India: Liberalize in the Face of Crisis?

By Nikhar Gaikwad, Kenneth Scheve
2016 | Case No. P86 | Length 28 pgs.

In June 1991, India was in the midst of a currency and balance of payments crisis the likes the country had not seen since independence in 1947. The country’s foreign exchange reserves were barely enough to finance 13 days worth of imports. In the face of the crisis, India was forced to consider external help from the International Monetary Fund (IMF), which was accompanied by market-oriented conditionalities. The prospect of IMF support was a double-edged sword: on the one hand, restoration of finances and a viable path to economic recovery, but on the other, forced trade liberalization that would upend decades of centralized planning and inward-oriented growth. The IMF’s adjustment plan would touch nearly every citizen, firm, and industry in the country. Liberalization, in theory, could stimulate long-term growth in the economy, yet it could also impose substantial adjustment costs in the form of firm closures and job losses. These economic reverberations would undoubtedly shake the country’s political establishment, potentially jeopardizing the electoral fortunes of those in power. This case introduces students to Prime Minister P.V. Narasimha Rao’s decision to liberalize the Indian economy. Students must pay attention to the domestic political actors—communist and right-wing parties, voter coalitions, and special interest groups—that played a central role in influencing Rao’s policy positions. They must also evaluate the negotiation strategies of international institutions, national governments, and firms and industry groups in the context of trade liberalization. By applying political economy theories of trade and economic policymaking to the decision facing Rao, students learn about the complex linkages between domestic political factors and international economic pressures when developing countries integrate into the global economy.

Learning Objective

This case introduces students to seminal political economy theories of trade and economic policymaking and helps students apply these theories to a watershed moment of trade liberalization in the developing world: India’s decision to open its economy to international trade in 1991. Students learn about the dynamics of (a) party and electoral competition surrounding mass politics over trade policy; (b) special interest lobbying by firms and industries that gain and lose from international trade; and (c) issue-linkaging pursued by international institutions in the domain of global economic policymaking.
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