Some Important Constituents of Economic Policy Samir Kumar Singh Reforms in any sector cannot be seen in isolation complementarity among different kinds of reform the export of a particular item/good but production « trolled, then the benefit of the reform will be limited poliey deregulates production of goods, then the benefit will he much greater Similarly, external-sector reforms will reach its potential if sufficient introduced in the financial, fiscal, industrial and agricultural sectors. Although I will concentrate on the external sector in this section forms in the other sectors must be recognized India was not only exposed to free trade from also maintained There is a degree of If there is delicensing of f that good remains con- Instead, if the industrial reforms are the implications of re- a very early time, but it its competitive position in world trade, Even during the colonial period, India's competitive strength remained fairly intact. Homeves it lacked exposure to modem technology with well-organized markets sed faced internal price repression and a deluge of non-competitive imports ln the post-Independence period, the problem of transforming an an industrial one, building domestic c the imi agrarian economy to apability in crucial sectors and ediate need and aspirations of people weighed he: The role of the government in economic man tive importance. India adopted a process of pl to save, where to invest addressing avily on the economy agement, therefore, grew in rela- lanning that determined how much and in what forms to invest. Ini economy strategy with the State and the peting for scarce resources, Self-reliance was the principal objective Import substitution and CXport pessimism were underlying strategies/assumptions?Doubts about the effectiveness of this policy regime arose ax early as the mid-1970s. After con- siderable thinking, a process of reorientation of the policy framework began in the late 1970s and gathered some momentum in the 1980s. The most important changes were related to reducing the domestic barriers to entry and expansion. -Larger scope was also provided to enable big business groups to participate in the process of industrialization, Attempts were made to shift from direct physi eal controls to indirect financial incentives and disincentives. Overall, the 1950s dia adopted @ mixed- private sector co Scanned with CamScannert 34 Contemporary India al and definite deregulation from domestic controls, Trade xtent in the 1980s. For example, there i nd rts of capital goods in the second half of the | Some liberalization cal upgradation of the industry: Consequenty hg vith emphasis o toads witnessed a record growth of industrial production ve ae Banu The acceleration of growth during the 1980s wag per cent pet : ist er Juctivity performance, i ith distinctly better proe aes he 1980s, the governmen However, dar seal deft, which had remained moderate unt th ae ae ‘The average fiscal deficit of the central government alone ae oe toe GDP during 1985-86 to 1989-90. This was mainly dey eae expenctture articles, interest payment, salaries and defen ‘As the government borrowed internally and externally to finance the growing fiscal gaps, the economy faced serious structural problems, which posed ob, stacles to the sustainability of the higher growth that had been set in motion aor % ee section, we start with a discussion on the macroeconomic crisis of 1991 and then move on to reforms in the external sector. Inthe next se. tion, the basies of ical policies, and the fiscal performance of the government since the 1980s are discussed to understand the reforms adopted since 199]. ‘Next, we go on to financial and infrastructure reforms. In the final section, we summarize the discussion to assess the reforms and understand the need for future reforms. id Se io liberalized to some had started to live beyond it MACROECONOMIC CRISIS cute macroeco- of which it had never faced. The foreign-currency reserves illion, just enough to pay for two weeks of d with the prospect of ernationa ents. ite climbed to a peak of st 1991. The ratio of the fiscal deficit of the central govern tt reached a double-digit level, and the current-account cent of the GDP. may have aggravated the problem, but it cannot ‘economic crisis in the early 1990s. The crisis imbalances in factor- and product-market This, in a sense, underlined the need for The crisis was met with some decisive djustment of the rupee, the pledging! It of scheduled repayments, policy and the timely a Scanned with CamScannerSome Important Constituents of Economic Policy co) receipt of exceptional assistance from international, financial institutions. A comprehensive stabilization and structural-reform programme to correct the macroeconomic imbalances followed these policy initiatives: BxTeRNAL-SECTOR ReFoRMs Jai and Little! argue forcefully, there were not good reasons for the level of on that the inefficient manufacturing sector had enjoyed historically. As they also note, the really significant change on the import side was the introdue- ion of a ‘negative’ list. Any item not on the list could be imported freely except for some bulk items that were still controlled by the government agencies in the mid-1990s. ‘The first move was the real devaluation of the exchange rate in 1991 and fhe switch over from a fixed-exchange-rate regime to a market-determined- ‘exchange-rate regime under which the Reserve Bank of India (RBI) was sup- to intervene in times of crisis to maintain stability. With the change in the exchange-rate regime and accomplishment of trade reforms, the current account is now open along with limited capital-account convertibility. The ex- ‘Ghange-rate regime focuses on the management of volatility without a fixed- fate target and the underlying demand and supply conditions determine the ‘achange-rate movements in an orderly way. Furthermore, India made a gradual nove towards convertibility: We have already made the currency convertible on ‘the current account. This implies importers and exporters can acquire foreign currency at the market-determined rate as opposed to the unfavourable ent-determined rate that was prevalent in the pre-reform era. On the account, the movement has been slow. Capital-account convertibility as allowing foreigners to buy Indian assets and Indians to borrow and in- But due to volatility concerns, movement has remained quite slow nt. Due to the policy changes regarding Foreign Direct Investment ‘convertibility, the level of foreign-exchange reserves has steadily $$ 5.8 billion as at end-March 1991 to US$ 113.0 billion by ther to US$ billion by end-December 2007. one massive changes with the removal of g with rationalization of the tariff structure. India‘ has been in the area of tariffs. In 1990-91, the ff was 125 per cent. That figure came down to 71 per tariff rate in 1990 was an unbelievably high 355 per ‘came down to 85 per cent. In 1995, the highest uced to 50 per cent. Today, the average tariff rate e below 30 per cent. On the export side, Reforms, 1991-2001 (New Delhi: Oxford 4 Scanned with CamScanner“ 36 Contemporary India quantitative export restrictions came under attack. The list of restricted item, has shrunk as a result, Export-promotion schemes are also being pursued wig more than usual vigour, However, many export-promotion schemes still cay large administrative costs and are quite complex in practice We define a policy as an export-oriented policy if it increases the profitabj). ity of selling in the external marke ‘as compared to the domestic market. Ths, increased competition due to delicensing of industries and increased compe tion from the external sector has re Jina dip in the profitabi ty alse in the domestic market. Thus, the policy reforms started since 1991 have largely cnted, Therefore, in the broader policy framework, itis an at. tempt to encourage the economy and help the players to do well in is competitive environment. = Goktarios that are highly integrated in th world economy tend to exhibit 4 high trade to GDP ratio. In India, this has inereased over the years but not at the pace of the more dynamic, developing countries such as China, For example, the ratio of exports to GDP, which was less than 4 per eent during the 1960s and early 1970s, rose to 5 per cent in the 1980s and is now a little over 9 per cent. Exports “and imports taken together today stand at about 22 per cent of India's GDP If international transactions in services are included, the degree of openness of the Indian economy is well over 30 per cent. However, the ratio is one of lowest in ‘the world. At the end of the 1970s, when China opened its economy to the rest of the world, external trade accounted for less than 10 per cent of its GDP. But now, it accounts for about 40 per cent of China's GDP. Another indicator for ‘measur. jing a country’s integration with the rest of the world is through estimation of a ‘country's mean tariff rate. According to the World Bank, the mean tariff rate for Ilproducts in India has declined from 80 per cent in 1990 to 30 per cent in 1997, of China, these rates are at about 43 and IS per cent, respectively. This t while the degree of protection for Indian products has come down, it d to other developing countries. ce that countries that are integrated faster into the world not only a rapid export growth but also export diversi- nual-export-volume growth for India during the pe- dl with its own past as well as that of many ountries, its performance did not match that of East average-annual-export-volume growth during in China, about 13 per cent in Korea and looked quite encouraging before that, it has remained quite slug- in the successful countries, ‘Scanned with CamScannerSome Important Constituents of Economic Policy 37 intensive commodities; in the third stage, move to scale-intensive com- in the fourth stage, to differentiated products that are skill intensive; and, finally, switch to scientific goods, While the East Asian countries have sue- cessfully graduated from the second and third stage to the fourth stage, India ig still stagnating in the second and third categories, So India’s inability to di- versify the export basket has been the main reason behind the unsatisfactory ce of the export sector. This can be linked to the reservation policy of small-scale industries and various other institutional bottlenecks, which are obstructing such a transition, Thus, we have a huge potential for better export performance, pushing up growth and fighting poverty, Fiscat Poucy Capital formation plays an important role in the growth rate of an economy, which needs a continuous boost. In this context, public investment is very t. The Indian economy in general and agriculture in particular have wit- nessed a decline in the growth rate of public investment. In the agriculture sector, an increase in the private-sector investment more than offset the decline in the public investment. But private investment is no substitute for public in- yestment, and the latter is important for attracting private investment in the sector. In the post-liberalized era, public investment has not been inere sing at the desired rate in either agriculture or infrast This affects the potential of an economy and this is an explanation for the declining productivity | the agriculture sector during the post-liberalized era. This indicates a great need to accelerate public capital formation in the country. The main obstacle is the deteriorating fiscal scenario of the economy and the continuous. n capital expenditure. policy deals with revenue and expenditure of the government. Some ‘major objectives that fiscal policy intends to cater to are—solving redistri- le y, macroeconomic objectives, market failure, commercial The reason is that the objective of private players So, in order to bring about harmony in their objectives, ise fiscal policy. For example, the government has pro- pt the Green Revolution technology and can tax kinds of fiscal policy options are avail- of inequality. One of the options nt runs the poverty-alleviation Scanned with CamScanner38 Contemporary India distribution system, employment se! imposed. post-liberalized India. In India, private total investment. After 1991, the govern. vommercial sector. $0 the development flow of private investment, which, in hemes, etc. Progressivg programme, public taxation and high tax on luxuries are G investment is the largest part of t ment has been withdrawing from the ¢ of industries is now dependent on the turn, depends on public investment, /, An impor mum cost. This stant aim of a budget is to attain its objective at the mini. Ta particularlevel ofrevenuicis tobe generated, it should bedone with the minimum possible disturbance in the economy, as there could bea trade off between different objectives For example, when the government i as taxes to generate revenue, it affects the prices of commodities in the ‘market and, therefore, our consumption. In order to attain this, such a policy can be adopted where the elasticity of | demand is inversely proportional to the i f demand, lower would be the tax rate. .d on income and lower tax on food, he objectives of inflation avoiding business cycle, policy in an inflationary Macroeconomic Objecti This policy includes # loyment generation, control, growth promotion, empl ‘etc. Expansionary fiscal policy in depression and strict ‘economy can be adopted. According to Amartya Sen’, the market does two kinds of ‘and commission. Commission means doing 1g good. In the case of in the area, for example, n. A direct way of capital formation is borrowing to invest ct way of capital formation has been deficit financing. This price level due to which purchasing power ofthe society gets larger resources. Goods. The government invests in indus- railways. Public goods are those that have yption and non-exclusion. Here private nts take the task of production of the = — Scanned with CamScanner‘Some Important Constituents of Economic Policy 39 Government Budget, Before we get into a policy discussion, it is important to understand the classification of the government's budget and the related terms and concepts. The budget is divided into receipts and expenditures of the government. Receipts are further divided into revenue receipt and capi- ta receipts and expenditure into revenue expenditure and capital expenditure {gee Figure 3.1), Figure 3.1; Government Budget Budget | hae a al | Receipts Expenditure | Ss | Capital Revenue Captial Receipts. Expenditure Expenditure | id capital receipts pri- ts from disinvestments, \e expenditure side, rev- e expenditure includes the day-to-day cost of running the government. This interest payments, subsidy, defence expenditure, grant to states, ete. e account expenditure is close to consumption expenditure and is com- in nature. This is to say one does not expect a direct return from such liture and, at the same time, itis very difficult to reduce such expenditure span of time. The capital expenditure includes all those expenditures to the nation's productive capacity like infrastructure dev celopment. we can say itis a productive expenditure, while revenue account n ive expenditure, ‘as excess of total expenditure over receipts of gov- » it is the amount of borrowing by the govern- Scanned with CamScanner40 Contemporary India s nothing wrong as pour pores ity is utilized for larger income generation such that itis yeaa yee But ip there is a large and sustained revenuie-account defi. ES eening st big. tion of the government is continuously increasing ane" icult tg i] purposes: generate resources for developmental for current consumptions. There i Fiscat SceNARIO IN THE 19805 d the fiseal reforms and revenue if of 1991, it is impo? t to examing the last two decades. According to e central government increased from an aver. to about 20.5 per cent in 1985-90 and ve late 1990s. ‘What is most notable is the In order to unde the pattern of expenditure Mohan. the total expenditure oft age of 16.8 per cent of GDP in I then declined to 16-17.5 per cent 0 th most very significant inerease in the “econd half of the 1950s. ‘The increase took in almost all categories of revenuie-account expenditure such as interest pay. ments, defence expenditure, subsidies, pensions, and loans to stat ‘Thus, we find a massive increase in the consumption expe dliture of the gov. ‘ernment, During 1980-85, the ‘capital expenditure onan averse was 37 per cent of the total expenditure and, by 1990, it declined to barely 17 per cent. This implies that the interest obligation of the government was bound to increase. In- terest payment, which was 2.2 per cent of GDP in 1980, increased to 3.8 per cent einterest payment for long has been the largest component of gov- fiscal policy in the 1980s was not sustainable ernment expenditure. Thus, the tnd ultimately, this turned out to be an Fmportant reason for the 1991 crisis, ‘There are serious dangers of excessive fiscal deficit Joshi* has talked about ‘the dangers of sustainability, crowding out and flexibility of policy. A new cost that has emerged in the post-liberalization era is in terms of the capacity to Fiscal deficits can be financed by printing money or by bor- ‘and foreign sources, If carried out excessively, this can ‘If primary deficits remain high, then it might lead a country to Inother words, this means increasing, the debt: GDP r: ding ‘in order to pay the interest. ‘out private investment: If fiscal deficit remains high, it reflects from the government side. This reduces the ey of nar private players and, in turn, leads i P Be bs s toa high interest rate that ent inthe private sector. In the Indian case, expenditure a s private investment by increasing its profitability. js largely unproductive (revenue account), then ee by Uina Kapila New Deli: Academic has ‘Scanned with CamScanner‘Some Important Constituents of Economic Policy 41 there will be larger displacement of private investment. Since private invest- ment is more productive than public expenditure, rising fiscal deficit may im- ply reduction in overall productivity of investment and, consequently, slower srowth rate of economy. Reduces flexibility of policy: High fiscal deficit means lower financial re- sources in the government's hand. It, therefore, reduces the government's abil- ity to respond to external shocks like droughts, and oil-price rise. Furthermore, as the share of revenue-account expenditure in total expenditure increases, the government capacity to invest in capital infrastructure and social sector declines. This not only constrains growth prospects in the long run, but also compromises development of the social sector. Since this deficit cannot go on forever, in a bid to control it, the government may have to resort to higher tax rates, which discourages private investment, Special significance of fiscal health in the post-reform era: Since 1991, there has been a fundamental change in the role of the government. The govern ment started to pull itself away from commercial activities and was expected. to play the role of a facilitator rather than provider. This change in policy has made private investment the prime source of growth of different states. Since private investment is mobile and moves in the pursuit of profit, it will move to those regions where profitability is higher. This is why the 1990s witnessed an increasing regional disparity. The argument goes like this Flow of private investment (depends on) Capacity of a state to attract investment (depends on) Level of infrastructure and human capital ~ (depends on) x ncy of public investment determinant of the growth rate on the state's capacity to attract it and ‘Scanned with CamScannera 42 Contemporary India this, in tum, depends on human capital and infrastructure, W hich is depend 6on investment made by the central and state governments. = hus, if the gove, ment does not play an active role to address the problems of insuicient ang equal infrastructure, the disparity witnessed in the 1990s will get accent further. The widening gap between developed and bac Fevard states can encogy age resentment and can be a big threat to further reforms Now the governmen, can take up this task, if it manages to control its deficit. Since the gove Tmeng hhas to play a very active role asa facilitator, it should try to control unproductiy, expenditure and bring about an acceleration in co! ; THE 1081 ofl and response to it: The high ainable fiscal policy, iy, efficiency of public-sector enter poor manage it of the external Sector ttc, had led to the isis of 1991. The immediate task ahead was 0 stabilize) ‘economy and then do away with the structural weaknesses of the ceonomy thay nade it vulnerable to external shocks. There have been policy changes aimed raising revenues, on the one hi nd, and controlling expenditure, on the other, During the initial years of reform, the government tried to restructure qj rect taxes. The government, in fact, reduced direct taxes to promote the grovt} Of the economy: Direct taxes are already high in the Indian case, so the min purse of tak reveiveis indirect taxes and expansion of the tax base. In order ta expand the base, the government has been increasing the number of service within the tax net in a phased manner. This has become very important in the light of the fact thatthe services sector accounts for more than 50 per cent of thenational income. Despite this, no dynamism is visible in tax or nor , enue. Revenue receipts have moved from 9.7 per cent of GDP in 1990-91 just 9.8 per cent in 2004-05. There is not much variation in the relative role of tax and non-tax revenuie. One of the main reasons for subdued performance iy pec the eee failure to put in line proper user charges case pogpeneins tnt aeeeriupest tried to rationalize the number ee ee mene profligacy, but the situation is far from Leak Refor a ae, ee has forced the government acquire Neto eae oe ae eaateaeed its interest-payment burden. [n. x rea ation 2, ly pee eS per cent in 1990, reached in 2002-03 ren came down to 4.1 per cent in x rey Scanned with CamScannerSome Important Constituents of Economic Policy 43 As we talked earlier, the government is supposed to play a very active tale in the various spheres of economy, but due to the poor fiscal scenario, its ability és significantly constrained Tre FINANCIAL SECTOR Jatt cera, India has witnessed significant policy changes towards the financial sector. As we know, before 1991, there was primacy to centralized planning. which made it important for the state to generate resources in order to fand the developmental functions, The financial policy before 1991 was heavily used on this understanding of generating resources and that is why the govern- ment kept the banking sector in its control and kept the interest rate low for its horrowing. In the post-reform cra, the role of the government changed signifi- ‘cantly, The State was supposed to be a facilitator rather than the controller. This ‘made it imperative to bring abut changes in the financial policy. USince the genesis of reform, the ownership pattern of the banking sector ‘pas changed. In 1993, the RBI issued guidelines for setting up of the private- sector banks. Legislative changes were made in 1994 to enable public-sector ‘Jpanks to raise capital funds for the market by public issue share. Financial reforms ‘canbe reviewed under three major heads: * —Banking-sector reforms + Stock market reforms * Financial institutions reforms in ‘post-liberalization era. The major policy reforms include of adminis! interest rate, major reduction in reserve require- Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) lit controls, permission to private players in the ‘ign participation and improving the supervision etc. In order to understand the significance and y changes, we need to look at the banking sector i sector in the pre-reform era was entirely ‘The government started with the nation- Due to the multiplicity of goals, political 7 ntability and incentive structure, (PSBs), this sector became tion in the banking sec- Scanned with CamScannerel 44 Contemporary India ing sector bas changed. In 1919, te-sector banks. Legislative hanks to raise capital fund, 1 of private sector 1 of the ba ing up of the prival sector » nicrw, ther she 1 80 per cent with the PSB q pre-reform era of reforms, the ownership pat the RBI issu changes were for the market by pu in total deposits to the bat banks. The sector needs much # Administered interest rate and cred p sos aclnaotoredl interest policy wae iiowoe. THAPHHDNGL Tae interests were Not decided by demand and supply conditions in th market but by the govern, aoe The government controlled the flow of financial resources Well direct re rieand maintaining high interest rates for the private sector. Mourage hosschokd eavings and folll weliacs objesisons, tater Teo Kept high. At the same time, it borrowed from macroeconomics tells higher inter. nent. Furthermore, the government ncial resources keeping. a relatively rious kinds of control on 194 t issue of shares. Ev Jy 20 per cent, ane necome vib re reforms to t Ait control. Drariews, th control ov In order to em est rates on deposits were a the banks at a low inte! st rate, The basic est rate for loans discourage private investi took away a significant proportion of the fi lower amount for the private sector, that too with va distribution of credit al measures to facilitate the deregulation The Reserve Bank undertook severa and flexibility in interest rates. First, the Reserve Bank allowed banks the free- dom to prescribe different Prime Lending Rates (PLRs) for different maturities. Banks were accorded the freedom to charge interest rates without reference to the PLR in case of certain specified loans. The RBI also allowed various kinds of financial operations like hedging products, mutual funds, etc. ‘Quantitative vs market-based tools: Banks are needed to keep a part of their liabilities with the RBI in the form of CRR. Furthermore, banks are required to keep a part of their liabilities in the form of cash, gold or government securities, which is called SLR. These norms are needed to safeguard the interests of the consumers. These were deliberately kept high to garner resources for carrying out huge government expenditure. But this left banks with lower resources for commercial lending. Further, lower supply of commercial lending increased the ee rates a the private sector. Thus, on the one hand, the policy restricted ie es esto generate surpluses, and on the other, it killed incentives During the 1990s, the orientation of the banki h s > banking policy was overhauled. Rather than using quantitative tos, they relied on the market-based tools This ets witnessed significant reductions in the CRRand SLR requirements. There 5 greater reliance on the open-market operations to control money supply in economy, Open-market operation means that the gover el I _ othe government sells bonds to ‘mOp.Up. excess supp! economy and purchases bonds whe: a whene it wants to increase the money supply. Due to these factors, banks’ resource: i ee ee Te atc eal to . hen resources for commercial eee n profit generation by the banking sector, and the reduction in lending rates encouraged private investments. ‘Scanned with CamScannerSome Important Constituents of Feonomic Policy 45 Prudential normy: The Reserve Hank of Tudia persevered with the on-going cess of strenatheniiy pridential accountingg norms with the objective of im- oviing the financial soundness of hanks and to bring them at par with inter- national standards. The Reserve Bank advised PSBs to vet up Settlement Advi- gory Committees (SACS) for timely and apeedier settlement of non-performing astots in the small-scale sector and the agricultural sector The guidelines on SACs were aimed at reducing the stock of NPAs by encouraging the banks to go in for compromise settlements in a transparent manner. Recognizing that the ‘high level of NPAs tn the PSIs can endanger the financial-syster stablity, the government set up debt recovery tribunals for speedy recovery of bad loans. An amendment in the Recovery of Debts Due to Banks and Financial Institutions Act, 1093 was eflected to expedite the recovery process t Reforms, ‘the last two decades have seen the rapid develop- ment of the stock market due to deregulation and reforms. In 1980, the total market capitalization of the Indian stock markets was only 5 per cent of CDP. This increased to 13 per cent by 1990 and has already crossed 100 per cent of GDF During the 1990s, the gow ‘nt phased out its control over new share issues and permitted recognized foreign-institutional investors to directly buy shares in India, Indian firms have also been allowed to raise funds abroad. ‘The significance of the stock market is also increasing for small investors. Earlier, deregulations have seen some scandals in the stock market, whi od- ‘ed the confidence of small investors, But improved supervision and change in trading mechanisms have restored confidence in the system. The 1990s have seen the emergence of a large number of financial products, like different types of mutual funds, which meet the requirement of small investors. Institution Reforms. In the post-liberalization era, the deregula- tion of the financial sector started. This made it mandatory to increase supervi- iple, it becor portant to ensure that banks with tly invest i projects, go in for specu- investment or pose a threat to the stability of the economy. There has ¢ supervisory role of the RBI. To and promote the stock market, the Securities and Exchange Board of EBI) had been empowered, and similarly, for the healthy development ce market, the Insurance Regulatory and Development Author- been set up. With the passing of the Insurance Regulatory and ent Authority (IRDA) Act, 1999, banks and Non-Banking Fina (NBFGs) have heen permitted to enter the insurance busines nk has issued guidelines in this regard. This was felt necessary in that the insurance business does not break-even during the on, and that the banks and NBFCs do not have adequate undertaking the insurance business. Scanned with CamScannerjmprovement in Thus, the financial-sector reforms focused on, im ng supertin nome anal standards, interestrate liberalization, yr anaged to control increased competition in the banking secto® BT rns set by the RBI : non-performing assets and have met the pry ve performane of the fin fee wpade substantial progress towards imPMNE "Yi, greater autonomy, iplacency. The operation system and putting in place a new financial hagas pa parency and accountability, But there is 0 ro ere 80 fp costs for the public-sector banks are still very ME" technology and, thus, cut efficiency, bringing innovations and introducing, pas eed to concentait the transaction cost of the entire economy ture re roper supervision a these issues and encourage private jcipation with PF cha. nism. 46 Contemporary India INFRASTRUCTURE REFORMS Sustained growth and development requi ment in the infrastructure sector. Better Dro ction costs in the economy. This reduction eo time or uncertainty. One of the characteristics be provided before it is needed. It, therefore, re a sustained and appropriate invest © aon of infrastructure reduces tran. Hid be in terms of financial resourcr, ‘of infrastructure is that it needs 6 becomes important to understand ide it i ture investment in India is highly | ; , vate participation was not allowed in Seer shen it was opened to the private sector, invest ments came into a few segments only. Though the government has provided 1 ean rious sectors, only limited success has been registered due to many centives institutional problems. We will discuss briefly about two major sectors that have “These are the telecommunications sector and teen opened to the private sector. portant to note that most of infra- the power sector. Before we get into this, it is imy : t allowing private players can lead ‘sectors are natural monopolies. So just of the consumer. In order to make the market function properly for monopolies, it is very important that proper regulation is imposed to the interests of both consumers and producers. is tory of India’s economic reforms. Though has been generating debates on the manner in which these ed out and private players remained unhappy at variou: kinds of ector underwent a revolution in the Indian-growth story. P from telecom accelerated from an average of 6.3 per to 1991-92 to 18 per cent per annum during test rate of growth among alll sectors. In contrast \s have been the most unsuccessful so far.” the infrastructure sector. Some Lessons from Indian ‘on International EconomicSome Important Constituents of Economic Policy 47 Despite ‘some trouble, the government managed to create a viable and competitive environment for the telecom players. In this sector, the profitabil- ity of Pete eee ey not been ignored. The story of the electricity vs aaa me € he first problem was that the pace of reforms in is Trbb6-00 et ‘ low. Private investment in transmission was not al- Date vate ae fs tstribation, was allowed only in 2003. Furthermore, Pepe eee pat not a central government subject. The regu- m sector has been very weak. It was not just a failure of the policy, but of the institutional set up also. The main problem imposed by the institution is lack of proper unbundling of the generation, transmission distribution. The success with private participation heavily depends on the capability of the regulatory agency. One of the salient features of the post-reform era is the rising share of pri yate investment in the infrastructure sector, Apart from the above-mentioned !e participation has been encouraged in the construction of mati srvices in the railways have been given to the ivate players. Even in the aviation industry, the private sector has been per- mitted and they have started playing a very significant role. The major reforms in roadways were the imposition of a fuel cess to finance highway construction and the commissioning of the National Highway Development Project (Prime ister’s Gram Sadak Yojana). In the case of ports, private operators have been introduced and then the Tariff Authority of Major Ports was formed; in the civil-aviation sectors, new private airlines, new private airports and the begin- hing of an open skies policy are in evidence. The success of such a reform pro- ‘cess, where the private sector is being encouraged, is largely going to depend upon the regulatory framework provided. So, the most important task that has ‘to be taken up very seriously is the creation of different regulatory agencies, which are efficient, dynamic, accountable ional and profes CONCLUSION een significant reforms in the post-1991 era and there has been impact also. But the situation is far from satisfactory. In terms a policy should be ju ‘on the basis of its contribution to on. Here capability expansion means improving the human ‘one area, which has been ignored in the successive plans era. There is an urgent need that the government important not just for im- ‘c the modern growth 1e driving force of the ., trade-, fiscal- and financial-policy reforms. good but not sufficient. Itneeds to be realized that the Scanned with CamScanner48° Contemporary India benefit of reforms already taken up strongly depends on the amount and pag, future reforms. So there is a need to push up these reforms: The most impon agenda of reform could be agricultural-sector reforms, powers ies and ing structure reforms, tax reforms, reconsideration of remvel poecy smal seale industry and further simplification ofthe bureaucratic DOC, Apart economie reforms, large reforms in the legal system ane’ lvrnibce are aly, needed. These reforms are not cay to come By as many O° Hate ay jects and are going, to be fought fiercely by the vested ICTY it We wag to achieve something big, then it requires big and fundime kes in the policy; and the reforms process should not be confined only to the economig sector, but should look beyond it. suggested Readings_] * . d Prospects in th Basu, Kaushil ia's Bi Economy: Performance ave in Kaushik ed) i's Emerg Boon: P2005 1990s and Beyond. New Delhi: Ow / Dréze, Jean and Amartya Sen. India: Economic Development and Social Opportunity New Delhi: Oxford University Press, 1995. Ahluwalia, I. J, India’s Economic Reform: Essays. for Oxford University Press 2005. Krueger, Anne 0. Economic Policy Reforms and the In University of Chicago Press, 2002. ¢ Srinivasan, T. N. and Suresh D. Tendulkar. Reintegrating India with the World Economy. Washington, DC: Peterson Institute, 2003. Manmohan Singh. New Delhi: dian Economy. Chicago, Fquestions_} fiscal scenario of the 1980s. In the light of this, critically -1991 fiscal reforms. reforms of the post-1991 era. What are the ion of these financial policies? ior the macroeconomie crisis of 1991? Elaborate the - a Scanned with CamScanner