eco india reforms

7/29/2019 Eco India Reforms

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ECONOMIC REFORMS IN

INDIA


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Section B_Group 2

Ravi barun (68)

Arib khan (69)

Arjun arya(71)

Kaushik patel(94)

Anurag mathur(99)

Jerin john(128)

ECONOMIC REFORMS IN INDIA


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Pre 1990 scenario in India..

Till 90s India was a more of a Socialist economy.

i.e. -Dominant role of government

-Import substitution

-Huge investments in public sector and in capital goods.

Permit Raj

-High tariffs and quantitative restrictions

Heavy dependence on agriculture income-72% employment

Indias GDP rose from 3.5 to 5% in 80s.

The volume of exports grow after decades of independence.


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Manufacturing growth in public sector was around 7-8% after years of

degrading performance.

Late 80s and early 90s scenario:

The central govt. fiscal deficits increased from 6% of GDP to above 9% in

a time period of 1980s-90.

Nationalization of industries and financial institutions50% of industrial assets was owned by government

Subsidized 90000 sick units

Nationalized 100% of banks

Export policy

Decline of export growth from 6.5%(1950)-3.6%(1970)

Cash Assistance scheme

Registered exporters policy


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Reasons that led to 1991 crisis..

In 1991 India experienced a classic external payments crisis high fiscal deficit,

external borrowing to finance it, rising debt service commitments and resulting

inflation, inadequate adjustments in the exchange rate and a deteriorating current

account

The economic crisis was primarily due to the large and growing fiscal imbalances

over the 1980s. During mid eighties, India started having balance of payments

problems. Precipitated by the Gulf War, Indias oil import bill swelled, exports

slumped, credit dried up and investors took their money out. Large f iscal def ic i ts,

over time, had a spill over effect on the trade deficit cumulating in an external

payments crisis. By the end of 1990, India was in serious economic trouble.


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The other shock was the slow economic growth in Indias export markets.

and in the U.S. Indias largest export destination fell from 3.9 percent in

1988 to1 percent in 1991.

Conditions in another major export market the Soviet Union had also

worsened due to the oil shock.

World growth had also declined from 4.5 percent in 1988 to 2.25 percent in

1991.Consequently, Indias export growth was only 4 percent in 1990-91.

Petroleum import costs in 19901991 increased by half to US$5.7 billion.

Continued


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The gross fiscal deficit of the government (center and states) rose from 9.0

percent of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent

in 1990-91. For the center the gross fiscal deficit rose from 6.1 percent of GDP

in 1980-81 to 8.3 percent in 1985-86 and to around 12% in 1990-91.

Since these deficits had to be met by borrowings, the internal debt of the

government accumulated rapidly, rising from 35 percent of GDP at the end of

1980-81 to 53 percent of GDP at the end of 1990-91.

The foreign exchange reserves had dried up to the point that India could barely

finance three weeks worth of imports.

INFLATION REACHED 12.1% during the crisis.


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FOREIGN EXCHANGE RESERVES (INCL. GOLD AND SDRS) (US $BN.)

1990-91 5.831991-92 9.221992-93 9.831993-94 19.25

1994-95 25.191995-96 21.691996-97 26.421997-98 29.37

Source: M S.Ahluwalia 2000; RBI Annual Reports


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INTERNAL & EXTERNAL REASONS THAT BREDFOR CRISIS


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The Immediate response was to secure an emergency loan of$2.2 billion

from the International Monetary Fund by pledging 67 tons of India's gold

reserves as collateral.

The Reserve Bank of India had to lift 47 tons of gold to the Bank of England

and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.

IMMEDIATE RESPONSE..

National sentiments were outraged and there was public outcry The Chandra

Shekhergovernment had collapsed


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P.V. Narasimha Rao took over as Prime Minister in June, the crisis forcing him to

rope in Manmohan Singh as Finance Minister, who unshackled what was then

called the 'caged tiger'.

The Rao government ushered in several reforms that are collectively termed as

liberalization in the Indian media. Although, most of these reforms came because

IMF required those reforms as a condition for loaning money to India in order to

overcome the crisis.


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Main Features Of EconomicReforms

ECONOMICREFORMS

LIBERALISATION

PRIVATISATION

GLOBALISATION


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New Economic Policy 1991

New Economic Policy (1991)

Industrial Sector Reforms

Public Sector PolicyIndustrial Licensing Policy MRTP Act

External Trade Reforms

Foreign Investment Foreign Technology

Agreements


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Public Sector Policy.

Existence of large number of chronically sick public enterprises incurringheavy losses, operating in a competitive market and serving little or no

public purpose

Measures:

Portfolio of public sector investments reviewed with a view to focus the

public sector on strategic, high tech and essential infrastructure

Public Enterprises which are chronically sick and which are unlikely to

be turned around referred to the Board for Industrial and Financial

Reconstruction (BIFR) for revival/rehabilitation schemes


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Part of the governments shareholdings in the public sector would be

offered to mutual funds, financial institutions, the general public and

workers to raise resources and encourage wider public participation

Instilling professionalism in board of public sector companies

Greater thrust on performance improvement and greater autonomy to

management

Contd..


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Industrial Licensing Policy.

Role of the government changed from that of only exercisingcontrol to one of providing help and guidance by making essential

procedures fully transparent and by eliminating delays

Industrial licensing to be abolished for all projects except for a short

list of industries related to securities and strategic concerns.

In projects where imported capital goods are required, automatic

clearance will be given in cases where foreign exchange availability

is ensured through foreign equity.

Location other than cities of more than 1 million population, there will

be no requirement of obtaining industrial approvals from the central

Government except for industries subject to compulsory licensing.


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List of Industries..


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MRTP ACT

Monopolies and Restrictive Trade Practices Act, 1969 was amended. The

important objectives were:

Prevention ofconcentration of economic power in the hands of few which

will be detrimental to the common interest; and

Regulation of monopolistic, restrictive and unfair trade practices.

Hence, the MRTP Act now concerned only with the prohibition of monopolistic,

restrictive and unfair trade practices followed by the industrial undertakings and

the trading communities.


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Major Economic reforms /solutions to crisis.

Indias economic policy-making can be illuminated by examining five key

sets of decisions:

Devaluation

IMF programme

A new exchange rate regime and changes in the RBIs role

Carefully managed opening up to foreign investment

Financial sector reform


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Devaluation.

It refers to decline in value of a currency with respect to other currencies,

which is most of the times brought by central bank.

Value of money is decreased

Encourages exports and discourages imports

Trade deficit decreases .

Employment increases, demand for domestic goods and services increases.

All above leads to foreign reserve currency. So that later the trade can be

done easily.


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IMF approached.

As India was going through so many reforms during the 1991 period it needed

a huge amount of money.

And India largely got what it wanted. In a November 1991 stand-by agreement

the IMF promised to provide $2.2 billion over a period of twenty months.


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FOREIGN INVESTMENT.

Aimed at encouraging foreign trading companies to assist Indian exporters

in export activities:

Approval was given for direct foreign investment upto 51% foreign

equity in high priority industries

Import of the components, raw materials and intermediate goods, and

payment of know how fees and royalties would be governed by the general

policy applicable to other domestic units, the payment of dividends would be

monitored through the Reserve Bank of India

Majority foreign equity holding upto 51% equity would be allowed for

trading companies primarily engaged in export activities


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Foreign Technology Agreements.

In order to inject the desired level of technological dynamism in

Indian industry Automatic permission will be given for foreign

technology agreements in high priority industries up to a lump

sum payment of Rs. 1 crore, 5% royalty for domestic sales or 8% for

exports, subject to an overall limit of 8% of sales over a 10 year

period from date of agreement or 7 years from commencement of

production. .

No permission will be necessary for hiring of foreign technicians,

foreign testing of indigenously developed technologies.


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Financial Sector Reform.

Interest rates on term loans and on the bulk of debt instruments in capital

markets have been decontrolled and deposit interest rates

have been increased.

Full statutory powers will be given to the Securities and Exchange Board ofIndia (SEBI) to regulate, promote, and monitor Stock Exchanges in India

correspondingly the functions of the Controller of Capital Issues are being

redefined.

The private sector is now allowed to establish Mutual Funds.

RBI supervision over commercial banks and other financial institutions.


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Tax reforms.

Since 1991 several efforts have been made through the annual budget

process to achieve tax reforms. These have focused on:

Expanding the tax base by including services (not previously taxed);

Reducing rates of direct taxes for individuals and corporations;

Abolishing most export subsidies,Lowering import duties

Rationalizing sales tax and reducing the cascading effect of central indirect taxes

by introducing a Modified Value Added Tax and a soon-to-be implemented

nationwide Value Added Tax. Providing for tax incentives for infrastructure and export-oriented sectors,

including setting up Special (Export) Economic Zones;


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Reducing fiscal deficits..

Faced with the necessity of reducing the fiscal deficit in the crisis year of

1991-92, Finance Minister Singh attempted to reduce fertilizer and food

subsidies in 1991-92 and to some extent in 1992-93. Simultaneously, he (and

several subsequent finance ministers) resorted to the softer options of

reducing public investment expenditure and reducing public expenditure on

social welfare services from 1991 to 1995. These measures did help reduce the

fiscal deficit of the central government to 4.8 percent of GDP at the end of 1992-

93. However, further cuts in fertilizer and food subsidies were opposed in

Parliament and proved suicidal for the ruling Congress Party, which lost power in

state elections in 1993-94.


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Positive Aspects: Fulfilled a long-felt demand of the corporate sector for declaring in very

clear terms that licensing was abolished for all industries except 18

industries which included coal, petroleum, sugar, motor cars, cigarettes,

hazardous, chemicals, pharmaceuticals and some luxury items

Business houses intending to float new companies or undertake

substantial expansion were not required to seek clearance from the

MRTP Commission

Bottlenecks created by the bureaucracy were struck down by thissingular decision of the Government

Overall relief in the dismantling of industrial licensing and regime of

controls

Evaluation of New Economic Policy - 1991


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Evaluation of New Economic Policy - 1991

Negative Aspects:

Policy regarding Foreign Capital:

Assertions by critics assert that the welcome foreign capital may

lead us to selling of our sovereignty to multinationals.

Prudence demanded that utmost care to be taken to invite foreign

capital in high priority industries only.

Monitoring of payment of dividends by RBI


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Second Generation Reforms


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Increase in the rate of economic growth.

Control over fiscal deficit

Promoting FDI

Decline in deficit of BOP

Reduction in poverty

Objectives of second generation reforms..


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Second Generation Reforms .

The 2nd

generation reforms focus on 4 areas in particular: The financial system paying greater attention to the soundness of

banking systems and encouraging greater transparency and the

liberalization of capital accounts.

Good governance-By improving public resource management and

transparency of the economic and regulatory environment for private sector

activity

Composition of fiscal adjustment- Reducing unproductive expenditures

such as military spending and focusing spending on social sectors

Deeper structural reform- including civil service reform, labour market

reform, trade and regulatory reform, and agrarian reform.


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Defense production was opened up for Indian private sector with unto 26

per cent foreign equity.

Reduction in the minimum Government ownership in nationalized banks

from 51 to 33 per cent

FDI limit was raised to 49 per cent in banking sector

100 per cent foreign investment on domestic route has been allowed in

pharmaceutical sector , airport ,mass rapid transport systems andtownships

Reforms.


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100 per cent FDI allowed in hotel and tourism industry.

In the telecom sectorFDI up to 74 per cent has been permitted to

Internet service providers.

Contd..


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Custom duty was significantly reduced

Corporate tax was brought down to 30%

State level sales tax to VAT

Introduction of Fiscal Responsibility and Budget Management Act 2004

Extension of service tax to 51 services

Reforms contd.


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CAUSES OF PRESENT ECONOMIC SLOWDOWN

AND NEED FOR REFORMS

1. RISING INFLATION

Inflation adversely impacts the poor more than the rich or the middle classes

and results in further widening of gap between rich and poor.

When inflation is driven by high food prices , the consequences are

magnified since the economically weaker section spend more than half of

their incomes on food.

2. INEFFECTIVE MONETORY POLICIES

To keep check on inflation, government started tightening liquidity by

increasing interest rates which has contributed to a slowdown of

investments in industry and capital formation.


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3. WEAKENING RUPEE

The depreciation in the value of the Indian Rupees results in the

jumping of trade deficit by 56 per cent between 2010-11 and 2011-12.

More than half of the Indias import bill is accounted for two items-

crude oil and gold- are inelastic and Indias export market in the West

have shrunk drastically due to Great Recession

4. REDUCTION IN FIIs AND FDIs

FII and FDI are also reduced as investors are taking larger amountto their home countries even as some domestic industrialists prefer

to invest outside India rather than at home.


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5. RAMPANT CORRUPTION

Who doesnt know about

a. 2G scam

b. Coalgate

c. CWG scam

d. Adarsh Housing Society scam

e. Karnataka illegal mining scam

f. ISRO's S-band scam

Instead of ensuring transparency in the manner in which natural resources

are valued and allocated, government policies have been opaque,

resulting in a plethora of allegations of corruption and nepotism.


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6. POLITICAL PARALYSIS

No support from its coalition partners and

opposition in major initiatives taken up by ruling

party resulting in parliamentary dysfunctional.


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PRESENT REFORMS.

1. FDI in Multi-Brand Retail

Up to 51% FDI in multibrand retail trading has been permitted

A foreign investor would be required to invest a minimum of USD

100 million, with at least 50% invested in backend infrastructure

within three years of its initial investment.

At least 30% of products must be sourced from local small

industries

Retail outlets may only be set up in city with a population

exceeding 1 million.


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2. FDI in Civil Aviation

Foreign airlines will be permitted to invest up to 49%

of the paidup capital of Indian Companies

3. FDI in Broadcasting

FDI in broadcasting carriage sector hiked from 49% to 74%

4. FDI in Power Trading Exchanges

Foreign investment up to 49% (with an FDI limit of 26% and FII

investment limit of 23% of the paidup capital) has been permitted in

power trading exchanges


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5. Divestment of PSUs

The government approved the sale of its minority stakes in four PSUs,

namely, Hindustan Copper, Oil India, MMTC and National Aluminium

Company Limited, with a view to raise up to INR 15,000 crores

6. New tax cuts for business and introduction of a more transparent , non-

retrospective tax regime for investors & various schemes for Investors in the

equity market and boost the domestic investment (RGES)

7. Hike in diesel fuel prices by 14%

8. Curtailing the subsidy on natural gas cylinders


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2011-2012: 6.52010-2011:9.5


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Fiscal Deficit (% of GDP)Centre States Consolidated

1990-91 6.6 3.3 9.4

1996-97 4.1 2.7 6.4

2002-03 5.9 4.7 10.1

2003-04 4.8 4.4 8.4

2004-05(Revised)

4.5 3.8 8.3

2005-064.3 3.7

7.7

Source: Rao (2005), Table A4, RBI (2005a), Table 11

2009-10: 7.4%2010-11: 6.5%


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2012: 295235.2 US$ Mn2011: 2 US$ Mn


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WHAT CAN BE THE FUTURE REFORMS?

SPV(Special Purpose Vehicle) for PPP projects

Push infrastructure PSUs to spend their cash surplus

Clear private sector dues by PSUs and ministries

Set up Coordination Committee among related ministries

Use SEB bailout to clean up power sector

Map Land Using GIS and zone it

Speed up road construction

Ecommerce


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RECAP


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From : Finance minister (1991) To : Prime minister(2004- in office)

Two decades have passed but India still stands on the same growth rate facingsimilar problems and no solutions with same man holding power for around adecade who changed the scenario in 2 years..


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eco india reforms

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