Dr. Tarun Das, Eco. Adviser, Mof

Role of Public Policies and Public Institutions in Market Economy Dr. Tarun Das, Eco. Adviser, MOF

Public Policy by Tarun Das

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Role of Public Policies and Public Institutions in Market Economy Contents 1. Economic Reforms in India 2. Policies and institutions 3. Impact on the economy 4. Concluding observations

Public Policy by Tarun Das

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I.

Economic Reforms in India

•

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1.1 Economic Reforms in India

• Since July 1991 India has initiated wideranging reforms in trade, industry, financial and public sectors. • To improve efficiency, productivity and international competitiveness of Indian industries and to impart dynamism to overall growth process. • Emphasis is on the role of market economy and the so-called LPG (liberalization and privatisation along with globalization). Public Policy by Tarun Das

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1.2 Indian Economy in Pre-Reforms Period  Mixed economy, but too closed  Far behind world-wide globalization  High level of control, licenses and regulation  Monopolistic practices in public utilities  Complex tax regime with high rates

 High tariff walls & QRs on imports  Rigid factor markets-land, labour, capital  High fiscal deficits and public debt  Precarious balance of payments Public Policy by Tarun Das

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1.3 Rationale for Reforms Over control, regulation, licensing and high taxes and duties resulted in : Low efficiency and productivity High transactions cost Corruption and rent seeking Non-optimal allocation of resources Sub-optimal choice of size, technology and location of industries Low quality but high prices of products Bureaucratic inefficiency and red tape Public Policy by Tarun Das

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1.4 Challenges of Public Policy  To break the nexus among vested interests so that reforms can be implemented,  To change the mind-set of all policymakers and bureaucrats to accept change,  To achieve sustained growth with equity and social justice so that fruits of reforms reach everybody,  To involve all stakeholders in the process of development, because we know that no reforms can succeed unless we are able to take the people along with us.

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1.6 Unique Features of Reforms  Gradual, Step by Step, Evolutionary and Cumulative Approach, not a Big Bang, Shock Therapy or Revolutionary Approach  General political consensus  Strong emphasis on “human face”  Sovereignty and nationality constraint  Agency constraint- ideology of party in power  Preference for national-level decentralization  Prioritisation and sequencing of reforms  No write-off / rescheduling of external debt  Practically no sacrifice made by people

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2. Public Policies and Public Institutions

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2.1 Reorientation of Public Policies  To create enabling environment for public-private partnership  To link fiscal incentives to productivity  To streamline public investment  To repair market failures  To strengthen structures and institutions  To emphasis on consultations, flexibility, decentralization, selectivity, outcome, implementation, evaluation, monitoring and co-ordination of policies Public Policy by Tarun Das

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2.2 Redefining the role of Bureaucracy There is a distinct change of mind set of the government officials:  From a controller to an enabler  From a supplier to a facilitator  From an operator to a policy maker  From a regulator to a trustee of social equity and environmental sustainability

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2.3 Redefining the role of govt

 Both well governed state and well functioning markets are essential for high growth and sustainability.  Government and free markets should supplement and complement each other  Govt to withdraw from sectors where private participation is more productive  Scope of government to remain large in social sectors and infrastructure. Public Policy by Tarun Das

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2.4 Markets and Institutions

 Efficient markets are central for rapid and successful economic development.  But the real markets are neither competitive nor perfect. Government’s role is to correct market imperfections by strengthening institutions.  Institutions include organisations, rules, laws, conventions and informal norms.  Institutions play important roles in developing fair, competitive, inclusive, efficient, and integrated markets.  Institutions are also essential for formulating, implementing, monitoring, reviewing, evaluating and updating public policies. Public Policy by Tarun Das

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2.5 Role of Public Institutions

To protect property rights, To regulate market agents, To uphold peace, law and order To maintain macro-economic stability, To ensure social equity and justice, To provide social safety nets, To resolve conflicts. All these help in reducing transactions costs and provide incentives for competition.       

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2.6 Building Efficient Institutions

 Institution building is diverse involving all stakeholders viz. policymakers, corporate bodies and civil society.  It is an evolutionary and cumulative process, and requires open mind by all stakeholders to accept new ideas and innovations and to reward merits.  Most of the institutions that support markets need to be developed by the government for regulating, stabilizing and legitimizing their scope and functions.

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2.7 Institutions for Good Governance Good Governance requires the development and strengthening the following institutions:  Economic and political institutions- Law and order, tax administration, social security systems, regulatory institutions, labour laws.  Independent audit- financial, performance and policy audit.  Independent judiciary,  Free Press,  Private voluntary organisations (NGOs). Public Policy by Tarun Das

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2.8 Progress until now  Significant progress has been made in these respects since 1991.  Indian economy today is more liberal and open, and there is greater participation of people in development.  Regulatory bodies have been set up for ports, telecom, electricity, insurance, pension, (POL under consideration).  Govt desires to set up Competition Commission  Although slow, outdated laws and Acts are being amended.

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2.9 Social Sector Development

 “Growth with social justice” has been basic objective of Indian planning  Several anti-poverty programs are in operations for decades.  Two basic approaches for poverty reduction- Trickle down and direct attack on poverty.  Employment Guarantee Act  Education Cess and Sarva Siksha Yojana  Role of NGOs and SHGs in social sector Public Policy by Tarun Das

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3. Impact of Reforms

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Impact on Growth UNDP Report on Globalization has mentioned that growth under globalization has been jobless, rootless, ruthless,

But, no such adverse effects have happened in India. Public Policy by Tarun Das

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3.1 India emerged as one of the fastest growing economie in 1990- 2001 10.0 10.0 8.0

7.7

6.7

7.4

6.0

6.5 6.3

6.8

4.0

6.2

6.0

5.9

2.0

Ind ia

ep Do m. R

er ia Li b

Ch i le

Ug an da Mo za mb i qu e Ma l ay sia

My an ma r

Ire lan d

0.0 Ch i na

Average growth rate in 1990s (% )

12.0

Country Public Policy by Tarun Das

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3.2 India moved on a higher growth path (Real GDP growth rate in per cent) 9 8 7 6 5 4

8.5 7.8 7.3 7.3

6.9 6.5

5.9

5.6 5.1

6.2

5.8

6.1

4.8 4.4

4.0

3 2

1.3

19

90 19 -91 91 1 9 - 92 92 1 9 -93 93 19 -9 4 94 1 9 -95 95 19 - 9 6 96 19 - 9 7 97 1 9 -98 98 1 9 -9 9 99 20 -0 0 00 20 -01 01 20 - 0 2 02 20 - 0 3 Ap 0 3 r- D 0 4 e 20 c0 4 04 -0 5

1 0

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3.3 Sectoral growth rates and shares in GDP (%) Sectors

GR GR Share in 1980-1990 1992- GDP 2005 1990-91 Agriculture 3.1 2.9 30.9 Industry 7.2 6.3 30.0 Services 6.5 8.0 39.1 GDP 5.5 6.2 100

Public Policy by Tarun Das

Share in GDP 2004-05 20.5 27.1 52.4 100

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3.4 Employment growth rates and shares in India (%) Sectors

Agriculture Industry Services Employment

GR 19831993

GR 19932000

2.2 2.8 2.8 2.7

0.0 2.7 2.2 1.1

Share in Share in Employ. Employ. 1983 1999-00

Public Policy by Tarun Das

63.2 15.6 21.2 100

56.7 17.5 25.8 100

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3.5 Composition of sectoral GDI (%)

A. B. C. D.

Agriculture & allied Industry Services Total GDI

1990-91 8.4 53.0 38.5 100.0

Public Policy by Tarun Das

2002-03 8.9 46.9 44.2 100.0

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3.6 Impact on Financial Sectors Item Mar-96 Mar-98 Mar-04 1.No.of foreign banks 33 42 33 2.New private banks 9 9 10 3.Gross NPA ratio 24.8 16.0 7.2 4.Net NPAs ratio 10.7 8.2 3.0 5.Op. profits ratio 1.6 1.8 2.7 6.Net profits ratio 0.2 0.8 1.1 7.CRAR (Capital adequacy ratio) No. of Banks -- Below 9% 31 6 2 -- 9 to 10% 10 16 1 -- Above 10% 43 71 87 8.Number of banks 84 93 90 . Public Policy by Tarun Das

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3.7 Improvement in Current Account on External Sector (as % of GDP) 1 .8

2

1 .2

1

0 .7

0 -0 .3

-0 .4

-0 .5

19 91 91 19 - 92 92 19 - 93 93 19 94 94 19 -95 95 19 -96 96 19 9 7 97 19 - 98 98 19 -99 99 20 00 00 20 -01 01 20 -02 02 20 03 Ap 03-0 r-D 4 ec 04

-1

19

90

-1 .0

-2 -3

-1 .7

-1 .2

-1 .7

-1 .0 -1 .0

-0 .9

-1 .4

-3 .1

-4

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3.8 Substantial increase in Foreign Investment (US$ bln) 1 2 .5

12

11

in US $ billion

10 8 6 4 .2

4

5 .4

5 .1

5 .9

6 .7 4 .6

2 .3

2 0 .1 0 .1

0 .6

19 90 19 -91 91 19 -92 92 19 -93 93 19 -94 94 19 -95 95 19 -96 96 19 -97 97 19 -98 98 19 -99 99 20 -00 00 20 -01 01 20 -0 2 02 20 -03 03 20 -04 04 -05

0

5 .1 4 .9

6 .0

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3.9 Significant reduction in External Debt Service Ratio (at end March) 40 35 30 25 20

(% of gross current receipts) 3 5 .3 3 0 .2 2 7 .5

2 5 .4 2 5 .9 2 6 .2

2 3 .0 1 9 .5 1 8 .8

1 7 .1 1 6 .2 1 3 .4

15

1 5 .8

1 7 .8 1 2 .3

10 5

19

91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

0

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3.10 Significant reduction in External Debt/GDP ratios (at the end March) 3 8 .73 7 .5 2 8 .7

3 3 .8 3 0 .8 2 7 .0 2 4 .62 4 .32 3 .6

2 2 .12 2 .6 2 1 .1 2 0 .2

1 8 .6 1 6 .7

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

45 40 35 30 25 20 15 10 5 0

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3.11 Reduction in Short Term Debt to Total External Debt Ratio (end March) 1 0 .2

10 8 .3

8

7 .2

7 .0

6 4

5 .4 3 .9

4 .3

5 .4 4 .4

4 .0

4 .4

5 .1

3 .6 2 .8

2

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

0

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3.12 Substantial Build-up of Foreign Exchange Reserves (end March) 160

142

140 113

120 76

80 55

60 40 20

5.8 9.2 9.8

32.5 25.221.7 26.4 29.4 19.3

38.0 42.3

0 -20

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 0 1- 4 M ay

in US $ billion

100

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3.13 Steady Improvement in Import Cover of FER (Number of months) (end March) 25 20

in US $ billion

20

18

15

1 3 .8 1 1 .3

10 5

8 .6 8 .4 5 .3 4 .9

6

6 .5 6 .9

8 .2 8 .2 8 .6

2 .5

19

90 19 - 91 91 19 - 9 2 92 19 -93 93 19 -94 94 19 - 9 6 95 19 -9 6 96 19 - 97 97 19 -98 98 19 -99 99 20 - 0 0 00 20 -0 1 01 20 -0 2 02 20 -0 3 03 20 -0 4 04 -0 5

0

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3.14 Expenditure on social sectors Year

Total Expenditur Expenditur Expend. e on social e on social As % of sectors sectors GDP as % of as % of total GDP expend.

1992-93

17.4

7.8

1.4

2000-01 2005-06

15.5 17.0

11.1 11.5

1.7 2.0

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3.15 Basic Indicators of Human Development-1 Year

Life expectancy at birth (years)

Literacy rate (percent)

1951 1961 1971 1981 1991 2001

32.1 41.3 45.6 50.4 59.4 63.5

18.3 28.3 34.5 43.6 52.2 65.4

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3.16 Basic Indicators of Human Development-2 Year

Birth rate Per 1000

Death rate Per 1000

1951 1961 1971 1981 1991 2001

39.9 41.7 41.2 33.9 29.5 25.8

27.4 22.8 19.0 12.5 9.8 8.5

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Infant mortality rate Per 1000 146 146 129 110 80 68

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3.17 Reduction of Poverty Y ear

P o verty R atios ( % ) N u m ber o f P oo _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ R u ral U rban C om bin ed R u ral U rban _ _ _ _ _ _ _ _ _ _ __ __ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ____ 1 9 7 3-7 4 5 6 .4 4 9 .0 5 4 .9 261 60 1 9 7 7-7 8 5 3 .1 4 5 .2 5 1 .3 264 65 1 9 8 3-8 4 4 5 .7 4 0 .8 4 4 .5 252 71 1 9 8 7-8 8 3 9 .1 3 8 .2 3 8 .9 232 75 1 9 9 3-9 4 3 7 .3 3 2 .4 3 6 .0 244 76 1999 2 7 .1 2 3 .6 2 6 .1 193 67 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ __ __ __ __ __ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

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4 Strengths, Challenges and Prospects

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4.1 Strengths of Indian Economy  Fourth largest economy in terms of PPP    

adjusted GDP after USA, China and Japan Largest pool of technical manpower Largest share of working population Largest English speaking population Huge domestic market with second largest population, democracy, free press, independent judiciary Rich natural resources, well established financial system, wide spread infrastructure, dynamic private sector Public Policy by Tarun Das

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4.2 Illiberal Conclaves  What is less clear is the drawing line between invisible hand of markets and the helping hand of the government.  There are still ‘illiberal conclaves’ such as inflexible land and labour markets, municipalities and corporations, outdated laws and legal procedures, rigid institutional rules and practice.  Govt is in the process of second generation reforms to remove these constraints on growth and development. Public Policy by Tarun Das

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4.3 Concluding Remarks  As first generation reforms take root and second generation reforms unfold, India is emerging as a favourite destination for investment and a land of immense opportunity for all.  India should maintain its open door policy in goods & services production, investment, trade.  Carried to their logical ends, economic reforms would make India as one of the most dynamic economies of Asia by 2010.  India is “an economic miracle” waiting to happen.  All the stakeholders have to play a distinct role in that exciting process of development. Public Policy by Tarun Das

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Thank you Have a Good Day

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