World Bank Suggests More Open Economy for India

The World Bank has suggested India should move to a more open economy by gradually removing most government controls on industry and adopting a liberal external trade policy with reduced levels of protection.

A confidential “executive summary” of a draft Bank report on the Indian economy was made available to Reuters. It suggests liberalisation as part of a package of reforms to boost exports of Indian goods by making them more competitive.

The summary said, “These reforms would result in (domestic) prices much more in line with world prices than is true today, and in a greater degree of import competition and export rivalry than the nation has ever seen.”

The summary said foreign trade must play a key role in India’s transition towards a more dynamic economy. Liberal imports of capital goods would help modernise the economy and expose Indian producers to foreign competition. Larger exports would provide the foreign exchange for imports.

“The main guideline is unambiguously to abandon the present principle of unlimited protection for all indigenously available products and to recognise the role of actual or potential competition from imports as a source of discipline on the prices and costs of public and private sector domestic manufacturers,” the summary said.

An Indian official told Reuters the government was discussing the report with the Bank. A final report with some changes was likely to be ready by May, but he declined to give further details.

The Bank and industrialised nations will discuss the Bank’s final report at a meeting in Paris on June 22 and 23 to discuss aid for India in the 1987/88 year starting in June.

The summary said India’s gross domestic product (gdp) grew at an average five pct in Indian fiscal years 1985/86 and 1986/87, which ended in March.

It said investment was being sustained at nearly 25 pct of gdp. Almost 94 pct of the investment was being financed by national savings, mainly from the private sector.

India’s trade deficit is officially said to have narrowed to 5.6 billion dlrs in 1986/87 ended March, from a record 6.96 billion dlrs in 1985/86. The current account deficit fell to 2.4 billion dlrs in 1986/87 from 2.88 billion in 1985/86.

But the summary said the improvement was largely due to lower prices of crude oil, petroleum products and fertilisers which make up the bulk of India’s import bill.

India was able to save about 2.6 billion dlrs in foreign exchange in 1986/87 due to lower prices of those products, the summary said.

The Bank’s summary said there was little room for complacency in the balance of payments position.

It said that despite a lower trade deficit in 1986/87, Indian foreign exchange reserves fell by 240 mln dlrs.

Real export growth would need to average at least 6.1 pct a year in value terms in the coming years to maintain a viable balance of payments, the summary said.

It did not explicitly suggest the rupee should be devalued. India “might have to reaffirm the commitment to exporting while undertaking some dramatic changes in general incentives that involve some political costs,” it said.

“An example of such a policy would be the adoption of an exchange rate regime that maintained exporters’ profitability,” the summary said.

It said such an approach had been successful in countries such as South Korea, Colombia and Turkey. It would maintain the competitiveness of Indian exports and simultaneously reduce import pressures.

Earlier this year, the Indian government denied that the World Bank asked it to devalue the Indian rupee to boost exports.