Meaningful Solutions to the Problems of Mass Poverty

that prevails in India I believe can only be found in the

framework of an Expanding Economy.

- Dr Manmohan Singh

ECONOMIC REFORMS IN
INDIA AND ITS IMPACT
ON MACROECONOMIC
PERFORMANCE

GROUP-7
MUSKAN NANDRAJOG (A007)
MAYANK SINHA (A017)
H RAVISANKAR MENON (A027)
GAURAV PAL (A037)
KRISHNA KUMAR (A057)
Need of Economic Reforms
in India
Economic reforms can be seen as a policy shift in an economy
from one to another or ‘alternative development strategies.'

India, along with other developing countries were recently gained

independence were influenced by Socialism.

By the 1970s, it was becoming evident that Socialist and Planned

economies had very slow and had lower growth rates or were
stagnating.

India was undergoing fiscal and balance-of-payment (BoP) crisis

which was induced by First Gulf War (1991).

Due to the crisis, India's foreign debt was on the rise. Also, India
had a fiscal deficit of over 8 per cent of the GDP and a
hyperinflation (over13 per cent) situation.
 Alternative Development Strategies
Planning Model
Most of the developing nations were influenced by socialism
Protectionist economic policies with import substitution
Slow growth rates paved way for the Washington consensus
(1980s)

Washington Consensus
Paved the way for structural reforms
The increased role of market forces and less government
intervention

Mixed Economy
However neither of the extremes – the Washington consensus or
the state-led planned economy seemed fruitful

East-Asian economies stand out in contrast to other western

economies that were following Washington Consensus.

East-Asian economies achieved success as they were able to

strike between the role of the state/government and the
market/the private sector in their economies
 Economic Reforms in India
Fuelled by the fiscal and BOP crisis in 1991, India witnessed the LPG reforms

Obligatory reforms
IMF conditions put forth for India were:
Devaluation of INR by 22%
Reduction in import tariff (130% to 30%)
Excise duty to be hiked by 20% to compensate for revenue shortfalls due to custom cut
Government expenditures to cut down by 10%
Exchange rates to be reflexive of market conditions

LPG - From Regulation to Facilitation

LIBERALISATION – Direction Of Reform - Decreasing influence of state and the increasing influence of free market
PRIVATISATION – Path Of Reform - Everything which includes promotion of the market – de-nationalisation
GLOBALISATION – Goal Of The Reform - Unrestricted cross-border movement of goods, services, capital and labour
force
 Liberalisation
Economic liberalization is the lessening of
government regulations and restrictions in
an economy in exchange for greater
participation by private entities.
European and American economies
liberalized in the 1970s.
China announced its "Open Door Policy"
in the mid-1980s which changed world
trade.
In India, the direction of Economic
reforms is from North to the South, i.e.,
decreasing influence of the State and
increasing influence of the free market.
India is attempting to strike its own
balance of the ‘state-market mix’. The
balance is such that it can never be
branded a blind run to capitalism.
Privatization
Privatization occurs when a government-
owned business, operation, or property
becomes owned by a private, non-
government party.
The objective is often to increase
government efficiency; an implementation
may affect government revenue either
positively or negatively.
UK and US under the inspiration of the New
Right priorities and beliefs took steps towards
privatisation.
India went for privatization in the historic
reforms budget of 1991, also known as 'New
Economic Policy or LPG policy
In order to Liberalise the economy,
privatisation will be the path to reform,
Globalization
Globalization is the spread of products,
technology, information, and jobs across
national borders and cultures. In
economic terms, it describes an
interdependence of nations around the
globe fostered through free trade.
Developing countries also benefit
through globalization as they tend to be
more cost-effective and therefore attract
jobs.
Globalization first started in the 1800s,
got interrupted in the 1930s and then
popularised again in the mid-1980s.
India became one of the founding
members of the WTO and was obliged
to promote the process of globalisation.
India started the process of globalisation
right after the reforms 1991.
LPG: Effects
Before the 90s, states had limited say in decision of private
investments since these decisions were taken by the central
bodies
Public investments were the main determinants of growth
for states
After liberalisation – macroeconomic policies were still the
prerogative of the central govt
However, they could attract private investments through
promotional policies and developing infrastructures
Accordingly, major 15 states post-liberalisation could be
classified into reform-oriented, intermediate reformers and
reform laggers based on their policies

Reform orientation for states was often influenced by the

ruling parties decisions. In the case of AP and TN, ground
policies were similar but the way they were implemented was
different AP openly embraced the reforms while TN due to
huge fragmentation in political parties pursued “by stealth”.
1st Generation Reforms (1991-2000)
Promotion of private sector – de-licensing of industries, simplified
laws for establishing industries
Public Sector reforms – disinvestment and corporatisation
External Sector reforms – Abolishing quantitative restrictions on
imports, floating exchange rate, FEMA instead of FERA
Financial Sector reforms – Reforms in banking and insurance sectors
Tax Reforms – Policies towards Simplifying and modernising,
checking invasions etc.

2nd Generation Reforms (2000-01 onwards)

Factor Market Reforms – Dismantling APM (Administered Price
Mechanism)
The state’s role in reforms increased
Increased spending in social sectors including healthcare and
education

3rd Generation Reforms (2002-07)

Incorporated an inclusive approach with the fully functional
Panchayati raj systems
Focused on inclusive growth and development
 State level response to reforms
Before Reforms After Reforms

States had limited say in decisions of private
investments
Public investment - determined the growth levels
of state
Licensing and resource allocation was under the
central government
States could attract private investments through
promotional policies
Factors such as infrastructure development of
states were decisive
However, macroeconomic policies - remained
prerogative of the central government

Depending on the state's response, they were classified into : reform-oriented, intermediate reformers, and
reforms laggers
Results of these reforms were dependent on state's ruling parties
 Factors Affecting Investments
Cost of availability and means of Other Factors Legal Framework
production Networked infrastructure – roads, Procedures for entry and exit
Average wage electricity, water Labor laws
Natural resources Social Infrastructure – Schools and Degree of law enforcement
Human capital hospitals

Reform-oriented states took initiatives to develop the above-mentioned.

Also, land management was still under state list which was a crucial factor for large scale industries
establishment
However, in a race between states to attract more private investments, state governments offered sales
tax exemptions
This prompted central government intervention in 1999
 Orissa: Mobilizing Mineral Assets To Attract
Investment
The transition from Public sector-led development in the 1980s to greater reliance on private-sector post reforms
State-led Public sector enterprises constituted major investments in the state before reforms.
Industrial policies strengthened economic developments
Major investments were in the mining sector since the region is rich in mineral resources
Team Orissa – under CM’s supervision provides legal and economic advice to investors
Reduced rate of land and electricity and various tax subsidies with special attention to public-private partnerships
Effectiveness of reforms
POSCO plans investment of $12B
Large geographical and social disparities within the states – incidence of poverty in the southern part is thrice that of
the coastal regions
SC – 16% and ST – 22% of the population. However, they share the largest proportion among the poor - 23% and
41% respectively
According to an indicator developed by WB, it is ranked amongst the bottom 3 in terms of the investment climate
Corruption is still perceived as a major problem
KERALA: RELUCTANCE TO REFORM
SOCIAL DEVELOPMENT MODEL
Kerala’s social democratic model has led to sluggish growth
and large deficit accumulation
Remittances from the large migrant communities have held
the economy afloat
KSIDC-an agency to support private and mixed capital
investment projects have not been supported well by their
political bosses
As a result, only a 16% conversion rate of potential investors
was witnessed as against 60% in Maharashtra
A major part of the state’s development has been affected by
the political scenario
The systematic alteration between LDF and UDF have been
impedimental to continuous growth
A high level of political competition has kept the level of
social services high and halted reformist policies
AP: CLAIMING POLICY SPACE AS PART
OF A POPULAR REGIONALIST AGENDA
IT Policy
AP openly embraced liberalization agenda 24-hour electricity connection
Investment scenarios were improved and FDI Exemptions from zoning regulation
was promoted Exemptions from inspections under most labor laws
AP Vision 2020: Scheme launched to realize in exchange for self-certification
specialized infrastructure
Dynamic sectors such as IT, pharma, logistics,
and biotechnology were prioritized
A strong industrial base facilitated sectors like IT
to flourish
AP pro-reform model gained attention from
World bank
Aggressively marketed the state as 'pro-
business' and promoted high-tech sectors
HARYANA: POLICY CONSENSUS FOR
PROMOTING INDUSTRIALISATION
The strategy has been to pursue infrastructure-led
development
Experiences more political stability than Kerala
A major reason for rapid growth – proximity to NCR
Even though there’s an alternation between two parties for
power, both favour the ‘modernization’ approach to
economic development
The state vastly benefitted from the green revolution
during the 60s
In contrast to the national trend, 75% of the production in
states is in the formal sector
Till 1997, the strategy was to offer generous tax benefits to
new investments
Focus shifter to infrastructure development post that
Second Generation Reforms
The second phase has proven more difficult and uneven.
Reforms that were not included in the first phase
Includes public finance reforms, restructuring of public utilities (electricity, water), privatization of public enterprises,
reform of labour laws and the establishment of institutions to regulate a market economy.

Why they are difficult to implement?

Depends more heavily on the cooperation of State governments.
Limitations on the manoeuvring space of State governments, in particular with regard to fiscal powers.
“Grants-in-aid”, by National Finance Commission, has not created incentives for States to maintain fiscal discipline.

Fiscal Responsibility and Budget Management Law

Came into force in 2004.
Required the government to eliminate its current account deficit and reduce its overall budget deficit within 3% of
GDP before 2008.
The act was binding only to Central Government whereas the States’ combined budget deficits contribute to nearly
half of the total deficit.
The effects of Fiscal Responsibility and Budget Management Law were uneven.
States with low per capita income and heavy debt were hardest hit.
The severity of the public finance crisis –with regard to fiscal deficit, varies widely among States.
Orissa
In the late 1990s, the budget deficit was critical (30% of net output). In 2003, the ratio of interest payments to current
income was 32%, higher than the Indian average of 29% and 15% limit recommended. The Government was in difficulty
paying its own employees in this critical situation.

Reform of public finances:

MOU BETWEEN THE ORISSA ADOPTION OF ITS OWN FISCAL INTRODUCTION OF VAT
GOVERNMENT AND THE RESPONSIBILITY AND BUDGET ALONG WITH REDUCED
CENTRAL GOVERNMENT. MANAGEMENT ACT. PUBLIC EXPENDITURE

HIKE IN ROYALTIES CHARGED FREEZE ON SALARIES AND STEPS TO PRIVATIZE

ON THE MINING AND NEW RECRUITMENT OF PUBLIC ENTERPRISES
METALLURGY INDUSTRY CIVIL SERVANTS

Impact of the reforms:

Contributed return to more balanced public finances but did not appear to take into account the social and spatial
disparities that exist in the State.
The absence of mobilization among marginalized groups has made it easier for the government to conduct its policy
of attracting industrial investors.
Andhra Pradesh
In 2002, borrowed money on a large scale from international donors.
The British cooperation agency provided support for structural reforms through financial and technical assistance.
TDP government took pragmatic decision to publicly embrace structural reforms and appropriate them as its own.

Reforms implemented:
RESTRUCTURING FREEZE ON PUBLIC SECTOR HIRING
END TO COSTLY POLICIES OF AND DELEGATION OF SERVICES TO
THE PREVIOUS GOVERNMENT GOVERNMENT, ITS SIZE AND
MODE OF INTERFACE PRIVATE COMPANIES

PROMISE OF ECONOMIC
CLOSURE OF LOSS-MAKING GROWTH AND GOOD
COOPERATIVE SOCIETIES GOVERNANCE

Political scenario and impact of reforms:

Political elites in Andhra Pradesh maintain greater control of the reform process in deciding to launch it and during
implementation.
Very close links existed between industrial and political power in the State.
Liberal economic policies under the TDP regime appealed the most to the “urban entrepreneurial class”.
For other groups, the TDP put in place parallel popular policies that targeted specific categories of the electorate.
Haryana
Development policies followed in the State have often
been in line with the Centre.
Underwent modernization process through public
investment in irrigation, and capital-intensive cultivation.
The economy has industrialised and restructured and
many landowners have diversified their activities in
favour of industry, trade and real estate.
Many owners have sold their land and have bought
plots elsewhere and continue to rely on agriculture.
Other owners moved towards new activities, including
property development, one of the fastest growing
sectors of the Indian economy.
The government, thus develops policies favourable to
industrial development without upsetting their political
support base and farm lobby.
Haryana has been witness to sectarian violence, crimes
against women which involved insufficient dowry for
instance.
Kerala
The state has independent policy stance and strong social
indicators.
The state has political mobilization of the population, has
traditional autonomy and income redistribution through
social policies.
Lack of private investment and economic growth over
several decades caused high unemployment and high
public deficits.
Socialist ideologies and mistrust of the private sector gave
way to negative consequences s, and to the ruling faction
within it.
Policy positions depend increasingly on electoral
opportunism and rather less on ideology.
Comparatively, reforms were brought in more by UDF
which implemented liberal market reforms. UDF also
undertook administrative reforms and austerity measures.
State still has large deficits, but overall performance is
better thanks in part to the growth of certain sectors such
as construction.
Economy is based more on small and medium enterprises
and the sectoral distribution of firms indicates the primacy
of the service sector.
Big Ticket
Reforms in the
last few years
Real State ( Regulation and Development
Act)
Insolvency and Bankruptcy Code
Demonetization
GST
Jan Dhan, Ujjawala Scheme and PM-Kissan
Yojna
FDI reforms
Key Highlights
RTI
MNREGA
Marred by corruptions over 2G spectrum,
commonwealth games
Loss of value of India’s three largest
showpiece oil and gas exploring
companies — RIL and Vedanta (Cairn
Energy) in the private sector and ONGC in
the public sector
Average growth rate of 7.7 per cent but
was 6.6 per cent in 2013-14 when its term
ended.
Major Reforms in detail
Real State ( Regulation and Development Act):
Pathbreaking law has brought tremendous relief to
homebuyers who have been systematically cheated over
the years by real estate developers

Insolvency and Bankruptcy Code: It has enabled

companies to be declared bankrupt and hence allow the
assets to be sold, ensuring that lenders get at least some
of their money back

Demonetization and GST

Ujjawala Scheme, Jan Dhan and PM-Kissan Yojna:

expanded the scope of financial inclusion to large
segments of the urban and rural poor.

Mudra Loans: Micro Units Development and Refinance

Agency promises hassle and collateral-free cheap credit of
10lakhs for self-employment

FDI rule changes: FDI in 2019-20 grew by 14 per cent, a

four-year high, to a record $49.8 billion. Sectors such as
insurance (74%), defence(74%) and real state broking
(100%) are some examples

Disinvestment: The government raised Rs 2,79,622

crore from the disinvestment of public sector
undertakings (PSUs) during 2014-19
Possible Reforms in the
future
Raise non-tax resources by divesting custodian
of enemy property assets, and surplus land from
railways to defense sectors, and bring an
attractive gold amnesty scheme to boost tax
collection

Leverage preferential access to the domestic

market of 1.36 billion consumers to lure them to
India. Learn from the information technology (IT)
and business process outsourcing (BPO) industry

Reform banks: Non-performing assets (NPAs) or

bad loans as a percentage of all advances at PSBs
increased to 15.6% in 2017 from 3.5% in 2008.
Private and foreign banks managed to keep bad
loans below 5% during the same period. The
PSBs should be brought under the Companies
Act, while the Bank Nationalisation Act should be
modified.
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