India's Economic Crisis

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India's Economic CrisisPreface

I started writing this book in 1989 in Washington. I was then serving as India's Executive Director on the Board of the International Monetary Fund. A large number of developing countries, particularly in Latin America and Africa, were facing acute economic difficulties and were approaching the Fund for financial assistance. Several of them had over-borrowed from commercial banks, some were affected by unfavourable external developments, and nearly all were making reappraisals of their economic policies and development strategies. Several leaders with impeccable socialist credentials, such as those in Zambia, Venezuela and Spain, had declared themselves in favour of much less state intervention and a greater reliance on the market. The USSR, China, Hungary, Poland, Czechoslovakia and Vietnam were also undergoing profound economic changes. In the midst of these developments, the economic situation in India looked relatively calm-on the surface. But economists in government and outside were aware that the underlying economic situation, particularly with regard to the fiscal position and the balance of payments, had worsened considerably and required urgent tackling. My original purpose was to take a close look at India's long-run development strategy and policy in the light of both the recent academic research on development issues and the experience of other developing countries. I felt that India's choice of economic strategies had been unavoidable within the particular historical context in which this choice was made. However, re-thinking was now required on certain basic issues in the light of changes in India's political economy and the accumulated experiences of our past.

The writing of this book was interrupted for a year because of a new official assignment, and I was able to resume work on it only in New Delhi in December 1990. Meanwhile, India had gone through two changes of government. There had also been several important domestic developments, which had an impact on the country's economic situation. The economy, already in a difficult position, was plunged further into a deep financial crisis by the Gulf conflict. In view of these developments, the focus and the content of this book changed somewhat: it seemed that much greater attention needed to be paid to the immediate crisis and to the policies required to overcome this crisis over the medium term.

This book is written from the perspective of an economist involved in administration and policy formulation. My search has been to find some practical answers to the problems of macro-economic policy and strategy within the constraints of a multi-party parliamentary democracy of the type, which prevails in India. An attempt has been made to take into account the experiences of other countries as well as the results of academic research, but the main focus is on what is possible and on what must be done. I shall feel amply rewarded it, in some small way, this book contributes to the emergence of a consensus on economic policy priorities for India in the 1990s. The book is about India; however, I hope portions of it will also interest economists in other developing countries and intentional institutions.

Bimal Jalan
15 May, 1991
New Delhi 

Postscript to the Paperback Edition

This book was sent to press before the general elections of May-June 1991, and the first edition was published in August 1991. The past few months have been a period of important change in economic policy and the regulatory framework. In July 1991 the government announced a series of measures, which included a two-step devaluation of the rupee, certain major trade-policy reforms, the liberalisation of rules regarding foreign investment, and the virtual abolition of industrial licensing. The first budget of the new government was presented on 24 July 1991. It contained a series of fiscal adjustment measures, including a reduction in the fertiliser and the elimination of the cash subsidy for exports.

The budget for 1992-3, presented on 29 February 1992, carried forward the process of fiscal adjustment. The fiscal deficit was sought to be reduced to 5 per cent of GDP in 1992-3 from the level of 6.5 per cent in 1991-2 (and 8.4 per cent in 1990-1). A number of tax reform measures, including a reduction in protective import duties, was announced. An important new scheme for the, partial conversion of foreign exchange was also introduced.

In view of these and other changes in economic policy, the question naturally arose as to whether the original text of this took needed revision for the paperback edition. On balance, I have decided to leave the original text unchanged, except for some minor typographical corrections and the addition of some footnotes, which draw attention to changes that have occurred in trade and industrial regulations. It is too early to assess the full impact of new policies, and some of them still seem to be evolving. For example, the new system of Exim Scrips introduced in July 1991 has already been abandoned and replaced by a dual exchange rate system. Also, as I pointed out in the preface to the first edition, my endeavour was to look at India's current problems in the light of certain long-term issues of development strategy and policy. I believe that the long-term perspective set out in this book remains valid, and does not require a revision. The reader will notice that several of the recent policy changes of a long-term nature, particularly those that reduce discretionary and administrative controls in the economy, are consistent with my conclusions, although there are some differences in the specific measures that have been taken.

There is a certain amount of anxiety in the country about the immediate economic outlook. It is also being debated whether the stabilisation and structural policies introduced by the government are yielding the expected results. This debate is healthy. There are no magic solutions, and we have to learn to adjust our policies as we go along. However, I believe that in judging the outcome of current policies a firm distinction needs to be made between two different sets of issues. The first concerns the need to redefine the role of the state in India's economy in the light of changes that have taken place in our politics, administration and governance. It is beyond reasonable doubt that the state is now over-extended. Even as the process of centralisation has strengthened over time, the authority of the state has diminished. As a result the quality of intervention as well as quality of services provided by the state have deteriorated. A second set of issues relates to the impact of specific policy measures (for example, those relating to the exchange rate, administered prices or interest rates) on certain macro-economic aggregates

I believe that a reduction in the role of the state and bureaucracy in India's economy is a political as well as an economic necessity irrespective of the outcome of specific macro-economic policies. Similarly, irrespective of ideological considerations, it seems to me that the need to reduce the revenue deficit and the growth of public debt is recognised by all sections of opinion in the country. There may be legitimate questions regarding the validity or social impact of a particular measure. But this should not distract us from the pursuit of our long-term objectives.

This book was written before the present government took office and without any prior knowledge of the new policies or of the government negotiations with international financial institutions. I hope that the analysis contained in this book will contribute to a dispassionate discussion of economic policy options for India in the 1990s.

Review - Reproduced from the book's back page

India's Economic Crisis
Bimal Jalan

While this book covers several technical issues which will interest professional economists and policy makers, it is also wholly accessible to the general reader In five crisp chapter along with an Introduction and Epilogue, Dr Jalan provides a succinct overview of India's major developmental directions in economic planning. He demonstrates, with great clarity, the country's economic failures and successes, as well as the important global macro-economic changes and domestic political developments which now necessitate new national policy measures and developmental strategies.


'Balanced and pragmatic'
-Economic and Political Weekly, Bombay

Compelling... gives both sides of the long debate on development with a wealth of reference'.

-The Economist, London
'Offers a brilliant economic landscape against which we can chart the path for a new India'.
--Seminar, New Delhi

Jalan's is a compact, well researched, erudite volume, and make(s) a significant addition to the literature'.

-Mainstream, New Delhi

'Binal Jalan's book is important ... essential reading for economists, administrators and the concerned layman'.

-The Statesman, Calcutta
'An extremely researched analytical work which in its extraordinary sweep complements that of the late Sukhamoy Chakravarty'.
-The Times of India, Bombay
'A credible plan of action for steering the economy out of the present crisis.'
-The Hindu, Madras

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