Analysis of India's Policy Reforms

Abstract

The process of major economic reforms undertaken in the Indian economy has now completed six years of implementation. The unilateral reform measures in the industrial and trade policies of India along with reforms in the tax regime represent a significant departure from the policy framework of the preceding decades. Our paper evaluates the comparative static effects of selected trade and domestic policy reforms on trade, output, domestic prices, economic welfare, and the intersectoral allocation of resources using a computable general equilibrium (CGE) model of the Indian economy.

The results indicate that the import liberalization enhances the welfare of the economy, and that the effect gets further enlarged if exports are also liberalized simultaneously. This is particularly true of the agricultural sectors. The freeing of prices in the sectors which were under some form of administered price controls in the base year (1989-90) adds noticeably to the welfare effect. The economy becomes more efficient through reallocation of land, labor and capital across different producing sectors with increases in the returns to each of the factors of production. The rationalization of the existing structure of indirect taxes (mainly excise) and subsidies is expected to further benefit the factors of production and enhance overall welfare. Though such ex-ante analysis may not be replicated ex-post due to various macroeconomic and other factors that our model does not capture, the positive results nevertheless go a long way in establishing the credibility of the reforms process.

JEL Classification: F14, O20