A skeptical view has emerged recently, however, which argues that the growth rate in India had shifted in the 1980s, making it impossible to credit reforms with the improved performance of India. If those skeptics were right, 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. But a closer look reveals that the story is more complex than the skeptics would have us believe.
Three specific points emerge from a detailed analysis. First, growth during the 1980s was patchy, with the last three years contributing 7.6 percent annual growth. Without those three years, growth in the 1980s would look, at best, marginally better than that of the previous three decades. Second, the high growth in the last three years of the 1980s was, in fact, preceded or accompanied by significant liberalization under Prime Minister Rajiv Gandhi, who had vowed to take India into the 21st century when he first took office in 1984. Finally, growth was stimulated partially by expansionary policies that involved accumulation of a large external debt and that ended in an economic crisis. In the end, it was the 1991 market reforms and subsequent liberalizing policy changes that helped sustain growth.
India can still do much to improve its economic performance. For example, India lags behind China largely because India’s relatively small industrial sector is hobbled, a problem that must be fixed through a further reduction in tariffs, privatizations, and other liberal measures.
