Cycles in Indian Economic Liberalization, 1966-1996

Abstract

In the 1990s there appears to be a growing disjuncture between India's economic and political performance. The economic news since 1992 has been very positive. Yearly economic growth has been 5-8 percent, inflation has declined dramatically, and India's modern, private sector (electronics, software, and heavy machinery) is doing very well in international competition. Crop yields have also risen, and, in the process, India has become a major grains exporter.' However, the political scene has been far more turbulent and increasingly troubling. Regional and ethnic political parties have proliferated, intimidation and violence are widespread, and corruption is pervasive in local, state, and national governments.2 In the May 1996 parliamentary elections, for the first time since independence, a communal party, the Hindu nationalist Bharatiya Janata Party (BJP), won a plurality. Although the BJP was not successful at forming a lasting majority in parliament, the electoral results sent a tremor through the Indian body politic. Eventually, a compromise was reached to create a complex coalition of thirteen parties, named the United Front, headed by H. D. Deve Gowda of Karnataka. Not only was Deve Gowda the first southerner to be prime minister, but he was the first member of a minor, regional party to lead the nation. Within eleven months Gowda lost a vote of confidence in the Lok Sabha. The coalition survived, but in tenuous shape, with Inder Kumar Gujral as the new prime minister. If we step back from this barrage of new developments and try to assess the factors shaping economic policy choice in India, we can see both consistent patterns and interesting anomalies. For almost five decades the dominant mode of economic policy in India has been to rely on the central for macroeconomic direction (monetary, fiscal, and exchange rate policy) and for the administration of a vast set of controls, subsidies, tariffs, and quotas. Many of these controls were started during World War II under British rule. The controls were continued and expanded, however, by a sequence of Congress Party regimes that justified intervention on the grounds that government should control the commanding heights of the economy.'3 By the mid 1960s, the controls were so pervasive and the protection of Indian industry so stifling4 that a vigorous intellectual debate ensued about the appropriate way to redirect Indian economic