ECONOMIC REFORMS SINCE 1991
Genesis
- Origin of economic crisis can be traced to inefficient management of Indian economy in 1980s.
- Though the revenue collection was very low, the government has to overshoot its revenue to meet problems like unemployment, poverty and population explosion and to fund development policies.
- Moreover, continued government spending on development programs did not generate additional revenue.
- Government was unable to generate sufficient revenues from internal sources such as taxation.
- Government was spending a large share of its income on sectors that do not yield immediate returns such as social sector.
- Income from PSUs was also insufficient.
- Foreign exchange borrowed from other countries and international financial institutions was being used to meet consumption needs.
- In late 1980s govt. expenditure began to exceed revenues in an unsustainable way. Prices of many essential goods rose sharply.
What government did?
- We approached IBRD & IMF & received $ 7 billion loan
- In return, India was expected to liberalize & open up the economy by
- removing restrictions on private sector.
- removing Trade restrictions.
- Reducing the role of government in many areas.
- India agreed to this and announced New Economic Policy (NEP).
- NEP aimed at creating more competitive environment in the country and removing trade restrictions like barriers to entry etc.
- The set of policies can broadly be divided into 2 groups:
Stabilization Measures:
- Short term measures.
- To control inflation and some of the weakness in the BOP.
Structural Reforms:
- Long term measures
- Aimed at improving efficiency of economy
- Improve competitiveness by removing rigidities in various segments of economy.
- Includes policies strategies of Liberalization, Privatization and their outcome of Globalization.
- Structural reforms or adjustment refuses to measures relating to improvement in productivity of labor and capital.
What are Structural Adjustment Programs?
SAP was designed by World Band & IMF to reduce government budget deficit, remove price controls, free exchange rates and privatize state assets.
LIBERALISATION
- No real economy is ever free of restrictions when some of these restrictions are removed or reduced the country is said to be following a policy of Liberalization, Otherwise, it is said to be following Restrictive policy.
- Industrial licensing was abolished from almost all sectors, such that only industries that are now reserved for public sector are
- Atomic energy
- Railway transport.
- In many industries markets have been allowed to determine prices.
- Financial sector reforms introduced (Banking reforms).
- Major aim
- to reduce the role of RBI form regulator to facilitator of financial sector.
- This led to
- setting up private sector banks
- freedom to setup branches without approval of RBI
- rationalize their existing branch network.
- FIIs allowed to invest in Indian Financial Markets
- Taxation:
- reduction in taxes on individual income as it was felt that high rates of income tax were an important reason of tax evasion.
- Corporation tax – gradually reduced
- To encourage better tax compliance by tax payers many procedures were SIMPLIFIED.
- As a immediate measure to resolve BOP crisis, rupee was devalued against foreign currencies. This led to ↑in inflow of forex.
- Through liberation we have been successful in de-bureaucratization and promoting marketization of system.
Privatisation
- Implies shedding up ownership or management of a government owned enterprise.
- Done in two ways
- withdrawal of govt. from ownership & management of PSU.
- outright sale of PSU.
Disinvestment: It is privatization of PSU by selling a part of equity of PSU to the public.
- Purpose is
- to improve financial discipline
- Facilitate modernization
- Improve performance of PSUs.
- To provide strong impetus to flow of FDI.
Divestment: It refers to total liquidation or sell off of a firms or parts of it a particular company.
Q.1 Structural changes brought in post 1991 period (Privatisation, Liberalisation).
Q.2 Increasing role of Private sector and decreasing role of Public sector in Post – 1991 reforms era.
Q.3 Change in government policies from Pre 1991 to post 1991 phase.
A.3
- Priority given to Public Sector, since it was believed that private will invest only in areas with low risk and short gestation period.
- Therefore Public sector was given work of large scale investment in heavy and basic industries.
- Private were given right to develop consumer goods industries only. Thus public sector was supposed to lead Private sector.
- Interventionist State.
- i.e 1) State to secure adequate livelihood for poor.
- Bring down disparity among masses.
- No free flow of foreign capital investment. If allowed the govt will direct the use of this capital.
- State controlled much of activities in Private sector.
- But in post 1991 phase, public sector has given way to private sector to lead the way. For this, govt. has abolished industrial licensing and now only few sectors are reserved for PSU namely
- atomic energy
- Railway transport.
- State has reduced its intervention in post 1991 phase. It is now providing incentive to private sector and not interfering in its working.
- Pre 1991
- State was protecting small scale Industry CSSD
- no of sectors reserved for it.
- Post 1991
- No. of Sector reserved for SSI
- Government still extending protecting but degree has reduced.
- Pre 1991
- State controlled financial Resources
- Now - Even Foreign financial service providers coming. Opened up various sectors, viz insurance + Restructuring Banking sector.
1) Public Sector
2) Interventionist State
3) Small scale Industry
4) Financial Resource
Critique of Privatization of PSUs.
- In many cases, the Whole exercise of privatization has been hasty & unplanned. Therefore govt failed to realize the best value it could get.
- Undervaluation of assets meant huge losses for the govt.
- If government sells and asset which provides profit more than interest rate prevailing on govt. securities, then government would lose future income by selling that asset .
- Proceeds from disinvestment which were supposed to be generation in backward areas were not for this purpose.
Rather they were used to bridge budget deficit.
- 2001
- on recommendation of Eco Advisory Council
- Labor law flexibility
- Pension reforms based on employee contribution
- VAT & GST & Liberalized FDI inclusive FDI in retail
Second Generation Reforms:
- It refers to major steps being taken in Structural adjustment Program.
- These include
- financial sector reforms
- Insurance sector (opening up) - Raise FDI limit to 49%
- Restructuring of banks – Create a regulatory body for pension funds for profitable investment of these resource.
- Legislative actions
- Amendment of Companies law
- Passing Anti–Money Laundring act
- Passing Competition Act
- Competition commission in place of MRTP Commission.
- Tax Reforms –introduction of VAT strict compliance to existing taxes.
- Social sector reforms.
- Reforms in Agriculture.
- SEZ
- Reforms in agriculture include opening of exports of agriculture Product, removing restrictions on interstate movement of food grains, giving agriculture the status of industry.
- Thus second generation reforms mean that while certain Ist generation reformed have to be carried further, certain new reforms like power sector reforms, agriculture reforms have to be introduced.
Advantages of Liberalization of India
- Liberalization of trade has brought rich dividends to us in several areas.
- With India subscribing to Information Technology Agreement, Computer hardware and telecommunication equipment became accessible to entrepreneurs at international prices.
- It has given us an efficient telecom system.
- It has brought India to the fore front of developing countries providing IT enabled and knowledge based services.
- Liberalization has also improved competitiveness of manufacturing sector eg: Indian automobile component industry and generic drugs industry are becoming front runners internationally.
There has been steady liberalization of FDI policy as well Though some key services have FDI celing, FDI limit has been eliminated in most area
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