## Letting the Future In: India's Continuing Reform Agenda, Address by Anne O. Krueger, Acting Managing Director, IMF

_IMF News, June 4, 2004_

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## Bibliographic details
- Published: June 4, 2004

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### Overview and central message
- The 1991 reform program set India on a sustainable growth path through trade, financial and economy-wide liberalization.
- Official growth target of 7-8 percent is "attainable" and "more can be achieved"; with appropriate commitment, "growth of 10 percent a year is both necessary and feasible."
- The IMF's role is to support governments in delivering sustained and rapid growth to raise living standards and reduce poverty; the Fund does not dictate policy priorities.

### Achievements to date and empirical findings
- Growth acceleration began in the 1980s due to: removal of some controls on private sector activity; relaxation of quantitative restrictions on imports; and expansionary fiscal policy.
- The 1991 balance of payments crisis led to radical reforms that restored stability and sustainability.
- Post-1991 performance:
  - India averaged around six percent a year over the period since 1991.
  - National poverty rate estimate: dropped from just under 41 percent of the population in 1992-93 to less than 29 percent at the turn of the century.
  - Rural poverty: "a tad over 30 percent in 2000."
  - Urban poverty: 24.7 percent.
- Recent growth exceeded 7 percent ("growth in excess of 7 percent achieved last year").
- Sectoral successes: software industry growth, outsourced services (call-centers), rise in middle-class consumption.

### International comparison: Korea as an example
- Korea reforms and outcomes:
  - In 1960, exports equaled 3 percent of GDP, nearly 90 percent primary commodities.
  - By 1964, exports rose from $30 million in 1960 to more than $100 million.
  - Imports rose from 13 percent to around 40 percent of GDP; exports from 3 percent to 37 percent of GDP during reform progression.
  - In the first decade after 1963, real GDP growth averaged 13 percent a year.
  - By 1988, exports were 46 percent of GDP.
  - Between 1962 and 1992, per capita income rose almost sevenfold.
- Lesson: opening the economy and export-led policies, plus infrastructure investment, supported sustained growth and relatively equal income distribution.

### Major reform priorities and policy recommendations
- Fiscal policy and deficit:
  - The large deficit is "now in excess of 10 percent of GDP" and "simply not sustainable."
  - Support for Fiscal Responsibility and Budget Management Act; concern over proposed delay to budget balance target date to 2009.
  - Fiscal reform emphasis: make public sector more efficient; improve revenue collection and tax administration; widen tax base; streamline civil service; better-targeted transfer payments; reduce subsidies that benefit the middle class.
  - Reducing government's reliance on borrowing will free up resources for the private sector and help raise productive investment.
  - Empirical examples: Turkey ran a primary surplus of more than 6 percent while achieving almost 6 percent growth; Brazil had a primary surplus of 4.5 percent with growth picking up.

- Infrastructure:
  - Rapid improvements in transport, power and communications are "vital" for private sector productivity and poverty reduction.
  - Government should focus on core responsibilities and leverage private sector where appropriate.

- Social provision and service delivery:
  - Better targeting of education and health can increase benefits for the poor at the same or lower cost.
  - Public sector efficiency is critical to improving delivery of education, health and infrastructure.

- Center-state relations:
  - Many delivery and infrastructure problems lie with states; resolving center-state issues and giving states the right incentives is key.
  - States can learn from one another to address regional disparities.

- Labor market reform:
  - Around 40 million people are already looking for a job in India, and another 35 million are likely to join them within three years.
  - Labor regulation prevents large-scale private-sector job creation; deregulation would enable labor-intensive manufacturing to create unskilled jobs.
  - High-tech and services sectors are successful in part because they are exempt from restrictive labor regulations; similar freedoms across the economy would expand job creation.

- Foreign direct investment (FDI):
  - FDI in India is "still less than three quarters of one per cent of GDP."
  - Comparative figures: more than 3 percent in Brazil, and more than 4 percent in China.
  - India accounts for "less than one half of one per cent of global foreign investment."
  - Recommendation: reduce regulation and red tape to attract more foreign investors.

### Implementation challenges and micro-level bottlenecks
- Bureaucratic hurdles and lack of local incentives impede exporters; streamlining procedures at local levels could yield significant gains.
- Public sector shortcomings are not always due to funding shortages: corruption and mismanagement matter.
  - Education sector absenteeism findings: across India 25 percent of teachers are absent on any given day; in Bihar 38 percent and in Jharkhand 42 percent. Absence in private schools is nearly as bad—"around two percentage points less than in public schools."
- Center-state coordination, local implementation incentives, and reduction of corruption/mismanagement are essential to translate reforms into better services and infrastructure.

### Scenarios and potential outcomes
- With sustained and bolder reform momentum post-election:
  - India could move to a path of sustained and rapid growth, enabling much greater poverty reduction and faster rises in living standards.
  - Growth, combined with improved public service delivery and labor market liberalization, would generate more and better jobs.
- Without fiscal consolidation and structural reforms:
  - The unsustainable large deficit could constrain long-term growth prospects and crowd out private investment.

### Conclusion
- India has achieved significant reform-driven gains since 1991; these gains can be expanded by pursuing:
  - Fiscal consolidation combined with public-sector efficiency,
  - Rapid infrastructure modernization,
  - Improved center-state cooperation,
  - Labor market deregulation to enable large-scale job creation,
  - Greater encouragement of foreign investment.
- "Bigger steps, taken more boldly, would bring correspondingly greater rewards."

*Source: Letting the Future In: India's Continuing Reform Agenda, Address by Anne O. Krueger, Acting Managing Director, International Monetary Fund, June 4, 2004.*

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## References

- [India and the IMF](http://www.imf.org/external/country/IND/index.htm)
- [Republic of Korea and the IMF](http://www.imf.org/external/country/KOR/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Anne O. Krueger](https://www.imf.org/external/np/omd/bios/ak.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp060404_