Economic Reforms In India By Tarun Das

MEPP Lectures 4-5-6 Economic Reforms in India Rationale, Scope, Progress and Unfinished Agenda Dr. Tarun Das Professor, IILM Economic Reforms

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Contents of this presentation What do we mean by economic reforms? Why do we need these reforms? How far have we progressed? Where do we want to go? How to prioritize, sequence these reforms with what speed and intensity? What are their likely impact on growth, output and employment? What is our role in the progress of economic reforms?

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1.1 Indian Economy in Pre-Reforms Period  Mixed economy, but too closed  Far behind world wide globalisation  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 and labour  High fiscal deficits and Public Debt  Precarious balance of payments Economic Reforms

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2.1Rationale for Reforms Over control, regulation, licensing and high taxes and duties resulted in : Low efficiency and productivity High transactions cost High cost economy and rent seeking Non-optimal allocation of resources sub-optimal choice of technology and location of industries Low quality but high prices of products Bureaucratic inefficiency and corruption Economic Reforms

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2.2 Core objectives To enhance productivity, efficiency, and international competitiveness of Indian economy  To achieve sustained growth with equity and social justice To impart dynamism to the overall growth process

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2.3 Unique features  Gradual, Step by Step, Evolutionary approach not a Big Bang, Shock Therapy or Revolutionary Approach  General political consensus  Strong emphasis on “human face”  Practically no sacrifice made by people  No write-off / rescheduling of debt Economic Reforms

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2.4 Reorientation of Public Policies  To create enabling environment for publicprivate partnership  Link fiscal incentives to productivity  To streamline public investment  Emphasis on consultations, flexibility, decentralisation, selectivity, monitoring and co-ordination  To repair market failures  To strengthen structures & institutions Economic Reforms

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MAJOR REFORMS

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3.1 Economic Reforms since 1991 Structural Reforms Stabilisation Policies • Reforms in industry and • Fiscal policies infrastructure • Monetary policies • Reforms in trade and external • Exchange rate policy sector • Financial sector reforms • Wage-income policy • Public sector reforms • Tariff policy • Social sector reforms • Administered price • Factor market reforms - Land, Labor, Capital policy

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3.2 Paradigms of Reforms since 1991 Pre-Reforms Period 1.Quantitative licensing on trade and industry 2. State regulated monopolies of utilities and trade 3. Govt control on finance and capital markets 4.Restrictions on foreign investment and technology

Post Reforms Period 1.Abolition of industrial and trade licensing 2.Removal of state monopolies, privati-sation & divestment 3.Liberalisation of financial and capital markets 4.Liberal regime for FDI, portfolio investment, foreign technology

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3.3 Paradigms of Reforms since 1991 Pre-Reforms Period 5.Import substitution and export of primary goods 6.High duties & taxes with multiple rates and large dispersion 7.Sector-specific monetary, fiscal and tariff policies 8.Multiple & controlled interest rates

Post Reforms Period 5.Export promotion and export diversification, no import bias 6.Reduction and rationalisation of taxes and duties 7.Sector-neutral monetary, fiscal and tariff policies 8.Flexible interest rates without any end-use

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3.4 Paradigms of Reforms since 1991 Pre-Reforms Period 9.Foreign exchange control, no convertibility of rupee 10.Multiple and fixed exchange rates 11.Administered prices for minerals, utilities, essential goods 12.Tax concessions on exports and savings

Post Reforms Period 9.Abolition of exchange control, full convertibility on current A/C 10.United and market determined exch.rates 12.Abolition of all administered prices except for few drugs 12.Rationalised and being phased out

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3.5 Paradigms of Reforms since 1991 Pre-Reforms Period 13.Explicit subsidies on food, fertilisers, and some essential items 14.Hidden subsidies on power, urban transport, public goods, POL 15.General lack of consumers protection and other rights

Post Reforms Period 13. No change, budget subsidies on LPG and kerosene introduced 14.No change, but user charges are being rationalised, and subsidies targeted 15.Acts governing consumer rights, IPR, independent regulatory authority

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3.6 Paradigms of Reforms since 1991 Pre-Reforms Period 16.Central planning, discretionary process, high degree of bureaucracy 17.Outdated Companies Act 18. No exit policy for land and labour 19.Outdated legal system

Post Reforms Period 16.Decentralisation, sound institutional framework, reforming civil services 17. No change 18. No change in labor policy, little change in land markets 19. No change

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3.7 Industrial Sector Reforms Status in Dec 2006 Status in June 1991 (a)Govt.licensing required (a)Licensing abolished for most industries which except for 9 industries which account for less accounted for 66% of than 10% of production new investment (b)MRTP Act amended. (b)Restrictions on expansion under MRTP ( c)Many items dereserved. ( c)Reservation of 836 (d)Only four viz.defense, items for SSI units atomic energy,some (d)18 major industries minerals, rail reserved reserved for public sector for public sector.

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3.8 Public Sector Reforms Status in June 1991 Status in Dec 2006 (a)Budget support to (a) Support reduced to PSEs: 1.5% of GDP 0.6% of GDP (b) Price and purchase (b)No price preference, preference for PSEs but purchase ( c) Preferential treatment preference exists for bank credits ( c) No preferential treatment for bank credits (d) No hard budget constraints (d) MOUs strengthened (e) No disinvestment (e) Divestment allowed (f)SICA does not include (f)SICA amended sick PSUs Economic Reforms

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3.9 External Sector Reforms Status in June 1991 (a)Fixed exchange rate determined by RBI (b)QRs on 91% of imports (c)Imports of 55 goods canalised (d)439 items of exports are s.t. export licenses (e)Export taxes on agro products & minerals (f)Rupee not convertible

Status in Dec 2006 (a)Exchange rate is market determined (b)Most QRs removed (c)Most items decanalised (d)Abolished except for minerals & agriculture (e)Abolished (f)Fully convertible on current account

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3.10 External Sector Reforms Status in June 1991 (g)strict Exchange control and FERA (h)Restrictions on foreign investment and technology transfer (i)Restrictions on joint ventures abroad (j)Direct export subsidies on specific sectors (k)High tariff walls

Status in Dec 2006 (g)FERA replaced by FEMA (h)FDI liberalised, no restrictions on technology transfer (i)Liberalised (j)Abolished (k)Significant reduction

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3.11 Financial Sector  Capital markets • Establishment of SEBI as regulator • Liberalisation in primary/ secondary markets  Banking • Major Steps taken for tackling NPAs • Reduction of government equity • Reduction in CRR, SLR & lending rates  Insurance  Opened for private and foreign participation Establishment of IRDA as a regulatory entity Economic Reforms

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3.12 Progress of Financial Sector Reforms Status in June 1991 • Indian firms not allowed to raise funds from foreign stock exchanges • Portfolio investment by foreign investors in Indian companies not allowed • Foreigners not allowed to buy G-secs

Status in Dec 2006 • Indian firms allowed to raise foreign funds by GDR, ADR, FCCBs & offshore funds • FIIs, NRIs and OCBs allowed to buy stocks in Indian markets s.t. overall limit of 49% • FIIs/ NRIs/ OCBs allowed to buy G-secs

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3.13 Fiscal Reforms  Reduction of fiscal deficit  Fiscal Responsibility Act  Simplifying rules and procedures  Strengthening tax administration  Widening tax base & enhancing buoyancy  Rationalisation and Reduction of rates

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3.14 Progress of Fiscal Reforms Status in June 1991 • Fiscal Deficit was financed by: (a) RBI Ad Hoc TBs at 4.6% interest (b) Banks through SLR holdings at 38.5% © Market borrowings (d) Public funds (e) External debt

Status in Sept 2003 (a) Ad hocs replaced by WMAs at market rate of interest (b) SLR reduced to 25% © Govt. securities are sold at market rates (d) Reduction of interest rates for public funds (e) Less dependence on External debt

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3.15 Social Sector  Greater involvement of states  Revamping of poverty alleviation and employment generation programmes  High priority to: • Universal education • Basic health • Drinking water • Sanitation • Women and child development Economic Reforms

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4.1 Second Generation Reforms Emphasis on • Micro, Sectoral and State Levels • Factor Markets- Land and Labour • Agriculture • Targeting of Subsidies • Hard budget constraints and control of contingent liabilities Economic Reforms

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4.2 Agricultural Reforms

Greater thrust on rural infrastructure Review of Essential Commodities Act Higher credit to agriculture Introduction of Kisan credit cards Amendment of Acts relating to agrobased products Setting up Agricultural Export Zones Expansion of futures and forwarding trading to agricultural products Watershed development Economic Reforms

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4.3 Infrastructure New Electricity Act 2003 Reforms in SEBs for Energy audit, commercialisation of distribution and restructuring of SEB Accelerated Power Development and Reform Enactment of Energy Conversation Act 2001 Larger funds for National Highway Development Model BOT schemes for roads/ bridges Corporatisation of DOT and ports Private investment in airports Convergence Act covering telecommunications, IT and broadcasting Economic Reforms

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4.4 Financial sector Establishment of Clearing Corporation Screen based trading in G-securities Replacement of Public Debt Act by Government Securities Act Reduction of govt equity in banks VRS in banks Setting up of ARCs Legislation on securitisation Legislation to facilitate foreclosure in banking sector Economic Reforms

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4.5 Industry • Abolition of SICA and BIFR • • • • • • • •

Competition Commission set up Amending Companies Act Dereservation of SSI sector Petroleum sector liberalised Privatisation of PSEs Amendment in Industrial Disputes Act Amendment in Contract Labour Act Phased decontrol in fertilisers

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4.6 Human Development Greater outlay on social sectors Better micro-credit facilities to women Enhancing social security cover for landless labourers and children in BelowPoverty-Line families Educational loan facilities for students Private Pension Fund set up social insurance for old age Economic Reforms

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4.7 Fiscal Reforms Fiscal Responsibility Act Expenditure control • Downsizing government departments • Reduction of controlled interest rates

Revenue enhancement • • • •

Introduction of VAT at state level Single rate of central excise @ 16% Expansion of service tax Enlarging scope of TDS

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4.8 Future Agenda  Coordinating state level reforms  Accelerated privatisation  Liberalisation of labour and land laws  Strengthening regulation in infrastructure  Development of debt and bond markets  Provident and pension fund reforms  Thrust on state provision of basic needs  Rationalisation of user charges for public utilities

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4.9 Implications for Managers in Government & Public Sector

Need to change our mind set:  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 Economic Reforms

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4.10 Redefining the role of government  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 Economic Reforms

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4.11 Implications for Managers  World is a global village  Knowledge is most valuable asset  Wider choice of resources- domestic/ foreign, debt/ equity/ portfolio etc.  Greater Risk- Currency, exchange rate, interest rate, commodity prices, markets  Emphasis on decentralisation, consultation and risk sharing Economic Reforms

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4.12 To strengthen Systems for  Management information system  Asset-Liability Management  Project appraisal and evaluation  Quality control and inventory management  Auditing, accounting and book keeping  Performance audit  Policy audit  Prediction of sickness Economic Reforms

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4.13 Concluding Remarks  Reforms have made significant progress since 1991.  Fifteen years is too short to complete reforms for a country like India.  Carried to their logical ends, reforms would make India as one of the most dynamic economies of Asia by 2010.  India is “an economic miracle” waiting to happen.  All of us have to play a distinct role in that exciting process of development. Economic Reforms

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5.1 Review Questions 1. (a) What is the rational of economic reforms initiated since June 1991? (b) Indicate the scope and unique features of Indian reforms program. 2. (a) Discuss briefly the paradigms of economic reforms initiated in India since June 1991. (b) What are the basic objectives of these reforms?

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5.2 Review Questions 3. (a) What do you mean by macro stabilisation policies and structural reforms? (b) What are the basic distinctions between stabilisation policies and structural reforms? (c) Discuss the major reforms taken in financial sectors and capital markets.

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5.3 Review Questions

4. (a) Discuss major reforms taken in industrial and external sectors. (b) Some economists advised the government to move towards capital account convertibility with a faster speed. Do we agree with their views? Give reasons for your views. 5. (a) Discuss major reforms taken in public sector enterprises. (b) What is the specific role of the managers in the progress of economic reforms? Economic Reforms

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Thank you Have a Good Day

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