This new paper of Panagariya is mainly directed to evaluating alternative interpretations of the growth outcomes in India from policy reform, interpretations which locate it in the mid-1980s, rather than as it is more conventional, in 1991. The conclusion matters, since if the economic outcomes of today can be traced directly to initiatives taken in the 1980s and quite independent of what happened in the years following 1991, in Panagariya?s words ?it would be a major blow to liberal trade and market-friendly policies, not only with respect to India but to developing countries around the world?. However, it is not entirely clear what linkage the sceptics, as Panagariya calls them, exemplified by Bradford DeLong and Dani Rodrick, construct between the mid-1980s and the early-1990s. Again in Panagariya’s words, it ?is not entirely clear what policy message is to be gleaned … Neither DeLong nor Rodrik suggests that the reforms of the 1990s were detrimental to the growth process?. DeLong apparently judges the reforms of 1991 as enabling the sustenance of growth, while Rodrik suggests that ?growth would have been sustained even without the reforms of the 1990s?.
For those of us who do not need an inter-galactic telescope to peer into the workings of the Indian economy, nor have an agenda of tilting at the windmills of the self-evident, the issues appear in crystal clear light. Without abolition of industrial licences, re-alignment of the exchange rate, fiscal restructuring, financial sector reform, freeing up of trade flows, lower and more reasonable rates of taxes, there would only have been a decade-and-a-half of lost chances to show. We would not have averaged over 6% growth, nor be poised to stabilise at over 7% today; nor would Indian business be internationally competitive; nor would young educated Indians be looking forward to a lifetime of opportunity, instead of preparing for the devastating grimness of bleak tomorrows ? the signature tune to which our generation grew up.
But to appreciate such things one has to be part of the smell and the noise. Long-distance viewing with an agenda poking at the elbow, suffers from an excess of debilities. Having said this, the 1980s did indeed see the beginning of a change in the mindset. Officialdom began to dig itself out of the hole that it had first dug itself into over the previous two decades, accepting the role of a market and the legitimacy and importance of private incentives. The partial decontrol of cement in December 1981 was in a way, the first in a series of sensible small steps away from rigidity, to be followed shortly by liberalisation of the steel price regime ? which initiated large scale private investment in the sector after decades. Liberalising trade regimes for capital and some intermediate goods also gave substance to the idea of global competition.
The primary contribution of these developments was to give legitimacy to common sense and build helpful conditions, in the mindset of the policy makers, for the reforms of 1991 to take place. Did these reforms give a fillip to growth? Maybe it did, but surely the biggest single contributor to the higher rate of growth in the second half of the 1980s can be directly traced to public spending, the burgeoning deficit and the deterioration of the health of public finances. It was like amphetamine? it gave a short term high and much long-term hand-wringing. It is surprising that not only DeLong and Rodrik, but even Panagariya, seem to have ignored the economic consequences of what happened in public finances.
However, Panagariya does correctly set out to establish that the 1990s reform was critical. He ascribes a learning role to the 1980s reform. Perhaps, but more important, it restored sound common sense to the forefront of policy, simultaneously relegating the dead hand of dogma to where it ought to be, namely in the ash heap of time.
The writer is economic advisor to Icra