ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Modest Globalisation, Significant Gains

India's External Reforms

The liberalisation of India's external sector during the past decade was extremely successful in meeting the BOP crisis of 1990 and putting the BOP on a sustainable path. These reforms improved the openness of the Indian economy vis-à-vis other emerging economies. Much, however, remains to be done. India's economy is still relatively closed compared to its 'peer competitors'. Further reduction of tariff protection and liberalisation of capital flows will enhance the efficiency of the economy and along with reform of domestic policies will stimulate investment and growth. The main lesson of the nineties is that liberalisation of the current and capital account increases the flexibility and resilience of the BOP. This applies to trade, invisibles, equity capital, MLT debt flows, and the exchange market. The author's analysis confirms that in India the exchange rate is a powerful instrument of adjustment in the current account deficit. It also confirms that equity outflows are very unlikely to be a major cause of BOP problems (unlike short-term debt). The impact of fiscal profligacy on the external account has become indirect and circuitous with the implementation of external sector reforms. It operates much more through the general expectations about economic (growth) prospects and the risk premium demanded by foreign (and domestic) investors and lenders. Thus its negative effects are likely to be focused on the domestic rather than the external account. In other words, the negative long-term effects of fiscal profligacy are more likely to be felt in future on the growth rate of the economy and the health of the domestic financial sector.

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