in the infrastructural industries like power,
telecom etc., where tariff regulatory authorities have been (or are being) set
up.
Deregulation by the Central government has proceeded at a remarkably
fast pace in the industrial sector over the past eight years of economic

5 Economic Survey 1998-9, Government of India, Ministry of Finance.

212 SOUTH ASIA

reforms. The same, however, cannot be said about the state level economic
reforms. Major economic reforms already in place include the following:
i The 'Licence-Permit Raj' has been largely abolished. Only six broad
groups of industry (such as atomic energy), are still reserved for the
public sector.
ii Under trade policy reforms, the Indian rupee has been made convertible
for current account transactions (as per article VIII of the IMF). Most
products of exports and imports have been deregulated from seeking any
licences. Tariff rates have been cut from a weighted average of as high
as 87 per cent in 1990-1 (with a peak rate of 350 per cent) to 27 per cent
by 1995-6 (with a peak rate of 50 per cent).
iii Successive governments have increasingly liberalised policies governing
inflows of foreign investment and made them more investor-friendly.
Foreign Direct Investment (FDI) has been encouraged in infrastructure,
high-tech, and export oriented industries. All Governments at the centre
and in the States have recognised the critical supportive role of FDI in
mobilising funds for financing the needs of modernising India's
infrastructure. An expert committee headed by Dr Rakesh Mohan has
estimated that India will require investments of US tl 15-130 billion in
the next 5 years and US t215 billion up to 2005-6 to finance its
infrastructure requirements alone.6 This level of investment is clearly
beyond the resources of the Indian government, the public sector, and
the private sector put together.
The government has made feeble efforts at the privatisation of existing
public sector units by partial disinvestment. A Disinvestment Commission had
been set up to advise government on the disinvestment policy. Upon
completion of its term in 1999 the government did not reconstitute this
Commission.
All governments under four different Prime Ministers since July 1991
have failed to make reforms in the industrial sector like labour market
reforms. The pace of economic reforms first slowed down in 1994 under
Narasimha Rao's government due to defeats suffered by the Congress Party in
various Congress ruled states. Congress faced defeat in state level elections
due to fiscal deficit raising populist policies adopted by opposition leaders.
The Congress Party, fearing a backlash from the opposition's charges against
the pro-rich economic reforms of the Rao government during 1991-6, did not

6 Rakesh Mohan (Chair), Expert Group on Commercialisation of Infrastructure Projects, The

India Infrastructure Report: Policy Imperative for Growth and Welfare, Vols. 1-3 (New
Delhi, 1998).
 POST 1991 ECONOMIC REFORMS IN INDIA 213

allow Dr Singh to campaign on the virtues and accomplishments of economic

reforms. As James Manor has documented, Mr Rao was deeply conscious of
the lack of intra-Congress Party consensus on the nature of economic reforms
launched by Dr Singh and quietly supported by him.7
India has been ruled by coalition government since Congress lost the
general elections in 1996. These governments have comprised more than a
dozen partners with different economic philosophies and different priorities.
Coalition politics has made the task of moving forward to the next phase of
economic reforms even more difficult.

n
While evaluating the gains and the losses (both actual and potential) in terms
of the opportunity cost of not moving more quickly into the next generation
of reforms, it must be remembered that the pace and content of these reforms
have been constrained by the very slow change in the mindset of the ruling
political authority.
Judged by historical standards, India has come a long way since July
1991 in changing the dirigiste economic policy that governed the country
during the previous forty years. Economic reforms have come to stay due to
the emergence of a very broad political consensus across parties for
continuing them. Substantial deregulation has been achieved, particularly in
the industrial, trade and financial sectors.
The Indian economy has been opened at a fairly rapid pace in terms of
lowering tariff rates, although these still remain higher than the average rates
prevailing in most Southeast Asian nations. India has also actively encouraged
inflows of foreign investment of both direct and portfolio varieties. It has
been recognised worldwide as one of the top twelve emerging markets for
portfolio investment. It has achieved free convertibility of the rupee on
current account under Article VIII of the IMF. For all practical purposes, the
rupee is convertible for FDI and also for portfolio investment, subject to
some conditions. The exchange rate is now largely market determined. The
capital market is also freer. Interest rates are being gradually deregulated.
Direct taxes have been lowered and corporate income taxes have nearly come
down to internationally comparable levels.

7 James Manor, 'The Political Sustainability of Economic Liberalisation in India', in R. Casin

and V. Joshi (eds), India - The Future of Economic Reforms (New Delhi, Oxford University
Press, 1995).
214 SOUTH ASIA

The present BJP-led coalition government has identified information

technology as a niche area for developing India's potential international
competitiveness. The government has announced a policy package for tapping
its full potential in the global market.
The market has responded positively to the limited economic reforms
which have only been incrementally put in place. India's GDP growth
(excluding the earlier two years of stabilisation efforts) increased in 1993-4 to
equal the pre-reform average annual growth rate of 6.0 per cent achieved
during the five year period of 1986-7 to 1990-1. Thereafter, the growth rate
accelerated further for the next three years, peaking at 7.8 per cent in 1996-7
and averaging 7.4 per cent for the three year period 1994-5 to 1996-7. This
happened despite the fact that agricultural production had registered a
negative growth rate of -2.7 per cent in 1995-6 over the previous year.
Inflation has been under control since 1995-6. Exports showed encouraging
growth in dollar terms registering a growth rate of 22.9 per cent in 1994-5
and 28.0 per cent in 1995-6. But this trend could not be sustained partly due
to an adverse global trading environment, especially the Southeast Asian
meltdown since June 1997.
The balance of payments situation remained comfortable as the current
account deficit, as a proportion of GDP, stayed well below 2.0 per cent
throughout the period 1993-4 to 1998-9. Thanks to the increasing inflows on
capital account, reflecting the renewed confidence of foreign investors in the
soundness of fundamentals of the Indian economy, foreign currency reserves
peaked at t27.4 billion on 30 January 1999. The country was able to bear the
costs of economic sanctions imposed primarily by the USA and Japan in the
aftermath of India's nuclear explosions of May 1998. The resurgent India
bonds, largely subscribed by the Non Resident Indians, mobilised US$4.2
billion. Most of these resources are intended to be utilised for investments in
India's infrastructure.
Industrial growth started slowing down after 1996-7, having reached a
peak of 12.8 per cent in 1995-6. The sluggish phase of industrial activity can
be attributed to the slowing down of economic reforms and continuing
deceleration in the growth of public investment in infrastructure. The
industrial economy experienced a worsening of supply side constraints (power
shortages, port congestion and strikes, etc.) as well as demand side constraints
partly due to lower levels of public investment. Both Indian industries and
multinational corporations, which had set up manufacturing operations in
India with FDI, had overestimated the growth of domestic demand and
created overcapacities. The Indian consumer got the benefits of the excess
supply situation in terms of lower prices of a wider variety and better quality
of goods.
 POST 1991 ECONOMIC REFORMS IN INDIA 215

Economic reforms implemented so far at the national level have brought

selective productivity gains at the micro level, but have not translated into
significant improvement in the international competitiveness of most
industries. It is ironic that eight years after the launching of economic
reforms, India's comparative ranking in the composite index of international
competitiveness of a large number of countries (including developing
countries) has in fact fallen for most of the years in the post-1991 period. The
World Competitiveness Report - 1999 prepared annually by the World
Economic Forum has ranked India at thirty-nine in international
competitiveness among forty-seven countries ranked for that year.8
A positive development in the evolution of economic reforms has been
its more recent spread to several states, especially Andhra Pradesh. Most State
governments have realised the importance of effecting investor-friendly
reforms for attracting investments (especially in the infrastructure sectors)
from all sources including indigenous industrialists, Non Resident Indians and
foreign direct investors. This is evident from the fact that even the
Communist government in West Bengal has made every effort to welcome
investors, especially foreign investors. This is part of healthy competitive
politics for accelerating the growth of output and employment. The visionary
leadership reflected in the Vision 2020 document and the commitment of Mr
Chandra Babu Naidu, Chief Minister of Andhra Pradesh, towards
modernising his state and placing it in the world's map of centres of
excellence and competitiveness in information technology, stand out.
Karnataka's Bangalore is already the software capital of India. Madhya
Pradesh's dynamic Chief Minister is not far behind in making his State a
global player in the information technology market place, and focusing on
human resource development.
India has been successful in cumulatively attracting foreign direct
investment of US tlO billion over the last eight years of economic reforms.
This looks good when compared to the average rate of tl50 million per year
in the preceding 40 years (1950-90). However, this record does not look as
impressive when one compares it with the average annual inflows of FDI
attracted by most Southeast Asian countries, not to speak of China, even after
the economic crisis that beset these nations since June 1997.
A question often asked is why India has not been able to attract a lot
more inflows of FDI when they started dwindling in the Southeast Asian
nations after the onslaught of the June 1997 crisis. The answer lies in the
commonly held perception that India still has a long way to go to become a

8 World Economic Forum (IMEDE), World Competitiveness Report - 1999 (Lausanne,

Switzerland).
216 SOUTH ASIA

sufficiently attractive destination for FDI, comparable to Southeast Asian

nations. Foreign investors appreciate that in India democracy is well
entrenched. Democracy in India does impose some costs on the effectiveness
of implementation of the government's policy announcements. India urgently
needs to launch a second generation of economic reforms which will remove
the existing impediments to create a more business friendly environment and
improve the 'feel-good' factor for foreign investors.

m
The preceding analysis clearly shows that the unfinished agenda (the more
painful reforms) of the first phase of economic reforms launched in 1991 is
quite large. Action needs to be quickly taken effectively to address the issues
relating to the next stage of the agenda. In addition, there is an urgent need to
launch a second wave of reforms calibrated to suit India's national interests
and in line with its international obligations. The second phase of reforms
must be clearly distinguishable from the first phase by the broadening and
deepening of the reform process to issues of political reforms: good
governance and formulation of management strategies to cope with the new
challenges posed by the new world trade order, and the world investment
order being evolved under the World Trade Organisation for the next
millennium. This section outlines ten selected priority areas for launching the
second wave of required reforms.

1. Political reforms
Political reforms will have to be a simultaneous adjunct of economic reforms.
Indian politicians at all levels of government will need to be educated. They
should be made fully aware of the costs and benefits of economic reforms for
the welfare of the people of India in the longer term. Ruling politicians with
limited tenure in office often have short term horizons in thinking about the
national interest. The public at large also needs to be thoroughly educated
regarding certain short term pain for the somewhat longer term gains of
economic reforms. Economic reforms must be people-centric and must
always be tailored to maximise (or at least not reduce) the social
empowerment of the weaker and vulnerable sections of the society. The
burden of adjustment to both stabilisation measures and structural adjustment
must be more heavily borne by the more prosperous sections of the society.
Appropriate electoral reforms, including state funding of elections, will help
to reduce the lobbying power of vested interests.
 POST 1991 ECONOMIC REFORMS IN INDIA 217

2. Re-engineering the role of the government

Future reforms must generally be aimed at limiting (downsizing) the size of
the government. Governments must specialise in performing roles which they
alone can perform better than free market private enterprise. The government
must expand its role in areas like provision of public goods such as primary
health, primary education, and creation of social or soft infrastructure. The
role of the Planning Commission must be accordingly changed to that of a
strategic think tank. The political mindset needs to be changed to accept the
re-engineered role of government in achieving market oriented economic
reforms. Future State level reforms will be more important than those at the
Centre, since most social services and infrastructural services are the
responsibility of the State governments.

3. Administrative and legal reforms

No matter how good the design of progressive and people-oriented economic
reforms, their success ultimately depends on efficient and speedy
administrative and legal systems. The people would like to see the
institutionalising of systems for providing benefits to the targeted
beneficiaries. The legal system must be strengthened for providing justice to
the genuinely aggrieved sections of the society. The second wave of economic
reforms must focus on changing the mindset of the administrators (especially
at the grassroots level), and of the judiciary (especially at the lower level), to
support administrative and legal reforms to synergise with economic reforms
for maximising social welfare. Public funding of appeals by the aggrieved,
deprived and weaker sections of the society should be effectively organised.

4. Strategic management of the economy

Macroeconomic management must be dovetailed with the strategic
management of the economy with Vision 2020. Clarity, transparency and
accountability with properly designed incentive systems (covering both
rewards and punishments) for all economic actors with an appropriately
framed and observed code of conduct, would be the hallmarks of the new
managerial system guiding the formulation and implementation of the second
wave of economic reforms.

5. Fiscal prudence
The fiscal deficit, especially the revenue deficit, needs to be quickly reduced.
India can learn from the successful experimentation with fiscal responsibility
218 SOUTH ASIA

legislation in Australia and New Zealand. Simultaneous action is required

both at the Centre and the State to increase user charges for public utilities
like electricity, water, transport etc.

6. Agricultural sector reforms

The second wave of reforms must reduce the perennial anti-agricultural bias
by permitting freer exports of all 'agricultural' products, including cereals, in
which India has a dynamic comparative advantage, especially under the new
rules set by the World Trade Organisation. This would entail rising food
prices domestically, and the government will have to manage the political
economy of discontent of urban consumers of foodgrains. This new policy
reform will unleash a high growth rate for agriculture on which nearly two-
thirds of India's population is still dependent for employment.

7. Industrial restructuring
All future industrial reforms must be geared to explicitly improve
productivity and international competitiveness. Economic policy in this
respect must facilitate relevant mergers and acquisitions and the winding up
of terminally sick enterprises in the public and private sectors, by
restructuring bankruptcy laws. Organisations like the Board for Financial and
Industrial Reconstruction need to be restructured to perform the above tasks
more purposefully. Most 'sick' public sector units should be sold through
genuine privatisation. Public sector enterprises should be governed by a
commercial culture which would require government holding no more than
26 per cent of equity to preserve only strategic control. Microlevel reforms
must supplement these efforts to achieve synergetic effects.

8. Labour sector reforms

A proper exit policy must form the core of second wave reforms subject to
the pre-requisite of placing a more viable alternative social safety net. Greater
competition should be injected in the labour market by allowing a 'hire and
fire' policy, unambiguously linked to productivity and profitability of the
micro enterprises. These measures would be of great help in improving the
presently wide-spread inefficiency oriented 'work culture', especially in
public enterprises.
 POST 1991 ECONOMIC REFORMS IN INDIA 219

9. Foreign trade and outward investment policies '•

No economic reforms can succeed without the adequate growth of exports of
goods and services to ensure the longer term viability of balance of payments.
While anti-dumping procedures need to be strengthened to protect Indian
industry from unfair import competition, the longer term reforms must
continue to lower import duties and replace quantitative restrictions with
appropriately determined tariffs.
The next wave of economic reform must facilitate the growth of India's
own Multi-National Corporations (MNCs). The government must further
liberalise outward foreign investment for such potentially globally
competitive Indian MNCs, for establishing both production bases abroad and
for pure international trading.
Finally, industry and government must make cooperative efforts to
prepare Indian industry to meet the new and ever emerging challenges posed
by the new world trade order and the new world investment order being
evolved under the WTO.

10. Financial sector reforms

Learning from the East Asian economic crisis and recovery, the next phase of
financial sector reforms need to be expedited. The currently high Non
Performing Assets and lending under directed credit programmes of the
government must be reduced.
Greater competition in the banking sector with an appropriate exit policy
to reduce overstaffing, together with sound macro economic policies, will
help to lower the real rate of interest to investors. Simultaneously, foreign
insurance and pension funds should be allowed to operate in India, subject to
reasonable conditions, to augment resources for financing the huge needs of
India's infrastructure.

IV
To conclude, political leadership will be the critical factor in implementing
the second wave of Indian economic reforms. Indian political culture has not
yet embraced the pro-reform lobby of a burgeoning middle class of
consumers. The transfer of power from the western educated elite to
relatively less educated Indians belonging to the scheduled castes and tribes
and other backward classes, has, since independence, given primacy to
redistributive justice over growth. As V.A. Pai Panandiker has observed, this
220 SOUTH ASIA

is bound to change over the next 20 years.9 By 2020, the fast growing middle
class will be the most formidable influence on the political economy and
public policy which would help to transform India into a major economic
global power.
The success of the next wave of economic reforms in India, as the World
Bank has also emphasised, will depend on the skills of Indian political leaders
to facilitate social cohesion and trust.10 Political leadership must also ensure
good governance and credible institutional delivery mechanisms, so that the
benefits of well designed economic reforms reach all sections of society.

9 V. A. Pai Panandiker, 'Demography and its implications', V.A. Panandiker and Ashis Nandy
(eds), Contemporary India (New Delhi, Tata McGraw Hill Ltd., 1999).
10
World Development Report, 1997 (World Bank).