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25 YEARS OF ECONOMIC REFORMS
- Economic reform usually refers to deregulation, or at times
to reduction in the size of government, to remove distortions
caused by regulations or the presence of government, rather
than new or increased regulations or government programs
to reduce distortions caused by market failure.
- The last quarter of the 20 th^ century has seen a wave of
economic policy reforms in the developing world, with one
country after another taking the Liberalization cure, often
imposed by the international financial institutions.
- Economic reforms in India started on 24 July 1991. After
independence in 1947, Indian adhered to socialist policies.
Attempts were made to liberalise the economy in 1966 and
1985. The first attempt was reversed in 1967. Thereafter a
stronger version of socialism was adopted. The second major
attempt was in 1985 by Prime Minister Rajiv Gandhi.
- The process came to a halt in 1987, through 1966 style
reversal did not take place. In 1991 after India faced a
balance of payments crisis, it had to pledge 20 tones of gold
to Union Bank of Switzerland and 47 tones to Bank of
England as part of a bailout deal with the International
monetary fund. In addition the IMF required India to
undertake a series of structural economic reforms.
- As a result of this requirement the government of P.V.
Narasimha Rao and his finance minister Dr. ManMohan Singh
started back through reforms, although they did not
implement many of the reforms the IMF wanted. The new
neo-liberal policies included opening for international trade
and investment, deregulation initiation of Privatization, tax
reforms, the inflation controlling measures.
- Dr. Manmohan Singh, the former Prime Minister of India, was
then the Finance Minister of the Government of India. He
assisted Narasimha Rao and played a key role in
implementing these reform policies. The reforms have
unlocked India's enormous growth potential and unleashed
powerful entrepreneurial forces. Since 1991, successive
governments, across political parties, have successfully
carried forward the country's economic reform agenda.
The last quarter of the 20th century has been a wave of economic policy
reforms in the developing world, with one country after another taking the Liberalization cure, often imposed by the international financial institutions. This wave of reform had been preceded by a quarter-century of state directed effort at economic development, during which time the goals of economic self -reliance and import substitution industrialization were the hallmarks of development strategies in the less developed countries. These goals seemed particularly justified, given the long experience of these countries with colonialism and the agricultural nature of their economies. However, all this seemed to be overtaken by the subsequent surge of liberalization.
Economic reforms in India started on 24 July 1991. After independence in 1947, Indian adhered to socialist policies. Attempts were made to liberties the economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter a stronger version of socialism was adopted. The second major attempt was in 1985 by Prime Minister Rajiv Gandhi. The process came to a halt in 1987, through 1966 style reversal did not take place. In 1991 after India faced a balance of payments crisis, it had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International monetary fund. In addition the IMF required India to undertake a series of structural economic reforms. As a
result of this requirement the government of P.V. Narasimha Rao and his finance minister Dr. Manmohan Singh started back through reforms, although they did not implement many of the reforms the IMF wanted.The new neo- liberal policies included opening for international trade and investment, deregulation initiation of Privatization, tax reforms, the inflation controlling measures.
Dr Manmohan Singh, the present Prime Minister of India, was then the Finance Minister of the Government of India. He assisted. Narasimha Rao and played a key role in implementing these reform policies. The reforms have unlocked India's enormous growth potential and unleashed powerful
entrepreneurial forces. Since 1991, successive governments, across political
In mid-1991, SLR and CRR were very high. It was proposed to cut down the SLR from 38.5 percent to 25 percent within a time span of three years. Similarly, it was proposed that the CRR br brought down to 10 percent (from the earlier 25 percent) over a period of four years
- Interest Rate Liberalisation: Earlier, RBI controlled the rates payable on deposits of different maturities and also the rates which could be charged for bank loans which varied according to the sector of use and also the size of the loan. Interest rates on time deposits were decontrolled in a sequence of steps beginning with longer term deposits, and liberalisation was progressively extended to deposits of shorter maturity
- Greater competition among public sector, private sector and foreign banks and elimination of administrative constraints
- Liberalisation of bank branch licensing policy in order to rationalize the existing branch network
- Banks were given freedom to relocate branches and open specialized branches
- Guidelines for opening new private sector banks
- New accounting norms regarding classification of assets and provisions of bad debt were introduced in tune with the Narasimham Committee Report
- Reforms in Capital Markets: Recommendations of the Narasimham Committee were initiated in order to reform capital markets, aimed at removing direct government control and replacing it with a regulatory framework based on transparency and disclosure supervised by an independent regulator. The Securities & Exchange Board of India (SEBI) which was set up in 1988 was given statutory recognition in 1992 on the basis of recommendations of the Narasimham Committee. SEBI has been mandated to create an environment which would facilitate mobilization of adequate resources through the securities market and its efficient allocation.
- Industrial Policy Reforms: In order to consolidate the gains already achieved during the 1980s, and to provide greater competitive stimulus to the domestic industry, a series of reforms were introduced in the Industrial Policy. The government announced a New Industrial Policy on 24 July 1991. The New Industrial Policy established in 1991 sought substantially to deregulate industry so as to promote growth of a more efficient and competitive industrial economy. The central elements of industrial policy reforms were as follows:
- Industrial licensing was abolished for all projects except in 18 industries. With this, 80 percent of the industry was taken out of the licensing framework.
- The Monopolies & Restrictive Trade Practices (MRTP) Act was repealed to eliminate the need for prior approval by large companies for capacity expansion or diversification.
- Areas reserved for the public sector were narrowed down and greater participation by private sector was permitted in core and basic industries. The new policy reduced the number of areas reserved from 17 to 8. These eight are mainly those involving strategic and security concerns. (Example, railways, atomic energy etc.)
- The policy encouraged disinvestment of government holdings of equity share capital of public sector enterprises.
- The public sector units were provided greater autonomy and professional management that could be helpful for generating reasonable profits, through an MOU(Memorandum of Understanding) between the enterprise and the concerned Ministry, through which targets that the enterprise had to achieve were set up
- There was no requirement to get approval from the Central Government for setting up industries anywhere in the country except those specified under compulsory licensing or in cities with population exceeding1 million. Polluting industries were required to be located 25 kms away from the city peripheries if the city population was greater than 1 million.
- Under PMP, any enterprise had to progressively substitute imported inputs, components with domestically produced inputs under local content policy. However new industrial policy’ abolished PMP for all industrial enterprises. Foreign Investment Promotion Board (FIPB) was set up to speed up approval for foreign investment proposals.
- Trade Policy Reforms: Under trade policy reforms, the main focus was on greater openness. Hence, the policy package was essentially an outward-oriented one. New initiatives were taken in trade policy to create an environment which would provide a stimulus to export while at the same time reducing the degree of regulation and licensing control on foreign trade. The main feature of the new trade policy as it has evolved over the years since 1991 are as follows:
- Freer imports and exports: Prior to 1991, in India imports were regulated by means of a positive list of freely importable items. From 1992, imports were regulated by a limited negative list. For instance, the trade policy of 1 April 1992, freed imports of almost all intermediate and capital goods. Only 71 items remained restricted.
- Rationalization of Exchange Rate Policy: One of the important measures undertaken to improve the balance of payments situation was the devaluation of rupee. In the very first week of July 1991, the rupee was devalued by around 20 percent. The purpose was to bridge the gap between the real and the nominal exchange rates that had emerged on account of rising inflation and thereby to make the exports competitive.
- Partial Convertibility: Partial convertibility can be defined as to convert Indian currency (up to specific extent) in the currency of other countries. So that the flow of foreign investment in terms of Foreign Institutional Investment (FII) and foreign Direct Investment (FDI).
- This convertibility stood valid for following transaction:
- (a) Remittances to meet family expenses
- (b) Payment of interest
- (c) Import and export of goods and services
- (^) Public sector reforms:
- Autonomy to Public sector: There was more sovereignty to selected PSUs referred to as ‘Maharatnas’(CIL, ONGC, NTPC, SAIL & IOL) and ‘Navaratnas’(BEL, HPCL, BPCL, BHEL, GAIL etc.) to take their own decisions.
- De-reservation of Public Sector: The number of industries reserved for the public sector were reduced in a phased manner from 17 to 8 and then to only 3 including Railways, Atomic energy, Specified minerals. This offers opportunities for more areas of investment for the private sector and increased competition for the public sector forcing greater accountability an defficiency.
- Disinvestment Policies: Till 1999-2000 disinvestment was done basically through sale of minority shares but since then the government has undertaken strategic sale of its equity to the private sector handing over complete management control such as in the case of VSNL and BALCO.
IMPACT OF ECONOMIC REFORMS
We have seen landmark shift in Indian Economy since the adoption
of new economic policy in 1991. This had far reaching impacts on all
spheres of life in India. There can be no concrete conclusions about
their impact on Indian people. This turns out to be more of an
ideological debate like capitalism vs Socialism. But there is no doubt
in the fact that those reforms were unavoidable and very
compelling.
The liberalisation was aimed at ending the licence-permit raj by decreasing the government intervention in the business, thereby pushing economic growth through reforms. The policy opened up the country to global economy. It discouraged public sector monopoly and paved the way for competition in the market. The policy, which met with wide opposition from within the Congress and even the domestic industry, was seen as the only way out for India after the balance of payments crisis that brought the country to its knees. However, after the Congress government under PV Narasimha Rao managed to overcome all the opposition and push through the reforms, successive governments too devised similar policies to slowly and surely shed a Nehruvian legacy.
Impact
The size of the economy can often give the first impression of the might of a country. GDP gives the total worth of the goods and services produced in a country in one particular year. India’s GDP stood at Rs 5,86,212 crore in 1991. About 25 years later, it stands at Rs 1,35,76,086 crore, up 2216 percent. In dollar terms, India’s GDP crossed the $2 trillion mark in 2015-16. Currently, the country is ranked ninth in the world in terms of nominal GDP. India is tipped to be the second largest economy in the world by 2050.
Once admonished for its “Hindu rate of growth” – cliché for low rate of economic growth – post-reforms, India remained the second fastest growing economy in the world, behind China until 2015. Especially, between 2005 and 2008, the economy clocked the 9% mark annually. With the NDA government revising the GDP growth figures and China slowing down, India is now being billed as the fastest growing major economy in the world, with a growth rate of 7.6% in 2015-16.
Unlike FDI, FII investment is not for long term and is sensitive to domestic and international volatility. FII inflows and outflows may often reflect a nation’s economic and political stability. In 1992-93, FII inflow stood at a meagre $4.2 million. By 1994-95, the figure had risen to $2.43 billion. However, there was a net outflow of $386 million for the first time in 1998-99. The reason for this may be the political instability and the Kargil War. Another major outflow was recorded in 2008-09 – $9.83 billion – during the global financial crisis. FII inflow rose to $45.69 billion in 2014-15 from $8.87 billion in 2013-14, a 414 percent spike in just one year. In 2015-16, however, there was a net FII outflow of $2.53 billion.
SENSEX:
Though only around small fraction of the Indian population plays in the share market, the ups and downs in the Sensex reflect the prevalent economic and political scenario in the country. The 30-share index was lingering around the 1000- level in 1991 before crossing the 4,000 mark the next year. However, the Harshad Mehta scam brought about a downturn, with markets ending 1992-93 below the 4,000 mark. The Sensex reached the high point of 15,644 by the end of 2007-08, but fell 38 percent to 9,708.50 points by the end of 2008-09. Since then, the Sensex has risen steadily to reach 25,341.86 points by the end of FY 16.
PER CAPITA INCOME:
Per capita income is the average income of every citizen arrived at by dividing the GDP by the country’s population. Though purely a statistical exercise which may not necessarily show the true picture of a country’s development, nevertheless the data makes for an interesting read. Between 1991 and 2016, per capita income rose from Rs 6,270 to Rs 93,293. This is a whopping 1388 percent jump. However, there’s nothing to be euphoric about the number. As RBI governor Raghuram Rajan says, with this number we are nowhere near ending poverty. “...We are still a $1,500 per capita economy. All the way from $1,500 per capita to $50,000, which is where
Singapore is, there is a lot of things to do. We are still a relatively poor economy and to wipe the tear from every eye, one would at least want to be middle-income around $6,000-7,000 which, if reasonably distributed, will have dealt with extreme poverty. And that is two decades worth of work to be even moderately satisfied,” he said in a recent interview to The Times of India.
PURCHASING POWER PARITY:
Purchasing power parity (PPP) gives a comprehensive idea on the standard of living and the cost of living in a particular country. When per capita income of Indians is calculated in terms of PPP, the standard of living has improved for sure. However, the cost of living has risen too. In 1991, per capita PPP was $1,173. In 2014, it rose nearly five-fold to $5,701. Nevertheless, when compared with developed countries, India’s standard of living as well as cost of living is quite low.
SHARE OF AGRICULTURE, INDUSTRY AND SERVICES IN GDP
The post-reform period shows the gradual decline in the agriculture sector’s contribution to the Indian economy. India’s traditional occupation, agriculture now contributes only about 15% to the GDP, down from 29 percent in 1991. The services sector has taken the lead role in propelling the economy at the global stage. The IT sector has been the torchbearer of the service sector in India. Currently, it contributes around 53 percent to the national economy. In the meanwhile,the industrial sector has undergone marginal growth in the last 25 years.
Average growth rate has been a constant since 1991 across sectors, but agriculture has seen a deceleration.
The share of agriculture in domestic economy has declined to about
15%. However, people dependent upon agriculture are still around
55%. Cropping patterns has undergone a huge change, but impact
of liberalization can’t be properly assessed. We saw under series
relating to agriculture that there are still all pervasive government
controls and interventions starting from production to distribution.
Global agricultural economy is highly distorted. This is mainly
because imbalance in economic and political power in hands of
farmers of developed and developing countries. In developed
countries, commercial and capitalistic agriculture is in place which is
owned by influential Agri corporations. They easily influence policies
of WTO and extract a better deal for themselves at cost of farmers
of developing world.
Farming in developing world is subsistence and supports large
number of poor people. With globalization there has been high
fluctuation in commodity prices which put them in massive risk. This
is particularly true for cash crops like Cotton and Sugarcane. Recent
crises in both crops indicate towards this conclusively.
Also there is global Food vs. Fuel confusion going on. Sugar and corn
are used to manufacture ethanol which is used as fuel. In USA Corn
is produced mainly for this purpose, as sugar cane is in Brazil. Now
there are apprehensions that what if converting food into fuel is
more remunerative for producers? More than 1 billion people still
live in hunger, much more are just hand to mouth. It is futile to
expect that free market will take care of these people, who don’t
have any purchasing power. Clearly, Agriculture is biggest market
failure, but is rarely discussed for being so in WTO.
Another global debate born out of globalization is one of GM crops.
Here too powerful MNCs like Monsanto hold the key. USA allows
unhindered use of GM crops, but EU bans it. In India field trails are
going on. (It was discusses here)
On the positive note, India’s largely self-sufficient and high value
distinguished products like Basmati Rice are in high demand all over.
Generally speaking, India is better placed to take up challenge of
globalization in this case. If done in sustainable and inclusive
manner, it will have a huge multiplier impact on whole economy.
Worldwide implicit compulsion to develop Food processing Industry
is another landmark effect of globalization.
Apart from these, Farm Mechanization i.e. use of electronic/solar
pumps, Tractors, combines etc. all are fruits of globalization. Now
moving a step further, Information technology is being incorporated
into agriculture to facilitate farming.
Impact on Services Sector
In this case globalization has been boon for developing countries
and bane for developed ones. Due to historic economic disparity
between two groups, human resources have been much cheaper in
developing economies. This was further facilitated by IT revolution
and this all culminated in exodus of numerous jobs from developed
countries to developing countries. Here US have to jealously guard
its jobs as we guard our agriculture.
IT SECTOR
Software, BPO, KPO, LPO industry boom in India has helped India to
absorb a big chunk of demographic dividend, which otherwise could
have wasted. Best part is that export of services result in export of
high value. There is almost no material exported which consume
some natural resource. Only thing exported is labor of Professionals,
which doesn’t deplete, instead grows with time. Now India is better
placed to become a truly Knowledge Economy.
Exports of these services constitute big part of India’s foreign
Exchange earnings. In fact, the only three years India had Current
Account surplus, I.e. 2000-2002, was on back of this export only.
Banking
Further, in banking too India has been a gainer. Since reforms,
there have been three rounds of License Grants for private banks.
Private Banks such as ICICI, HDFC, Yes Bank and also foreign
banks, raised standards of Indian Banking Industry. Now there is
cut through competition in the banking industry, and public sector
banks are more responsive to customers.
countries such as the US. Post-reforms, per-capita power consumption in India has increased each year. Cumulatively, there has been about 162 percent growth between 1990-91 and 2012-13 – from 291.8 KWh to 765 KWh.
LABOUR FORCE AND EMPLOYMENT :
Labour Force in crores
The labour force in India currently stands at 49.7 crores. In 1991, it stood at 33. crores. More or less two-fifth of population is part of the labour force. The most important fact is that the decline in unemployment rate over the last 25 years is only marginal – from 4.3% in 1991 to 3.6% in 2014. The sectoral composition of labour has witnessed a notable change. The agriculture sector, which is considered India’s backbone, now employs less than 50% of the labour force, while industrial and service sectors have marginally surged ahead.
CAR SALES
With the increase in per capita income, the prosperity of the middle class has also increased for sure. What else describes the rise in car sales in the country. In 1991-92, just over 2 lakh cars were sold. The figure rose to 3, 12,000 by March
- The sales crossed the one million mark in 2003-04. The latest figures show that about 20.3 lakh cars were sold by the end of 2015.
TELECOMMUNICATIONS :
Telecommunication Subscribers in million
The telecom revolution in India can be called the biggest legacy of the post-1991 economy. Telephone, especially wireless, subscription has witnessed exponential growth since the dawn of this century. Telephone connections steadily rose in the initial few years, but could never match the rapid rise of SIM-based mobile subscriptions. In the last eight years, the number of telephone connections has been dipping marginally. Mobile phones have revolutionised the way Indians communicate. In the last 15 years, wireless subscription has grown by a whopping 28,611 percent. As of March 2016, there are more than 103 crore mobile subscribers in the country. Currently, India is the second largest mobile subscribers in the world after China.
Economic reform is a continuing process and not a one-time action. The present NDA government – which recently opened the defence and aviation sector for 100 percent foreign investment – is carrying forward the legacy of the 1991 reforms. With China slowing down, US slowly losing its clout, and the EU weakening, the Indian economy seems better placed to reach new heights.
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