Second generation reforms in india ver 4
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This document summarizes India's economic reforms that began in 1991 in response to a fiscal crisis. It describes how prior to reforms, India had a closed, licensed economy with slow growth. The reforms aimed to liberalize trade and investment. Key measures included cutting tariffs and import restrictions, encouraging foreign investment, and reducing the bureaucracy. The reforms accelerated GDP growth. However, issues remained around fiscal deficits, poverty reduction, uneven growth across regions, and sustaining growth impulses. Further "second generation" reforms were needed focused on competitiveness, infrastructure, education, and involving all economic sectors.
Second generation reforms in india ver 4
- 1. Compiled By: Suchismita Dhar: 51/09 Nitin Vohra: 55/09 Ankita Joshi: 50/09
- 2. Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. India also operated a system of central Planning for the economy, in which firms required licenses to invest and develop. The labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted a license to produce and the state would decide what was produced, how much, at what price and what sources of capital were used.
- 3. The government also prevented firms from laying off workers or closing factories. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade. Planning and the state, rather than markets, would determine how much investment was needed in which sectors.
- 4. India started having balance of payments problems since 1985, and by the end of 1990, India was in serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks worth of imports. India had to airlift gold to pledge it with IMF for a loan. From 1950 to 1980, the Indian economy grew at a slow rate of 3.6 percent. This gave rise to foreign borrowing on a small scale. The result was increase in foreign debt and repayment liability. Foreign debt increased from US$23.5 billion in 1980 to $63.40 billion in 1991. Nearly 28% of total export revenue went to service the debt. Lead to Fiscal deficit (expenditure exceeds the revenue)
- 5. Reasons of fiscal deficit Exorbitant expenditures were incurred by the central government's subsidies. The inefficient functioning of many of the central and state public sector enterprises. The multilateral agencies such as IMF and the World Bank insisted that the policymakers undertake structural reforms. Internal debt liability increased to 53% of GDP.
- 6. To combat the critical situation Govt. of India launched an Economic Reform programmed in July 1991. The emphasis of the economic reform programmed was on attainment of macro- economic stability and shifting the Indian economy to a higher growth plan. The core of Indian's economic reform strategy has been, to dismantle the central economic control exercised during the last four decades.
- 7. Key measures Controlling the fiscal deficit. Cutting and rationalizing corporate taxes and personal income tax. Abolishing industrial licensing. Encouraging foreign investment. Liberalization of import rules and cutting import duties. Encouraging exports. Deregulating the capital market.
- 8. Success story of First Generation Reforms: First, the acceleration of GDP growth to -6.7 per cent from the pre-crisis decadal (1980-89) average of 5.6 per cent is remarkable and attributable to reforms. Second, it is noteworthy that in the post-crisis quinquennium, all the major sectors (agriculture, industry, services) grew at a noticeably faster pace than in the pre-crisis decade.
- 9. Aspects of the economic reforms Economist reform has been primarily in the form of economic, liberalization with the aim of de-control, de-regulation and ushering spirit of competition. The basic objective of the economic reforms programmed has been to expose the domestic economy to external competition and give domestic consumers’ wider choices. But nothing has been done to ensure competitiveness of the domestic economy according to experts. The essence of the reform is to increase productivity of all sections of society by making competition free and access to the markets easier. National pride and self esteem are best promoted by ensuring that we have high economic growth and can produce good quality products which can sell all over the world. There is no room in a globalize world economy de-linked from the world trade in foreign investment. If we do not reform rapidly and position ourselves to compete, we are bound to be marginalized. Hence it is through economic reforms that we can keep pace with the fast moving world economy of today.
- 11. Four major areas of the Indian economy which require urgent attention: Fiscal deficit There has not been too much progress in cutting the fiscal deficit. Whatever little the Central government has managed up to 1999 has been cancelled out by the deteriorating fiscal position of the State governments. Since 1999, even the Centre has failed to curb fiscal deficit. The combined fiscal deficit is now near 10 per cent of GDP. High fiscal deficit crowds out private investment and banks' capacity to lend, since the government corners the lion's share of the bank's funds. Fiscal measures to encourage domestic saving and foreign direct investment (FDI) are essential now. Poverty There is no consensus yet on the key question: have the reforms helped the poor? The data put out by the National Sample Survey Organization suggests that poverty rates have remained static, but National Council for Applied Economic Research (NCAER) data show that poverty rates have fallen. But since the rent-losers from economic reforms are entrenched and organised, and the gainers are not, the legitimacy of reforms is being eroded every day. This needs to be set right.
- 12. Growth distribution Growth has been unevenly distributed, especially in terms of regions. Some dynamic States like Maharashtra are sprinting ahead, while the likes of Bihar have stagnated. This could put pressure on the federal system, since the bulk of the poor and rapidly growing population lives in the already populous northern States. The North-South divide (as it is seen globally) is reversed in India, and could upset the polity in the future. Growth impulses The economy's growth impulses were getting weaker, while domestic industry, with exceptions like TVS, is caving in to foreign companies in hostile take-overs. While the government still talks about pushing GDP growth rate to 8 per cent, the harsh reality is that India seems stuck in the 5-6 per cent range during the last four years. Talk cannot be a substitute for action.
- 13. Second Generation Reforms The achievements through economic reforms programmers, thus far may be termed as first generation reforms. Taking lesson from the achievements and failure on some fronts we are entering into the second generation of Economic reforms. Key aspects of second generation reforms are: Reforms process must focus on building competitiveness of the economy and its different sectors. Elimination of subsidies. Reform in public sector undertakings is a necessity for materializing economic reforms. Administrative reforms are a must for the successful campaign for reforms.
- 14. It must be realized that there is urgent need of infrastructural reforms to clear all the hurdles in the way of the development of infrastructure. Improvement in health and literacy among the masses must be emphasized upon. The over-all focus of reforms has to involve all sections of the economy.