SAPs & THE MODEL OF ECONOMIC MANAGEMENT IN INDIA

NOUFAL PALATHINGAL

The regime of economic planning began with a glorious vision of a

resurgent India marching firmly on the path of progress while ensuring
an equitable distribution of the nation’s wealth. Though the
macroeconomic policy achieved many of its objectives, over the past
five and a half decades, the economy was caught in the vice of the
twin deficits – fiscal deficit and the current account deficit in BOPs. The
major factors responsible for such a grave situation could be identified
as follows
• excess of consumption and expenditure over revenue,
resulting in heavy government borrowing,
• growing inefficiency in the use of resources,
• over protection,
• mismanagement of the firms and the economy,
• various distortions like poor technological development and
a shortage of foreign exchange, and
• imprudent borrowing from abroad and the mishandling and
mismanagement of foreign exchange reserves.

It is in this context, there emerged the need for some ‘structural

adjustment programmes’ crafted along the following lines
• to overcome the concealed deficiencies in our development
process with a well coordinated structural reforms,
• attainment of a growth-oriented adjustment where growth
cannot be sacrificed at the altar of adjustment, and
• restoration of fiscal balance to contain inflation and to
relieve the current account deficit in BOPs.
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In appreciation of these considerations, the first wave of economic

reforms, as a part of the New Economic Policy (NEP) 1991 aimed to
impart a new element of dynamism to the growth process of the
economy. There has been a judicious blending of real sector policies
designed to step up the momentum of growth with financial policies
that ensure macroeconomic and financial stability.

The major trust of the NEP will be “to increase the efficiency and
international competitiveness of industrial production, to utilize foreign
investment and technology to a much greater degree than in the past,
to improve the performance and rationalize the scope of the public
sector and to reform and modernize the financial sector so that it can
more efficiently serve the needs of the economy.” The NEP focused its
attention to dismantling the edifice of controls and a large number of
stabilisation measures were designed to restore internal and external
confidence.

► THE STRUCTURAL ADJUSTMENT PROGRAMMES (SAPs):

The Structural Adjustment Programmes (SAPs) envisages rapid

industrialisation with modernization for attaining faster growth of GDP
by satisfying the following conditions
• substitution of market and of private enterprise for
planning and public sector leadership,
• orientation towards export production in place of import
substitution, and
• removing the capital goods industries bias in resource
allocation and letting the market do the allocation.

The SAPs find their origin in the growth of neo-liberalism during the
decades of 1980s and the 1990s. The neo-liberalism affirms the role of
market in economic decision making and correspondingly limits the
role of the state to rule-setting and contract upholding. This type of
growth aims at establishing a global market-based system. It is often
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nicknamed as the “Washington Consensus” as it has the approval of

the ‘Brettonwoods Twins’ – IMF and the World Bank.

For the sake of brevity, India’s model of economic reforms as

compared with the pre-reform approach to development can be
summarised as follows

Pre-Reform Strategies Post-Reform Strategies

Closed economy
Self reliance
State-led economic growth
Import substitution
License-dominated regime
Frequent state interventions
Politically administered prices
Not much concern for deficits
Development by inflationary
process
PSUs as engines of growth
Dominance of PSUs
Philosophy of natural monopoly
Restrictions on FDI & MNCs
Restrictions on currency
movements
State-controlled interest rates
State-controlled credit
Underdeveloped capital market
Huge public sector budgetary
resources
High tax rates
Open economy
Integration with world markets
Market-determined economic
growth
Export orientation
Delicensing, deregulations &
debureaucatisation
Selective and effective state
interventions
Market-determined prices at large
Contain all kinds of deficits
Deflationary monetary & fiscal
policies
Private investments as growth
engine
Withdrawal from the areas of
private interest
Minimize the gap between public
and private sectors
Inducement to FDI & MNCs
Liberalisation of restrictions
Deregulation of interest rates
Credit policy reforms
Reforms in capital market
Minimize public sector budgetary
resources
Tax reforms

Thus, in the new economic environment, the vocabulary itself has

undergone a change. Earlier, the key words or phrases were control of
commanding heights, nationlisation, employment generation,
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protection of domestic industry, indigenization of technology and public

monopoly. But, today, the key words or phrases are international
competitiveness, efficiency, profitability, technology upgradation,
foreign capital, liberalisation, privatisation, globalization and golden
handshake.