Economic Reforms

ECONOMIC REFORMS

CRISIS OF JUNE 1991- ORIGIN OF REFORMS        

Fiscal deficit: 6.6 % of GDP Internal debt: 50% of GDP GNP growth rate: 1.4% Growth rate of agricultural production: -2.8% Growth rate of industrial production: -0.1% Inflation: 13- 14% Depreciation of rupee vis-a-vis US$: 26.7% Current account deficit: 3.1% of GDP

CRISIS OF JUNE 1991- ORIGIN OF REFORMS       

External debt to GDP: 28.7% Foreign exchange reserves: $0.47 billion Imports declined: 19.4% Exports declined: 1.5% Import cover: less than 2 weeks Decline in creditworthiness rating Defaults in international financial obligations

CRISIS OF JUNE 1991- ORIGIN OF REFORMS… NUTSHELL   

Fiscal imbalance Fragile BOP situation Mounting inflationary pressures

(a) Fiscal imbalance:    



Non dvt exp High FD: 6.6% of GDP High RD: 3.3 % of GDP Internal borrowing: 3.5% of GDP in 1980-81 to 49.8% in 1990-91 Interest payment

(b) Fragile BOP:  



 

Current Account deficit: 3.69% of GDP External debt: 12% of GDP in 1980-81 to 28% in 199091 Increase in debt service burden: 10% of current account deficit in 1980-81 to 22% in 1990-91 Decline in foreign exchange reserves Import cover: 10 days

(c) Inflationary expectations:  Second half of 1980s: 6.7%  1990-91: 13-14%

ECONOMIC REFORMS MACRO ECONOMIC STABILISATION   

   

Control over inflation Fiscal adjustment BOP adjustment STRUCTURAL REFORMS Trade & Capital flows reforms Industrial deregulation Disinvestment & Public enterprise reforms Financial sector reforms

MACRO ECONOMIC STABILISATION (I) CONTROL OVER INFLATION   

1990-91: 13% Introducing fiscal & monetary discipline Improving output & supply position

MACRO ECONOMIC STABILISATION (II) FISCAL CONSOLIDATION – Tax reforms  Broadening tax base  Rationalizing tax rates  Targeting black income – Expenditure reform  Cutting wasteful expenditure  Hike in user charges of public utilities

MACRO ECONOMIC STABILISATION (III) BOP ADJUSTMENT  Foreign exchange reserves  Current account deficit

STRUCTURAL REFORMS (I) TRADE REFORMS:    

Liberalisation of import regime Substantial reduction in customs tariff rates Decanalisation of many items of trade Measures to give a thrust to exports

STRUCTURAL REFORMS (I) CAPITAL FLOWS REFORMS:  

Liberalisation of capital flows in form of FDI Replacement of FERA by FEMA

STRUCTURAL REFORMS (II) INDUSTRIAL DEREGULATION  Reduction in industries reserved for public sector  Abolition of industrial licensing  Scrapping the limit on size of companies enforced under MRTP Act  Simplifying & liberalising industrial location policy

STRUCTURAL REFORMS (III) PUBLIC SECTOR REFORMS & DISINVESTMENT: 







Reduction in number of industries reserved for public sector from 17 to 8 Disinvestment of shares of few PSEs in order to raise resources & to encourage wider participation of general public & workers in ownership of PSEs Policy towards sick PSEs to be the same as for the private sector Providing greater autonomy to PSUs through a system of MOU

STRUCTURAL REFORMS (IV) FINANCIAL SECTOR REFORMS   

Reductions in CRR and SLR New private banks allowed to enter Allowing private (domestic and foreign) entry into insurance upto certain limits

POST-REFORM PERFORMANCE

(1) GDP Growth 

Table 1

Table 1 Real GDP Growth Period/ Average Annual Growth Rate (%)

19501980

1980 1990

19911992

19921997

19972002

200203

Real GDP

3.50

5.9

1.3

7.1

5.5

4.0

7.1

8.5

9.7

Population

2.2

2.1

2.0

1.9

1.7

1.7

1.6

1.6

1.6

Real GDP per capita

1.3

3.8

-0.7

5.2

3.8

2.3

5.5

7.9

8.1

Sources: economic survey 2007-08 (growth rates from 2000-02 based on new series with base year 1999-2000)

2004- 2005-06 200605 (P) 07 (Q)

(2) POVERTY REDUCTION   

Table 2 Reduction since 1980 Still a long way to go

Table 2 PERCENTAGE OF POPULATION LIVING IN POVERTY RURAL

URBAN

NATIONAL

August 1951 – November 1952

47.4

35.5

45.3

September 1961 – July 1962

47.2

43.6

46.5

July 1973 – June 1974

56.4

49.0

54.9

July 1977 – June 1978

53.1

45.2

51.3

1983

45.7

40.8

44.5

July 1987 – June 1988

39.1

38.2

38.9

July 1993 – June 1994

37.3

32.4

36.0

July 1999 – June 2000

27.1

23.6

26.1

Target for 2007 (Tenth Five-Year Plan)

21.1

15.1

19.3

Sources: World Bank (2000), Annex Table 1.1

(3) FISCAL PERFORMANCE    

Table 3 Failure to address subsidies Progress in tax reforms High public debt

TABLE 3 FISCAL DEFICIT (% OF GDP) Centre

States

Consolidated

1990-91

6.6

3.3

9.4

1996-97

4.1

2.7

6.4

2002-03

5.9

4.7

10.1

2003-04

4.8

4.4

8.4

2004-05 (Revised)

4.5

3.8

8.3

2005-06 (Budget)

4.3

3.7

7.7

Source: Rao (2005), Table A4, RBI (2005a), Table 11

(4) DOMESTIC SAVINGS AND INVESTMENT  

Table 4 Public sector dissaving

TABLE 4 SAVINGS AND INVESTMENT RATES Sources: Central Statistical Organization (CSO), National Accounts Statistics, 2007 and earlier issues

19901991

20012002

2003-2004

2004-05

2006-07

23.1

23.5

28.1

29.1

34.8

Public

1.1

-2.8

-0.3

2.2

3.2

Household:

19.3

22.8

24.3

22

23.8

Financial

8.3

11.2

11.4

10.3

11.3

Physical

11.0

11.6

12.9

11.7

12.5

Corporate

2.7

3.5

4.1

4.7

7.8

TOTAL PRIVATE

22.0

26.3

28.4

26.8

31.6

Net Capital Inflow Gross Domestic Investment Public

3.2

-0.4

-1.8

-1.00

-1.10

26.3

23.1

26.3

30.1

35.9

10.4

6.0

5.6

7.2

7.8

Household

11.2

12.6

12.9

12.9

12.5

Corporate

4.6

5.1

4.5

10.5

14.5

15.8

18.1

17.4

20

27

Gross Domestic Savings

TOTAL PRIVATE

(5) EXTERNAL SECTOR (5.1) EXPORTS OF GOODS AND SERVICES   

Table 5.1 China versus India Contribution of Software and BPO

TABLE 5.1 EXPORTS 1983

1993

2004

Share in World Merchandise Exports

0.5 (1.2)*

0.6 (2.5)*

0.8 (6.5)*

Share in World Commercial Services Export

-

-

1.9 (2.9)*

*China Source: International Trade Statistics, Tables I.5, I.7 and II.2, Geneva, World Trade Organization, 2005.

(5.2) FOREIGN DIRECT INVESTMENT  

Table 5.2 Modest inflows

TABLE 5.2

US $ MILLION FDI

1990-91

1999-00

2004-05

96

2093

3240

(5.3)OTHER INDICATORS

1990-91 1999-00 2004-05 2005-06 2006 -07 GROWTH OF EXPORTS (%)

9

9.5

23.9

23.4

22.6

GROWTH OF IMPORTS (%)

14.4

16.5

48.5

33.4

24.5

SOURCE: director general of commercial intelligence and statistics

Some additional facts( major characteristics for policies) 1.

2.

3. 4.

Framework of private agriculture based on public investment support in key areas such as irrigation , research and extension Adoption of logic of investment planning aimed at coordinating large scale investment in the so called key sectors of the economy Assigning of leading role to investment under state auspices A complex system of regulatory instruments aimed at conserving foreign exchanges but in course of time developed into monopoly houses

Cont. 1. 2. 3.

Deliberate policy of fostering small and medium industries to help diffuse ownership Use of state power to regulate the inflow of private foreign capital Adoption of a regime of administered price in key sectors to regulate both the instabilities and presumed inequalities of market system.

Cont. 1. 2.

System of industrial licensing and import licenses( analyses?) Choice between import substitution and export promotion oriented strategies

(6) FINANCIAL SECTOR REFORMS     

Interest rates largely deregulated Greater competition from private banks and foreign banks Improved debt recovery and restructuring mechanism Creation of SEBI, National Stock Exchange Monetary Policy more independent and based on indirect instruments

CONCLUSION       

Reform process stalled Attract larger inflows of FDI Push for further liberalization of trade in goods and services in successive WTO rounds Financial sector reforms Fiscal consolidation – Tax and Expenditure reforms Further opening of the economy to external competition Have to move away from protectionism

Emerging issues in the economy       

Agriculture Backwardness of rural areas Infrastructure- lack of adequate infrastructure Education , health and public services-quality External sector-sustainable improvements- but current scenario is rally bad Unemployment- rural unemployment increasing Poverty- 1/3 rd population is below poverty line in eight states