Analysis of India's Policy Reforms

University of Michigan School of Public Policy Discussion Paper No. 413

28 Pages Posted: 3 Jun 1998

See all articles by Rajesh Chadha

Rajesh Chadha

National Council for Applied Economic Research of

Sanjib Pohit

National Council of Applied Economic Research (NCAER)

Alan V. Deardorff

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan at Ann Arbor - Department of Economics

Robert M. Stern

University of Michigan at Ann Arbor - Department of Economics

Date Written: October 29, 1997

Abstract

The process of major economic reforms undertaken in the Indian economy has now completed six years of implementation. The unilateral reform measures in the industrial and trade policies of India along with reforms in the tax regime represent a significant departure from the policy framework of the preceding decades. Our paper evaluates the comparative static effects of selected trade and domestic policy reforms on trade, output, domestic prices, economic welfare, and the intersectoral allocation of resources using a computable general equilibrium (CGE) model of the Indian economy.

The results indicate that the import liberalization enhances the welfare of the economy, and that the effect gets further enlarged if exports are also liberalized simultaneously. This is particularly true of the agricultural sectors. The freeing of prices in the sectors which were under some form of administered price controls in the base year (1989-90) adds noticeably to the welfare effect. The economy becomes more efficient through reallocation of land, labor and capital across different producing sectors with increases in the returns to each of the factors of production. The rationalization of the existing structure of indirect taxes (mainly excise) and subsidies is expected to further benefit the factors of production and enhance overall welfare. Though such ex-ante analysis may not be replicated ex-post due to various macroeconomic and other factors that our model does not capture, the positive results nevertheless go a long way in establishing the credibility of the reforms process.

JEL Classification: F14, O20

Suggested Citation

Chadha, Rajesh and Pohit, Sanjib and Deardorff, Alan V. and Stern, Robert M., Analysis of India's Policy Reforms (October 29, 1997). University of Michigan School of Public Policy Discussion Paper No. 413, Available at SSRN: https://ssrn.com/abstract=94988 or http://dx.doi.org/10.2139/ssrn.94988

Rajesh Chadha

National Council for Applied Economic Research of ( email )

Parisila Bhawan
11 - Indraprastha Estate
New Delhi, 110002
India

Sanjib Pohit

National Council of Applied Economic Research (NCAER)

India

Alan V. Deardorff (Contact Author)

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

735 South State Street, Weill Hall
Ann Arbor, MI 48109
United States

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
458 Lorch Hall
Ann Arbor, MI 48109-1220
United States
313-764-6817 (Phone)
313-764-2769 (Fax)

Robert M. Stern

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
313-764-2373 (Phone)
313-763-9181 (Fax)

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