ECONOMIC REFORMS IN INDIA

BYShubham Goel

Period 1947- 1990

The historical discontinuity after independence

The Plan strategy

A nation building exercise

The experiment with socialism

WHY ECONOMIC REFORMS

A rate of growth of average 3.2 per cent

High population growth denies a significant dent on poverty

A huge public sector with minimum returns

A protective private sector

WHO DID IT?

These reforms (1990s) were brought in by a team led by Dr.Manmohan Singh, who was Finance Minister at the time, and is currently the Prime

Minister.

Philosophy of Reforms

To free the economy from the circumspection of socialist equity in the form of pervasive state control on production, low productivity, a distorted and dis-functional price system and a complacent over-protective private sector.

To establish the supremacy of individual and the role of economic freedom

Perspective: year 1990-91

International reserve came down to $ 1.3 billion, less than 1 month import bill, and India was on the verge of default in foreign obligations [ short term debt]

Stagnant exports India’s ratings down High deficits in domestic budget Public sector banks having large NPA PSU incurring huge losses

International Scene USSR’s disintegration… the currency trouble

weakened

Overall confusion on the efficacy of command economy

Some east European countries came out of socialist economic structure

Loss of credibility of the ‘command economy’ as disturbing revelation came out on lower productivity and disinformation about planning

Role of IMF The Washington consensus about

the ‘transition economies’ Dismantle command economy

structure Reduce the size of government Privatization of state undertakings Reduce and remove budget deficit Make currency stable and current

account convertible

Mechanism Dismantling of the license and

permit raj so that the rent-seeking system is abolished

Minimize the role of the state in production except in some core and strategic areas

Reform of the legal system to end monopoly of any group/ sector

Financial sector reforms

Financial Sector Reforms

Reforms--- change in the budgetary process makes the government accountable--- discipline in revenue-expenditure process

Low inflation- low interest regime

Changes in the banking sector – making the system of bank credit more transparent_ efficient appraisal system and accountability for decision taking

Results of F.S. reforms Role of capital is appreciated and effort

are on to make capital cheaper at par world standard

More transparent estimate of the need for investment in the infrastructure sector--- how to mobilize the resources

One estimate puts the requirement as $50 billion equivalent---- role of foreign direct investment as perceived by the government. Whether FDI is good for the country is no longer the issue

India Growth rates in 1990s

ECONOMIC GROWTHOF INDIA

0

1

2

3

4

5

6

7

8

19

90

19

92

19

94

19

96

19

98

20

00

20

02

PE

RC

EN

T R

EA

L G

DP

Growth Rates (% p.a) 1980s v/s 1990s

1980s(1983-1994)

1990s(1993-2000)

Higher Growth in

1980s 1990s

GDP Per Capita 2.9 4.9

Real Income Per Capita 3.1 4.2

Private Consumption p.c. 1.7 3.6

Private Consumption p.c. 1.2 1.3

Real Wages per worker

All India 2.6 4.4

Rural 2.7 4.1

Agricultural Households 2.8 3.1

Agricultural Workers 2.4 3.1

Urban 2.2 4.9

Cost of Cultivation Survey 3.3 4.4

India__ international liquidity

INTERNATIONAL RESERVES AND FOREIGN DEBT OF INDIA

5

10

15

20

25

30

35

40

45

1993-Q3 1994-Q3 1995-Q3 1996-Q3 1997-Q3 1998-Q3 1999-Q3 2000-Q3 2001-Q3

INTERNATIONALRESERVES

DEBT SECURITIES ISSUED ABROAD

SHORT-TERMCOMPONENT

Source: Joint BIS-IMF-OECD-World Bank Statistics

The biggest drop in The biggest drop in inflation…inflation…

9.59.1

7.4

4

1970s 1980s 1990s 2000-4

% decrease in inflation

The fastest rise in The fastest rise in incomes….incomes….

2013

7

36

70

1950s 1960s 1970s 1980s 1990s

% rise in per capita income

Real GDP growth rates of selected countries during 1990--- 2000 [ per cent]

China 10.3 Ireland 7.3 India 6.0 USA 3.5 Japan 1.3 Russia -4.8 Ukraine -9.3

NEW GENERATION ECONOMIC REFORMS

TELECOM Telecom sector opened up to the private sector

and for foreign investors with 74% equity cap As many as 61 million new phones have been

added since 1998-99 which is more than thrice the number of lines added in the preceding five decades

INSURANCE Insurance sector was opened up in August 2000. Insurance Regulatory and Development

Authority (IRDA) regulates the insurance business.

India in 2050India in 2050

-5,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

US 2

003

$ bi

llion

s

0

1

2

3

4

5

6

7

8

2005-10 2015-20 2025-30 2035-40 2045-50

5-Ye

ar P

erio

d A

vera

ge P

erce

nt P

er

Ann

um

Brazil

China

India

Russia

India will be the 3rd largest economy….

…..with the highest growth rate of BRICs

Reform: Progress & Prospects

Progress so far Prospects

Infrastructure 4/10 Progress to be slow

External Economy 7/10 Will continue to shine

Privatization 4/10 Selective disinvestment

Labour Reforms 3/10 Unlikely under UPA Bureaucracy 3/10 No significant

changes

Current position of Reforms The reforms process has been slowed down__

Reasons Inability to carry out reforms in some crucial

sectors like legal infrastructure and education

Resistance by interested groups Lack of political will Role of powerful bureaucracy as they feel

threatened with diminutive public sector A section of corporate sector beneficiary

of old system

Reforms slowed down?

Low literacy message of reforms not reaching

Lack of genuine administrative reforms at the grass-root levels

Transparency in public policy lacking that creates credibility gap a breeding ground of violence

Need of the hour

Reforms of the infrastructure sector Education_ universities Legal system A proper perspective of market

mechanism Redefine the role of Government

Conclusion

We are in the middle of the process of reforms….

Only expectations about the better future

End of discussion