Reasons for economic reforms
Poor performance of Public Sector
In the 40 years period (1951 – 90), public sector was assigned an important role to work for the economic development of India. However, except for few public enterprises, the overall performance was very disappointing. Considering the huge losses incurred by a good number of public sector enterprises, the Government recognized the need for making necessary reforms.
Inflationary Pressure
There was a consistent rise in the general price level in the economy due to increase in money supply and shortage of essential goods.
Deficient in Balance of Payment
Deficit in BOP arises when foreign payments for imports exceed foreign receipts from exports. Even after imposing heavy tariffs and quotas, there was a sharp rise in imports. On the other hand, there was slow growth of exports due to low quality and high prices of Indian goods in the international market.
Fall in Foreign Exchange Reserve
In 1991, India met with an economic crisis relating to its external debt — the government was not able to make repayments on its borrowings from abroad; foreign exchange reserves, which we generally maintain to import petroleum and other important items, dropped to levels that were not sufficient for even a fortnight. The crisis was further compounded by rising prices of essential goods. All these led the government to introduce a new set of policy measures which changed the direction of our developmental strategies.
Huge Burden of Debts
The expenditure of the government was much higher than revenue. As a result, government had to borrow money from banks, public and from international financial institutions.
Inefficient Management
The inefficient management of the Indian economy.
The government was not able to generate sufficient revenue from internal sources such as taxation, running of public sector enterprises, etc.
Government expenditure began to exceed its revenue by such large margins that it became unsustainable.
At times, the foreign exchange borrowed from other countries and international financial institutions was spent on meeting consumption needs.
Crisis of 1991 Forced India for Financial help from IMF and World Bank
India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF) and received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected India to liberalize and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions between India and other countries. India agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy (NEP).
The New Economic Policy
Main Features of The New Economic Policy
LIBERALISATION
Liberalization means removal of entry and growth restrictions on the private sector.
Liberalization means removal of entry and growth restrictions on the private sector.
The purpose of liberalization was:
Reduction in Industrial Licensing:
The new policy abolished industrial licensing for all the projects, except for a short list of industries (like liquor, defense equipment’s, industrial explosives, etc).
No licenses were needed -
(i) To set up new units; or
(ii) Expand or diversify the existing line of manufacture.
Decreasing in role of Public Sector:
One of the striking features was the substantive reduction in the role of public sector in the future industrial development of the country.
The number of industries, exclusively reserved for the public sector, reduced from 17 to following 3 industries:
Defense equipment’s; Atomic energy generation; and Railway Transport.
De-reservation under small-scale industries:
Many goods produced by small scale industries have now been de-reserved.
The investment ceiling on plant and machinery for small undertakings enhanced to rupees one crore.
In many industries, the market was allowed to determine the prices through forces of the market (and not by directive policy of the government).
Financial Reform
Change in Role of RBI: The role of RBI was reduced from regular to facilitator of financial sector. As a result financial sector was allowed to take decisions on many matters without consulting the RBI.
Origin of Private Banks
The reform policies led to the establishment of private sector banks, Indian as well as foreign. For example, Indian banks like ICICI and foreign banks like HSBC increased the competition and benefitted the consumers through lower interest rates and better services.
Increase in limit of foreign investment:
The limit of foreign investment in banks was raised to around 51 per cent. Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds were now allowed to invest in Indian financial markets.
Ease in Expansion Process:
Banks were given freedom to set up new branches (after fulfillment of certain conditions) without the approval of the RBI.
Tax Reforms
Direct Taxes:
Consist of taxes on income of individuals as well as profits of business enterprises. For example, Income tax (taxes on individual incomes) and Corporate tax (taxes on profits of companies).
Indirect Taxes:
It refer to those which affect the income and property of persons through their consumption expenditure. Indirect taxes are generally imposed on goods and services. For example, sales tax, VAT, Custom duty, etc.
Reduction in Taxes:
Since 1991, there has been a continuous reduction in income and corporate tax as high tax rates were an important reason for tax evasion. It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income.
Reforms in Indirect Taxes:
Considerable reform have been made in indirect taxes to facilitate establishment of common national market for goods and commodities.
Simplification of Process:
In order to encourage better compliance on the part of taxpayers, many procedures have been simplified.
Devaluation of Rupee:
Devaluation refers to reduction in the value of domestic currency by the government. To overcome Balance of Payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange.
Market Determination of Exchange Rate:
The Government allowed rupee value to be free from its control. As a result, market forces of demand and supply determine the exchange value of the Indian rupee in terms of foreign currency.
Removal of Restrictions on Imports and Exports:
Under the New economic policy, quantitative restrictions on imports and exports were greatly reduced. For example, quantitative restrictions on import of manufactured consumer goods and agriculture products were removed from April 2001.
Reduction in Import Duties:
Import duties were reduced to improve the position of domestic goods in the foreign market…...
Relaxation in Import Licensing System: except in case of hazardous and environmentally sensitive industries….
The Import licensing was abolished, except in case of hazardous and environmentally sensitive industries. This encouraged domestic industries to import raw materials at better prices, which raised their efficiency and made them more competitive.
A few examples of public enterprises with their status are as follows:
Maharana’s – (a) Indian Oil Corporation Limited, and (b) Steel Authority of India Limited,
(ii) Navaratnam – (a) Hindustan Aeronautics Limited, (b) Mahan agar Telephone Nigam Limited; and
(iii) Minorants – (a) Bharat Sanchar Nigam Limited; (b) Airport Authority of India and (c) Indian Railway Catering and Tourism Corporation Limited.
Globalization
Globalization, is the process of interaction and integration the national economy with the world economy through removal of barriers on international trade and capital movement.
Positive impacts
1. Greater access to global market.
2. Advanced technology
3. Better future prospects for large scale industries of developing countries to become important player in the international area.
Outsourcing?
Outsourcing refers to contracting out some of its activities to a third party which were earlier performed by the organization.
Outsourcing is one of the important outcomes of the globalization process.
It has intensified in recent times because of the growth of fast modes of communication, particularly the growth of Information Technology (IT)…
With the help of modern telecommunication links, the text, voice and visual data in respect of these-service is digitized and transmitted in real over continents and national boundaries.
India has become a favorable destination of outsourcing for most of the MNC’s because of availability of skilled manpower. For example, Indian Business Process Outsourcing (BPO) companies are already gaining prominence and earning precious foreign exchange.
Some of the services outsourced to India include:
Voice-based business processes (known as BPO or Call Centers);
World Trade Organization (WTO)
Origin of World Trade Organization (WTO)
Prior to WTO, General Agreement on Trade and Tariff (GATT) was established as global trade organization, in 1948 with 23 countries. GATT was set up to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market. WTO was founded in 1995 as the successor organization to the GATT.
The WTO agreements cover trade in goods as well as services, to facilitate international trade.
At present, there are 164 member countries of WTO and all the members are required to abide by laws and policies framed under WTO rules.
India has kept its commitments make to the WTO. India has taken reasonable steps to liberalize trade by removing quantitative restrictions on imports and reducing tariff rates.
Some major functions of WTO
AN APPRAISAL OF LPG POLICIES (ECONOMIC REFORMS)
Arguments in Favor of Economic Reforms
The following are some of the important arguments advanced in favor of economic reforms:
Increase in rate of Economic Growth:
The growth of GDP increased from 5.6 per cent during 1980-91 to 6.1 per cent during 1992-2001. This shows that there has been an increase in the overall GDP growth in the reform period.
Inflow of foreign Investment:
The opening up of the company has led to the rapid increase in foreign direct investment (FDI). Rhe foreign investment (FdI and foreign institutional investment) increased from about US 100 million dollar in 1990-91 to US 150 billion dollar in 2003-04.
Rise in Foreign Exchange Reserves:
Foreign exchange reserves reached the level of 25,186 million dollar at the end of March, 1995 as compared to only 3,962 million dollars in 1989-90. At present, India is the 6th largest foreign exchange reserve holder in the world, with 2,91,300 million dollars at the end of November 2013.
Rise in Exports:
During the reform period, India experienced considerable increase in exports of auto parts, engineering goods, IT software and textiles.
Control on Inflation
Increase in production, tax reforms and other reforms helped in controlling the inflation. The annual rate of inflation reduced from the peak level of 17 per cent in 1991 to around 7,6 per cent in 2012-13.
Increase in role of private Sector:
Abolition of licensing system and removal of restrictions on entry of the private sector, in areas earlier reserved for the public sector, have enlarged the area of operation of the private sector.
Criticism of Economic Reforms
Growing Unemployment:
Though the GDP growth rate has increased in the reform period, but such growth failed to generate sufficient employment opportunities in the country.
Neglect of Agriculture: Reduction of public investment: Public investment in agriculture sector, especially in infrastructure, which includes irrigation, power, roads market linkages and research and extension (which played a crucial role in the Green Revolution), has been reduced in the reform period.
Removal of subsidies: Removal of fertilizer subsidy increased the cost of production, which adversely affected the small and marginal farmers.
Low Level of Industrial Growth:
Due to globalization, there was a greater flow of goods and capital from developed countries and as a result, domestic industries were exposed to imported goods. Cheaper imports replaced the demand for domestic goods and domestic manufacturers started facing competition from imports. For example, cheaper Chinese goods pose a big threat to Indian manufacturers.
Lack of infrastructure facilities: The infrastructure facilities, including power supply, have remained inadequate due to lack of investment
Ineffective Disinvestment Policy:
So we can say that,
The government has always fixed a target for disinvestment of PSUs. For instance, in 1998-99, the target was rupees 5,000 crore, whereas, government was able to mobilise rupees 5,4000 crore.
However, according to some scholars, the disinvestment policy of government was not successful because:
The assets of public sector undertakings (PSUs) were under-valued and sold to the private sector.
Moreover, such proceeds from disinvestments were used to compensate shortage of government revenues rather than using it for the development of PSUs and building social infrastructure in the country.
Ineffective Tax Policy: The tax reduction in the reform period was done to generate larger revenue and to curb tax evasion. But it did not result in increase in tax revenue for the government.
Tariff reduction decreased the scope for raising revenue through customs duties.
Tax incentives provided to foreign investors to attract foreign investment further reduced the scope for raising tax revenues.
Spread of Consumerism:
The new policy has been encouraging a dangerous trend of consumerism by encouraging the production of luxuries and items of superior consumption.
Unbalanced Growth: growth has been concentrated only in some select areas in the services sector, such as telecommunication, information technology, finance, entertainment, travel and hospitality services, real estates and trade, rather than vital sectors, such as agriculture and industry, which provide livelihood to millions of people in the country.
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