Twenty-Five Years of Indian Economic Reform: A Story of Private-Sector Success, Government Failure, and Institutional Weakness

24 Pages Posted: 1 Dec 2016

Date Written: October 26, 2016

Abstract

Economic reforms that began 25 years ago have transformed India. What used to be a poor, slow-growing country now has the third-largest gross domestic product (GDP) in the world with regard to purchasing power parity and is projected to be the fastest-growing major economy in the world in 2016 (with 7.6 percent growth in GDP). Once an object of pity, India has become an object of envy. It has been called a potential superpower and the only credible check on Chinese power in Asia in the 21st century. Hence, the United States has backed India for a permanent seat in the United Nations and has persuaded the Nuclear Suppliers Group to exempt India from the usual nuclear nonproliferation rules.

Yet India’s success has been tarnished in several areas. The past 25 years can be largely summed up as a story of private-sector success and government failure, of successful economic reform tainted by institutional erosion. Although many old controls have been abolished, many still continue, and a plethora of new controls have been created in areas relating to the environment, health, tribal areas, and land. What leftist critics have denounced as an era of neoliberalism is better called neo-illiberalism. India remains in the bottom half of countries measured by indicators of economic freedom. Social indicators of education, health, and nutrition have improved much too slowly, and India has been overtaken in some indicators by poorer Bangladesh and Nepal. The delivery of all government services remains substandard. Political interference has eroded the independence and quality of institutions ranging from the police and courts to educational and cultural institutions. India’s economic reforms over 25 years have transformed it from a low-income country to a middle-income one. But to become a high-income country, India must liberalize the economy much further, improve governance, and raise the quality of its institutions.

Keywords: Economic Reform, liberalization, Private Sector, Public Sector

JEL Classification: H3, H5

Suggested Citation

Aiyar, Swaminathan, Twenty-Five Years of Indian Economic Reform: A Story of Private-Sector Success, Government Failure, and Institutional Weakness (October 26, 2016). Cato Institute Policy Analysis No. 803. Available at SSRN: https://ssrn.com/abstract=2877918

Swaminathan Aiyar (Contact Author)

Cato Institute ( email )

1000 Massachusetts Avenue, N.W.
Washington, DC 20001-5403
United States

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