economic reforms by dipen shah

ECONOMIC REFORMS

The Rationale (or Need) of economic Reforms-crisis of 1991 Origin of Economic Crisis:

• In 1970s, Indian economy was strong enough to bear large oil stock.• But by 1990 a minor oil shock could damage the stability of the economy.Major factors responsible for economic crisis of 1990s were:

Fiscal imbalance:• The fiscal situation had worsened during the 1980s due to growing burden of non-

developmental expenditure.• All the indicators of fiscal imbalance showed that throughout the 1980s the imbalance was

on a rise.• Indicators which are normally used to measure fiscal imbalance are:a) revenue deficitb) gross fiscal deficitIn 1991, both measures of fiscal imbalance indicated that there was a serious fiscal crisis. Revenue deficit had risen from 0.2% of GDP 1981-82 to 3.3% in 1990-91. Gross fiscal deficit had increased from 5.9% of GDP in 1980-81 to 6.6% in 1990-91.

The Rationale (or Need) of economic Reforms-crisis of 1991Worsening Balance of Payments situation:

The current account deficit was $9.7 billion or 3.69% of GDP in 1990-91. As a consequence, India’s external debt rose to 23% of GDP at the end of 1990-91.

Gulf Crisis: The mounting strains during the 1980s peaked to crisis in 1990 due to the Gulf

Crisis. There was Political Instability in the country. As a result, country’s credit rating in the international capital market declined

sharply.Slow and Unsatisfactory Economic Growth

Over the three decades of planning (1950-51 to 1980-81), the average annual growth rate was 3.5%. It was painfully low rate of growth.

The main reasons were :Excessive government controlsLicense-permit system, loss making inefficient public enterprises, etc.

The Rationale (or Need) of economic Reforms-crisis of 1991Successful Experiences of other Countries

Many development countries launched the model of free market mechanism and liberal controls.

Success stories of countries like Malaysia, Thailand, South Korea, China, etc. made India rethink and change its policy of excessive government controls.Inflationary Pressures

The inflationary pressure was quite high in 1980s due to excessive government expenditure.

Inflation rate peaked to 10.3% in 1990-91. In term of consumer Price Index (CPI) inflation rate was 11.2% pa in 1990-91.

The Rationale (or Need) of economic Reforms-crisis of 1991Inefficiency and high cost Economy:

Prior to 1991, government was enforcing regulation in many ways:

• Industrial licensing, that is, every entrepreneur had to get permission from government to start a firm, expand a firm, or to start production of a new good).

• Private sector was not allowed in many industries.• Some goods could be produced only in small scale industrial

products.• Import license (in this, licence had to be taken to import).• Existence of foreign exchange control.• Restrictions on investment by big business houses, etc.

These controls resulted in consumption delays, inefficiency, losses and high cost economy.

1991-The Year of crisis:1991 was the year of crisis for the Indian economy. It is clear from the following

facts:• National income was growing at the rate of 0.8%.• Inflation reached the height of 10.3%.• Balance of Payment crisis was to the extent of 10,000 crores.• India was highly indebted country. It was paying 30,000 crores interest charges per year.• Foreign exchange reserves were only US $5.8 billion dollars which were sufficient for three

weeks.• India sold large amount of gold to Bank of England.• India applied for loan from IMF to the extent of 5 billion dollars.• Fiscal deficit was 11.2% of GDP.• Prices of petroleum products were very high.

For availing the loan, IMF and World Bank expected India to:

• Liberalize and open up the economy by removing restrictions on the private sector.• Reduce the role of the government in many areas.

India agreed to the conditions of World Bank and IMF and adopted Economic Reforms in 1991.

ECONOMIC REFORMS SINCE 1991- NEW ECONOMIC POLICY(NEP)

Economic reforms is a long-term multi-dimensional package of various policies and programmes for further economic development. It includes reforms in agricultural sector,

Industrial sector, financial stocks, Fiscal sector, International trade, etc.

Objective of New Economic Policy are: To reduce fiscal deficit and to ensure an era of relative price stability. To reduce the are of operation of the public sector and to open up more areas for

the private sector. To liberalize industrial policy and abolish industrial licensing for most of the

private sector industries. To encourage inflow of foreign capital by granting more concessions to foreign

direct investment. To liberalize foreign trade by reducing tariff duties and abolishing quota

restrictions in case of many imports.

Components of NEP 1991: Macroeconomic Stabilisatim : Demand side management:These Policies are short-run measures to return to low and stable inflation and

a sustainable fiscal and balance of payments position. • Fiscal correction• Reforms in tax structure• Improvement in balance of payment situation• Control of inflation Structural Adjustment : Supply side Management:These Policies are long- run measures to remove the bottlenecks and obstacles in the

growth path of an economy.• Trade and capital flow reforms• Industrial deregulation• Public sector reforms and disinvestment• Financial sector reforms.

NEP- Policy of Liberalization, Privatization and Globalization

In the NEP 1991, Structural reforms can be seen with respect to:• Liberalization• Privatization• Globalization

Liberalization:Liberalization means removing all unnecessary controls and restrictions like permits, licenses,

quantitative restriction, quotas, etc.

Prior 1991, Government was enforcing regulation in many ways:

Industrial licensing Private sector was not allowed in many industries. Some goods could be produced only in small scale industries. Price controls and control on distribution of selected industrial products. Import Licence Foreign exchange control Restrictions on investment by big business houses, etc.

These control resulted in: Consumption delays Inefficiency Losses High cost economy.

Liberalization:Objective of Liberalization: To raise internal competitiveness of industrial production. To raise foreign investment and technology. To reduce debt burden of the country. To get an opportunity to export to developed countries and to import

capital goods and machinery from them.

Liberalization Measures: Liberalization was introduced in many areas in July 1991. These were:1) Industrial sector reforms Abolition of industrial licensing• Industrial licensing was abolished for all projects except for 6 industries

related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental reasons .

-Liquor

-Cigarettes,

-Industrial explosives,

-Defence equipments,

-Drugs and pharmaceuticals, and

-Dangerous chemicals.

Contraction of Public sectorThe number of industries reserved for the public sector has been reduced

from 17 to 3.The only industries reserved for the public sector are:• Defence equipment, • Atomic energy generation, • Railway transport.

Reforms in small scale sector:Investment limit of small scale industries has been increased to one crore

with a view to modernize them.

Concessions in the MRTP act:The MRTP Act gives more emphasis to the prevention and• control of monopolistic, • restrictive and • unfair trade practices.

2) Tax reforms:

Before 1991, both direct and indirect taxes were high. This encouraged tax evasion and provided disincentives to honest tax payers.

After liberalization policy of 1991:• Both direct and indirect taxes were reduced.• The procedure for paying taxes was simplified.• Non-planned expenditure by government was reduced.

3) Foreign exchange reforms:

After Liberalization policy of 1991:• Approval was given for direct foreign investment up to 51% foreign

equity in high priority industries.• Automatic permission was given for foreign technology agreements in

high priority industries up to a lump sum payment of Rs. 1 crore.

4) Trade policy reforms:The trade policy reforms aimed at:• Abolition of import licensing system except in case of hazardous and

environmentally sensitive industries;• Removal of quantitative restriction on import;• Reduction in tariff rates;• Strengthening of export promotion structure.

5) Finance sector reforms:Liberalization in finance sector implied:• There was a substantial shift in role of RBI from “a regulator” to “a

facilitator” of the financial sector.• Both Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio (SLR) have

been reduced to increase availability of funds with commercial banks to advance more credit formation.

• Bank rate has been reduce. It lowered the interest rate charged by the commercial banks, thus, encouraging credit formation.

• There was establishment of private sector banks, Indian as well as foreign. Foreign investment limit in banks was raised to around 50%

PrivatizationPrivatization is defined as the transfer of a function, activity or organization from the public to the private

sector.

Privatization of Industries means opening the gates of Public Sector to Private sector

The term privatization is used in two sense Transferring the ownership of public sector to private sector Management and controlling of public sector by private

sector without transferring the ownership

Disinvestment is sale of a part of equity holdings held by the government in any public sector undertaking to

private investor.Disinvestment is done for two main reasons:• To provide fiscal support to the government.• To improve the efficiency of public enterprise.

CAUSES OF PRIVATISATION• Disintegration of Socialist Economies• Inefficient public sector• Burden on the Government• Inefficient management control

OBJECTIVE OF PRIVATISATION• To increase the efficiency and competitive power.• To reduce deficit financing and public deficit• To strengthen industrial management• To earn more and more foreign currency• To make optimum use of economic resources• To achieve rapid industrial development

GLOBALISATION

Globalization refers to growing economic interdependence among countries in the world with regard to technology,

capital, information, goods, services, etc.

• Globalization is the process by which a firms activity become worldwide in scope

• Doing, or planning to expand , business globally• Giving distinction between the domestic market & foreign

market• Locating the production and other physical facilities of global

business dynamics• Basing product development and production planning on the

global consideration• Global sourcing of factors of production• Global orientation of organizational structure and management

culture

The exim poly 1992 seeks to achieve globalization through:

Liberalization in import licensing• Abolition of most of the licensing regulations. • Most imports have been put under open General License

(OGL) where automatic permission is granted to import goods.

Rationalization of tariff structure• Tariff reduction will improve the quality of our goods. • Our goods will be able to compete in the world market. it

will drastically increase exports.Foreign exchange management reformsUnder the liberalized foreign exchange management system:• Rupee value is determined by the market forces of demand

and supply• Free convertibility of rupee was allowed in the current

account of balance of payments.

FACTORS LEADS TO GLOBALISATION•Human Resources•Wide Base•Growing Entrepreneurship•Growing Domestic Market•Expanding Markets•Economic Liberalization•Competition

OBSTACLES TO GLOBALISATION

•Government Policy and Procedures•Resistance to change•Supply problems•Lack of Experience•Limited R&D and marketing research•Growing Competition•Trade barriers

Achievements of Economic Reforms Rise in GDP growth: Since the introduction of economic reforms in 1991, country has

shown rise in GDP growth rate. • 9th five year plan : 5.5%• 10th five year plan : 7.2%

Rise in foreign exchange reserves:• In 1991 - US $ 5.8 billion • In 2009 - US $ 283.5 billion

Control of inflation: The plus point of economic reforms is that it has controlled

inflation from 16.8% in 1991 to 4.8% in 2000.

Achievements of Economic Reforms Rise in flow of foreign capital:• 9th five year plan : US $ 3.7 billion• 10th five year plan: US $ 5.7 billion• In 2009-2010 : US $ 14.1 billion

Rise in integration with the world economy:• India is now much more integrated with the world economy and

has benefited from this integration in many ways.• The outstanding success of IT has shown what Indian skill and

enterprise can do-given the right environment.

Rise in competitiveness of Industrial sector: Sectors such as auto components, textiles and pharmaceuticals

are the pillars which show the strength of the industrial sector.

Challenges of Economic Reforms Agricultural crisisEconomic reforms have not been able to benefit the agricultural

sector because: Public investment in agriculture sector especially in

infrastructure which includes irrigation, power, roads, market linkages and research has been reduced in the reform period

Liberalization has forced the small farmers to compete in a global market where prices of goods have fallen while removal of subsidies has led to increase in the cost of production. It has made farming more expensive.

Various policy changes like reduction in import duties on agriculture products, removal of minimum support price and lifting of quantitative restrictions have increased the threat of international competition to the Indian farmers.

Challenges of Economic Reforms Changing employment pattern There is inadequacy of widely dispersed and sustainable off-farm

productive employment opportunities. Growth without jobs can neither be inclusive nor can it bridge divides. Providing essential public services to the poor We cannot be satisfied with only universal primary education-the

challenge is to provide universal secondary education as soon as possible. In the area of health, there continues to be large gaps in basic services

such as clean drinking water.

Inadequacy of physical infrastructure Our roads, railways, ports, airports, power supply, communication are

not comparable to the standards prevailing in competitor countries. Quality infrastructure is still a challenge facing our country today. Protecting the environment Our concern for environment issues is growing along the lines of global

concerns. The threat of climate changes pose a real challenge to future generations.

Challenges of Economic Reforms Slowdown in industrial growthThe post- reform period shows that industrial growth has slowed

down. This was due to: Globalization created conditions for free movement of goods and

services from foreign countries. It adversely affected the local industries and employment in developing countries.

Globalization led to decrease in demand for domestic industrial products due to cheaper imports.

There was inadequate investment in infrastructural facilities such as power supply.

Fall in tax revenueIn the post-reform period, there has been fall in tax revenue. This

was due to: The tax reductions in the reform period have not resulted in

increase in tax revenue for the government. The reform policies involving tariff reduction have reduced the

scope for raising revenue through customs duties. To attract foreign investment, tax incentives were provided to

foreign investors which further reduced the scope for raising tax revenues.

Tenth five year plan(2002-2007):

objectives, targets & strategy

Tenth Five year plan(2002-2007): objective, targets & strategy.Planning for development continues to play a vital role in the Indian economy.The tenth five year plan addresses to some of chronic problem of the

economy, namely, mass poverty, unemployment, regional and interpersonal inequalities in the distribution of income continue to persist.

It covers the period beginning with April 2002 and ending in March 2007.

Objective:Growth Rate:One of the important objectives of the Tenth Five Year Plan is a discernible

rise in the target growth rate for the economy.• The plan aims at achieving an average growth-rate of 8% in the GDP over

the period 2002-07.• The plan also seeks to create conditions conducive for a further acceleration

in the rate of economic growth in the succeeding plan period (i.e. 2007-12).• The overall objective is to double per capita income over a period of ten

years i.e. 2002 to 2012. Growth rate has improved since fourth five year plan but setback in ninth five

year plan.

Tenth Five year plan(2002-2007): objective, targets & strategy.

Developmental Objective/ Targets:Improvement in quality of life of an average Indian is the prime mover of growth &

development planning over the years.▫ Reduction of poverty ratio by 5 percentage points by 2007; and by 15 % points by

2012. ▫ Providing gainful and high-quality employment at least to the addition to the labour

force; ▫ All children in India in school by 2003; all children to complete 5 years of schooling

by 2007; ▫ Reduction in gender gaps in literacy and wage rates by at least 50% by 2007; ▫ Increase in Literacy Rates to 75 per cent within the Tenth Plan period (2002 to 2007); ▫ Reduction in the decadal rate of population growth between 2001 and 2011 to

16.2%;▫ Reduction of Infant mortality rate (IMR) to 45 per 1000 live births by 2007 and to 28

by 2012; ▫ Reduction of Maternal Mortality Ratio (MMR) to 2 per 1000 live births by 2007 and to

1 by 2012; ▫ Increase in forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012; ▫ All villages to have sustained access to potable drinking water within the Plan period; ▫ Cleaning of all major polluted rivers by 2007 and other notified stretches by 2012;


Developments Strategies:The strategy of development during the tenth plan period emphasises the

need to learn from the past experiences. The strategy is to strengthen what has worked well in the past and at the

same time avoid the mistakes of the past.Main elements of the strategy are detailed under the following heads: Redefining the role of Government:• There were too many responsibilities with Government. So, it is

necessary where Private sector capabilities were undeveloped but situation changed.

• Strategy of development is to create an environment conducive to the growth of private sector in the economy.

• The role of the government will substantial in the social sectors, areas of infrastructure development, the role of the government may have to be expanded and restructured.

Reformulating Fiscal management:Greater flexibility in Fiscal & Monetary policies needed with growing

importance of Private sector.


Integrating State-wise Growth with national Targets:• The strategy emphasizes balanced development for all the states. • The tenth plan includes a state-wise break-up of the broad development

targets, including targets for growth rates and social developments, which are consistent with the national targets.

• To reinvigorate the planning and development process at and the state level.

Strategy for Ensuring Equity and Social Justice :The plan suggests a three-pronged strategy:• Agricultural Development and benefits to rural poor.• Growth strategy emphasized rapid growth of those sectors which have

highest employment-potential such as construction, tourism, transport, small scale industries, etc.

• Continuation of the special programmes aimed at special target-groups which may not benefited from the normal growth-process.

Improved Efficiency- Capacity Utilisation:• The strategy aim to raise investment level as well as efficiency & tapping

potential.• The plan identified public infrastructural investment, public sector

enterprises and private-sector enterprises as area with significant idle capacity.


Strategy for External Sector:• During tenth year plan, high rate of growth associated with increased

imports because of growing imports of energy and liberalisation of imports as required by WTO.

• In such a situation sustained high rates of growth of exports will be essential for keeping the current –account deficit with in manageable limits.

• GDP decline and need to reverse these trends. And also need to ensure greater integration with the international economy.

Strategy in Respect of Financial Sector:• Importance of financial sector is to increase growth and diversification of

the economic activities.• There is shortage of long term risk capital in India.• Mix of policies relating to interest and incomes from capital gains will be

necessary element of the strategy to balance the needs of savers as well investors.

Strategy for Agriculture and Rural Development:Agricultural production needs to be increased. This can be achieved by

raising the productivity of land and water resources.


Developments Strategies:This strategy of agriculture stress on:• The tenth plan aims at major revival of public investment in irrigation capacity

and water management, besides increasing the efficiency of existing irrigation infrastructure.

• Development of rural infrastructure that supports not only agriculture but all rural economic activities is another priority.

• There is a need to strengthen agricultural research and dissemination of technologies for improvement in agricultural productivity.

• For such diversification to gain momentum during the tenth plan, the requisite science and technology inputs will be provided along with appropriate support price policy.

Strengthening and Improvement of Social Infrastructure:• Qualitative improvement in the fields of education, health and shelter.• “Education for all” is one of the primary objective.• There is need to improvement the infrastructure so as to raise the actual

attendance in schools, improve the syllabus both at the schools and higher education levels.

• There is a considerable need to strengthen the health infrastructure and improve its accessibility

• Action plans will have to be put in place for overcoming the shortages in housing and provide shelter to the shelter less.


Developments Strategies: Improvement in the Quality of Governance:• Quality of governance at all levels has a massive scope for improvement. • Reforms of governance has been highlighted in the tenth plan document

assigning accountability whether in bureaucracy or corporate bodies as well as improvement in efficiency has to be developed as essential input for accelerated rate of growth and development.

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