India's Evolving Economic Model: A Perspective on Economic and Financial Reforms

I Introduction India's economy has been attracting attention from the Western press, diplomats and businesses since 1991. This is when Prime Minister Mr. P. V. Narasimha Rao inherited the mantle of the Congress Party following the tragic assassination of Prime Minister Rajiv Gandhi. Mr. Rao was a loyal long standing member of this, the political party of Mohandas Gandhi and Jawaharlal Nehru, which gained independence from Great Britain on August 15, 1947 and which has governed India for most of the 50 years since. Mr. Rao is consolidating all the strengths of the Indian economic system to integrate India's economy with that of the rest of the world through policies boldly enunciated since 1991. The new economic policy is bold in the sense that it effects an apparently significant departure from a certain philosophy and pragmatism that had served India during the Cold War between the West and the Soviet Union from 1945 to 1991. During these decades, India was labeled a "socialist" economy and society, a perception that makes the current focus on liberalization and competition, both internally and externally, bold and almost revolutionary. But, in fact, independent India has always attempted to gain the most from a combination of market forces and an appropriate role for the government in what is called a mixed economy. India was never wedded to socialism. This paper sketches a broad perspective on the policy choices made by India for the past 50 years and helps explain where India's economy has come from, the forces that have shaped it and where it is going. As a sub-theme, the paper shows how India is adopting U.S. market processes and institutions to strengthen its solid foundation based on British laws, practices and procedures. The U.S. is India's biggest trading partner, and India is expected to become more important to the American economy as its appetite for American products and services grows along with its economy. II India at Birth: Background for Policy Choices Just before independence, the political map of India and its governance structure resembled a matrix where the feudal system co-existed with some areas under direct rule of the British Raj from Delhi. Some of the 650 or so self-governing principalities and areas reported to each other, others reported directly to Delhi and paid their annual tribute to the central government. At independence, they were given options to remain separate entities, join India or join a newly created entity named Pakistan. Pakistan was created to satisfy a political need felt by some Muslims. As it happens, today there are more Muslims in India than in Pakistan. The first challenge thus was to create a new political entity named India through mergers of as many parts of pre-independence India as possible. Prime Minister Jawaharlal Nehru, and his Deputy Prime Minister, Vallabh Bhai Patel met that challenge. To keep the new political India together was no small task either. Colonialism had not totally left India and there was fear that it could easily reassert itself. The roles of Britain and the British in India, not to mention all the Rajas and Maharajahs, were not clear either. Before any allocation decisions could be made, the first economic policy task was assessing the economic resources and productive capacity in existence. It took five years to take an inventory of India's resources. The main economic activity was agriculture. Large areas of land were owned by the feudal lords and small areas held by members of the upper caste population. About 60 percent of India's Gross Domestic Product in 1947 was from agricultural activity, mainly dependent on monsoon rains with no significant irrigation system in place (Planning Commission, 1969). Total productivity and output were low. Most of the 350 million people lived in abject poverty, many as landless laborers. With regard to educational resources there was a handful of colleges in the country. …