Reforms helped growth and productivity
The impact of reform, perhaps, provides the most consistent explanation for the increase in growth and productivity, an endogenous explanation for the rise in private investment, and an explanation of why the growth slowed.
First, the reforms encouraged investment by opening up opportunities for profitable investment and reducing taxes on it.
Second, rising foreign direct investment and imports of capital goods, encouraged by deregulation, suggest that not only was there an increase in new vintage capital, but that the new vintage was even more productive than usual.
Third, the reforms encouraged a shift of resources towards exports, which increases the productivity of resources.
The estimated effective rates of protection in industry suggest that primary inputs in exports are on average of 47.6 per cent more productive than in import-substituting industry.
Hence a switch of resources into exports and out of imports -- a rise in the ratio of trade to GDP such as actually occurred -- can generate substantial increases in output.
The reforms not only allowed India to take advantage of a booming export market, they led to an increase in India's share of world markets.
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