India’s Growth Path: Steady but not Straight

Seeing through Preconceptions: A Deeper Look at China and India


India’s Growth Path: Steady but not Straight

Contentious internal political debates have slowed India’s movement into the global economy, but its commitment to democratic processes will serve it well in the long term.

By almost any reckoning, the Indian economy is booming. This year, Indian officials revised their estimated economic growth for 2006 from 8% to 9.3%. This growth has been sustained over the past several years, effectively doubling India’s income every eight to nine years.

Since 1991, the year India removed some of the most crippling controls ever imposed on business activities in a non-communist country, it has not only been attracting large amounts of foreign investment, it has also begun luring back many skilled Indians who had chosen to live overseas. It has also lifted millions of Indians out of poverty.

Such a scenario seemed impossible to conceive in 1991, when the Indian economy was on the ropes, as its foreign reserves plummeted to a level that would cover only three weeks of imports and the main market of its exports (the Soviet Union, and by extension, the eastern bloc) unravelled. Forced to make structural adjustments to its economy, India lifted many restrictions on economic activity, as a result of which macroeconomic indicators have improved vastly (Table 1). Foreign investors, once shy, have returned.

The gross domestic product grew at a compounded rate of 9.63% annually during this period, and capital inflows increased dramatically. This change is remarkable because since India’s independence in 1947, it had pursued semi-autarkic policies of self-sufficiency and self-reliance, placing hurdles and barriers in the path of foreign and domestic businesses. Foreign investors shunned India because they were not welcome there. Restrictions kept multinational firms out of many areas of economic activity, and once in, companies were prevented from increasing their investments in existing operations. In 1978, the government asked certain multinationals to dilute their equity to 40% of the floating stock or to divest. IBM and Coca Cola chose to leave India rather than comply. Six years later, a massive explosion at a Union Carbide chemical plant in Bhopal, which killed more than 2,000 people within hours of the gas leak, brought India’s relations with foreign investors to its nadir.