Saturday, November 22, 2014

Stand up and talk to me, Mr Jaitley

Unsustainable tax demand would only earn bad name: FM

Last Updated: Friday, November 21, 2014, 18:57 
Unsustainable tax demand would only earn bad name: FM
New Delhi: Finance Minister Arun Jaitley on Friday said that an unsustainable tax demand would only earn the country a bad name as an investment destination, comments that come in the wake of tax department losing its battle against Shell in Mumbai High Court.

"Unsustainable demand won't get you taxes. Unsustainable demands in the books can show you in good glory, but eventually those taxes will be blocked in some judicial court proceedings...They would have only earned us a bad name as an investment destination," he said.

He, however, maintained that those who are supposed to pay taxes must pay.

Jaitley's comments come in the wake of Mumbai High Court order earlier this week wherein Income-Tax Department lost its Rs 18,000-crore transfer pricing cases against oil major Shell India.

Already the government is engaged in a Rs 20,000 crore tax dispute with British telecom major Vodafone.

Referring to retrospective amendments to the tax laws by the UPA government, Jaitley said, if it is not investor friendly, people would start looking elsewhere.

He further said making taxation regime investor friendly and streamlining the procedure for land acquisition are the big challenges facing the government.
"Undoing a lot of taxation decisions is quite challenging, but that necessarily does not involve a legislative action. Only some areas require action," he told the gathering.

Jaitley, however, took comfort from the fact that taxation laws are the domain of the Lok Sabha in which the NDA has majority.

The Minister said though it managed to get the mess concerning allocation of coal blocks cleared with ease, resolving other issues remain a challenge.

When asked the three specific reforms he would like to get passed in the ensuing Winter session of Parliament, Jaitley said he would like insurance, coal laws and Goods and Services tax (GST) to be cleared.

He said there are political risks to reforms and those in government would have to adequately blend the economic reforms with politics.

"Economic reforms have also to be blended with competent and clever politics. Reforms alone by themselves are not enough, if they have to survive politically, the blending has to be adequately done by those involved. And I am sure it is one area both my party and government is paying adequate attention," Jaitley said.

On black money in the country, he said, real estate, jewellery market, luxury market and mining are the sectors in which they are prevalent. The Minister said he has asked the chief commissioners of direct taxes to look into these sectors.

As regards black money stashed abroad, he said his government would follow legally the right course.

"If you make an adventurist step and make every name available, without any supporting evidence, breach your international treaties, you are not going to be only disadvantaged by future non-cooperation, but also nobody will want to provide you with supporting evidence," he said.

On privatisation, he said, principally he has always been for privatisation in sectors where government can get out. "Not only the mindset of polity has to change but also all other agencies will have to change," he said, adding that the civil servants cannot work in an oppressive environment.

"While our accountability norms has to be very tight, but government taking commercial decision can never do it in an oppressive environment. As part of our reform process, we will also have areas which at some stage require to be considered by the larger political system," he said.

Jaitley also said government would be able to meet the direct tax target, though indirect tax remains a "challenge" as manufacturing sector was a great source of worry.

The Finance Minister also expressed concern over banks become defensive in lending in the wake of high stressed assets.

He said the NPAs had come down to 2 percent of total advances after implementation of SARFAESI Act, but have now again risen to 5 percent.

"This has put banks on backfoot and made them defensive," he said, adding slowdown in credit offtake was a cause of concern. Bankers, he said, have been asked to push up lending.

Referring to the land acquisition bill, Jaitley said, the NDA government did not have any problem in farmers getting higher compensation but the real issue was procedure.

"I have really no quarrel with the compensation part. Farmers in India are entitled for higher compensation, but the procedural part of the land law is a big problem and it will require a lot of efforts to simplify those procedures", he said.

When asked if he expect RBI to cut interest rate in its December 2 monetary policy, Jaitley said: "I have lot of patience."

On relationship between the Finance Ministry and Reserve Bank, he said "I don't think there is any requirement for a knee-jerk reaction. I consider it (discussions) only a part of a healthy debate".

On Supreme Court's observations on CBI Director Ranjit Sinha, Jaitley said governments should be extremely careful while making appointments to such high posts.

"I have been looking at the law that applies, whether it's a gap in the law or otherwise. One has to seriously examine who has the power to do that. Because now the new appointing authority is a collegium, I think governments have to be extremely careful when they make appointments for this purpose," he said.

In a humiliation just days before retirement, CBI Director Sinha was yesterday removed by the Supreme Court from the 2G scam cases, saying the allegations against him of protecting some accused appears to be "prima facie credible".

Recalling the events leading to appointment of Sinha in 2012, Jaitley said the CBI Director was appointed by the previous UPA government just a day before a Parliament select committee report on Lok Pal Bill that provided for the procedure of such appointment was to be tabled in Rajya Sabha.

"At 11 am that report was to be tabled and this appointment was made the previous evening at 9 pm. The next day Sushma Sushma Swaraj and I wrote to the Prime Minister (Manmohan Singh) that on what criteria have you done this..." he said.


First Published: Friday, November 21, 2014, 18:06
Join the discussion…
Mr Arun Jaitley, please elaborate on your following statement: "I don't think there is any requirement for a knee-jerk reaction. I consider it (discussions) only a part of a healthy debate".
I consider your attempt to blame previous administrations as less than diplomatic.
Say when....
I am ready to debate with you. Yes sir, You are a non-person, as far as I am concerned. Vilifying has been BJP's sole game. Stand up and talk to me. Your silence means your defeat.
...and I am Sid Harth

  • - 10 -
    7.6 percent are critical to obtaining an average growth rate during the 1980s that is
    comparable to the growth rate in 1990s. Second, the variance of growth rates during the 1980s is statistically significantly higher than that in the 1990s. In this sense, growth during the first period was fragile relative to that in the second and, indeed, culminated in the June 1991 crisis. Thus, consider Table 2, which offers the
    average growth rates for several selected periods. The average annual growth rate
    during the eleven-year period from 1992–93 to 2002–03 that I have defined as the post-1991 reform period or the “1990s” is 5.9 percent.
    One obvious criterion for defining the pre-1991 reform period or the “1980s” is to select 11 years immediately preceding the post-1991 reform period: 1981–82 to 1991–92. Average annual growth rate during this period is 5.3 percent. If the inclusion of the crisis year, 1991–92, into this period is objectionable, we can
    consider the ten-year period between 1981–82 and 1990–91. In this case, the average growth rate rises to 5.7 percent.
    Either way, growth rates between the 1980s and 1990s are comparable.
    But consider for a moment annual average growth rates until 1987–88. If we take the ten-year period from 1978–79 to 1987–88, the average growth rate is an unimpressive 4.1 percent. In 1988, anyone looking back at the ten-year experience would have concluded that India was still on the Hindu growth path. Indeed, even limiting ourselves to 1981–82 to 1987–88, we get an average growth rate of only 4.8 percent, which is strictly below the growth rate of 4.9 percent achieved during the Fifth Five Year Plan (1974–79). Thus, had it not been for the unusually high growth rate of 7.6 percent during 1988–91, we would not have reason to debate whether the reforms of 1990s made a significant contribution to growth. The implication is that any explanation of growth in the 1980s must explain the
    exceptionally high growth during 1988–91.

  • - 9 -
    Figure 1: Annual Growth Rates: GNP and GDP
    Growth Rate
    Thus, even though growth rates of GDP and GNP follow nearly identical, overlapping paths (see Figure 1), Wallack’s cutoff dates for the shift in the growth rate turn out to be vastly different for them.
    The outcome is highly sensitive to small movements in the data. When we recognize the fact that the errors in the measurement of GNP and GDP perhaps
    dwarf the differences between the two series as measured, we cannot place a high degree of confidence in the cutoff dates obtained by Wallack.
    Besides, by construction, the calculated cutoff date is itself influenced by the events following the cutoff date. Future policies that influence future growth can automatically change the calculated date of the shift in the growth rate. For example, had the policies and therefore growth experience in the 1990s been
    vastly different, the cutoff date would also be different. Alternatively,
    addition or deletion of data points can alter the cutoff point. Even holding the data set fixed, Wallack finds multiple candidates for the shift. Thus, while she reports only the year with the maximum F-statistic (that is, the strongest rejection
    of the null hypothesis that average growth was the same in the two periods), for each series she finds additional years in the 1980s with test statistics close
    to the maximum value and above the 10 percent critical value. The difficulty in pinpointing the date of shift in the growth rate does not allow us to precisely define the starting point of the “1980s” growth period. Fortunately, however, two important related facts remain valid regardless of which starting date we choose. First, the
    years 1988–91 during which the economy grew at the super high average annual rate of
    Table 1 lists the GDP growth rates from 1951–52 to 2002–03.
    Wallack (2003, p. 4314) herself is careful to recognize this fragility. Thus, she notes, “Although the evidence for the existence of a break is strong, the data are more ambiguous on its exact timing in the early and mid-1980s.”
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    - 8 -
    former period was fragile and unsustainable. In Section III, I link the shift in the
    growth rate in the 1980s to the conventional economic reforms both in terms of the
    policy changes and outcomes. In Section IV, I discuss the role played by expansionary fiscal policies supported by both internal and external borrowing that
    made the growth process unsustainable. In Section V, I describe briefly the main
    reforms undertaken since 1991 and their impact. In Section VI, I offer remarks on
    why growth in the 1990s has continued to fall behind that of China and what India
    could do to catch up with the latter. Finally, in Section VII, I summarize the paper
    and offer concluding remarks. II. THE FRAGILITY OF GROWTH IN THE 1980S
    In comparing the performance prior to the July 1991 reforms and that following them, the conventional practice is to draw the line at 1990–91 and thus divide the time period into the decades of 1980s and 1990s. But this division does not accurately reflect the division into periods prior to and following the July 1991 re
    forms. Indeed, because 1991–92 was the crisis year and the 1991 reforms were a response to rather than the cause of the crisis, the conventional practice creates a
    serious distortion by including the year 1991–92 into the post-1991 reform period. The July 1991 reforms and subsequent changes could not have begun to bear fruit prior to 1992–93. Therefore, for the purpose of this paper, I take 1991–92 as the dividing line between the two periods. The post-1991 reform period is defined to start in 1992–93 and last until the latest year for which data are available, 2002–03. Pre-1991 reform period precedes this period with the starting date left vague at this point. Though it may be argued that the June 1991 crisis was the result of the policies of the pre-1991 reform period and therefore the year
    1991–92 legitimately belongs in it, where appropriate, I present the analysis with and without this year included in the pre-1991 reform period.
    Throughout the paper, unless otherwise stated, the terms “1980s” and “
    1990s” refer to the pre- and post-1991 reform periods as per these definitions
    At the outset, it may be noted that it is difficult to pinpoint the timing of the upward
    shift in India’s growth rate. Thus, in a recent attempt to pinpoint structural breaks in the growth series, Wallack (2003) is able to achieve at best partial success. She finds that with a 90 percent probability the shift in the growth rate of GDP took place between 1973 and 1987. The associated point estimate of the shift, statistically significant at 10 percent level, is 1980.
    When Wallack replaces GDP by gross national product (GNP), however, the cutoff point with 90 percent probability shifts to the years between 1980 and 1994. The associated point estimate, statistically significant at 10 percent level, now turns out to be 1987.
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  • - 7 -
    taken here is that the liberalization in the 1980s served as the necessary groundwork for the more systemic and systematic reforms of the 1990s. The 1990s reforms were qualitatively different from those in the 1980s in that they represented a broad acceptance of the idea that entrepreneurs and markets were to be given priority over government in the conduct of economic activity and that government interventions required proper justification rather accepted by default.
    The main conclusions of this paper can be summarized as follows: •Growth during the 1980s was higher than in the preceding decades but fragile. It not only culminated in a crisis in June 1991 but also exhibited significantly higher variance than growth in the 1990s. Central to the high growth rate in the 1980s was
    the super high growth of 7.6 percent during 1988–91. Absent this growth, the average growth in the 1980s would be significantly lower than in the 1990s. •The fragile but faster growth during the 1980s took place in the context of significant
    reforms throughout the decade but especially starting in 1985. While this
    liberalization was ad hoc and implemented quietly (“reforms by stealth” is the term
    often used to describe them), it made inroads into virtually all areas of industry and
    laid the foundation of the more extensive reforms in July 1991 and beyond. The
    liberalization pushed industrial growth to a hefty 9.2 percent during the crucial high-
    growth period of 1988–91. •Growth during the 1980s was also propelled by fiscal expansion financed by borrowing abroad and at home. But this was unsustainable and led to the crisis of June 1991. •The reforms in the 1990s were more systematic
    and systemic and they gave rise to a decidedly more stable and sustainable growth from 1992 on. •Nevertheless, India continues to lag behind China, growing at an average rate of 5 to 6 percent compared to the latter’s average growth rate of 8 percent. The key reason for the difference is that industry has failed to grow rapidly in India and still accounts for only a quarter of the GDP compared with half in the case of China. •If India is to catch up with China, some key reforms aimed at helping industry grow faster are essential: labor laws that give firms the right to reassign and lay off workers under reasonable conditions, end to the small-scale industry reservation that currently reserves most of the labor-intensive products for
    small firms, bankruptcy laws, and tariff levels comparable to or lower than
    those in the East Asian economies. The remainder of the paper is organized as follows. In Section II, I contrast the experience during the 1980s with that in the 1990s, arguing that growth in the
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  • - 6 -
    Joshi and Little (1994, chapter 13), who have been champions of reforms and have
    extensively studied Indian macroeconomic policies in the 1980s, recognize the role of reforms but regard fiscal expansion financed by external and internal borrowing as the key to the acceleration of growth during the 1980s.
    This is also the view expressed indirectly by Ahluwalia (2002a, p. 67) who states that while the growth record in the 1990s was only slightly better than that in the 1980s, the 1980s growth was unsustainable , “fuelled by a build up of external debt that culminated in the crisis of 1991.” Srinivasan and Tendulkar (2003) attribute some role to the reforms but they too underplay them when they state: “India’s exports increased over this period [1980s] of piecemeal reforms, but this was
    more due to a real exchange rate depreciation mostly as a result of exogenous forces than due to an active policy of nominal devaluation or due to explicit policy reforms aimed at reducing trade barriers. Growth performance was also distinctly better in the 1980s than in the earlier period. This surge in growth, however, was supported on the demand side by unsustainable fiscal policies, and it ended with an economic crisis in 1991.”[Emphasis added.] Finally, Das (2000), as quoted by DeLong, gives the strongest impression of all writers that reforms originated with the July 1991 package announced by Manmohan Singh: “ July 1991... with the announcement of sweeping liberalization by the minority government of P.V. Narasimha Rao... opened the economy... dismantled import controls, lowered
    customs duties, and devalued the currency... virtually abolished licensing controls on private investment, dropped tax rates, and broke public sector monopolies.... We felt as though our second independence had arrived: we were going to be free from a rapacious and domineering state..." Among those who have ventured to attri
    bute the acceleration in growth in the 1980s to liberalization are Desai (1999), Pursell (1992), and Virmani (1997). Desai focuses on liberalization in the industry a
    nd industrial growth and Pursell on trade liberalization in the 1980s. I draw on their work later, particularly the latter. The discussion in Virmani is brief but he attributes the shift in the growth rate in the 1980s virtually entirely to liberalization. Moreove
    r, he views the liberalization measures during the 1980s and 1990s as “subphases” of an overall phase. In contrast, the view many reform-minded economists, especially from India including the author, have advocated caution in this area.
    Specifically, Joshi and Little (1994, p. 190) note, “It appears that "Keynesian" expansion, reflected in large fiscal deficits, was a major cause of fast growth.” In personal correspondence, Vijay Joshi has recently changed his mind, however. Commenting on an earlier draft of this paper, he writes, “Joshi and Little did point to the importance of the mildly liberalizing reforms in the 1980s but in retrospect we should have put greater stress on them exactly as you have done.”
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    - 5 -
    entrepreneurs without a change in the policy or its implementation? It is only through policy changes such as the expansion of the Open General Licensing list at the expense of the banned and restricted import licensing lists, and change in the implementation strategy such as, for instance, by issuing import licenses more
    liberally so that officials could convey the change in their attitudes to entrepreneurs. By extension, the absence of further reforms would have surely signaled to entrepreneurs a reversion back to the old attitudes.
    The policy versus attitude change issue apart, the key question is whether minor
    changes in either policy or attitudes in the 1980s produced the same outcome as the major reforms in the 1990s. In this paper, I demonstrate that the skeptical view offered by Rodrik and DeLong overstates the growth and understates the reforms during 1980s. Growth during the 1980s was fragile, highly variable from year
    to year, and unsustainable. In contrast, once the 1991 reforms took root, growth became less variable and more sustainable with even a slight upward shift in the mean growth rate. At the same time, reforms played a significant role in spurring growth in the 1980s. The difference between the reforms in the 1980s and those in the 1990s is that the former were limited in scope and without a clear road map whereas the latter were systematic and systemic.
    This said the reforms in the 1980s must be viewed as precursor to those in the
    1990s rather than a part of the isolated and sporadic liberalizing actions during the 1960s and 1970s, which were often reversed within a short period. The 1980s reforms proved particularly crucial to building the confidence of politicians regarding the ability of policy changes such as devaluation, trade liberalization, and delicensing of investment to spur growth without disruption. It is questionable,
    for example, whether the July 1991 package would have been politically acceptable in the absence of the experience and confidence in liberal policies acquired during 1980s.
    Before I move to the next section, let me note that the view that liberal economic
    policies did not make a significant contribution to the shift in growth during the 1980s extends well beyond reform skeptics and includes some of the ardent advocates of reform.
    This is not unlike the stop-go reforms in China though the latter did go much farther during the 1980s, especially in the Special Economic Zones and Open Cities.
    Among skeptics, Joseph Stiglitz too seems to have bought into the DeLong-Rodrik story, though with a different twist. Thus, in an exchange with economist Kenneth Rogoff published in the Wall Street Journal Europe (October 18, 2002), he is reported to have said,
    “The two countries that have the most impressive economies now are China and India. They happen to be the two that bought the least into the globalization story that the IMF and others are selling.” But there is little basis for such a claim. All the reforms undertaken by India, described below, are those that reform-minded economists and the IMF would recommend.
    The pace of reforms has been slower but this is to be attributed not so much to conscious choice as to the country’s democratic political process that demands consensus that is slow to build. It is true that India has chosen not to embrace capital-account convertibility to-date but (continued...)
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    - 4 -
    the significantly more ambitious reforms of the 1990s actually had a smaller impact
    on India's long run growth path. DeLong speculates that the change in official
    attitudes in the 1980s, towards encouraging rather than discouraging entrepreneurial activities and integration into the world economy, and a belief that the rules of the economic game had changed for good may have had a bigger impact on growth than any specific policy reforms.”
    It is not entirely clear as to what policymessage is to be gleaned from this skepticism. Neither DeLong nor Rodrik suggests that the reforms of the 1990s were detrimental to the growth process. DeLong explicitly states that in the absence of the second wave of reforms in the 1990s, it is unlikely that the rapid growth of
    the second half of the 1980s could have been sustained. Rodrik is more tentative,
    emphasizing the change in official attitudes about the change in policies, possibly implying that the attitudes having changed for good, growth would have been sustained even without the reforms of the 1990s.This interpretation itself raises two immediate questions: Is there evidence demonstrating that official attitudes changed significantly during the 1980s and if so how was this change conveyed to the public? Most observers of India are likely to question the view that there had been a significant shift in official attitudes in the 1980s. Indirect evidence of the general dominance of the old attitudes can be found in the care Manmohan Singh took in packaging the bold reforms of 1991, describing them as a continuation of the old policies.
    A careful reader of Singh’s historic 1991 budget speech is bound to be struck by the effort he made to draw a close connection between his proposals and the policies initiated by India’s first Prime Minister Jawaharlal Nehru and carried forward by his grandson Rajiv Gandhi. As I noted in Panagariya (1994), Singh continuously
    reiterated the usefulness of the past policies in the speech and repeatedly referred to the contributions of Nehru to development, while also recalling the just-assassinated former Prime Minister Rajiv Gandhi’s dream of taking India into
    the twenty-first century. More directly, commenting on a previous draft of this paper, N.K. Singh who has been directly involved in policymaking in India during the 1980s as well as the 1990s and is currently Member, Planning Commission wrote the following to the author:
    “I am somewhat intrigued by the statement of Delong & Rodrik stressing change in
    official attitude over change in policies implying that if attitude changed for good,
    growth would have been sustained even without reforms in the 1990s. Even today,
    more than change in policies we are struggling with change in attitude. The first
    reflex of any observer of Indian economy or potential foreign investor would be that
    while policies may not be so bad it is the attitude particularly of official ones which
    becomes the Achilles heel. In fact the 80s and even the 90s have seen far-reaching change in policies which have not translated themselves fully into changes in attitudes. This attitudinal change indeed constitutes a major challenge in our reform agenda.”
    But even conceding that a change in attitude on the part of officials had taken place, one must confront the question how officials could have conveyed this change to
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    I. I
    While public opinion in India continues to move toward the view that liberalization
    has been good, that more of it is needed, and that its pace must be accelerated, the view in some scholarly and policy circles has turned skeptical. It is being pointed out that the average annual growth rate of gross domestic product (GDP) hit the 5.6 percent mark in the 1980s, well before the launch of the July 1991 reforms.
    Alternatively, the growth rate in the 1990s was not much higher. Therefore, liberalization cannot be credited with having made a significant difference to growth in India.
    The key contribution expressing this skepticism has come from economic historian
    J. Bradford DeLong (2001, pp. 5–6) who writes in an article on growth in India:
    “What are the sources of India's recent acceleration in economic growth?
    Conventional wisdom traces them to policy reforms at the start of the 1990s. Yet the aggregate growth data tells us that the acceleration of economic growth began earlier, in the early or mid-1980s, long before the exchange crisis of 1991 and the shift of the government of Narasimha Rao and Manmohan Singh toward neoliberal economic reforms.”
    DeLong continues: “Thus apparently the policy changes in the mid- and late-1980s under the last governments of the Nehru dynasty were sufficient to start the acceleration of growth, small as those policy reforms appear in retrospect. Would they have just produced a short-lived flash in the pan—a decade or so of fast growth followed by a slowdown—in the absence of the further reforms of the 1990s? My hunch is that the answer is ‘yes.’ In the absence of the second wave of reforms in the 1990s it is unlikely that the rapid growth of the second half of the 1980s could be sustained.
    But hard evidence to support such a strong counterfactual judgment is lacking
    .” [Emphasis added.] The paper by DeLong appears in a volume edited by Dani Rodrik. Summarizing the main message of the paper in the introduction to the volume, Rodrik (2002) carries DeLong’s skepticism to the next level. He notes:
    “How much reform did it take for India to leave behind its ‘Hindu rate of growth' of
    three percent a year? J. Bradford DeLong shows that the conventional account of
    India, which emphasizes the liberalizing reforms of the early 1990s as the turning
    point, is wrong in many ways. He documents that growth took off not in the 1990s,
    but in the 1980s. What seems to have setoff growth were some relatively minor
    reforms. Under Rajiv Gandhi, the government made some tentative moves to
    encourage capital-goods imports, relax industrial regulations, and rationalize the tax system. The consequence was an economic boom incommensurate with the modesty of the reforms. Furthermore, DeLong's back-of-the-envelope calculations suggest that
    While the documentation below is limited to scholarly writings, many opponents of reforms in the political arena, including some in the Congress party, share this view.
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    Contents Page
    I. Introduction ........................................................................3
    II. The Fragility of Growth in the 1980s................................................8
    III. Connection to Liberalization......................................................12
    A. Reforms During the 1980s ...........................................................14
    IV. Unsustainable External Borrowing and Public Expenditure ...........................21
    V. A Brief Look at 1990s...............................................................22
    A. Deregulation of Industry ...........................................................23
    B. External Trade......................................................................24
    C. Impact of Liberalization............................................................26
    VI. Looking Ahead: Why India Lags Behind China ........................................27
    VII. Conclusion .......................................................................29
    1. Annual Growth Rates: GNP and GDP.....................................................9
    2. Yearly Growth Rates of GDP .........................................................11
    Tables1. Annual Growth Ra
    tes of GDP: 1951–2003 .................................................................31
    2. Average Annual Growth Rates During Selected Periods ................................32
    3. Five-yearly Variance of Growth
    Rates: Major Sectors and GDP...........................................................32
    4. Average Annual Growth Rates of Non-oil Merchandise Exports and Imports in
    Current Dollars........................................................................33
    5. Merchandise non-oil exports and imports as percent of GDP ..........................33
    6. Changes in Protection and Total Factor
    Productivity Growth (TFPG) by Industry Classification (unweighted averages) ...........34
    7. Fiscal Indicators: 1980–81 to 1989–90...............................................34
    8. Composition of GDP (Percent) .......................................................35
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  • Abstract
    This Working Paper should not be reported as representing the views of the IMF. .The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
    Bradford DeLong and Dani Rodrik have argued that reforms in India cannot be credited with higher growth because the growth rate crossed the 5 percent mark in the 1980s, well before the launch of the July 1991 reforms. This is a wrong reading of the Indian experience for two reasons. First, liberalization was already under way during the 1980s and played a crucial role in stimulating growth during that decade.
    Second, growth in the 1980s was fragile and unsustainable. The more systematic and systemic reforms of the 1990s, discussed here in detail, gave rise to more sustainable growth. The paper concludes by explaining why the growth rate in India nevertheless continues to trail that of China.JEL Classification Numbers: 019, 024, 053.
    Author’s E-Mail Address:
    The author is a Bhagwati Professor of Indian Political Economy and Professor of Economics at Columbia University, New York, NY 10027. I am grateful to Jagdish Bhagwati and Kalpana Kochhar for numerous helpful comments and to T.N. Srinivasan for extended email exchanges that led to many improvements in the
    paper. I also thank Rajesh Chadha, Satish Chand, Douglas Irwin, Raghav Jha, Vijay Joshi, Vijay Kelkar,
    Ashoka Mody, Sam Ouliaris, Jairam Ramesh, Jayanta Roy, Ratna Sahay, Kunal Sen, N.K. Singh, and Roberto Zagha for helpful suggestions on an earlier draft of the paper. The paper was completed while I was a Resident Scholar at the International Monetary Fund and has benefited from comments made at the IMF-NCAER Conference, “A Tale of Two Giants: India’s and China’s Experience with Reform and Growth,” November 14–16, 2003, New Delhi.
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  • WP/04/43
    India in the 1980s and 1990s: A Triumph of Reforms
    Arvind Panagariya © 2004 International Monetary Fund WP/04/43
    IMF Working Paper
    Research Department India in the 1980s and 1990s: A Triumph of Reforms
    Prepared by Arvind Panagariya
    Authorized for distribution by Raghuram Rajan March 2004

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