Finance and Competitiveness in Developing Countries

By José María Fanelli; Rohinton Medhora | Go to book overview

4

International competitiveness, tradeand finance

India 1

A. Ganesh-Kumar, Kunal Sen and Rajendra R. Vaidya


1.Introduction

In 1990-1, the Indian economy underwent a severe balance-of-payments crisis. By the summer of 1991, India's foreign exchange reserves covered less than two weeks of imports. The immediate cause of the crisis was the increase in world oil prices and the drop in the remittances of migrant workers from the Gulf following the annexation of Kuwait in September 1990. There was a realisation among Indian policy-makers, however, that 'the roots of the crisis were more structural in nature and lay in the import-substituting industrialisation (ISI) strategy followed by successive Indian governments since independence' (Agrawal et al. 1995:161). While the ISI regime had enabled India to develop a large and diversified manufacturing sector, the net result of the protectionist policies was 'the growth of a high-cost, capital-intensive domestic industry that was by and large incapable of withstanding international competition' (p. 175). Not only did these policies severely inhibit India's export performance, they also served to limit the possibility of growth based on domestic demand. 2 In spite of four decades of import-substitution policies, production in the Indian manufacturing sector remained greatly import intensive. As a consequence, with India's trade regime providing little incentive to export, growth based on domestic demand would lead to balance-of-payments problems sooner or later. 3

In June 1991, the new government that assumed office (led by P. V. Narasimha Rao) embarked on an economic reform programme along with several macro-stabilisation measures. One of the major long-term objectives of the reforms was to increase India's international competitiveness, both in relation to its past and to the fast-growing economies of East Asia. While the 1991 reforms could be seen as a continuation of the deregulation measures that were initiated in the mid-1980s by the Rajiv Gandhi government, they were far more comprehensive in scope and radical in substance. The macroeconomic stabilisation programme initiated in 1991 yielded immediate benefits, with foreign exchange reserves recovering from just over 1 billion USD at the time of the crisis to over 6.4 billion USD at the end of 1992-3. The inflation rate, which had peaked at 17 per cent in 1991, came down steadily to 7 per cent in 1992-3. Real output growth, which had dipped to 1.2 per cent in 1991-2, recovered to 4 per cent in 1992-3. It is far from

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