Several major economic and political changes occurred during the 1970s and 1980s, which affected the

developing countries and paved the way for the implementation of IMF-sponsored Structural Adjustment Policies (New Economic Policy) in India in 1991. This was due to a combination of factors such as stagnant agriculture, low levels of industrial growth and diversification, inadequate capital formation, adverse terms of trade in international markets, limits to domestic resource mobilization due to a fairly narrow tax-base, loss making public sector enterprises, over regulated and controlled economy, poor industrial productivity, huge amount of fiscal deficit, huge amount of public debt, poor rating of Indian economy by international agencies, foreign exchange crisis etc. New Economic Policy of 1991 includes globalization, liberalization and privatization (Disinvestment) 1. Globalization means flow capital (finance in the form of foreign direct investment (FDI) and foreign portfolio investment (FPI), technology, human resource, goods and service among countries. FDI is investment in real assets like automobile, consumer goods production, service sectors like insurance, telecommunication, air transport etc. 2. Liberalisation means freeing the economic activities and business from unnecessary bureaucratic and other controls imposed by the governments. 3. Privatisation or Disinvestment: Selling the government owned public sector enterprises to private industrialists and opening the government operating sectors for private investment. The New Economic Policy includes reduction in government expenditure, opening of the economy to trade and foreign investment, adjustment of the exchange rate from fixed exchange rate system to flexible exchange rate system, deregulation in most markets and the removal of restrictions on entry, on exit, on capacity and on pricing. Immediate consequences of economic liberalization that are to focus on are (a) an increase in internal and external competition and (b) structural change induced by changes in relative prices in the economy. The Major areas of New Economic Policy 1991 are 1. 2. 3. 4. 5. 6. 7. 8. Fiscal policy reforms Monetary policy reform Pricing policy reform External policy reform Industrial policy reform Foreign investment policy reform Trade policy reform Public sector policy reform

The principal reforms initiated in the year 1991 included; reduction in import tariffs on most goods other than consumer goods, removal of quantitative restrictions and liberal terms of entry for foreign investors. Indias simple average tariff rate was reduced from 128% in 1991 to about 32.3% in 2001-02. Quotas and non-tariff barriers were also reduced.. To restore Macro economic stability, the reforms package of structural adjustment policies are aimed at freeing markets by dismantling controls on production, prices and trade and reducing intervention in the economy. The need to control the fiscal deficit led to policies to curb public expenditure and these cuts were mainly on social sector expenditure and on production and consumption subsidies, which directly affected the living standards of the economically vulnerable sections of the population. Privatisation, Liberalisation and export-promotion were the main features of the economic reforms recommended by the international institutions for the problems facing by the developing countries .At the same time, the role of the state in advanced industrial economies was not shrinking as expected, but growing despite the ideological bias in favour of a rolled back state. The share of national income spends by government, which averaged 30% in the rich industrial countries in 1960 increased to 42.5% by 1980 and 45% by 1990.The experiences of countries, which have undergone these reforms, have in most cases not led to the expected outcome but have infact worsened the state of their economies. In India, the New Economic Policy (NEP) is a set of policy (ies) and administrative procedures introduced in July 1991 to bring about changes in the economic direction of the country. Industrial Policy Resolution 1991 (IPR-1991) The regulatory policy framework which acted as a barrier to entry and growth by the entrepreneur was sought to be basically changed by the Industrial Policy announced in July 1991.The measures introduced in this area along with other economic reforms were as under: Industrial licensing has been abolished for all projects except for a list of 15 industries related to security, strategic or environmental concerns and certain items of luxury consumption that have a high proportion of imported inputs. The exemption from licensing also applies to the expansion of existing units.

Industrial licensing was abolished for all projects except for a list of 15 industries related to security, strategic or environmental concerns and certain items of luxury consumption that had a high proportion of imported inputs. The Monopolies and Restrictive Trade Practices (MRTP) Act applied in a manner which eliminated the need to seek prior government approval for expansion of present undertakings and establishment of new undertakings by large companies. The set of activities henceforth reserved for the public sector was much narrower than before, and there would be no ban on the remaining reserved areas being opened up to the private sector.

Foreign Investment Policy The Industrial Policy 1991 also provided increased opportunities for foreign investment with a view to take advantage of technology transfer, marketing expertise and introduction of modern managerial techniques. It was also intended to promote a much needed shift in the composition of external private capital flows. The following measures were announced in this regard:

Automatic approval would be given for direct foreign investment upto 51 per cent foreign equity ownership in a wide range of industries. Earlier, all foreign investment was generally limited to 40 per cent. To provide access to international markets, major foreign equity holdings upto 51 per cent equity would be allowed for trading companies primarily engaged in export activities. Automatic permission would be given for foreign technology agreements for royalty payments upto 5 per cent of domestic sales or 8 per cent of export sales or for lumpsum payments of Rs.10 million. Automatic approval for all other royalty payments will also be given if the projects can generate internally the foreign exchange required. Abolished MRTP Act and FERA and instead of FERA, FEMA Act was passed in the Parliament. The threshold (Minimum) asset limit for companies under MRTP Act was raised from Rs.20 crores to Rs.100 Crores.

Public Sector Policy The Government was of the view that public sector had not generated internal surpluses on a large scale. On account of its inadequate exposure to competition; the public sector was subject to a high cost structure. To provide a solution to the problems of the public sector, Government decided to adopt a new approach, the key elements of which were:

The existing portfolio of public sector investment would be reviewed with a greater sense of realism to avoid areas where social considerations were not paramount or where the private sector would be more efficient. Enterprises in areas where continued public sector involvement was judged appropriate would be provided a much greater degree of managerial autonomy. Budgetary support to public enterprises would be progressively reduced To provide further market discipline for public enterprises, competition from the private sector would be encouraged and part of the equity in selected enterprises would be disinvested; and Chronically sick public enterprises would not be allowed to incur heavy losses.

As a follow up of this policy, several measures were taken:

The number of industries reserved for the public sector was reduced from 17 to 8. Even in these areas, private sector participation was allowed selectively. Joint ventures with foreign companies would be encouraged. Public enterprises that were chronically sick and unlikely to be turned around would be referred to the Board for Industrial and Financial Reconstruction (BIFR) for rehabilitation or restructuring. The existing system of monitoring public enterprises through Memorandum of Understanding (MOU) was strengthened with primary emphasis on profitability and rate of return. Initiated the disinvestment of public sector enterprises.

The Bank and Structural Adjustment

he 80s will be remembered as the decade of global impoverishment linked to the Bank and

the IMF's infamous medicine: the Structural Adjustment Program (SAP). These programs are being implemented in over 70 Third World and Eastern European countries with devastating results. The Bank-IMF sponsored SAP has two phases. The first phase is short-term macroeconomic stabilization. It is followed by implementation of a necessary structural reforms phase. In the early 80s, most SAPs focused on a narrow range of policies aimed at reducing account deficits. As the debt crisis deepened and it became obvious that the stabilization programs were not working, the US Treasury Secretary, Mr. James Baker came up with a strategy to solve the debt crisis. This was called the 'Baker Plan'. Under this plan, the WB was asked to impose more comprehensive conditions on the debtor countries. By 1990, majority of the countries that had received conditional loans from the IMF also received structural adjustment loans with harsh conditionalities from the Bank. In 1992, the bank's lending for SAPs totaled 5847 million or 27% of its total commitments. More than 70 countries are subjected to 566 IMF and World Bank stabilization and SAPs in the last 14 years. These countries were told that the structural reforms were essential for sustaining growth and economic stability. Faced with the threat of a cut off of external funds Aid needed to service the mounting debts incurred from western private banks in the 1970s, these countries had no choice but to implement the painful measures demanded by the Bank. Fourteen years after the World Bank issued its first structural adjustment loan, most countries are still waiting for the market to "work its magic". Despite global adjustment, the third world's debt burden rose from $785 billion at the beginning of the debt crisis in 1978 to $1.3 trillion in 1992. The structural adjustment loans from the Bank have enabled the third world countries to make interest payments to western commercial banks. Having done this, the Bank went on applying adjustment policies to assure a regular supply of repayments in the medium and long term. Thus, the structural adjustment has brought neither growth nor debt relief, it has certainly intensified poverty. The series of policy measures launched by the Indian government are part of structural adjustment program in India. Government has taken up following measures to implement SAP :

Devaluation of rupee by 23%. New Industrial Policy allowing more foreign investments. Opening up more areas for private domestic and foreign investment. Part disinvestment of government equity in profitable public sector enterprises. Sick public sector units to be closed down.

Reforms of the financial sector by allowing in private banks. Liberal import and export policy. Cuts in social sector spending to reduce fiscal deficit. Amendments to the existing laws and regulations to support reforms. Market-friendly approach and less government intervention. Liberalization of the banking system. Tax reforms leading to greater share of indirect taxes.

All the above men-tioned ingredients of SAP are based on the Anderson Memorandum titled "Trade Reforms in India" dated Nov. 30, 1990 submitted to Government of India by the World Bank. It is interesting to note that this memorandum was not disclosed to the then Prime Minister, Mr. Chandra Shekhar, the then Finance Minister and the Cabinet Secretary by a group of senior officials in the Finance Ministry. Incidentally, all these officials were ex-World Bank and ex-IMF employees. India embarked upon a path of liberalization in the 1980s, whose pace quickened radically after 1985. Two points need to be noted, as a backdrop to India's new liberalization saga. It has been argued that it came at a juncture in the international situation when the second oil-price hike of 1979 had prompted the advanced industrial countries to raise interest rates (nominal) which had a serious, adverse impact on the borrowings by the developing countries, jacking up their debt servicing charges. Secondly, anti-inflationary measures pursued by the advanced capitalist countries extended the impact of recession into the Third World countries. The recession in their markets led to lowered demand for developing country exports further adversely affecting their trade balances. On top of this was the direct impact that the hike in oil prices was to have on India in any case, since crude oil and its products are the single largest item on India's huge import bill. India's deficit on the current account increased throughout the eighties. From the mid-eighties it was pushed into greater reliance on high interest commercial loans from international banks to finance the deficits. The net outcome was that her external debt tripled during this decade of high growth. The above scenario set the stage in 90s for undergoing the medical therapy of the IMF and WB. When these 'reforms' were initiated, the Government denied any pressure from the Bank or IMF but had few takers. But very few believed in it. The Government's claim that they had been independently decided to carried little weight. Later on the Finance Minister told Parliament that the loans of the Bank and IMF carry conditionalities. In fact, the Finance Minister did not disclose about his correspondence with the IMF and the Bank, due to great public pressure, he presented to Parliament the terms of the IMF standby credit of $2.2 billion. But, the same consideration was not applied to reveal the policy conditions accepted under the Structural Adjustment Loan of $900 million by the World Bank. When news of the Bank having access to the 1992-93 budget and the Eighth Five Year Plan document prior to their presentation to Parliament, the government was forced to make them public.

Under SAP, WB is not supervising individual sectors of the Indian economy such as agriculture, social sector and energy sector. The Bank now monitors the entire macro-economy such as balance of payments, fiscal deficit, foreign investment, money supply, etc. The public expenditure reviews are a part of the Bank's conditionalities. Under this review, the Bank not only asks for cuts in expenditure but also gives detailed instructions for cuts in specific sectors. The health budgets in recent years are an example of this. Health, far from being accepted as a basic right of the people, is now being shaped into a saleable commodity. Thereby, excluding those with less or no purchasing power. The existing distortions of health services in India are getting accentuated with the Government following the Bank's agenda on healthcare. The recent budget of 1994-95, of which health care forms just 0.58% is an indication of the government willingness to adopt Bank's policies. In India, the health care agenda is increasingly being set out by the Bank rather than by the people and the Indian state. .

Before and After Adjustment

The World Bank's own study titled, "Adjustment Lending: An Evaluation of Ten Years of Experience" (1988) illustrates that the structural adjustment programs undertaken by 15 Sub-Saharan African countries failed in many areas :

The shape of Gross Domestic Product (GDP) devoted to investment fell rather than rose as intended. Annual economic growth declined. Budget deficits of export earnings that had to be devoted to debt payment increased.