India five years of stabilization and reform and the challenges ahead

The stabilization and reform measures introduced over the past five years have considerably improved India's growth prospects. Growth accelerated to over 6 percent in 1995-96 from less than one percent in 1991-92 The progressive integration of the Indian economy into the global economy with the liberalization of the investment, trade and foreign exchange regimes has improved productivity, particularly in the industrial sector, which has been growing at rates exceeding 10 percent in the last two years. In addition, the exchange rate devaluation and the reduction in the level of protection of the industrial sector have been beneficial to agriculture Growth is now driven by exports and private investment, and is being accompanied by an increase in domestic savings. At US$2 billion in 1995-96, foreign direct investment is 15 times higher than it was before the economy was liberalized and portfolio investment has stabilized at around US$2 3 billion--that is 10 percent of world portfolio investment in emerging markets Inflation has declined and the external accounts have strengthened

Notwithstanding these remarkable achievements, this report, like the Government's June 1996 Common Minimum Program and the Ministry of Finance 1995-96 Economic Survey, re emphasizes the importance of urgently addressing the remaining structural constraints to higher growth. Chief among them are: reducing the country's chronically high fiscal deficits, removing the remaining investment and trade restrictions, particularly in agriculture; averting a crisis in infrastructure, and strengthening the country's human capital base.