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DOON BUSINESS SCHOOL SELAQUI, DEHRADUN

INDIAN ECONOMY AND POLICY


ASSIGNMENT:1

SUBMITTED BY: Shreya Bhattacharyya


SUBMITTED TO: Dr Bhakti Ranjit Pawar
COURSE: PGDM Global- III Trimester
What triggered the India Economic Reforms of 1991? Explain in detail.
ECONOMIC REFORMS OF 1991
The 1991 reforms took place largely due to the economic crisis that India was facing at that time.

 The immediate factor that triggered India's economic reforms of 1991 was a
severe balance of payments crisis that occurred in the same year. The first signs of
India's balance of payments crisis became evident in late 1990, when foreign
exchange reserves began to fall.
 We had 3 years of very good crop productions from 1989–92, as the fruits of Green
Revolution had ripened. Still we faced food inflation of 11%. This shows
the mismanagement of resources during that time.
 With the onset of the Gulf War, world oil prices starting increasing, and remittances
from Indian workers in the Gulf region fell sharply as many of these workers left the
region. From a level of U.S.$3.11 billion at the end of August 1990, foreign
exchange reserves dwindled to $896 million in January 1991.
 There were huge imports. India lacked basic infrastructural needs to supplement the
demands of its people. Thus, huge imports burdened the domestic currency and there
was a further pressure for foreign borrowings.
 The rapid loss of reserves prompted the Indian government to initially tighten
restrictions on the importation of goods. However, it was increasingly clear by the
beginning of 1991 that the import compression, by limiting the imports of capital and
intermediate goods, was restricting the rate of economic growth and of exports.
 Furthermore, it was evident that the payments crisis was no longer primarily due to the
trade deficit, but was driven by adverse movements in the capital account, in particular
the drying up of commercial loans and a net outflow of deposits held in Indian banks by
non-resident Indians, reflecting a loss of confidence in the government's ability to
manage the balance of payments situation.
 During the latter part of 1980s India was turning into the largest borrower of that time
and was in debts of IMF, World Bank, as well as from Japan, with whom it was in a
bilateral agreement. Thus, its reputation was getting tarnished all over the world.
 Thus, giving birth to the policies of Liberalisation, Privatisation and Globalisation from
the Industrial Policy of 1991 under the leadership and guidance of Narsimha Rao and Dr.
Manmohan Singh (a great economist).
 The new government of Prime Minister P. V. Narasimha Rao, who assumed office in June
1991, moved swiftly to deal with the situation. It implemented a macroeconomic
stabilization program on an urgent basis, along with a comprehensive and far-reaching
overhaul of the policies governing India's and industrial sectors.

Rationale:
The decision to embark on the reforms following the crisis of 1991 was primarily motivated by the
beliefs of former finance minister Manmohan Singh that the roots of the financial crisis were
structural in nature and lay in the import-substituting industrialization strategy followed by India's
governments since 1947. The main elements of this strategy were inward-looking trade and foreign
investment policies, along with extensive bureaucratic controls over production, investment, and
trade, and a substantial public sector presence in the economy, going beyond the conventional
confines of public utilities and infrastructure.

2) Explain the relationship between poverty, unemployment and inequality. Comment on the
method of determination of poverty line in India.

Nation development is a continuous phase of progression towards betterment. In terms of


Economics, development is actually comprised of those efforts that tend to enhance the economic
situation and quality of life for a community by generating and retaining jobs and supporting
incomes. There is a vicious cycle that runs between poverty, unemployment and inequality. One
leads to the other. Due to unemployment, the purchasing power and consumption of an individual
declines. This leads to poverty. Unemployment and inequality are closely related to each other.
When considered from a larger point of view, unemployment is the reason and inequality is the
outcome. Unemployment results in inequality when it continues for successive cycles.
Unemployment, be it cyclical, structural or frictional, adds to the misery of the jobless workers.

Poverty line is the level of income to meet the minimum living conditions. For measuring poverty,
a poverty line is set. The poverty line is the level of income needed to meet the minimum standard
of living. People who have an income less than this is considered as below poverty line.
The concept about minimum consumption standards and consumption levels were changed based
upon recommendations of the various expert groups/task force. These expert groups use the NSS
(National Sample Survey) estimate the consumption pattern of households from time to time. The
NSS’s periodically makes extensive household surveys on expenditure. Here, from the
consumption basket of the people, the expert groups pick up the most essential commodities.
These commodities are placed under a poverty line basket (PLB).
Minimum standard of living is thus expressed as the basket of goods and services commonly used
by the people. Based on this consumption pattern, the Expert Groups estimate the minimum
consumption levels (and the income needed to buy these) and the income needed to obtain these
goods and services in both rural and urban areas. This income level acts as the poverty line.

3) Discuss the New Monetary Policy of India – Its Impact and future prospects.
Monetary policy refers to the policy of the central bank of a country to regulate and control the
volume, cost and allocation of money and credit with the aim of achieving the objectives of optimum
levels of output and employment, price stability, balance of payment equilibrium, or any other goal
set by the government.
Some Highlights of the RBI's Monetary Policy Committee (MPC)

 Repo Rate reduced by 0.25%


 Cash Reserve Ratio unchanged at 4%
 Bank Rate adjusted to 6.5%
 Reverse Repo Rate reduced to 6%
 GDP growth to accelerate to 7.4% next fiscal from 7.2%
 Collateral-free agriculture loans limit hikes from Rs 1 lakh to Rs 1.6 lakhs
 Proposal for setting up a task force on Offshore Rupee Markets to ensure Rupee value
stability
 Fixes GDP growth in the range of 7.2 to 7.4% in April-September and 7.5% in the third
quarter of 2019-2020.
 Headline inflation estimates revised to 2.8% in the March quarter, 3.2-3.4% in the first
half of the next fiscal and 3.9% in the third quarter of 2019-2020.
 Revision in the definition of bulk deposits as single rupee deposits of Rs 2 crore and above
from Rs 1 crore currently.
 Harmony in major categories of NBFCs.
 Union budget proposals to boost demand by raising disposable incomes.
 Oil price outlook hazy, trade tensions to weigh on global growth prospects
 Removes restrictions on Foreign Portfolio Investors investing in corporate debt market
 To come out with discussion paper on Payment Gateway Service Providers and Payment
Aggregators
 Hikes limit of collateral-free agricultural loans to Rs 1.6 lakh from Rs 1 lakh, to help small
and marginal farmers
 Monetary policy committee votes 4:2 in favour of rate cut, unanimous on change in
stance
IMPACT
 The hike in repo rate will have a definitive impact on the interest rates offered by banks on loans.
The primary effect this will have on the borrower is an increase in his/her vehicle/home/personal
loan EMIs.

 Now the transmission of policy rates is expected to become more transparent with the RBI
replacing MCLR with external benchmark. As and when the external benchmark rate changes, it
will reflect in the change in interest rate of the loan as well.

 There is a definite and remarkable economic impact of the monetary policy on Indian economy
in the post-reform period. The importance of the monetary policy has been increasing year
after year. Its role is very relevant in attaining monetary objectives, especially in managing
price stability and achieving economic growth.
 Along with that, the use and importance of monetary weapons like bank rate, CRR, SLR, repo
rate and the reverse rate have increased over the years. Repo and reverse repo rates are the
most frequently used monetary techniques in recent years. The rates are varied mainly for
curtailing inflation and absorbing excess liquidity thereby maintaining price stability in the
economy. Thus, this short-time objective of price stability is more successful for the Indian
economy rather than other long-term objectives of development.

4) Comment on the following –


Parallel Economy in India

When economic activities go unreported or not measured by societies current techniques to monitor
economic activity it falls under parallel economy. Money that have neither been reported to the public
authorities at the time of their generation or at any time of possession; no taxes have been paid on it.
Also known as Phantom trades or Shadow economy.

A hidden economy in its broadest sense may consist of - a) illegal economy, such as money laundering,
smuggling, etc; b) unreported economy including tax evasion; c) unregulated economy, that is
economic activities outside law and regulations.

History of parallel economy:

 The British East India Company in late 18th century laid the foundations of both a corrupt
bureaucracy and a parallel economy during World War II. The Indian black economy is
immense, lucrative, widespread, and has grown significantly since independence. The black
economy has grown from about 3% in the mid-50s to 20% by 1980, to 35% by 1990, and 40%
by 1995.
 Supreme Court asked the central government to appraise it of steps taken to implement the
recommendations of the Special Investigation Team (SIT) on retrieving black money and to
curb the menace of unaccounted wealth.

Reasons for growing black money:

 Income generated from illegitimate activities like smuggling, arms trafficking, corruption;
even those generating income legitimate activities avoid paying taxes because of excessive
taxation, greed and perception that government is corrupt and won't use it for public good.
 As a percentage of GDP and at almost $1 trillion in absolute terms, the black economy is
larger than both the industrial and agricultural sectors. Corruption is pervasive from the
lowest to the highest levels of public administration, public enterprise, bureaucracy,
judiciary, law enforcement, and elected officials.

Harmful Effects of Parallel Economy:

 The circulation of black money has adversely affected the economy in several ways. First, is

the misdirection of precious national resources? A part of black money is kept in a form that

contributes nothing/little to productive activities. Again, much around half to two third is

squandered away on ostentatious consumption of goods and services.


 Second, it has enormously worsened the income distribution, and has thereby undermined

the fabric of the society.

 Third, the existence of a big-sized unreported segment of the economy is a big handicap in

making a correct analysis and formulation of right policies for it. Nor. it is possible to monitor

the development in the economy with precision.

 Fourth, the black money has eroded the social values of the society. The undeclared income

is ‘earned’ by illegitimate ways. This is spent in undesirable and vulgar manner.

a) Five Years Plan and NITI Aayog

Niti Aayog

India has undergone a paradigm shift over the past six decades – politically, economically,

socially, technologically as well as demographically. The role of Government in national

development has seen a parallel evolution. Keeping with these changing times, the Government

of India has decided to set up NITI Aayog (National Institution for Transforming India), in place of

the erstwhile Planning Commission, as a means to better serve the needs and aspirations of the

people of India.

The NITI Aayog will comprise the following:

Prime Minister of India as the Chairperson

a.) Governing Council comprising the Chief Ministers of all the States and Lt. Governors of

Union Territories

b.) Regional Councils will be formed to address specific issues and contingencies impacting

more than one state or a region. These will be formed for a specified tenure. The

Regional Councils will be convened by the Prime Minister and will comprise of the Chief

Ministers of States and Lt. Governors of Union Territories in the region. These will be

chaired by the Chairperson of the NITI Aayog or his nominee.

c.) Experts, specialists and practitioners with relevant domain knowledge as special invitees

nominated by the Prime Minister

d.) The full-time organizational framework will comprise of, in addition to the Prime Minister as

the Chairperson
e.) i. Vice-Chairperson: To be appointed by the Prime Minister

ii. Members: Full-time

iii. Part-time members: Maximum of 2 from leading universities research organizations and

other relevant institutions in an ex-officio capacity. Part time members will be on a rotational

basis.

iv. Ex Officio members: Maximum of 4 members of the Union Council of Ministers to be

nominated by the Prime Minister.

v. Chief Executive Officer: To be appointed by the Prime Minister for a fixed tenure, in the

rank of Secretary to the Government of India.

vi. Secretariat as deemed necessary.

 A key component of the Nehruvian socialism—the economic approach adopted by India's


first Prime Minister Jawaharlal Nehru—the Five-Year Plans have been laid to rest by the
Narendra Modi-led NDA government. The 12th Plan, the last of the Five-Year Plans, is
coming to an end on March 31, though it has been given an extension of six months to allow
ministries to complete their appraisals.

The decades-old Five-Year Plans will make way for a three-year action plan, which will be
part of a seven-year strategy paper and a 15-year vision document.
The Niti Aayog, which has replaced the Planning Commission, is launching a three-year
action plan from April 1.

5) Explain the recommendations of the recent Monetary and Fiscal Policy.


 Reduce government expenditure on areas that are not very productive.

 Increase exports and reduce Current account deficit. (The current account deficit is a
measurement of a country's trade where the value of the goods and services it
imports exceeds the value of the products it exports.)

 Find the balance between growth and inflation.

 Increase tax revenues by broadening the tax base. This will help in bringing
more money for investment in developmental programmes.

 Remove Statutory Liquidity Ratio (SLR) for banks.

 Reduce CRR. As money parked as CRR doesn’t earn any interest for the bank. It is a
“dead deposit”. CRR should be counted only on the “Demand deposit. Ignore “Time
deposits” for its calculations

 Raise the minimum wage to reduce inequality.