Indian economic liberalization was part of a general pattern of economic liberalization and modernization occurring across the world in the late 20th century. Although unsuccessful attempts at liberalization were made in 1966 and the early 1980s, a more thorough liberalization was initiated in 1991. The reform was prompted by a balance of payments crisis that had led to a severe recession.

1. India’s evolving Political Settlement and the
Challenges of Sustaining Development (Mushtaq H.
Khan) (P. 40-50)
By
Noor-E-Jannat-19121012
Arpita Dutta-19121039

2. What is the common goal of every country in this 21th
century??

3. Background
• After Independence in 1947 Indian govt. faced a major problem to
develop economy and to solve the issues.
• Indian economic liberalization was part of a general pattern of
economic liberalization and modernization occurring across the world
in the late 20th century. Although unsuccessful attempts at
liberalization were made in 1966 and the early 1980s, a more
thorough liberalization was initiated in 1991. The reform was
prompted by a balance of payments crisis that had led to a severe
recession.

4. In 1966, the Indian government was obliged to seek monetary help from the IMF
and the World Bank owing to fast inflation induced by the Sino-Indian War and
severe drought.
The rupee was devalued to combat inflation and decrease export costs, and the
existing tariff and export subsidy system was abolished.
Another poor harvest and subsequent industrial recession fueled anti-
liberalization and left fears of a larger shift away from socialist policies.
Trade restrictions were reintroduced
1966 Liberalization Attempt

5. Liberalization re-attempt in 1980s
Why Again???

6. The low annual growth rate of the
economy of India before 1980,
which stagnated around 3.5% from
1950s to 1980s, while per capita
income average 1.3%. At the same
time Pakistan grew by 5%,
Indonesia by 9%, Thailand by 9%,
South Korea by 10% and Taiwan by
12%

7. But the growth acceleration in the 1980s is both exciting and
embarrassing for liberal economists
Exciting
India was moving out of its
planned economy
• Reduction in marginal tax rates
• Reduction in tariffs
• By 1988 licensing was reduced
from 77 to 27 industries
Embarrassing
Growth happened before any
formal liberalization took place.
• Formal removal of rent-creating
restrictions in the economy did
not happen
• Limited implementation
• 27 industries constituted 60% of
industry by value

8. • PM Rajiv Gandhi- Announcement of Pro-business
• PM Chandra Shekhar
Foreign Exchange Crisis 1990
• PM Rao- Began a more serious liberalization
• tariff reduced from 85% to 25%
• Made foreign direct investment easier
The Role of Congress Party Leadership to
reform Indian Economy

9. Rodrik and Subramanian (2004, 2005) argues that
reforms were pro-business rather than pro-
market reforms—signaling a shift in government
‘attitude’ rather than a shift in policy
Indicating a confusing phase??
Arguments

10. They pointed out that growth was driven by states
where manufacturing sectors were already bigger
The role of manufacturing Sectors
Or,
The Role of big business and Congress Politicians??

11. Kohli (2006a, 2006b) the focus is not just on an attitude shift
in the 1980s but the actual emergence of pro-business
policies
Distinguished from liberalization policies
Government intervention in 1980s
Dilution of Monopolies and Restrictive Trade Practices
Act(MRTP)
Growth was associated not with liberalization but a
series of more subtle changes

12. Standard economic theory also acknowledges liberalization would have
had no benefit if large areas of productive capability had not already
arisen.
Rent allocation strategies pockets of capabilities Success of the
Liberalization Increasing jobs and extending it to unexplored
regions

13. By the 1980s, significant new capitalist alliances existed in all of these nations, but
notably in India, who felt hemmed in by rent-creating rules that had become
dysfunctional for them. (Das Gupta)
Specializations of regions prior development of
technological and entrepreneurial capabilities

14. Significant growth differences of the regions can
be observed -
• Expanding the gap between richer and poorer areas and
states.
• Correction to market failures were weak
• Favorable political connections for state investment
--Consistent with Capability Approach--

15. After the de-licensing of locational choices, Indian corporate
conglomerates may clearly select where to locate. But
corporate capacities and labor skills are restricted. As a result
of deregulation, several corporations relocated, favoring some
southern and western states in India. this was evidence of the
importance of labour market regulations constraining
manufacturing growth in India(Besley and Burgess 2004;
Aghion et al. 2006).

16. •Excellent global service performance
•‘defective’ policies which created globally
competitive capabilities in specific sectors (Basu
2003)
IBM
CMC
Sectoral distribution of growth based on
prior capabilities

17. Growth was largely being driven by a relatively small number of individuals, regions
and sectors that had the capability to benefit from market opportunities (ADB 2007a:
49-59).

18. Market driven growth equalizes incomes in an integrated economic territory through
the free movement of labour and capital. Studies of growth rates in rich versus poor
states in India show that the divergence in their per capita incomes is steadily
increasing (Sachs, et al. 2002).

19. The rapid growth in inequality appears to have begun in the 1980s at around
the same time as the growth takeoff.

20. Cont.
Despite its flaws, the dirigiste era produced some fundamental
technological and business skills. Following deregulation, these
entrepreneurs have spurred growth by leveraging into labor market
talent pools. However, liberalization did not eliminate all important
market flaws.

21. Consequences-
• large sections of the population may have very slow benefits trickling
down to them
• There are significant pockets of poverty even within high growth and
high per capita income states like Maharashtra. 77% of India's
workforce had a per capita daily consumption of less than 20 rupees.

22. Both the growth of labour productivity and of total factor productivity
(TFP) displayed an improvement after 1980 compared to the previous decades.

23. That multinational investment had positive spillover effects on the
value-added per unit labour cost in domestic firms, but only if the
initial productivity gap between the domestic and foreign firms was
small. Where the productivity gap was initially large, the value-added
per unit labour cost of domestic firms either declined or did not
increase in the presence of foreign investment (Siddhartan and
Lal, 2004)

24. Catching up and Learning: An Analytical
Model
It has two phase
1st Phase-
• Learning-by-doing
• Changes in Political Settlement (Dominant to Competitive)
• Encourage to use political links

25. 2nd Phase
 learning was more effective
 firms now had strong internal incentives
Examples-automobiles and
pharmaceuticals

26. Developing countries find it difficult to catch up despite their
significantly low wages and large pools of underemployed labour
Why???
Labor productivity, or the ability to turn expensive (often imported)
inputs into outputs, is a key factor in determining competitiveness.

27. Cont.
 New technologies are forcing developing nations to manufacture
goods that already have a worldwide price established by the
Developing countries employing these technologies. Moreover, The
current organizations establish levels of quality and pricing that the
catching-up countries must match.
 Developing countries are not in the product development business.
The main challenge for developing countries is to learn how to create
more products with the same or lower quality than those already
available. Quality items by definition sell for more money, allowing for
higher wages, higher profit margins, or both.

28. The catching up issue is therefore characterized as--
• manufacture of a wide range of products at the best possible quality
• extending these organizational skills to increase employment for
everybody
• systematically improving product quality across categories to increase
wages and productivity

29. Any Questions?
Thank You