India: The Emerging Giant

545 Pages·2008·3.81 MB·English

by  Arvind Panagariya

India: The Emerging Giant
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INDIA: THE EMERGING GIANT
Arvind Panagariya
1
2008
1
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Copyright © 2008 by Arvind Panagariya
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Library of Congress Cataloging-in-Publication Data
Panagariya, Arvind.
India : the emerging giant / Arvind Panagariya.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-19-531503-5
1. India—Economic policy. 2. India—Economic conditions.
3. India—Commerce. I. Title.
HC435.3P36 2007
330.954’05—dc22 2007034153
1 3 5 7 9 8 6 4 2
Printed in the United States of America on acid-free paper
In Memory of
My Father
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acknowledgments
“Take your time, but write a defi nite book on India.” Those were the last words of
advice from my father on a telephone call from Jaipur, my hometown. He passed
away a week later, on New Year’s Day, 2006. At 84, his enthusiasm to see his chil-
dren (and grandchildren) excel was undiminished. He had lived his life by the same
rule, distinguishing himself fi rst as a top-class civil servant and then, after retire-
ment, as an author of a dozen books, of which one was released by no less than
Prime Minister Indira Gandhi.
In writing this book, I have benefi ted from the wisdom and generosity of many.
But I owe by far the greatest debt to Jagdish Bhagwati, who has been a constant source
of inspiration throughout my professional life. As a student in India, I read many of
his prolifi c writings on international trade, development, and India. At the time, I
scarcely imagined that one day I would have the honor to occupy a chair named after
him. His 1970 book on India, jointly written with Padma Desai, is the best work in
existence on the economic policies and their pitfalls in postindependence India. It
also outlines a strategy of growth and poverty reduction that India would begin to
implement only many years later. My thinking, as that of virtually every leading
scholar of the Indian economy, is greatly infl uenced by this monumental work.
I also wish to thank T. N. Srinivasan, a great scholar of international trade and
economic development, for helping me understand better many of the intricacies of
the Indian economy. Numerous discussions with Vijay Kelkar during his tenure as
India’s executive director at the International Monetary Fund sparked my interest in
aspects of the economy about which I had not thought before. This is particularly true
of higher education. My longtime friends Govinda Rao and Rajesh Chadha have been
most generous at all stages during this work. With their vast knowledge of the Indian
economy, they have always been there to answer my questions, big and small.
As will be apparent from my extensive references, many of the ideas in the book
originated in my monthly column in the Economic Times, India’s leading fi nancial
viii ACKNOWLEDGMENTS
daily. For this, my thanks go to Swaminathan S. Anklesaria Aiyar, who invited me
to contribute to the Economic Times. I should also like to thank successive edi-
tors of the editorial page of the newspaper—Mythili Bhusnurmath, T. K. Arun, and
Bodhisatva Ganguli—who provided me the opportunity to try out my ideas on more
than a million of the newspaper’s readers.
My task in writing this book was considerably simplifi ed by the availability of
extensive data on the Reserve Bank of India Web site. The Reserve Bank has done
an excellent job of organizing the important data on the Indian economy and mak-
ing them accessible to researchers. Its Handbook of Statistics on Indian Economy,
updated every year in a timely fashion, proved especially useful. Also helpful were
the tables accompanying the Economic Survey, published annually by the Ministry
of Finance and posted on its Web site.
Among those who generously commented on earlier drafts of several of the
book’s chapters, my greatest debt is to Poonam Gupta, a former student of mine who
is now an associate professor at the Delhi School of Economics. Whenever I needed
a friendly but critical reader, I went to her. I am equally grateful to Deena Khat-
khate for his willingness to read many of the chapters and to offer his sage advice.
Also helpful at various stages of the work were discussions with or comments
from Pranab Bardhan, Suman Bery, Angus Deaton, Pramod Deo, Shanta Devara-
jan, Ashok Gulati, Nandini Gupta, Rana Hasan, James Hanson, Kishore Gawande,
Vijay Jagannathan, Vijay Joshi, Anjini Kochar, Ashok Kotwal, Pravin Krishna,
R. D. Maheshwari, Deepak Mishra, Srijit Mishra, Devashish Mitra, Rakesh Mohan,
Garry Pursell, Govinda Rao, Kavita Rao, Devesh Roy, Gunjan Sharma, N. K. Singh,
N irivikar Singh, Arun Shourie, S. Sriraman, Prem Vashishtha, Jessica Wallack, and
Roberto Zagha.
I owe a great debt to Brian Desmond, my production editor at Oxford, and I am
especially grateful to my editor, Terry Vaughn, and his assistant, Catherine Rae,
who were there to answer my numerous queries from the submission of the manu-
script to the fi nal publication. Last but not least, I thank Yuko Ota for editing the
Getty image to turn it into a beautiful book cover.
A large part of the credit for making this book happen goes to Amita, my wife. I
could write the book because she did everything else. As a non-economist who reg-
ularly reads the Economist, Financial Times, and Economic Times, she also served
as the sounding board for many of my ideas, especially those that were half-baked
and shaky. This has helped keep many crazy ideas out of the book. Finally, I should
mention our two boys, Ananth and Ajay, now young men with whom I love to chat
leisurely, but have not been able to do so lately. With the book over, I can now catch
up with them.
contents
Prime Ministers of India xi
Introduction xiii
Part I. Growth and Economic Reforms
1. Distinguishing Four Phases 3
2. Phase I (1951–65): Takeoff under a Liberal Regime 22
3. Phase II (1965–81): Socialism Strikes with a Vengeance 47
4. Phase III (1981–88): Liberalization by Stealth 78
5. Phase IV (1988–2006): Triumph of Liberalization 95
6. A Tale of Two Countries: India and the Republic of Korea 110
Part II. Poverty, Inequality, and Economic Reforms
7. Declining Poverty: The Human Face of Reforms 129
8. Inequality: A Lesser Problem 157
Part III. Macroeconomics
9. Defi cits and Debt: Is a Crisis around the Corner? 171
10. The External Sector: On the Road to Capital Account
Convertibility? 191
11. The Financial Sector: Why Not Privatize the Banks? 214
Part IV. Transforming India
12. International Trade: Carrying Liberalization Forward 259
13. Industry and Services: Walking on Two Legs 282
14. Modernizing Agriculture 311