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ECONOMIC REFORMS IN

ECONOMIC REFORMS IN INDIA BY Shubham Goel

INDIA

BY Shubham Goel

Period 1947- 1990  The historical discontinuity after independence  The Plan strategy  A nation

Period 1947- 1990

The historical discontinuity after independence

The Plan strategy

A nation building exercise

The experiment with socialism

WHY ECONOMIC REFORMS  A rate of growth of average 3.2 per cent  High population

WHY ECONOMIC REFORMS

A rate of growth of average 3.2 per cent

High population growth denies a significant dent on poverty

A huge public sector with minimum returns

A protective private sector

WHO DID IT? These reforms (1990s) were brought in by a team led by Dr.Manmohan Singh,

WHO DID IT?

These reforms (1990s) were brought in by a team led by Dr.Manmohan Singh, who was Finance Minister at the time, and is currently the Prime Minister.

Philosophy of Reforms  To free the economy from the circumspection of socialist equity in the

Philosophy of Reforms

To free the economy from the circumspection of socialist equity in the form of pervasive state control on production, low productivity, a distorted and dis-functional price system and a

complacent over-protective private sector.

To establish the supremacy of individual and the role of economic freedom

Perspective: year 1990-91  International reserve came down to $ 1.3 billion, less than 1 month

Perspective: year 1990-91

International reserve came down to $ 1.3 billion, less than 1 month import bill, and India was on the verge of default in foreign obligations [ short term debt]

Stagnant exports India’s ratings down

High deficits in domestic budget Public sector banks having large NPA

PSU

incurring huge losses

International Scene  USSR’s disintegration… the currency trouble weakened  Overall confusion on the efficacy of

International Scene

USSR’s

disintegration… the currency trouble

weakened

Overall confusion on the efficacy of command economy

Some east European countries came out of socialist economic structure

Loss of credibility of the ‘command economy’ as disturbing revelation came out on lower productivity and disinformation about planning

Role of IMF  The Washington consensus about the ‘transition economies’  Dismantle command economy structure

Role of IMF

The Washington consensus about the ‘transition economies’

Dismantle command economy structure Reduce the size of government Privatization of state undertakings Reduce and remove budget deficit Make currency stable and current account convertible

Mechanism  Dismantling of the license and permit raj so that the rent-seeking system is abolished

Mechanism

Dismantling of the license and permit raj so that the rent-seeking system is abolished

Minimize the role of the state in production except in some core and strategic areas

Reform of the legal system to end monopoly of any group/ sector

Financial sector reforms

Financial Sector Reforms  Reforms--- change in the budgetary process makes the government accountable--- discipline in

Financial Sector Reforms

Reforms--- change in the budgetary process makes the government accountable--- discipline in revenue- expenditure process

Low inflation- low interest regime

Changes in the banking sector – making the system of bank credit more transparent_ efficient appraisal system and accountability for decision taking

Results of F.S. reforms  Role of capital is appreciated and effort are on to make

Results of F.S. reforms

Role of capital is appreciated and effort are on to make capital cheaper at par world standard

More transparent estimate of the need for investment in the infrastructure sector--- how to mobilize the resources

One estimate puts the requirement as $50 billion

  • equivalent---- role of foreign direct investment as

perceived by the government. Whether FDI is good for

the country is no longer the issue

India Growth rates in 1990s ECONOMIC GROWTH OF INDIA 7 PERCENT REA 0 1 2 3

India Growth rates in 1990s

ECONOMIC GROWTH OF INDIA

7 PERCENT REA 0 1 2 3 4 5 6 1992 8 2000 2002 1998 1996
7
PERCENT REA
0
1
2
3
4
5
6
1992
8
2000
2002
1998
1996
1990
1994

Growth Rates (% p.a)

Growth Rates (% p.a) 1980s v/s 1990s 1980s 1990s Higher Growth (1983-1994) (1993-2000) in 1980s 1990s

1980s v/s 1990s

 

1980s

1990s

Higher Growth

(1983-1994)

(1993-2000)

in

1980s

 

1990s

GDP Per Capita

2.9

4.9

Real Income Per Capita

3.1

4.2

Private Consumption p.c.

1.7

3.6

Private Consumption p.c.

1.2

1.3

 

Real Wages per worker

All India

2.6

4.4

Rural

2.7

4.1

Agricultural Households

2.8

3.1

Agricultural Workers

2.4

3.1

Urban

2.2

4.9

 
India __ international liquidity INTERNATIONAL RESERVES AND 25 1999-Q3 1994-Q3 1997-Q3 1998-Q3 1993-Q3 1995-Q3 1996-Q3 2001-Q3

India __

international liquidity

INTERNATIONAL RESERVES AND

25 1999-Q3 1994-Q3 1997-Q3 1998-Q3 1993-Q3 1995-Q3 1996-Q3 2001-Q3 2000-Q3 10 15 20 5 30 35
25
1999-Q3
1994-Q3
1997-Q3
1998-Q3
1993-Q3
1995-Q3
1996-Q3
2001-Q3
2000-Q3
10
15
20
5
30
35
40
45
FOREIGN DEBT OF INDIA
RESERVES
ISSUED ABROAD
DEBT SECURITIES
SHORT-TERM
COMPONENT
INTERNATIONAL

Source: Joint BIS-IMF-OECD-World Bank Statistics

biggest The drop in in inflation… inflation… 9.5 9.1 7.4 4 1970s 1980s 1990s 2000-4

The biggest

The

biggest drop

drop inin

inflation…

inflation…

9.5 9.1 7.4 4 1970s 1980s 1990s 2000-4
9.5
9.1
7.4
4
1970s
1980s
1990s
2000-4

% decrease in inflation

fastest The rise in in incomes…. incomes…. 70 36 20 13 7 1950s 1960s 1970s

The fastest

The

fastest rise

rise inin

incomes….

incomes….

70 36 20 13 7 1950s 1960s 1970s 1980s 1990s
70
36
20
13
7
1950s
1960s
1970s
1980s
1990s

% rise in per capita income

Real GDP growth rates of selected countries during 1990--- 2000 [ per cent]  China 10.3

Real GDP growth rates of selected countries during 1990--- 2000 [ per cent]

China

10.3

6.0

3.5

1.3

Ireland

7.3

India

USA

Japan

Russia

-4.8

Ukraine

-9.3

NEW GENERATION ECONOMIC REFORMS TELECOM  Telecom sector opened up to the private sector and for

NEW GENERATION ECONOMIC REFORMS

TELECOM

Telecom sector opened up to the private sector and for foreign investors with 74% equity cap

As many as 61 million new phones have been added since 1998-99 which is more than thrice the number of lines added in the preceding five decades

INSURANCE Insurance sector was opened up in August 2000. Insurance Regulatory and Development Authority (IRDA) regulates the insurance business.

in in 2050 India India will be the 3rd largest economy…. 50,000 45,000 40,000 35,000

India inin 2050

India

2050

India will be the 3rd largest economy….

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - US 2003 $ billions
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
US 2003 $ billions
50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - US 2003 $ billions

…..with

the highest growth rate of BRICs

8 7 6 5 4 3 2 1 0 5-Year Period Average Percent Per Annum 2015-20
8
7
6
5
4
3
2
1
0
5-Year Period Average Percent Per
Annum
2015-20
2005-10
2045-50
2025-30
2035-40
Brazil China India Russia
Brazil
China
India
Russia
Reform: Progress & Prospects Prospects Progress so far Infrastructure 4/10 Progress to be slow External Economy

Reform: Progress & Prospects

Prospects

Progress so far

Infrastructure

4/10

Progress to be slow

External Economy

shine

7/10

Will continue to

Privatization

4/10

Selective

disinvestment

Labour Reforms

3/10

Unlikely under UPA

Bureaucracy

3/10

No significant changes

Current position of

Current position of Reforms  The reforms process has been slowed down __ Reasons Inability to

Reforms

The reforms process has been slowed down __ Reasons

Inability to carry out reforms in some crucial sectors like legal infrastructure and education

Resistance by interested groups Lack of political will

Role of powerful bureaucracy as they feel threatened with diminutive public sector

A section of of old system

corporate sector beneficiary

Reforms slowed down?  Low literacy message of reforms not reaching  Lack of genuine administrative

Reforms slowed down?

Low literacy message of reforms not reaching

Lack of genuine administrative reforms at the grass-root levels

Transparency in public policy lacking that creates credibility gap a breeding ground of violence

Need of the hour  Reforms of the infrastructure sector  Education_ universities  Legal system

Need of the hour

Reforms of the infrastructure sector Education_ universities Legal system

A proper perspective of market mechanism

Redefine the role of Government

Conclusion  We are in the middle of the process of reforms….  Only expectations about

Conclusion

We are in the middle of the process of reforms….

Only expectations about the better future

End of discussion

End of discussion

End of discussion