Soham Punjabi-100801061 Tapan Gupta-100801066

WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC

Indian Economic Policy post independence influenced by

Colonial Rule leaders' exposure to British social democracy progress achieved by the planned economy of the Soviet Union

Adopted the Mixed economy

Import Substitution

Interventionist Licensing

License Raj
Central Planning

In 1960s, Raul Prebisch argued that trade did not favour poor countries. Permanently imprisoned in a state of dependency to rich country because of unequal terms of trade. Ragnar Nurkse argued that era of the export led growth was over and trade could not be an engine of growth So India invested in large machinery industry and creating an internal market

Industrial Policy Regulation, 1956 Reserved 17 industries for the Public Sector Logic- The industries were of basic strategic importance and required investment on a scale which only the state could provide Steel, mining, machine tools, telecommunications, insurance, and power plants, among other industries, were effectively nationalised

Industries (Development and Regulation) Act 1951- required an entrepreneur to get a license to set up a new unit, to expand it or change the product mix Purpose
To create the planned pattern of investment To counteract monopoly and the concentration of wealth To maintain regional balance in locating industries To protect small scale industries & encourage new entrepreneurs To encourage optimum scale of plants and advanced technology

Free trade & laissez-faire policies of the Raj behind countries economic problems Piloted by P.C. Mahalanobis, India adopted Soviet styled Planning Bring rationality of technocrats, economists & scientists to bear on decision making

Became the most important document in the world in 1950s Put into practice the socialist ideas of investment in large public sector Emphasis was given on heavy industry Focus on import substitution

Intellectuals electrified, business community dismayed

Even if one is pessimistic, and allows 15% chance of failure through interference from USA, a 10 % chance of interference by USSR and China, 20 % chance of interference by civil service and politics, 5 % interference by Hindu traditionalism, that leaves a 50 % chance of success which will alter the whole history of the world for better

Adoption of inward looking, import substituting path rather than an outwardlooking, export-promoting route leading to failure in participating in the world trade. Setting up massive, inefficient and monopolistic public sector. Overregulated private enterprise diminishing competition Discouragement of foreign capital Pampered organised labour

Dr. Manmohan Singh argued for a greater openness in trade & for a less controlled economy. Tried re-orienting underdeveloped economies towards exports. 1950-60s Japan followed by Korea, Taiwan Hong Kong & Singapore penetrated market with export of low cost manufactures. Brazil too seized the opportunity Led to local businessmen reinventing the wheel.

Eliminate poverty- state led industrialisation, redistributive taxes, controls Believing state could become an entrepreuner Public Sectors-hopelessly inefficient Controls reduced competition Wastage of capital Investments did not payoff-capital output ratio poor with corruption as a side effect

State owned companies managed by untrained civil servants. Not asked to make profits Recklessly hired workers without any thought to performance

Basket Case-Between 1960 and 1964, India imported a massive quantity of 16 million metric tonnes of wheat Under the leadership of Shastri and C. Subramaniam India imported Lerma Rojo along with huge amounts of fertiliser Incentives given to farmers-15% rise in wheat price Initially larger farmers profited but it slowly transferred to smaller farmers

Green revolution brought huge purchasing power providing tremendous boost to other industries Labour hiring spread to other parts of the country From basket case to 35 million metric tons by June every year

Shastri and L.K. Jha tried loosening the controls. December, 1965 marked the first time India heard about liberalisation After the death of Shastri, India returned to socialism under the leadership of Indira Gandhi

Growth plunged from 7.7% a year between 1951 and 65 to 4 % between 1966 and 1980 According to economist per capita GDP would have been $ 550 instead of $ 300 in 1990 Productivity of Indian manufacturing declined 0.5% a year between 1960 and 1985

Nationalisation of Banks-14 largest banks Reorient credit flows to the neglected areasagriculture, small scale industries etc. Open bank branches in the rural areas and bring average Indian into the banking system

Advantages
Bank branches increased 5 times between 1969 to 1991 Average population served declined from 65000 in 1969 to 11000 in 1991 Bank deposits soared 13% of GDP to 38% in 1991 Loans expanded from 10 to 25%

Disadvantages
Inefficiency of the system Productivity and profitably of banks plunged Bad Debts rose Corruption: Loans influenced by political connection

Any group with combined assets above Rs 20 Crore was declared as a monopoly and debarred from expanding its business Any single company with assets above Rs 1 Crore was placed under antimonopolistic supervision and control Policy changed to fivefold to Rs 100 crores by Rajiv Gandhi government and scrapped in 1991.

Discouraged entrepreneurs Tatas made 119 proposals to start new business-All rejected Aditya Birla expanded Birla enterprises outside India-Thailand, Malaysia, Indonesia and Philippines

In 1991, India experienced a twin crisis of balance of payments, and inflation. Major problems were high fiscal deficits, external borrowing to finance the deficits, crowding out, rising debt, rising inflation, and consistently falling value of rupee. These troubles called for an introduction of various reforms. In 1979, the oil shock, agricultural subsidies, and a consumption-driven growth strategy had pushed up the fiscal deficit. It further increased in the mid-1980s as defence expenditure was substantially increased and taxes were progressively reduced. The result was that the current account deficit ballooned from 1.4% in 1985 to reach 3.4% percent of the GDP by 1990 1991. The inflation reached to 12.1 %, an all time high.

Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but this will have to be counter-balanced in other ways such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.

It is well known that from 1951 to 1991, Indian policy-makers stuck to a path of centralized economic planning accompanied by extensive regulatory controls over the economy. The strategy was based on an import substitution model of development (the intention of producing development and self-

sufficiency through the creation of an internal market).

This was evident from the design of the countrys Second FiveYear Plan (1956-61), which had been heavily influenced by the Soviet model of development. Several official and expert reviews

undertaken

by

the

government

recommended

incremental

liberalization of the economy in different areas.

Indias foreign exchange reserves were $1.2 billion in January 1991 and depleted to half by June, barely enough to last for roughly 3 weeks of

essential imports.

The Prime Minister Chandra Shekhar Singh's immediate response was to secure an emergency loan of $2.2 billion from the IMF by pledging 67 tons

of India's gold reserves. India had to pledge 20 tons of gold to Union Bank
of Switzerland and 47 tons to Bank of England as part of a bailout deal with the International Monetary Fund (IMF).

In addition, IMF required India to undertake a series of structural economic

reforms. As a result of this requirement, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough

reforms .

The new PM (P.V. Narasimha Rao) converted the prevailing economic crisis into an opportunity to launch massive economic reforms.

He introduced an economist into the Cabinet as Finance Minister (Dr. Manmohan Singh) and gave the new Minister his full support, allowing him to evolve and implement pathbreaking economic reforms.

The new economic policies radically departed from the old economic policies and the old regulatory framework that pursued in India during the previous forty years.

The Rao government recognized in 1991 that the time had come to reshape Indias economic policies based on more export-oriented and more globally connected strategies of development, as successfully practiced earlier by Japan and South Korea and also by the South East Asian tigers Malaysia, Singapore, Indonesia and Thailand.

major macro-economic management reforms

structural and sector-specific economic reforms

The attention of the new government that took office in June 1991 was primarily focused on crisis management dealing with the balance of payments. It was of the utmost importance to restore Indias international credibility by meeting its scheduled external debt liabilities. Achieving macro-economic stabilization was also an urgent priority, necessitating control of intolerably high inflation. It was

recognized that macro-economic stabilization would provide a sound foundation

for medium and long-term structural economic reforms and accelerate the rate of economic growth in a sustained manner. Structural reforms include LPG (Liberalisation, Privatisation and Globalisation).

Macroeconomic management reforms:

Fiscal Discipline
Tax Reforms

Structural economic reforms:

Industrial and Trade Policy Agricultural Policy Infrastructural Development Social Sector Development

Macro-economic management reforms have focused on controlling the politically difficult problems of reducing the fiscal deficits. Indias problem is primarily in the area

of revenue deficits. The revenue deficits reflected an excess of annual expenditure by the
government over its annual income. The deficit was caused by excessive employment in the government sectors, mounting subsidies, rising defence expenditures etc.

The combined fiscal deficit of the central and state governments were reduced from

9.4% of GDP in 1990-91 to 7 % in 1993 and the balance of payments crisis was over.
The central governments effort must be directed primarily towards improving revenues.

Faced with the necessity of reducing the fiscal deficit in the crisis year of 1991-92, Finance Minister attempted to reduce fertilizer and food subsidies and reducing public expenditure on social welfare services. These reforms helped to bring the fiscal deficit to 4.8% in 1993.

Total tax revenues of the centre were 9.7 percent of GDP in 1990-1991.

Tax reforms included:

broadening the tax base reducing rates of direct taxes for individuals and corporations abolishing most export subsidies removing unnecessary exemptions from direct and indirect taxes simplification of procedures and efforts for improving the efficiency of the tax administration system especially through computerization

Industrial policy prior to the reforms was characterized by multiple controls over private investment which limited the areas in which private investors were allowed

to operate. The industrial structure that evolved under this regime was highly
inefficient.

The list of industries reserved solely for the public sector has been now drastically reduced from 17 to 3 - defence aircrafts and warships, atomic energy generation, and railway transport .

Industrial licensing by the central government has been almost abolished except for a few hazardous and environmentally sensitive industries.

The policy of deregulation has also proved to be very useful. Deregulation is when government reduces its role and allows industry greater freedom in how it operates, therefore higher productivity, more efficiency and lower prices overall are seen.

Before the reforms, trade policy was characterized by high tariffs and pervasive import restrictions.

Imports of manufactured consumer goods were completely banned. The criteria for issue of licenses were non-transparent, delays were endemic and corruption unavoidable.

The economic reforms sought to phase out import licensing and also to reduce import duties. Import licensing was abolished relatively early for capital goods and

intermediates

which

became

freely

importable

in

1993.

For

agricultural goods, the import licensing was abolished in 2002-03.

Quantitative

restrictions

on

imports

of

capital

goods

and

intermediates were removed.

Liberalizing foreign direct investment was another important part of Indias reforms.

This would increase the total volume of investment in the economy, improve
production technology, and increase access to world markets.

Policy now allows 100 percent foreign ownership in a large number of industries and majority ownership in all except banks, insurance companies,

telecommunications and airlines.

Have created a very different competitive environment. Indian companies have upgraded their technology and expanded to more efficient scales of production. They have also restructured through mergers and acquisitions and refocused their activities to concentrate on areas of competence.

Consequences of Reforms

Since 1991, India's GDP has quadrupled, its forex reserves have surged from $5.8 billion to $279 billion, and exports from $18 billion to $178 billion.

The change in our lives and lifestyles is a lot more fascinating. Back in 1991, owning a Maruti 800 (Rs 1.48 lakh in Delhi) was a middle- class status symbol. Scooters like Bajaj Chetak accounted for more than half of the twowheelers sold in the country. Today, we are one of the biggest consumption engines of the world as we are consuming colas, playing music on our iPods

and zipping around in our sedans. The cola market is worth about Rs 10,000
crore, up from just Rs 200 crore in 1991.

The foundations for a sustainable high growth rate in any economy lie in

maintaining fiscal discipline. This has not been adequately achieved by

Indian policymakers. Excessive use of market borrowing to cover budget deficits has often put pressure on interest rates.

Economic reforms have accelerated growth but failed to generate adequate employment. The rural unemployment rate, after declining to 5.61 percent in 1993-94, rose to 7.21 percent in 1999-2000.

The reforms have led to growing disparities between richer and poorer states.