economic reforms & challenges 2012

Economic reforms

Rahul Reddy

The Indian Economy

Part 1:Historical Overview

Pre-Independence 1. Agrarian economy (70% GDP from Agri. in

1947)

2. Food-deficient

3. Colonial exploitation

4. Zamindari system

5. Traditional industries (Cotton Textiles – low value-addition)

Triumphant Institute of Management Education Pvt. Ltd.

• Resource poor economy• Role of investment for the Govt• Socialistic thinking

• Soviet Influence on world economists

• Optimally use of resources – Centralized planning

• License Raj• Sellers market• No incentive for Quality or innovation• Poor Customer service• Cost plus pricing, no efficiency incentive

Pre-LPG


• Shortage and premiums• Licenses cap production quantity• Waiting periods & Premiums

• Inward looking economy• High degree of protection• Forex shortages & FERA• Import substitution

• Fundamental Distrust of Business• Complex set of rules and regulation

• Taxes• High taxes & Low revenues• Tax evasion & Black markets• Distinctive to produce & earn

• Huge trade deficits & Foreign Borrowing• Forex Crisis

Pre-LPG


• De – Licensing

• Import liberalization

• Phased reduction of tariffs

• Reform Taxation – Direct & Indirect

• Reduction in tax rates

• Simplified tax regimes

• Forex reforms

• Allowed FII & FDI

• Dividend repatriation

• Repeal of FERA

1st Generation Reforms


Institution Building

• Stock Exchange reforms – SEBI• BOLT & NSE

• Demat

• Derivatives

• Banking sector reforms

• Bank Computerization

• Private bank licenses

• Legal framework reforms

• MRTP repeal

• Dividend repatriation

• Electronic commerce

• Successful

• Telecom reforms

• Banking Reforms

• Insurance – Life & Non Life

Work in Progress

• Infrastructure

• Roads, Power, Ports, Airports

• Non Starters

• Labor law reforms

• Disinvestment

• Bureaucracy & Red tape

• Company Law reforms

• BIFR & Exit Policy

2nd Generation Reforms


Reform Objectives

• Acceptance of private sector as the engine of Economic growth

• Using Market forces and Competition to bring about efficiency – not regulation

• Bringing the benefits of foreign trade, foreign investment and technology to our economy

Lessons from Reforms

• In a large democracy with many lobby groups, progress would be slow

• Process of economic reforms has to be customized for each nation

• The sequencing of reforms is critical

• In a federal structure, state and local governments need to be involved

Gradual Approach

• Exchange rate reforms• 25% depreciation in two steps• Dual Exchange rate as a transitional measure

• Duties and tariffs• Weighted Avg Tariff 80% in 1991 to 30% in

1997

• Lack of Political consensus or Public support• Privatization• Labor law reforms

Sequencing of reforms

• Institution building• SEBI, TRAI, etc• Stock Market & Banking reforms

• Enabling legislation• Repeal of MRTP, FERA etc

• Caution• Currency convertibility• Financial Integration

Has it worked?

• GDP growth rate• Growth in national Income and Per capita

• Poverty alleviation• Significant poverty reduction• Through growth – Job and business creation• Through anti poverty schemes (Funded by

Higher Tax Collections)

• Creation of World class organizations• Indian MNC’s

Challenges Ahead

• Infrastructure

• Public investment Vs Subsidies

• Unlocking Manufacturing growth

• Agricultural growth & productivity

• Tax reforms & National markets

• Poverty alleviation or Income Inequality

• Governance

Infrastructure

• Key component of Economic growth• Can add 2-3 percentage points to GDP growth• Requires huge resources ($200 Bn – Power

alone)• Private sector participation, PPP• Extremely complex structural reforms

• Electricity• Ports/Airports (35% higher shipping cost, Much

Higher turnaround time)• Roads & Railways• Telecom

Public investment Vs Subsidies

• The Short term Long term balance

• Public investment• Infrastructure• Public Health• Primary education

• Subsidies• Food & fertilizers• Petro products• Electricity

Unlocking Manufacturing growth

• The 60-20 trap• 60% of Indians are in agriculture and earn about 20% of national

income• Will need to shift people from Agri to Industry and then services

• Red tape & remnants of License Raj• No of regulations and regulatory bodies• Time delays in permits and permissions

• Rigid Labor Laws• Applicable only to 6% of pop (organized sector)• Encourages Capital intensive production• Encourages outsourcing of production

• Land acquisition issues

• Flow of Talent to Services sector

• Lack of skilled, Trained manpower

Legal Reforms

• The Legal system has huge impact on the economy• Laws and rules• Regulators and Inspectors• Enforcers (Police and Judiciary)

• Laws and Rules• 1000s of Laws and Sub laws• Outdated, Ambiguous, Complex and often Contradictory

• Regulatory system• Large number of regulatory bodies with sweeping powers• Inspector Raj leads to Delays, harassment and corruption

Legal Reforms

• Police and Judicial system• Understaffed and ill trained police force• Overloaded judicial system• Delayed justice• No enforcement of contracts• Inadequate protection of property rights

• Solutions• Repeal, Rationalize and simplify rules and regulations• Dismantle inspector Raj, Change mindset• Increase courts and judges, reform procedures and

use technology

Agricultural growth & productivity

• Fragmented landholdings

• Under employment and Disguised unemployment

• Highly regulated markets• Mandi – Broker nexus

• Storage and transport

• Market distortions• Urea Vs Phosphate• Price Signals & Crop Choices

Agriculture reforms

• Free markets in agriculture

• Contract farming, Corporate – Farmer partnership• Better supply chain, Cold storages, Food processing and

exports

• Agri-Productivity• Seeds, Technology and practices

• Long term goal• Shift of employment from Agriculture to Industry and

Services• Consolidation of land holdings, better investments and

management

• Public Investment – Irrigation and infrastructure

Tax reforms & National markets

• Low Tax to GDP ratio

• Black money – Parallel economy

• Indirect tax reform• Goods and Service Tax• One national market

• Direct tax reform• Lower taxes• Elimination of Exemptions

• Job creation• Private sector, Manufacturing and Services• Education and skill development

• Entrepreneurship• Awareness, Information of opportunities• Availability of credit• Red tape and regulations ‘Inspector Raj’

• Social Security• Subsidies• NREGA• Public health• Direct Cash Transfer – Conditional cash transfer

Fiscal Consolidation

• Can we get Fiscal Deficit back under control?

• FD expected to hit 5.5% against Budget target of 4.6%

• Tax Buoyancy slows down due to Falling GDP growth

• Ever expanding Subsidy Bill• Petroleum, Fertilizer, Electricity, Food Security Bill

• Expenditure control• Huge increase in social sector outlay• Need to Focus on better efficiency in delivery systems

Subsidy Vs Direct Cash Transfer

• Direct Cash Transfer• In place of Fertilizer, Kerosene Subsidies• Using the UID (Aadhar) In a phased manner

• Advantages of DCT• Cuts leakages• Reduces administrative costs• Gives the poor a choice

• Disadvantages• Prone to misuse (Alcohol and Gambling)

economic reforms & challenges 2012

Economy & Finance