The Indian Economy
Ian Little's connection with India extended for more than fifty years and was the inspiration for a good deal of his work after he wrote A Critique. We have already covered his first visit in 1958, while he was favourably disposed to Indian planning, and his second visit in 1965, when he became disillusioned with it.
A major reason for the disillusionment was that he became convinced of the falsity of “elasticity pessimism”, which was one of its central tenets. This change of view, in conjunction with his field experience in project analysis, strongly influenced his thinking on methods of project selection for developing countries. The first fruits of this can be seen in “Public Sector Project Selection in Relation to Indian Development”, an article that was published in an obscure book in 1969.[154] Many of his distinctive ideas, in particular the use of world prices as shadow prices for tradable goods, later refined in collaboration with James Mirrlees, can be found in this seminal piece. More generally, Ian's second thoughts on India's development strategy, along with early evidence of the success of export-oriented growth in the “Gang of Four”, prompted him to mount the large OECD project on trade and industrialisation policies in developing countries. Six countries were selected for close examination; one of these was India. The volume on India, written by Jagdish Bhagwati and Padma Desai and published in 1970, became a classic in its own right. Following the OECD project, and until his retirement, Ian did not work directly on India but maintained his strong links with the country.After he retired, Ian wrote extensively about the Indian economy. This came about as a result of the project on macroeconomic policy in developing countries that he initiated at the World Bank in the mid-1980s. He wrote the India volume with Vijay Joshi as his co-author, and it was published by OUP in 1994 under the title India: Macroeconomics and Political Economy, 1964-1991.
This was the first systematic assessment of Indian macroeconomic policies from the death of Pandit Nehru until the inauguration of the liberalising reforms of 1991. The book was divided into three parts. Part One was an introduction to India's history, institutions and markets. Part Two examined four major macroeconomic crises that the country experienced during this period—in 1965-1967, 1973-1975, 1979-1981, and 1990-1991. To put it very crudely, the first three crises were mainly the result of exogenous events, in particular droughts and oil price increases. The fourth was different. It resulted from the pursuit of unsustainable fiscal policies during the 1980s. The authors analysed in depth the causes and resolution of the crises, with particular attention to the shortcomings of stabilisation policy. Part Three was concerned with longer-term trends in policy. Separate chapters were devoted to fiscal, monetary, and trade and payments policies, and to the connection between macroeconomic policy and long-run growth. A distinctive contribution of the book was that it demonstrated a link between microeconomics and macroeconomics in the Indian context. Before this book, the fashionable view about Indian economic policy was that it was unsound microeconomically but sound macroeconomically, and that these phenomena were positively related—in other words, the controls that led to microeconomic inefficiency helped to attain macroeconomic stability. In contrast, one of the central conclusions of the book was that India's control system was not only microeco- nomically inefficient but macroeconomically perverse. In CaR, Ian writes about this book, ‘It was the first and only full macroeconomic history of India since the death of Nehru and will, I hope, prove to be the definitive study of the period' (CaR 1999: 92).By the time that book was published, India had embarked on an ambitious reform programme designed to move the economy towards greater openness and market orientation.
Joshi and Little got a grant from the Overseas Development Administration to carry out an appraisal of this programme. The book that resulted—Indias Economic Reforms, 1991-2001 (Joshi and Little 1996a)—was the first systematic assessment of India's reforms. It went into seven impressions and made a significant impact. There were five chapters, apart from an introductory and a concluding chapter. Chapter 2 on stabilisation policy showed that government deficits and debt were on an unsustainable track, and that fiscal consolidation was imperative. On balance- of-payments policy, it was supportive of India's decision to opt for a managed exchange rate, buttressed by targeted capital controls, and by occasional sterilisation of reserve accumulation, in order to prevent excessive exchange rate appreciation caused by exuberant capital inflows. This policy proved its worth during the build up to the East Asian crisis of 1997. Chapters 3-5 undertook a critique of structural reform. The authors took the view that while India had made a good beginning, the reforms were partial and incomplete. On trade and indirect taxation, they argued that India should move to a uniform value- added tax, harmonised between the central government and the states, with few exemptions, supplemented by a uniform tariff no higher than 10% for industry as well as, more controversially, for agriculture.[155] They drew attention to the superabundance of government subsidies, explicit and implicit. Fertilisers, fuel, electricity, irrigation water, and many other goods and services that are not public goods were sold well below their costs of production. The beneficiaries were preponderantly the better off sections of society. Winding up these subsidies would improve resource allocation and yield more than enough fiscal savings to compensate the poor. On industrial policy, the book argued for privatising state-owned enterprises producing tradable goods. In these sectors, international competition would annul the main argument for nationalisation—namely the possibility of monopolistic exploitation. Public sector enterprises producing non-tradables should be broken up into competitive and naturally monopolistic elements. The former should be privatised; the latter could be privatised or left in State ownership, but in either case independent regulation was essential. The economy's poor infrastructure, which was mainly in State ownership, was identified as a critical constraint on growth. The book also argued strongly that liberalising output markets was not enough. Factor markets needed reform. Company laws, labour laws and urban land law had combined to make the economy highly inflexible and to impede labour-demanding, inclusive growth. Chapter 6 considered the social sectors. It argued that well-designed public employment schemes were superior to food subsidies (distributed via the highly inefficient public distribution system) as instruments of poverty alleviation.Since the book was written, India's reform programme has made significant progress. But many shortcomings remain, including a bias against employment and the continuing presence of counterproductive subsidies. These failings were clearly identified and analysed in the 1996 book.
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