A Matter of Time: India's Emerging Economic Prowess

By Luna, Joseph | Harvard International Review, Winter 2006 | Go to article overview

A Matter of Time: India's Emerging Economic Prowess


Luna, Joseph, Harvard International Review


As the world's largest democratic republic and the home to a substantial English-speaking population, India appears poised to establish itself as a powerful engine for global economic growth. Though India, already the fourth-largest economy by purchasing-power parity, is currently believed to be performing below its potential, the following indicators point to a more affluent future: a competitive business environment, a privatization agenda, a thriving services sector, and an increase in foreign direct investment. However, before achieving comprehensive economic sustainability, several key issues must be addressed.

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According to Augusto Lopez-Claros, Chief Economist of the World Economic Forum, "The extent of bureaucratic red tape and excessive regulation remains a serious problem in India." Resembling their previous history of central planning and nationalization, Indian governments have, in many respects, lost key opportunities for achieving economic reforms that could have rivaled the growth of the "Asian tigers." The current prime minister, Manmohan Singh, a Cambridge-educated economist, is attempting to push a liberalization agenda through Parliament, but his efforts are hindered by the socialist factions in his coalition. Perhaps forgetting the reforms instituted by Singh when he was finance minister in the early 1990s, the opposition only hinders the process of removing the excess bureaucracy that constrains the Indian business environment.

Slow Beginnings

Following independence from Great Britain in 1947, India's economy turned to centrally-planned autarky, replete with trade restrictions, industrialization, and state interventionism. Drawing on influence from socialism, especially Fabianism (trends not uncommon today), India achieved a lackluster growth rate, derogatorily referred to as "The Hindu Rate of Growth." The attempts to balance the private and public sectors did not encourage economic growth rates similar to those in Japan and South Korea during the 1970s and 1980s. By thwarting the impersonal mechanism of the price system, state intervention prevented India from realizing its true economic potential. The domestic effect was devastating; the global effect, nominal.

The first Indian prime minister following independence from Great Britain, Jawaharlal Nehru, was responsible for much of the stagnation that plagued India and that continues to haunt it today. Spurred by a vision of a centrally-planned Indian economy tempered by a liberal, democratic government, Nehru's nationalization only impeded growth. As Shashi Tharoor, author of Nehru: The Invention of India, wryly states: "Nehru's India put the political cart before the economic horse, shackling it to statist controls that emphasized distributive justice above economic growth, and discouraged free enterprise and foreign investment." If only such rhetoric were not so relevant today.

India's economic reforms began in 1980, under the leadership of Indira Gandhi. These reforms increased flexibility for India's private sector, opening the door for foreign investment and future innovation. In 1991 Singh, then-finance minister, responded to a macroeconomic crisis by abolishing the "License Raj" (onerous regulations once required to start a business), reducing government involvement in the economy, and enhancing private-sector ownership. As a result, foreign direct investment flourished, leading to today's expanding economic growth.

The Challenges

In spite of the progress effected by Singh's foresight, several factors have inhibited India's economic growth. According to the United Nations Conference on Trade and Development's (UNCTAD) Trade & Development Report 2004-2005, despite substantial tariff reductions, "India remains a relatively protected economy." Currently, India's tariffs average around 22 percent (or 18 percent in trade-weighted terms), somewhat higher than the respective global and Asian average tariff rates of 11.

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