India: macroeconomics and political economy, 1964-1991

Abstract

This volume is the product of a World Bank project on macroeconomic policy that reviewed the recent experience of eighteen countries as they attempted to maintain economic stability in the face of international price, interest rate, and demand shocks or domestic crises in the forms of investment booms and related budgetary problems. The project paid particular attention to the 1974-79 period, the 1980-82 period of worldwide recession and external debt problems for many developing countries, and the 1983-90 period of adjustment to economic difficulties and the resumption of growth. India is the largest and also one of the poorest of the eighteen countries studied. It is very dependent on fuel imports, so that the oil price rises caused serious balance of payments problems. Nevertheless, India is exceptional in that external shocks are less important than the severe droughts that occur from time to time. India's policies and experience have also been exceptional. Most countries adapted little in response to the 1973/74 oil price rise, but borrowed heavily and instigated investment booms. In contrast, India did not borrow commercially, kept inflation low, and built up reserves of food and foreign exchange. Unlike so many other countries, it therefore experienced no debt crisis or recession in the early 1980s and was able to recover quickly from the external shocks of 1979/80 and from a severe drought occuring at the same time. By the later 1980s, however, India's economic conservatism had evaporated and the fiscal deficits became unsustainable. Thus, India's macroeconomic policies have been ten years out of phase with most of the eighteen countries studied. It experienced its debt crisis or associated recession in 1991. It was once a fashionable view that India's economic policies were unsound microeconomically but sound macroeconomically, and that these aspects were linked - the forest of controls that caused resouces to be used inefficiently made it easier to maintain macroeconomic balance. Contrarily, the authors of this study conclude that India's control system was not only microeconomically inefficient but that it was also macroeconomically perverse.