The shock of reform

The economy of India has been restructured since 1991 in a manner that has won the support of its middle classes. ¹ In place of the Licence and Permit Raj which Jagdish Bhagwati once described as inefficient and perverse to the point of being ‘Kafkaesque’ (Bhagwati 1993: 50), the reforms that were introduced by Finance Minister Manmohan Singh in the summer of 1991, and which have been largely continued by his successors, including the Finance Ministers of the Bharatiya Janata Party (BJP)-led governments which came to power in 1998 and 1999, have opened India’s borders to private capital from overseas as never before, and have secured changes in the country’s trading and financial economies that few would have predicted. In just seven years the government of India, aided by many state governments, dismantled the major part of the system of industrial licensing that had taken shape over the previous 40 years; substantially relaxed the provisions of the Monopolies and Restrictive Trade Practices Act of 1969; provided incentives for foreign equity investment in high-priority industries; encouraged joint ventures in these and other industries; reduced the import weighted average tariff from 87 per cent in 1990 to 20.3 per cent in 1997-8; and reduced the cash reserve requirement which links commercial banks to the Reserve Bank of India from 25 per cent in 1990 to around 10 per cent in 1997-8. ² More recently, the government has restated its intention to divest some state assets, and it has discussed proposals for the abolition of the Food Corporation of India, greater ‘targeting’ in the operations of the public distribution system, and the gradual phasing out of the subsidies which reduce the costs of water, fertiliser and power to some of India’s farmers.