Indian Economic Reforms and Development

• In 1991, India faced a balance of payments crisis, leading to economic reforms.
• This unit evaluates the reform process and its effects on India.

Introduction

• Since independence, India has adopted a mixed economy, combining capitalist and socialist elements.
• Some argue this led to excessive regulation hindering growth.
• Others say India progressed from stagnation to growth in savings and a diversified industrial sector with food security.
• The economic crisis of 1991, involving external debt and low foreign exchange reserves, prompted new policy measures.
• This chapter examines the crisis background, government actions, and their economic impacts.

Background

• The 1980s' inefficient economic management caused the financial crisis.
• Government revenue sources include taxation and public sector enterprises.
• When spending exceeds income, the government borrows locally and internationally.
• Development policies required high spending to address unemployment, poverty, and population explosion, which didn't generate revenue.
• Spending on consumption instead of boosting exports worsened growing imports.
• By the late 1980s, government spending surpassed revenue, making borrowing unsustainable.
• Essential goods' prices sharply increased.
• Foreign exchange reserves fell critically low.
• India received a $7 billion loan from the World Bank (IBRD) and IMF.
• Loan conditions required India to liberalize its economy by:
  • Removing private sector restrictions.
  • Reducing government involvement.
  • Removing trade barriers.

New Economic Policy (NEP)

• India agreed to the World Bank and IMF conditions and introduced the New Economic Policy (NEP).
• The NEP aimed to create a competitive economy by:
  • Removing entry and growth barriers for firms.
• The NEP included:
  • Stabilization measures: Short-term to correct balance of payments issues and control inflation.
  • Structural reform measures: Long-term to improve economic efficiency and international competitiveness.
  • Policies under three heads were initiated.

Liberalisation

• Rules regulating the economy became hindrances leading to liberalization
• This aimed to end restrictions and open various sectors.
• While some liberalization occurred in the 1980s which included:
  • Industrial licensing
  • Export-import policy
  • Technology upgradation
  • Fiscal policy
  • Foreign investment.
• Reform policies after 1991 were more comprehensive focusing on:
  • Industrial sector
  • Financial sector
  • Tax reforms
  • Foreign exchange markets
  • Trade and investment.

Deregulation of Industrial Sector

• Regulatory mechanisms in India involved:
  • Industrial licensing: Entrepreneurs needed government permission to start, close firms, or decide production quantities.
  • Restrictions on private sector involvement.
  • Reservation of goods for small-scale industries.
  • Controls on price fixation and product distribution.
• Post-1991 reforms removed many of these restrictions.
• Industrial licensing was mostly abolished, except for:
  • Alcohol
  • Cigarettes
  • Hazardous chemicals
  • Industrial explosives
  • Electronics
  • Aerospace
  • Drugs and pharmaceuticals
• Atomic energy generation and core railway activities are reserved for the public sector.
• Many goods previously reserved for small-scale industries are now open.
• Market is allowed to determine prices in most industries.

Financial Sector Reforms

• The financial sector includes:
  • Commercial banks
  • Investment banks
  • Stock exchange operations
  • Foreign exchange market.
• The Reserve Bank of India (RBI) regulates India's financial sector.
• RBI controlled banks' money reserves, interest rates, and lending.
• Reforms aimed to shift RBI's role from regulator to facilitator.
• Allowing financial sector decision-making without RBI consultation.
• Reforms led to private sector banks' establishment, both Indian and foreign.
• Foreign investment limits in banks increased to about 74%.
• Banks meeting conditions could open branches without RBI approval.
• Banks can raise resources from India and abroad.
• RBI retains managerial control to protect account holders' interests.
• Foreign Institutional Investors (FIIs) like merchant bankers, mutual funds, and pension funds can invest in Indian financial markets.

Tax Reforms

• Tax reforms involve changes in government taxation and public expenditure policies.
• These are collectively known as fiscal policy.
• There are two tax types:
  • Direct taxation
  • Indirect taxation
• Direct taxes include taxes on individual incomes and business profits.
• Since 1991, individual income taxes have been reduced due to their high tax evasion.
• Moderate income tax rates are now considered to encourage savings and voluntary income disclosure.
• Corporation tax rates were reduced.
• Efforts have been made to reform indirect taxes (on commodities).
• In 2016, the Indian constitution was amended to allow laws for Goods and Services Tax (GST).
• Introduction of GST led to:
  • Additional government revenue.
  • Reduced tax evasion.
  • 'One nation, one tax, one market'.
• Tax reforms include simplification of procedures and lowered rates to improve taxpayer compliance.

Foreign Exchange Reforms

• The external sector's first major reform was in the foreign exchange market.
• In 1991, the rupee was devalued against foreign currencies to resolve the balance of payments crisis.
• The devaluation led to increased foreign exchange inflow.
• Setting the stage for market-based determination of rupee value.
• Exchange rates are now primarily determined by market demand and supply.

Trade and Investment Policy Reforms

• Trade liberalization aimed to:
  • Increase industrial production competitiveness.
  • Encourage foreign investment and technology transfer.
  • Promote local industry efficiency.
  • Facilitate modern technology adoption.
  • Dismantle quantitative restrictions on imports and exports.
  • Reduce tariff rates.
  • Remove import licensing procedures.
• Quantitative restrictions on imports of consumer and agricultural products were removed by April 2001.
• Export duties have been eliminated to enhance Indian goods' international competitiveness.

Privatisation

• Privatization refers to the transfer of ownership or management of government enterprises.
• Government companies are converted into private entities through:
  • Government withdrawal of ownership and management of public sector companies.
  • The outright sale of public sector companies.
• Selling off a portion of the equity of Public Sector Enterprises (PSEs) to the public is known as disinvestment.
• According to the government, the purpose of privatization is to:
  • Improve financial discipline.
  • Facilitate modernization.
• Privatisation allows private capital and managerial skills to effectively improve the performance of PSUs.
• PSEs are categorized as maharatnas, navratnas, and miniratnas
• Greater operational, financial, and managerial autonomy is granted to profit-making enterprises (miniratnas).

Globalisation

• Globalisation integrates a country's economy with the world economy.
• Globalisation is a set of policies transforming the world toward interdependence and integration.
• Creating networks and activities transcending economic, social, and geographical boundaries:
• Establishing links that ensure events in India can be influenced by happenings in other countries
• "Turning the world into one whole or creating a borderless world"

Outsourcing

• Outsourcing means hiring regular services from external sources, often in other countries.
• These services were previously provided internally (e.g., legal advice, IT, security).
• Outsourcing has grown due to faster communication, especially IT.
• Voice-based business processes (BPO/call centres), record keeping, and other services are outsourced to India.
• Companies in developed countries outsource to India for the cheaper cost with a reasonable degree of skill and accuracy.
• Low wage rates and a skilled workforce have made India a global outsourcing destination.

World Trade Organisation (WTO)

• The WTO was founded in 1995, succeeding the General Agreement on Trade and Tariff (GATT).
• GATT was established in 1948 to:
  • Administer all multilateral trade agreements.
  • Provide equal opportunities to all countries in the international market.
• The WTO's role is to:
  • Establish a rule-based trading system.
  • prevent nations from placing arbitrary trade restrictions.
  • Enlarge production and global trade of services.
  • Ensure optimum utilization of world resources.
  • Protect the environment.
• WTO agreements cover trade in goods and services through:
  • the facilitation of international trade (bilateral and multilateral).
  • The removal of tariff and non-tariff barriers.
  • Provision of greater market access to member countries.
• India has been advocating for fair global rules and safeguards, and liberalization of trade by:
  • removing quantitative restrictions on imports.
  • Reducing tariff rates.

Indian Economy During Reforms: An Assessment

• The reform process has been in place for three decades.
• Gross Domestic Product (GDP) growth measures an economy's performance.
• India experienced rapid GDP growth post-1991
• GDP growth increased from 5.6% (1980-91) to 8.2% (2007-12).
• Agriculture's growth has declined, while the industrial sector reported fluctuations.
• The service sector's growth has increased.
• GDP growth is mainly driven by the service sector.
• There has been a setback in growth rates of different sectors post-1991 (2012-15).
• Although agriculture recorded high growth rate for 2013–14 there was negative growth the following year.
• Service sector: With High growth higher than overall GDP growth 2014-15, and high growth rate of 9.8 per cent.
• Industrial sector steep saw a decline 2012–13: and in the years after it had a positive increase.
• A rapid upsurge in foreign direct investment and reserves was caused from the opening of the economy.
• The increase in foreign investment ( Including foreign direct investment (FDI) and foreign institutional investment (FII) Is from US $100 million 1990-91: US $ 30 billion in 2017-18

Problems with foreign exchange

• The increase in the foreign exchange reserve Was US $6 billion 1990-91: US $ 413 billion in 2018-19.
• India is seen as a India being an exporter of.
  • auto parts
  • pharmaceutical goods
  • engineering goods
  • IT software
  • textiles.
• Rising prices have been kept controlled

Reforms in Agriculture and Industry

• Agriculture’s reforms not having the ability to benefit as growth is decelerating.
• Public investment in agriculture has declined since 1991, infrastructure is an issue including.
  • Irrigation
  • Power
  • Roads
  • Market linkages
  • Research and extension
• Reduction of fertilizer subsidy has led to increase in the cost of production affected small and marginal farmers.
• Agriculture has been experiencing policy changes, for example:
  • Reduction in agriculture imports.
  • Low minimum support price/ lifting of quantitive retractions.
• Adversely affected Indian farmers
• More Indian farmers are facing international competition
• There has been a shift from domestic market production.
• Market towards food grains: Pressurises the price of food grains

Industrial slowdown

• Industrial growth recording slow down: decrease in.
  • Cheaper Imports
  • Inadequate infrastructure investment etc.
• Developing countries are going to open up their economies resulting:
  • Greater flow of goods and capital from developed countries.
  • Vulnerable their industries- Domestic manufacture competition the import.
    • The government fixes an disinvestment target P.S.E/1991(for example )