ECONOMIC REFORMS IN INDIA

THE POLITICAL ECONOMY OF ECONOMIC REFORM

The 1991 Balance of Payments [BOP] crisis forced India to procure a $1.8 billion IMF loan and acted as a tipping point in Indias economic history. The IMF bailout wounded the pride of a country that had strove above all for self-sufficiency through its post independence socialist policies. The bailout announced to Indian policymakers and the world the countrys policy failures.

 The BOP crisis immediately confronted P.V. . Narasimha Raos newly elected Congress government, which had been swept into power in mid-1991. Rao had already appointed a nonpolitical figure, economist Manmohan Singh, as finance minister in a gesture that symbolized Raos desire to charge forward with economic reform. In response to the crisis. The government immediately introduced stabilization measures to reduce the fiscal deficit. The fiscal tightening and devaluation of the rupee by approximately 25% adequately reduced the current account deficit.

FURTHER STABILIZATION REFORMS

The stabilization efforts of 1991 successfully warded off financial collapse. It was clear the status quo was unsustainable and that India needed to better integrate with the global economic system. The government went beyond traditional short-term stabilization efforts and began addressing the underlying causes of Indias economic woes.

 The government initiated a reversal of the historic policies of regulation and government intervention.

Broader reforms like market determined exchange rates, liberalization of interest rates, reductions in tariffs, and a dismantling of the License Raj. Reforms in areas like taxation, financial services and public sector management were developed.
The government also selected these early reforms carefully, fearing that with Indias constant cycle of elections, any setback at the polls would damage the reforms momentum.

FISCAL AND ADMINISTRATIVE REFORMS

Initial fiscal reform focused on politically feasible revenue-related issues like rationalizing the tax structure and increasing compliance. Government had to abandon the initial attempts to curb the deficit through spending cuts, and by 1996, the annual deficit had climbed back to 1991 levels 10.5% of GDP. Sensitive to public opinion, reformers could not break the vicious cycle of over expenditure and poorly targeted spending.

. The center government drove an initiative to move the country toward a Value-Added Tax system, and by 2005, most state governments had adopted it. According to Delhis Secretary of Finance Sanjeev Khairnar, the VAT contributed 70% of Delhis total revenue collection, but many others questioned the extent of its implementation nationally.

FINANCIAL SECTOR REFORMS

In order to liberalize the financial sector, Govt. established committees to research and make recommendations regarding financial system modernization, deregulation, and lending improvements. Before the 1990s, regulations limited the ability of the Indian financial sector to efficiently allocate resources. Regulations required heavy investment in government debt, while lending was restricted to specific sectors. Bank nationalization left management of most financial institutions to political forces.

 Efforts to privatize and introduce competition . were approached cautiously, due to the political sensitivity of these reforms and resulted in more limited change than did deregulation. Changes did not impact the banking workforce or management structure banks remain overstaffed and poorly managed. Trade unions persist as a formidable enemy of future reforms aimed at reducing operating expenses.

INTERNATIONAL TRADE AND INVESTMENT REFORMS

Indias trade policy prior to the 1991 reforms was characterized by high tariffs and import restrictions. Foreign-manufactured consumer goods were entirely banned, and capital goods, raw materials, and intermediate goods for which domestic substitutes existed were importable only through a bureaucratic licensing process. Illustrative of the severity of the situation, Infosys executives described how the founders had to visit Delhi nine times to obtain a license to import just one personal computer. Although foreign ownership in some Indian companies was permitted, investors faced complications that included a subjective licensing process, high regulation upon approval, and equity-holding caps. Despite the benefits of outside technical expertise, many fear that increased foreign investment will lead to lost jobs and threaten domestic businesses.

INDUSTRIAL SECTOR REFORMS

Indias industrial policy was one of the areas most changed by the economic liberalization of the 1990s. The early reforms crystallized a trend that had been building since the national government moved toward a pro-business approach to industrial policy during the 1980s.

During the following decade, India transitioned from a centrally planned and operated economy to a marketdriven economy, reflecting a global trend toward less regulated economies.
Most government-operated industries in India are now privatized.

INFRASTRUCTURE REFORMS
According to the 1999 Global Competitiveness Report, India ranked 55 out of 59 countries in terms of the adequacy of overall infrastructure.

LPG
Liberalization Privatization Globalization

Liberalization
Process of liberating the economy from the various regulatory and control mechanisms of the state and of giving greater freedom to the private enterprise. Various forms: Delicensing Freedom to PSUs to access capital markets Permission to corporate to buyback shares Increase in investment ceiling of small scale enterprises Liberalization of tax provisions for certain sectors Freedom to banks to enter insurance sector Simplification and rationalization of tax structure Adoption of system of VAT

Privatization
Transfer of ownership of Government/Publicly owned assets into private hands. Process in which major economic decisions concerning production , exchange , distribution and consumption are entrusted to the market forces and decisions are taken by a large number of units and private economic units.

 Disinvestment of Public sector . Opening of many core sectors to private investment(roads , ports, insurance , power transmission , telecommunication) Market related rates for 364 days treasury bills. Freeing of deposit rates of banks. Freedom to banks to determine their own PLRs in view of market trends. Freeing of number of products from administered price mechanism Contracting out of many services by public sector units(catering in railways)

Globalization
Global integration of products, technology , labor investment ,Information and even cultures. It takes place through international trade , foreign investment , joint ventures, international licensing, franchising and sub contracting , strategic alliances.

 Globalization ,as apart. of economic reforms in the country is the result of internal economic compulsions , external pressure from the international community particularly from IMF,WTO , World Bank.

Measures: Reduction in the scope of restrictive canalized trade. Increase in the limit of FDI Creation of Foreign investment promotion board Reduction in Tariffs Free import on many items Restriction or elimination on quantitative restrictions on import items Permission to FIIs to trade in government securities Replacement of FERA with FEMA

Reform Strategy
Fiscal Strategy: Continuation of the process of reduction of fiscal deficit to facilitate reduction in interest rates. Target of reduction of inflation to 5-6% Improvement in the fiscal balance of the states Supplementary efforts of states to reduce overall government deficit Elimination of huge losses involved in electricity , water and transport Improvement in quality of taxation and adjustment of tax rate structure Moderating tax rates , widening tax base and improving tax compliance Reform of welfare expenditure

Monetary Strategy
Monetary policy should play a proactive role in short term macroeconomic management Monetization should not be frequently used as a tool to finance fiscal deficit as it generates inflation Statutory liquidity ratio should be gradually reduced to permit commercial deployment of funds by banks Repurchase operations in securities for short term liquidity management by RBI

Strategy for Financial sector

Comprehensive coverage of Banking system Sustained reduction in SLR and CRR Freeing of financial institutions from compulsory investment in Government securities Rationalization of lending rate structure with provision of cross subsidization

Measure for cost reduction and greater efficiency in banking Improvement in trading practices of stock exchanges
Improvement in the trading practices of stock exchanges

Trade Strategy
Minimization of number of import items under licensing Fixation of appropriate tariffs Dilution in the rigor of exchange controls Progressive reduction of import tariffs

Industry and labor strategy

Deregulation of industry and freedom to private enterprise Disinvestment of public sector Permission to reputed companies Raising the competitiveness of SSIs Equity participation in SSIs

Agricultural strategy
Achievement of consistent growth Increase in investment Priority to credit structure To provide remunerative price to farmers Establishing of price stabilization of funds Introduction of National Agricultural insurance scheme.