ABSTRACT
In 1990-1, the Indian economy underwent a severe balance-of-payments crisis. By the summer of 1991, India’s foreign exchange reserves covered less than two weeks of imports. The immediate cause of the crisis was the increase in world oil prices and the drop in the remittances of migrant workers from the Gulf following the annexation of Kuwait in September 1990. There was a realisation among Indian policy-makers, however, that ‘the roots of the crisis were more structural in nature and lay in the import-substituting industrialisation (ISI) strategy followed by successive Indian governments since independence’ (Agrawal et al. 1995: 161). While the ISI regime had enabled India to develop a large and diversified manufacturing sector, the net result of the protectionist policies was ‘the growth of a high-cost, capital-intensive domestic industry that was by and large incapable of withstanding international competition’ (p. 175). Not only did these policies severely inhibit India’s export performance, they also served to limit the possibility of growth based on domestic demand.2 In spite of four decades of import-substitution policies, production in the Indian manufacturing sector remained greatly import intensive. As a consequence, with India’s trade regime providing little incentive to export, growth based on domestic demand would lead to balance-of-payments problems sooner or later.3
