Economic Policy Reforms and the Indian Economy

(Economics Project Report)

Submitted to
Mrs. Eritriya Roy
(Faculty: Economics)

Project submitted by
Name – Pravas Naik
Semester 2nd
Section – A
Roll no. - 119

Hidayatullah National Law University, Naya Raipur – 492002

(Chhattisgarh)

Date of submission – 23/10/2017

 Acknowledgements

I Pravas Naik, feel myself highly elated, as it gives me tremendous pleasure to come
out with work on this topic. I am thankful to my teacher, Mrs. Eritriya Roy who gave
me this topic. I am highly obliged for her guidance in doing all sorts of researches,
suggestions and discussions regarding my project topic by devoting her precious time.

I thank to the H.N.L.U. for providing Computer, library facility. And lastly I would
like to thank my friends and all those persons who have helped me in the completion
of this project.

Name: Pravas Naik

Roll No. – 119
Section - A
Semester II
Date- 23/10/2017
 TABLE OF CONTENTS

I. Acknowledgements
II. Table of contents
III. Introductions
IV. Objectives of the study
V. Methodology

1. India’s Economic Reforms.................................................6-8

a. Reforms in Industrial Policy........................................7

b. Reforms in Trade Policy...............................................7-8
c. Financial sector reforms..............................................8

2. Major Steps of Economic Reforms Taken by Government of India..9-16

a. New Industrial Policy...................................................9-11

b. New Trade Policy..........................................................11-12
c. Fiscal Reforms..............................................................13
d. Monetary Reforms.......................................................14
e. Capital Market Reforms.............................................15
f. Phasing out Subsidies..................................................16
g. Dismantling Price Control..........................................16

3. Conclusion..........................................................................17
4. References...........................................................................18
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INTRODUCTION

India is the second most populous country in the world and also one of the poorest. From
the late 1940s to 1980, India's per capita income grew at an average annual rate of only
two percent. Expansionist economic reforms during the 1980s boosted economic growth
but also unfortunately resulted in high inflation and a balance of payments crisis. As a
consequence, in 1991 the government announced sweeping new changes in economic
policies. Economic Policy Reforms and the Indian Economy evaluates the effects of
those changes and identifies areas of the Indian economy still in urgent need of reform.
After an overview of Indian economic policies and development since independence,
papers focus on the country's fiscal situation, the environment for private economic
activity, education, the reservation of certain activities for small-scale industry, and
determinants of differentials in rates of growth across the different Indian states.
Contributors include respected academic specialists on India and policy reform, high-
level Indian administrators, and present and past policymakers.

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Objectives

The specific objectives or the interrelated objectives of the study are as follows
1. To study India’s economic reform
a. Reform in industrial policy
b. Reform in trade policy
c. Financial sector reforms
2. What Major Steps of Economic Reforms Taken by Government of India

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India's Economic Reforms

The reform process in India was initiated with the aim of accelerating the pace of economic
growth and eradication of poverty. The process of economic liberalization in India can be traced
back to the late 1970s.
However, the reform process began in earnest only in July 1991. It was only in 1991 that the
Government signaled a systemic shift to a more open economy with greater reliance upon market
forces, a larger role for the private sector including foreign investment, and a restructuring of the
role of Government.
The reforms of the last decade and a half have gone a long way in freeing the domestic economy
from the control regime. An important feature of India's reform programme is that it has
emphasized gradualism and evolutionary transition rather than rapid restructuring or "shock
therapy". This approach was adopted since the reforms were introduced in June 1991 in the wake
a balance of payments crisis that was certainly severe.
However, it was not a prolonged crisis with a long period of non-performance. The economic
reforms initiated in 1991 introduced far-reaching measures, which changed the working and
machinery of the economy.1
These changes were pertinent to the following:
1. Dominance of the public sector in the industrial activity
2. Discretionary controls on industrial investment and capacity
expansion
3. Trade and exchange controls
4. Limited access to foreign investment
5. Public ownership and regulation of the financial sector
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.2
Reforms in Industrial Policy
Industrial policy was restructured to a great extent and most of the central government industrial
controls were dismantled. Massive deregulation of the industrial sector was done in order to
bring in the element of competition and increase efficiency. Industrial licensing by the central
government was almost abolished except for a few hazardous and environmentally sensitive
industries. The list of industries reserved solely for the public sector -- which used to cover 18
industries, including iron and steel, heavy plant and machinery, telecommunications and telecom
equipment, minerals, oil, mining, air transport services and electricity generation and distribution
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was drastically reduced to three: defense aircrafts and warships, atomic energy generation, and
railway transport. Further, restrictions that existed on the import of foreign technology were
withdrawn.

Reforms in Trade Policy

It was realized that the import substituting inward looking development policy was no longer
suitable in the modern globalizing world. Before the reforms, trade policy was characterized by
high tariffs and pervasive import restrictions. Imports of manufactured consumer goods were
completely banned. For capital goods, raw materials and intermediates, certain lists of goods
were freely importable, but for most items where domestic substitutes were being produced,
imports were only possible with import licenses. The criteria for issue of licenses were non-
transparent, delays were endemic and corruption unavoidable. The economic reforms sought to
phase out import licensing and also to reduce import duties.
Import licensing was abolished relatively early for capital goods and intermediates which
became freely importable in 1993, simultaneously with the switch to a flexible exchange rate
regime. Quantitative restrictions on imports of manufactured consumer goods and agricultural
products were finally removed on April 1, 2001, almost exactly ten years after the reforms
began, and that in part because of a ruling by a World Trade Organization dispute panel on a
complaint brought by the United States.

Financial sector reforms

Financial sector reforms have long been regarded as an integral part of the overall policy reforms
in India. India has recognized that these reforms are imperative for increasing the efficiency of
resource mobilization and allocation in the real economy and for the overall macroeconomic
stability. The reforms have been driven by a thrust towards liberalization and several initiatives
such as liberalization in the interest rate and reserve requirements have been taken on this front.
At the same time, the government has emphasized on stronger regulation aimed at strengthening
prudential norms, transparency and supervision to mitigate the prospects of systemic risks.
Today the Indian financial structure is inherently strong, functionally diverse, efficient and
globally competitive. During the last fifteen years, the Indian financial system has been
incrementally deregulated and exposed to international financial markets along with the
introduction of new instruments and products.2

Major Steps of Economic Reforms Taken by Government of India

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For the attainment of the above-mentioned objectives, the government of India has taken the
following major steps:
1. New Industrial Policy
Under Industrial Policy, keeping in view the priorities of the country and its economic
development, the roles of the public and private sectors are clearly decided Under the New
Industrial Policy, the industries have been freed to a large extent from the licenses and other
controls. In order to encourage modernization, stress has been laid upon the use of latest
technology. A great reduction has been effected in the role of the public sector.
Efforts have been made to encourage foreign investment. Investment decision by companies has
been facilitated by ending restrictions imposed by the MRTP Act. Similarly, Foreign Exchange
Regulation Act (FERA) has been replaced with Foreign Exchange Management Act (FEMA).3
Some important points of the New Industrial Policy have been highlighted here:
a. Abolition of Licensing: Before the advent of the New Industrial Policy, the Indian
industries were operating under strict licensing system. Now, most industries have
been freed from licensing and other restrictions.
b. Freedom to Import Technology: The use of latest technology has been given
prominence in the New Industrial Policy. Therefore, foreign technological
collaboration has been allowed.
c. Contraction of Public Sector: A policy of not expanding unprofitable industrial
units in the public sector has been adopted. Apart from this, the government is
following the course of disinvestment in such public sector undertaking. (Selling
some shares of public sector enterprises to private sector entrepreneurs is called
disinvestment. This is a medium of privatization.
d. Free Entry of Foreign Investment:
i. In 1991, 51% of foreign investment in 34 high priority industries was
allowed without seeking government permission.
ii. Non-Resident Indians (NRIs) were allowed to invest 100% in the export
houses, hospitals, hotels, etc.
iii. Foreign Investment Promotion Board (FIPB) was established with a view
to speedily clear foreign investment proposals.
iv. Restrictions which were previously in operation to regulate dividends
repatriation by the foreign investors have been removed. They can now
take dividends to their native countries.

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e. MRTP Restrictions Removed: Monopolies and Restrictive Trade Practices Act

has been done away with. Now the companies do not need to seek government
permission to issue shares, extend their area of operation and establish a new unit.
f. FERA Restrictions Removed: Foreign Exchange Regulation Act (FERA) has
been replaced by Foreign Exchange Management
Act (FEMA). It regulates the foreign transactions. These transactions have now
become simpler.4
g. Increase in the Importance of Small Industries: Efforts have been made to give
importance to the small industries in the economic development of the country.
2. New Trade Policy
Trade policy means the policy through which the foreign trade is controlled and regulated. As a
result of liberalisation, trade policy has undergone tremendous changes. Especially the foreign
trade has been freed from the unnecessary controls.
The age-old restrictions have been eliminated at one go. Some of the chief characteristics of the
New Trade Policy are as follows:5
a. Reduction in Restrictions of Export-Import: Restrictions on the exports-imports
have almost disappeared leaving only a few items.
b. Reduction in Export-Import Tax: Export-import tax on some items has been
completely abolished and on some other items it has been reduced to the
minimum level.
c. Easy Procedure of Export-Import: Import-export procedure has been simplified.
d. Establishment of Foreign Capital Market: Foreign capital market has been
established for sale and purchase of foreign exchange in the open market.
e. Full Convertibility on Current Account: In 1994-95, full convertibility became
applicable on current account. Here it is important to clarify the meaning of
current account and full convertibility. Therefore, this has been done as follows:6
Current Account:
Transactions with the foreign countries are placed in two categories: (i)
transaction with current account, for example, import-export, (ii) Capital account
transactions, like investment.
Full Convertibility:
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In short, full convertibility means unrestricted sale and purchase of foreign

exchange in the foreign exchange market for the purpose of payments and receipts
on the items connected with current account. It means that there is no government
restriction on the sale and purchase of foreign exchange connected with current
account. On the other hand, sale and purchase of foreign exchange connected with
capital account can be carried on under the rates determined by the Reserve Bank
of India (RBI),
f. Providing Incentive for Export: Many incentives have been allowed to Export-
oriented Units (EOU) and Export Processing Zones (EPZ) for increasing export
trade.
3. Fiscal Reforms
The policy of the government connected with the income and expenditure is called fiscal policy.
The greatest problem confronting the Indian government is excessive fiscal deficit. In 1990-91,
the fiscal deficit was 8% of the GDP. (It is important to understand the meaning of fiscal deficit
and GDP.) 7
I. Fiscal Deficit: A fiscal deficit means that the country is spending more than its
income.
II. Gross Domestic Product (GDP): The GDP is the sum total of the financial value
of all the produced goods and services during a year in a country. Generally, the
financial deficit is calculated in the form of GDP’s percentage. Presently, the
government of India is making efforts to take it to 4%. Solutions of Fiscal Deficit
In order to handle the problem of fiscal deficit, basic changes were made in the tax system.
The following are the major steps taken in this direction:
a. The rate of the individual and corporate tax has been reduced in order to
bring more people in the tax net.

b. Tax procedure has been simplified.

c. Heavy reduction in the import duties has been implemented.

4. Monetary Reforms
Monetary policy is a sort of control policy through which the central bank controls the supply of
money with a view to achieving the objectives of the general economic policy.

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Reforms in this policy are called monetary reforms. The major points with regard to the
monetary reforms are given below:8
a. Statutory Liquidity Ratio (SLR) has been lowered. (A commercial bank has to
maintain a definite percentage of liquid funds in relation to its net demand and
time liabilities. This is called SLR. In liquid funds, cash investment in permitted
securities and balance in current account with nationalized banks are included.)
b. The banks have been allowed freedom to decide the rate of interest on the amount
deposited.
c. New standards have been laid down for the income recognition for the banks. (By
recognition of income, we mean what is to be considered as the income of the
bank. For example, should the interest on the bad debt be considered as the
income of the bank directions have been issued in this context.
d. Permission to collect money by issuing shares in the capital market has been
granted to nationalize banks.
e. Permission to open banks in the private sector has also been granted.

5. Capital Market Reforms

The market in which securities are sold and bought is known as the capital market. The reforms
connected with it are known as capital market reforms. This market is the pivot of the economy
of a country. The government has taken the following steps for the development of this market:9
a. Under the Portfolio Investment Scheme, the limit for investment by the NRIs and
foreign companies in the shares and debentures of the Indian companies has been
raised. (Portfolio Investment Scheme means investing in securities.)

b. In order to control the capital market, the Securities and Exchange Board of India
(SEBI) has been established.
c. The restriction in respect of interest on debentures has been lifted. Now, it is
decided on the basis of demand and supply.
d. The office of the Controller of Capital Issue which used to determine the price of
shares to be issued has been dispensed with. Now, the companies are free to
determine the price of the shares.
e. Private sector has been permitted to establish Mutual Fund.

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f. The registration of the sub broker has been made mandatory.

6. Phasing out Subsidies

Cash Compensatory Support (CCS) which was earlier given as export subsidy has been stopped.
CCS can be understood with the help of an example.
If an exporter wants to import some raw material which is available abroad for 100, but the same
material is available in India for 120 and the governments wants the raw material to be purchased
by the exporter from India itself for the protection of indigenous industries, the government is
ready to pay the difference of 20 to the exporter in the form of subsidy. The payment of 20 will
be considered as CCS. In addition to this, the CCS has been reduced in case of fertilizers and
petro products.

7. Dismantling Price Control

The government has taken steps to remove price control in case of many products. (Price Control
means that the companies will sell goods at the prices determined by the government.).
The efforts to remove price control were mostly in respect of fertilizers, steel and iron and petro
products. Restrictions on the import of these products have also been removed.10

CONCLUSION

This volume evaluates the effects of those changes and identifies areas of the
Indian economy still in urgent need of reform. After an overview of Indian

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economic policies and development since independence, papers focus on the

country's fiscal situation, the environment for private economic activity, education,
the reservation of certain activities for small-scale industry, and determinants of
differentials in rates of growth across the different Indian states. Contributors
include respected academic specialists on India and policy reform, high-level
Indian administrators, and present and past policymakers. The entire world
economy will benefit from an open, successful Indian economy-not least the
quarter of Indians who live in poverty, and the nation's burgeoning middle class.
This volume offers not only an examination of the progress that has been made, but
also a sense of the problems still to be confronted, with much insight into how to
address them.

REFERENCE

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For my project utilized many interesting sites and encyclopedias a few of which
are-

1. www.Google.com
2. www.yourarticlelibrary.com
3. www.indiainbusiness.nic.in

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