MEPP Lectures 4-5-6

Economic Reforms in India

Dr. Tarun Das

Economic Reforms 1
Contents of this presentation
What do we mean by economic reforms?
Why do we need these reforms?
How far have we progressed?
Where do we want to go?
How to prioritize, sequence these reforms with what
speed and intensity?
What are their likely impact on growth, output and
employment?
What is our role in the progress of economic reforms?

Economic Reforms 2
 1.1 Indian Economy in
Pre-Reforms Period
 Mixed economy, but too closed
 Far behind world wide globalisation
 High level of control, licenses and regulation
 Monopolistic practices in public utilities
 Complex tax regime with high rates
 High tariff walls & QRs on Imports
 Rigid factor markets- land and labour
 High fiscal deficits and Public Debt
 Precarious balance of payments

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 2.1Rationale for Reforms
Over control, regulation, licensing and
high taxes and duties resulted in :
Low efficiency and productivity
High transactions cost
High cost economy and rent seeking
Non-optimal allocation of resources
sub-optimal choice of technology and
location of industries
Low quality but high prices of products
Bureaucratic inefficiency and corruption
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 2.2 Core objectives
To enhance productivity, efficiency, and
international competitiveness of Indian economy
 To achieve sustained growth with equity and
social justice
To impart dynamism to the overall growth process

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 2.3 Unique features
 Gradual, Step by Step, Evolutionary
approach not a Big Bang, Shock Therapy
or Revolutionary Approach
 General political consensus
 Strong emphasis on “human face”
 Practically no sacrifice made by people
 No write-off / rescheduling of debt

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 2.4 Reorientation of Public Policies
 To create enabling environment for public-
private partnership
 Link fiscal incentives to productivity
 To streamline public investment
 Emphasis on consultations, flexibility,
decentralisation, selectivity, monitoring
and co-ordination
 To repair market failures
 To strengthen structures & institutions

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MAJOR REFORMS

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 3.1 Economic Reforms since 1991
Structural Reforms
Stabilisation Policies
• Reforms in industry and
• Fiscal policies infrastructure
• Monetary policies • Reforms in trade and external
• Exchange rate policy sector
• Financial sector reforms
• Wage-income policy • Public sector reforms
• Tariff policy • Social sector reforms
• Administered price • Factor market reforms
policy - Land, Labor, Capital

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 3.2 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
1.Quantitative licensing 1.Abolition of industrial and
on trade and industry trade licensing
2.Removal of state
2. State regulated monopolies, privati-sation
monopolies of utilities & divestment
and trade 3.Liberalisation of financial
3. Govt control on and capital markets
finance and capital 4.Liberal regime for FDI,
markets portfolio investment,
4.Restrictions on foreign technology
foreign investment
and technology
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 3.3 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
5.Import substitution 5.Export promotion and
and export of primary export diversification, no
goods import bias
6.Reduction and rationa-
6.High duties & taxes
lisation of taxes and
with multiple rates duties
and large dispersion
7.Sector-neutral monetary,
7.Sector-specific fiscal and tariff policies
monetary, fiscal and 8.Flexible interest rates
tariff policies without any end-use
8.Multiple & controlled
interest rates
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 3.4 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
9.Foreign exchange 9.Abolition of exchange
control, no converti- control, full converti-
bility of rupee bility on current A/C
10.Multiple and fixed 10.United and market
exchange rates determined exch.rates
11.Administered prices 12.Abolition of all
for minerals, utilities, administered prices
essential goods except for few drugs
12.Tax concessions on 12.Rationalised and
exports and savings being phased out

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 3.5 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
13. No change, budget
13.Explicit subsidies on
subsidies on LPG and
food, fertilisers, and kerosene introduced
some essential items 14.No change, but user
14.Hidden subsidies on charges are being
power, urban rationalised, and subsidies
targeted
transport, public
15.Acts governing consumer
goods, POL rights, IPR, independent
15.General lack of regulatory authority
consumers protection
and other rights

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 3.6 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
16.Decentralisation, sound
16.Central planning,
institutional framework,
discretionary reforming civil services
process, high degree 17. No change
of bureaucracy
17.Outdated 18. No change in labor policy,
Companies Act little change in land markets
19. No change
18. No exit policy for
land and labour
19.Outdated legal
system

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 3.7 Industrial Sector Reforms
Status in June 1991 Status in Dec 2006
(a)Govt.licensing required (a)Licensing abolished
for most industries which except for 9 industries
accounted for 66% of which account for less
new investment than 10% of production
(b)Restrictions on (b)MRTP Act amended.
expansion under MRTP ( c)Many items
( c)Reservation of 836 dereserved.
items for SSI units (d)Only four viz.defense,
(d)18 major industries atomic energy,some
reserved for public sector
minerals, rail reserved
for public sector.
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 3.8 Public Sector Reforms
Status in June 1991 Status in Dec 2006
(a)Budget support to (a) Support reduced to
PSEs: 1.5% of GDP 0.6% of GDP
(b) Price and purchase (b)No price preference,
preference for PSEs but purchase
( c) Preferential treatment preference exists
for bank credits ( c) No preferential treat-
(d) No hard budget ment for bank credits
constraints (d) MOUs strengthened
(e) No disinvestment (e) Divestment allowed
(f)SICA does not include (f)SICA amended
sick PSUs

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 3.9 External Sector Reforms
Status in June 1991 Status in Dec 2006
(a)Fixed exchange rate (a)Exchange rate is
determined by RBI market determined
(b)QRs on 91% of imports (b)Most QRs removed
(c)Most items
(c)Imports of 55 goods decanalised
canalised
(d)Abolished except for
(d)439 items of exports minerals & agriculture
are s.t. export licenses (e)Abolished
(e)Export taxes on agro (f)Fully convertible on
products & minerals current account
(f)Rupee not convertible
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 3.10 External Sector Reforms
Status in June 1991 Status in Dec 2006
(g)strict Exchange control (g)FERA replaced by
FEMA
and FERA
(h)FDI liberalised, no
(h)Restrictions on foreign restrictions on
investment and technology transfer
technology transfer (i)Liberalised
(i)Restrictions on joint
ventures abroad (j)Abolished
(j)Direct export subsidies
on specific sectors (k)Significant reduction
(k)High tariff walls
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 3.11 Financial Sector
 Capital markets
• Establishment of SEBI as regulator
• Liberalisation in primary/ secondary markets
 Banking
• Major Steps taken for tackling NPAs
• Reduction of government equity
• Reduction in CRR, SLR & lending rates
 Insurance
 Opened for private and foreign participation
Establishment of IRDA as a regulatory entity
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 3.12 Progress of Financial Sector
Reforms
Status in June 1991 Status in Dec 2006
• Indian firms not • Indian firms allowed to
allowed to raise funds raise foreign funds by
from foreign stock GDR, ADR, FCCBs &
exchanges offshore funds
• Portfolio investment • FIIs, NRIs and OCBs
by foreign investors in allowed to buy stocks
Indian companies not in Indian markets s.t.
allowed overall limit of 49%
• Foreigners not • FIIs/ NRIs/ OCBs
allowed to buy G-secs allowed to buy G-secs
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 3.13 Fiscal Reforms
 Reduction of fiscal deficit
 Fiscal Responsibility Act
 Simplifying rules and procedures
 Strengthening tax administration
 Widening tax base & enhancing buoyancy
 Rationalisation and Reduction of rates

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 3.14 Progress of Fiscal Reforms
Status in June 1991 Status in Sept 2003
(a) Ad hocs replaced by
• Fiscal Deficit was WMAs at market rate of
financed by: interest
(a) RBI Ad Hoc TBs at (b) SLR reduced to 25%
4.6% interest © Govt. securities are sold at
market rates
(b) Banks through SLR
(d) Reduction of interest rates
holdings at 38.5% for public funds
© Market borrowings (e) Less dependence on
(d) Public funds External debt

(e) External debt

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 3.15 Social Sector
 Greater involvement of states
 Revamping of poverty alleviation and
employment generation programmes
 High priority to:
• Universal education
• Basic health
• Drinking water
• Sanitation
• Women and child development

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4.1 Second Generation Reforms
Emphasis on
• Micro, Sectoral and State Levels
• Factor Markets- Land and Labour
• Agriculture
• Targeting of Subsidies
• Hard budget constraints and
control of contingent liabilities
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 4.2 Agricultural Reforms
Greater thrust on rural infrastructure
Review of Essential Commodities Act
Higher credit to agriculture
Introduction of Kisan credit cards
Amendment of Acts relating to agro-
based products
Setting up Agricultural Export Zones
Expansion of futures and forwarding
trading to agricultural products
Watershed development

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 4.3 Infrastructure
New Electricity Act 2003
Reforms in SEBs for Energy audit, commercia-
lisation of distribution and restructuring of SEB
Accelerated Power Development and Reform
Enactment of Energy Conversation Act 2001
Larger funds for National Highway Development
Model BOT schemes for roads/ bridges
Corporatisation of DOT and ports
Private investment in airports
Convergence Act covering telecommunications, IT
and broadcasting

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 4.4 Financial sector
Establishment of Clearing Corporation
Screen based trading in G-securities
Replacement of Public Debt Act by
Government Securities Act
Reduction of govt equity in banks
VRS in banks
Setting up of ARCs
Legislation on securitisation
Legislation to facilitate foreclosure in banking
sector

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 4.5 Industry
• Abolition of SICA and BIFR
• Competition Commission set up
• Amending Companies Act
• Dereservation of SSI sector
• Petroleum sector liberalised
• Privatisation of PSEs
• Amendment in Industrial Disputes Act
• Amendment in Contract Labour Act
• Phased decontrol in fertilisers

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 4.6 Human Development
Greater outlay on social sectors
Better micro-credit facilities to women
Enhancing social security cover for
landless labourers and children in Below-
Poverty-Line families
Educational loan facilities for students
Private Pension Fund set up
social insurance for old age

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 4.7 Fiscal Reforms
Fiscal Responsibility Act
Expenditure control
• Downsizing government departments
• Reduction of controlled interest rates
Revenue enhancement
• Introduction of VAT at state level
• Single rate of central excise @ 16%
• Expansion of service tax
• Enlarging scope of TDS

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 4.8 Future Agenda
 Coordinating state level reforms
 Accelerated privatisation
 Liberalisation of labour and land laws
 Strengthening regulation in infrastructure
 Development of debt and bond markets
 Provident and pension fund reforms
 Thrust on state provision of basic needs
 Rationalisation of user charges for public utilities

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 4.9 Implications for Managers in
Government & Public Sector

Need to change our mind set:

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 4.10 Redefining the role of
government
 Both well governed state and well
functioning markets are essential for
high growth and sustainability
 Government and free markets should
supplement and complement each
other
 Govt to withdraw from sectors where
private participation is more productive
 Scope of government to remain large
in social sectors and infrastructure
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 4.11 Implications for Managers
 World is a global village
 Knowledge is most valuable asset
 Wider choice of resources- domestic/
foreign, debt/ equity/ portfolio etc.
 Greater Risk- Currency, exchange rate,
interest rate, commodity prices, markets
 Emphasis on decentralisation,
consultation and risk sharing

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 4.12 To strengthen Systems for
 Management information system
 Asset-Liability Management
 Project appraisal and evaluation
 Quality control and inventory management
 Auditing, accounting and book keeping
 Performance audit
 Policy audit
 Prediction of sickness

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 4.13 Concluding Remarks
 Reforms have made significant progress
since 1991.
 Fifteen years is too short to complete reforms
for a country like India.
 Carried to their logical ends, reforms would
make India as one of the most dynamic
economies of Asia by 2010.
 India is “an economic miracle” waiting to
happen.
 All of us have to play a distinct role in that
exciting process of development.
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 5.1 Review Questions
1. (a) What is the rational of economic
reforms initiated since June 1991?
(b) Indicate the scope and unique
features of Indian reforms program.
2. (a) Discuss briefly the paradigms of
economic reforms initiated in India since
June 1991.
(b) What are the basic objectives of these
reforms?

Economic Reforms 37
 5.2 Review Questions
3. (a) What do you mean by macro
stabilisation policies and structural
reforms?
(b) What are the basic distinctions
between stabilisation policies and
structural reforms?
(c) Discuss the major reforms taken in
financial sectors and capital markets.

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 5.3 Review Questions
4. (a) Discuss major reforms taken in
industrial and external sectors.
(b) Some economists advised the
government to move towards capital
account convertibility with a faster
speed. Do we agree with their views?
Give reasons for your views.
5. (a) Discuss major reforms taken in public
sector enterprises.
(b) What is the specific role of the
managers in the progress of economic
reforms?

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 Thank you
Have a Good Day

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