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News Release

India Needs More Global Engagement to Achieve Rapid Growth

March 24, 2003

Contact:    John Williamson    (202) 328-9000

Washington, DC—Despite having the world's second largest population (over 1 billion people currently) and being one of its most rapidly growing economies, India remains extremely poor (per capita income of $450 in 2001). Its poverty is particularly striking in comparison with its even more populous neighbor, China, and a number of other Asian countries such as Korea and Taiwan, which were at a similar level to India fifty years ago but are vastly richer today. In a new Institute study, Reintegrating India with the World Economy, two of India's leading economists argue that the root of this disparity is the very minor role that India has chosen to play in international economic affairs.

T. N. Srinivasan and Suresh D. Tendulkar show that the decline in India's share of world trade has been dramatic and that its own trade barriers, while lowered substantially over the last decade, still remain high. In the World Trade Organization (WTO) and elsewhere, India's stance on international economic issues has been harmful and counterproductive in terms of its own interests. India's ambivalence, or in some periods hostility, to international trade and especially increased foreign investment set it apart from many of its more rapidly growing neighbors.

On the international front, the authors contend that India should become much more engaged in multilateral negotiations through the WTO to counter protectionism in industrial countries. India should also take the initiative in increasing the effectiveness with which less developed countries can participate in WTO decision making.

On the domestic front, policies to improve the physical, institutional, and regulatory infrastructure for investment must top the list of future Indian reforms:

  • reform of the labor laws;
  • privatization of enterprises that have no compelling social rationale to be in the public sector;
  • reform of laws for bankruptcy and liquidation to allow for an orderly exit of failing private and public enterprises; and
  • restructuring of center-state economic relations, by amending the constitution if necessary.

The authors argue that these "second-generation" reforms are critical for restoring and sustaining rapid growth in India. The first generation of reforms, which were initiated in 1991, included policies toward greater integration with the global economy, greater reliance on private initiatives, and the use of market-based instruments in economic management. After a decade, these reforms, currently in various stages of completion, need to be given a harder push.

The new study covers the historical roots and the political economy of India's late integration with the world economy, the domestic and external constraints on that integration, external capital inflows including foreign direct investment, and India's emerging comparative advantage in the information technology industry and services, particularly computer software. The authors trace the interactions between India's positions on global policy (especially trade) issues and its own economic development. How have the development strategies chosen by India helped or hindered its ability to play a major role in international economic negotiations and institutions? Why has it not used those negotiations and institutions to promote more aggressive domestic reforms as China, Mexico, and other successful developing countries have? What are the prospects for both faster growth and more active international participation by India in the years ahead as its size alone inexorably propels it into greater global prominence?

India's reintegration with the world economy will require further dismantling of state controls and barriers to foreign investment, as well as the construction of new market-supporting institutions to foster competitive markets. The combination of international economic events, such as the collapse of the Soviet Union and the rise of China, buoyed by internal market pressures from entrepreneurs, has done much to weaken the old restrictive economic regime in India. But there are still many who advocate clinging to protectionist policies. The authors argue that removing the remaining components of the old economic regime will require a concerted effort with regard to both international and domestic policies.

About the Authors

T. N. Srinivasan, visiting fellow at the Institute for International Economics, is the Samuel C. Park, Jr. Professor of Economics and former chairman of the department of economics at Yale University, where he has taught since 1980. He was a special adviser to the Development Research Center at the World Bank from 1977 to 1980 and has taught at numerous academic institutions over the past four decades including MIT, Stanford and the Indian Statistical Institute. He has written many books and articles on econometrics, world trade, and developing-country economics. He is a visiting fellow at the Center for Research on Economic Development and Policy Reform, Stanford University; fellow at the Econometric Society, American Academy of Arts and Sciences, and American Philosophical Society; and a foreign associate of the US-based National Academy of Sciences.

Suresh D. Tendulkar, visiting fellow at the Institute for International Economics, is professor of economics at the Delhi School of Economics, University of Delhi, India, where he is also executive director of the Center for Development Economics. He was formerly head of the department of economics (1986-89) and director of the school (1995-98). Before joining the Delhi School, he taught at the Delhi Center of the Indian Statistical Institute (1968-78). He has written extensively on Indian development issues and policies, including those on liberalization and globalization. He has been closely associated with the Indian Statistical System, including the National Sample Survey Organization and the Advisory Committee on National Accounts, of which he is currently the chairperson. He was also a member of the National Statistical Commission (2000-01), the first Disinvestment Commission (1996-99), and the Fifth Central Pay Commission (1994-97).

About the Institute

The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. Its staff of about fifty focus on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and cover all key regions—especially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site.