ECONOMIC REFORMS IN INDIA Dr RAJ AGRAWAL Period

ECONOMIC REFORMS IN INDIA: Dr. RAJ AGRAWAL

Period 1947 - 1990 n The historical discontinuity after independence n The Plan strategy n A nation building exercise n The experiment with socialism 2

The Planning era n A Critical Assessment: : n n A rate of growth of average 3. 2 per cent High population growth denies a significant dent on poverty A huge public sector with minimum returns A protective private sector 3

Philosophy of Reforms n n To free the economy from the circumspection of socialist equity in the form of pervasive state control on production, low productivity, a distorted and disfunctional price system and a complacent overprotective private sector. To establish the supremacy of individual and the role of economic freedom 4

Perspective: year 1990 -91 n n n International reserve came down to $ 1. 3 billion, less than 1 month import bill, and India was on the verge of default in foreign obligations [ short term debt] Stagnant exports India’s ratings down High deficits in domestic budget Public sector banks having large NPA PSU incurring huge losses 5

International Scene n USSR’s disintegration… the currency rouble weakened n Overall confusion on the efficacy of command economy n n Some east European countries came out of socialist economic structure Loss of credibility of the ‘command economy’ as disturbing revelation came out on lower productivity and disinformation about planning 6

New Role of IMF n The Washington consensus about the ‘transition economies’ n n n Dismantle command economy structure Reduce the size of government Privatization of state undertakings Reduce and remove budget deficit Make currency stable and current account convertible 7

IMF and new WTO Regime n New WTO regulations make domestic liberalization and globalization an integrated one exercise 8

Mechanism n n Dismantling of the license and permit raj so that the rent -seeking system is abolished Minimize the role of the state in production except in some core and strategic areas Reform of the legal system to end monopoly of any group/ sector Financial sector reforms 9

continued n Reform of the system to allow free market mechanism by n n n Dismantling the administered price mechanism Inducing firms to set own targets of production Removing all artificial barriers to unleash forces of competition Reforms of the tax system Removal of trade barriers 10

Financial sector reforms n n n Fiscal reforms--- change in the budgetary process makes the government accountable--- discipline in revenue-expenditure process Low inflation- low interest regime Changes in the banking sector – making the system of bank credit more transparent_ efficient appraisal system and accountability for decision taking 11

Notes on Banking Crisis n n Delegated screening and monitoring of borrowers on behalf of depositors (mitigate information asymmetries). Transformation of short-term, liquid deposits held by households into illiquid liabilities issued by firms. 12

Results of F. S. reforms n n n Role of capital is appreciated and effort are on to make capital cheaper at par world standard [ GOI yet to fulfill the just demand of the corporate sector] More transparent estimate of the need for investment in the infrastructure sector--- how to mobilize the resources One estimate puts the requirement as $50 billion equivalent ---role of foreign direct investment as perceived by the government. Whether FDI is good for the country is no longer the issue 13

Current position of Reforms n The reforms process has been slowed down__ Reasons n n n Inability to carry out reforms in some crucial sectors like legal infrastructure and education Resistance by interested groups Lack of political will Role of powerful bureaucracy as they feel threatened with diminutive public sector A section of corporate sector beneficiary of old system 14

Reforms__ slowed down? n India’s endemic problems n n Low literacy _ message of reforms not reaching Archaic social structure__ at lower level of society and furthest from the centre of administration exploitation continues Social and economic discrimination are intertwined in the society Lack of genuine administrative reforms at the grass-root levels [panchayat system ]-- 15

Reforms slowed down? _ cont’d n Even when panchayats exist, they are totally dependent on state government for finance, that erodes their power n Emergence of regional groups based on caste Lack of accountability [ corruption index being at level 83 among 133 countries surveyed recently] n A permissive society? ? n 16

Slow reforms n n n Some economic issues— Wide gap between rural and urban areas regarding the availability of public goods like potable water, health services, primary education___ worse situation is that sometime availability is dictated on caste lines [ a MIT study on rural situation in AP , conducted by Dr. A. Banerjee of MIT, USA ] n n No cushion from the lower side regarding social security Transparency in public policy lacking_ that creates credibility gap__ a breeding ground of violence 17

India n Let us see some developments in economic scene 18

India__ Growth rates in 1990 s 19

India__ external sector 20

India__ international liquidity 21

GNP of 12 countries[ as on 2001 ] n n n n USA Japan Germany U. K. France China Italy Canada Spain Mexico Brazil India Pop GNP million b $ Rank 284 127 82 60 59 1272 58 31 40 99 173 1033 1 2 3 4 5 6 7 8 9 10 11 12 9901 4574 1948 1451 1377 1130 1123 662 587 550 529 474 GNP/C Rank Dollars 34870 7 35590 4 23700 20 24230 16 22690 24 890 138 19470 30 21340 26 14860 39 5540 68 3060 89 460 161 22

Real GDP growth rates of selected countries during 1990 --- 2000 [ per cent] n n n China Ireland India USA Japan Russia Ukraine 10. 3 7. 3 6. 0 3. 5 1. 3 -4. 8 -9. 3 23

Need of the hour n Reforms of the infrastructure sector n Education_ universities n Legal system n Sense of accountability n A proper perspective of market mechanism n Redefine the role of Government 24

Need……. n n Spread of innovation Incentive system An effective supervision system as reform process brings fragility also in the financial system. WHY ECONOMIC FREEDOM IS NECESSARY AND FOR THAT A CONGENIAL ATMOSPHERE IS TO BE CREATED __ THAT SHOULD BE THE GOAL OF ECONOMIC REFORM 25

Issue__ Economic Freedom 26

Economic freedom__ parameters n n n n n Trade Policy Taxation Government Ownership Monetary Policy Restrictions on Foreign Investment Restrictions on Banking Wage and Price Controls Property Rights Regulations Black Market 27

Freedom and income per capita 28

Freedom and income 29

Freedom__ bop of some countries[ 2001] 30

Currency __ INR [ a depreciating real exchange rate over time] 31

India’s exports to USA [ Issue is Capital flight] 32

India’s imports 33

Restrictions in bop n n n Import prohibitions applied since 1960 to a wide range of consumer goods The European Commission has received complaints from business The European Commission raised the issue in the framework of the World Trade Organization (WTO) Negotiations led to a progressive elimination of restrictions between 2000 (for priority products) and 2003 Expected additional turnover for EU industry: 2 Billion € 34

Restrictions Country Course of action India WTO dispute settlement system negotiated settlement Korea WTO dispute settlement system panel proceeding Brazil TBR procedure Taiwan Accession to the WTO Ukraine Consultations and the initiation of a dispute settlement procedure under the PCA Mexico Free trade agreement negotiation 35

Global scene n Next few slides we will see the experience of economic transition in former command economies and its impact on several parameters___ a cross-section sample 36

Comparison n We can make comparison with the transition process that started in China ( 1985) and Russia ( 1989 -90) Russia__ lack of experience of running enterprise…. Corruption in privatization of state enterprises…. . Financial mess…. . Emergence of mafia China___ lack of knowledge compensated by allowing foreign capital free run in limited areas ( eastern provinces) __ slow transition___ mess in financial system…. Large scale corruption 37

Growth & agriculture 38

Openness & share of agriculture 39

Cross –section example: growth & openness_ 1990 _97 40

Just for knowledge__ corruption and economic growth 41

conclusion n We are in the middle of the process of reforms…. n Only expectations about the better future 42

End of discussion n n Reference: 1. Prem Sankar Jha, The Perilous Road to Reforms, Rupa & Co. , Calcutta, 2002. 2. World Bank__ World Economic Outlook_ 2002 3. Economic Reforms_ a position paper 43