61 ECONOMIC REFORMS AND

Chapter LIBERALISATION
In early 1991, a
India. Most major economic crisis
economlsts are surfaced in The Gulf crisis in the late 1990 sharply accentuated
the economy was the how convinced that this crisis
worst that this country had macroeconomic problems. There was also political instability
berienced since Independence. in the country at this juncture. All these developments
ars, the government has Over the last nineteen together eroded international confidence in the Indian
acroeconomic
ctural reforms. stabilisation andfollowed
has
a policy of
introduced certain economy and, as a result, this country's credit rating in the
international capital market declined steeply. However, it
n this chapter, we shall has to be recognised that the problems of the economy did
discuss:
The reasons for not assume crisis proportions abruptly. These problems, in
economic crisis in
the early 1990s fact, were very much there for years destroying the capacity
Macroeconomic stabilisation
the post-reform period measures introduced in of the economy to cope with any internal or external
. shocks. In the 1970s, the Indian economy was strong
Measures introduced for structural enough to bear much larger and more sustained oil shocks.
economy reforms in the
But by 1990the situation had changed so much that the
" An
appraisal of economic reforms. minor oil shock made disproportionately large impact on the
economy anda macroeconomic crisis erupted in the form
THE ORIGIN OF
of (Usustainable fiscal defici;(3)-Unsustainable çurrent
IN ECONOMIC CRISIS account deficit; and, (3Acceleratíng inflation.
THE EARLY
1990s The Fiscal Imbalance
The
problems of the The fiscal crisis in 1990 was not a coincidence. The
assumed crisis proportions ineconomy in this country
which fiscal situation had deteriorated throughout the 1980s due to
The origin of the crisis is 1991 did not develop suddenly. growing burden of
directly attributable to the
cavalier macro management of the economy non-development expenditure. The gross
fiscal deficit of the Central governmnent which was 5.1 per
1980s which led to large and during the cent GDP in 1981-82, rose to 7.8 per cent in
of
imbalances. The strategy of persistent macroeconomic Since this fiscal deficit had to be met by 1990-91.
its limitations, cannot be development, notwithstanding
blamed for this crisis.
recourse to
borrowings, the internal debt of the Central government
gap between the revenue and The widening increased rapidly, rising from 33.3 per cent of GDP at the
expenditure of the government
resulted in growing fiscal deficits which had to end of T980-81 to 49.7 per cent of GDP at the end of
1990
borrowing at home. Further, the steadily growing be met by 91. This naturally made burden of servicing the
debt
between the income and expenditure of the
difference Interest payments which were 2 per cent of GDPonerous. and 10
economy as a
whole resulted in large current account deficits per cent of total Central government
balance of payments which were financed by
in the 81, rose to 3.8 per cent of GDP and expenditure in 1980
22 per cent of total
from abroad. According to Deepak Nayyar, The borrowing Central government expenditure in 1990-91. How
internal this fiscal situation was, can be alarming
imbalance in the fiscal situation and the external in 1990-91 interest payments had
realised from the fact that
imbalance in the payments situation were closely related, the total revenue eaten up 39.1 per cent of
through the absence of prudence in the macro management collections of the Central
of the economy."" This was, however, not
appreciated
This obviously was an
of the government falling unsustainable situation. government.
The danger
particularly during the 1980s and in an attempt to live into debt-trap was real. The
beyond me ans, the economy was pushed into a deep economic government thus could not persist with its cavalier policy
of growing reliance on
crisis. borrowings to meet steadily increasing
fiscal deficit to which unchecked
growth of non-plan revenue
expenditure was the major contributing factor.
792 Indian Economy

In support of his
Fragile Balance of Payments Situation Martin Memorial contention he quotes from the
The balance of pavments situation was highly
precarious
by I.G. Patel who Lecture, delivered in Cambridge Kiinngsley
in 1991, but this was not unexpected.
The
deficit which was $ 2.1 billion or .35 per cent
current
of
account
GDP in introducedI by Rajiv approvingly described the 1981
'New Gandhi in the
1980-81 rose to §9.7 billion or 3.69 per cent of
GDP in
to be
years as the
policy had moved the Economic Policy'precediThisng newone andrefoarmhalts
1990-91. These continuously growing deficits had
consequence outward and inward Indian economy toward economic
Panagariya emphasisescompetition
abroad and as a
the shift in thethe end iofncre1980s. ased
financed by borrowing from by
GDP at the
India's external debt rose from 12 per cent of
end of 1980-81 to 23 per Cent of GDP at the end of 1990
increase in
Statement, 1990,towards
large-scale
policy. This policy provided o liberalis Industrial
ation ofi Policy
and external liberalisation compelling evidence thatindustrial
91. This stead1ly growing external debt led to an
account had gained
debt service burden from 10 per cent of current internal
reveipts and I5 per cent of export carnings in 1980-81 to
acceptance at least a year
before
crisis. However, not being able to the considerable political
balance of
might react, the politicians were predict how the payments
22 per cent of current accOunt receipts and 30 per cent of
Cxport camings in l990-91. These mounting strains during
the 1980s stretched to the breaking point in 1991 due to the their conversion openly. "But they still afraid to electorate
were sufficientlyoannounce
of the need for change to
Gulf crisis. The balance of payments position was on the
brink of disaster as in mid-January I991 and again in markets in larger steps than had
move forward convinced
to open the
late June 1991 the level of foreign exchange reserves In his own study, Panagariya been the case in the past."
since 1988 as the phase of prefers to termn the
dropped to levels which were not sufficient tofinance
bimself admits that the 1991-92 economic reform. Howeverperiohad
imports of even ten days. liberalization was substantiallu
at variance from the
Mounting Inflationary Pressures Whereas piecemeal
the prior liberalization hadmeasures preceding it
The price situation was apparently not ala-ming during the essential been undertaken within
the second half of the 1980s as the average rate of inflation
framework of investment, import licensing
and price and distribution controls,
that framework and moved the 199l reform abandonet
was 6.7 per cent per annum in terms of the wholesale price
some way toward replacing it
index. However, the rate of inflation rose to 10.3 per cent with the market mechanism.
in 1990-91. In terms of the consumer price index, the rate backlash still compelled Finance Although the fears of political
of inflation climbed to 11.2 per cent per annum which to represent the reforms as theMinister Manmohan Singh
policies, the actual meas ures continuation
of the nast
was certainly a cause for concern. However, the most
disquieting feature of this inflationary situation was that represented
renunciation of the old policy framework andcomplete brought
the prices of foodrose substantially in spite of three good liberalisation out in the open."> It is precisely
because of
monsoons in a row. According to Deepak Nayyar, these this reason that in most of the
studies on
inflationary pressures in the economy did not surface out the process of economic reforms is Indian economy.
of the blue. The build-up was attributable to the large
assumed to have
started in 1991. This is the approach that we shall also
deficits, which were inevitably associated with a monetisation follow in the present chapter.
of budget deficits and an excessive growth of money The process of economic reforms undertaken by the
supply. This liquidity overhang, in conjunction with real P.V. Narasimha Rao government consisted of two distinct
disproportionalities and underlying supply demand imbalances strands - macroeconomic stabilisation and structura!
was bound to fuel inflation."2
reforms. While stabilisation deals with demand
management, structural reforms deal with sectora!
ECONOMIC REFORMS IN INDIA adjustments designed to tackle the problems on the supply
side of the economy.
It is generally agreed in studies on Indian economy
that the process of economic reforms was initiated in India MACROECONOMIC STABILISATION
by the government of P.V. Narasimha Rao in 1991l with the
announcement of a number of measures for liberalizing the
economy by the then Finance Minister Manmohan Singh. Macroeconomic stabilisation (often called just
However, Arvind Panagariya has argued that the process of stabilisation) involves returning to low and stable inflation
economic reforms was initiated during the second half of and a sustainable fiscal and balance of payments position.
1980s under the stewardship of Prime Minister Rajiv Gandhi. Stabilisation is necessary to overcomea crisis but it assumes
aspecial importance if structural reforms are also introduced
 Economic Reforms and Liberalisation 793

with.stabilisation.
together This isbecause structural reforms were not
accretion of foreign exchange reserves which
short
addto
macroeconomic pressures. example,
For deficits inin the
oftenrun, trade liberalisation may increase the sterilised. This naturally fuelled inflation andthe
wholesale
cent. In 1992-93. however.
balance of payments and financial sector price index rose by 13.7 per
reforms may and industrial production
agricultural growth was satisfactorymodest
worsen fiscal position by raisingthe cost of at a rate. As a result,
Therefore, stabilisation public borrowing. also increased though rather cent. On the demand
must accompany structural reforms net national product rose by 5.0 percautious approach and
and stabilisation policies have to be bold and effective,
side, the government followed a by only 14.8 per cent.
otherwise extra macroeconomic strains generated in the (M,) rose
thus the Supply of money Central government was also
reforms process can disrupt the latter completely. Vijay The fiscal deficit of the of GDP. These disinflationary
Joshi and L.M.D. Little have argued, In the longer run, cent
brought down to 5.3 per impact on the price situation and
structuralIreform1is as helpful for stabilisation asstabilisation Imeasures did make some to around 7.0 per cent
at the
is for structural reform. In the absence of reform, losses declined wholesale
the rate of inflation the
even in 1992-93,indicates
1993. However, that
afpublic enterprises would continue to burden the budget; beginningof per cent which
10.1 In
de restrictions would hamper the growth of exports; price index rose
by
only for a very short period.that
was it seems
and compulsory government capture of private savings respite from inflation -1993-94 and 1994-95,enforce much
years
would erode fiscal discipline. >* the next twogovernment did not attempt to
thus rose
the Central discipline. The fiscal deficit as much
The macroeconomic stabilisation programme adopted fiscal and monetary and remained
by the government consisted of the following measures: per cent of GDP in 1993-94 Money supply (M)
to 7.0 1994-95.
IControl of inflation; of GDP in account
in 1993-94 on deposits
as 5.7 per cent to 18.4 per cent
2.Fiscal correction; and growth accelerated both demand
increase in the amount of change in 1994-95 and
3Amproving the balance of payments position. of sharp
This situation did
not
increased at the rate
and currency. supply of money
Control of Inflation consequence, the clearly reflect
as a annum. These facts
was above 10 per cent per policies of the
The rate of inflation in 1990-91 of 22.4 per fiscal and monetary
rate
brought down on the one casualness in the circumstances, the inflation
(cent per annum. This could be monetary discipline in the government. Under the
hand by introducing fiscal and improving output and cent in 1994-95.
rose to 12.6 per 1995-96 due to
economy and on the other by government 's however, changed in down
position. It seems that the 1991-92, The situation,
growth. The inflation camearound
supply on both the fronts. In moderated money supply rate of
achievements are modest level, the 1996 was running at a
failed to increase over the 1990-91 sharply and in January
while output of large
rose by 20.6 per cent as a result
money supply
Box 61.1
India
Economic Reforms in

Three aspects
early 1990s
Macroeconomic crisis of the
Fiscal imbalance
payments situation
Fragile balance orf
Inflationary pressures
necessary
economic reforms
The crisis made
strands of reforms Management
Two distinct - Demand
Macroeconomic Stabilisation
1 Control of inflation
Fiscal adjustment
adjustment
Balance of payments Management
ctural Adjustments - Supply-side
rade and capital flows reforms
hdustrial deregulation
enterprises reforms
isinvestment and public
nancial sector reforms
 794 Indian Economy

of slower monetary 2010 to October 25, 201|.

5per cent. This was mainly the result On
growth, faster growth of output, a freeze on fuel prices and was raised to 8.50 percent and October 25, repo rate
non-revision of administered prices despite cost increases. cent. However, because of reverse repo 2011,
rate to T.50 per
dieconomi
ty intowerethec slsystowdown,
money (M,) by was felt to pump in more
During 1996-97 the expansion of broad
target of 15.5 - 16.0
16.2 per cent was marginally above the prices also remained
the rep0 and reverse repo liquirates em.
a
need
respectively on Aprilreduced17, toTher8.0eforeper.
cent and 7.0 per
per cent stipulated for the year. The
political
fuel
considerations. Hence, the
cent
frozen on account of Fiscal Adjustment
average annual inflation rate
remained a modest level of 2012.
4.6 per cent. In 1997-98, the
supply of M, increased by According to a widely
circles, fiscal adjustment is held
necessaryopinforiondealing
around 14.0 per cent. in
18.0 per cent. Fuel prices rose by
However. prices of food articles
per cent. As a
recorded only
result,
a modest
the inflation rate
twin problems of high domestic
in the balance of payments.inflatideficit goverwinment
on andoflargethe deficits th the
increase of 3.0
remained at 4.4 per cent. government was less than 4
per
Fiscal
cent of GDP at
During the vears 2000-01 to 2010-l1,
the years of of the 1970s. It,
however, rose the Central
5.1 perbegicent
relativelv high average annual inflation, above 5.5 per
2000-01. 2004-05, 2008-09 and
cent.
2010-11.
GDP by the beginning of the to
about
per cent of GDP in 1990-91. 1980s arnd was as
The large:
n ni
as
ng of
were the vears of most to the growing fiscal factor which 7.3
All these were vears of high fuel prices. The year 2004-05. of the balance on deficit was sharp contributed
however. also witnessed high inflation in manufactured
products because of high growth in the GDP in this sector
revenue
government had asurplus on account. In
revenue
drastically changed during the 1980s,account. The
deteri7o1,ration
1970-
the
leading to high demand and high prices of raw materials. was a revenue deficit of as situation
about 2.I per centby of1985-86
GDP there
The overall annual inflation rate in this year was 6.5 per cent
roseto 3.3 per cent in 1990-91.
which fell to 4.4 per cent in 2005-06 and stood at 5.4 per
recognised that such high levels Theof which
cent in 2006-07 and 4.7 per cent in 2007-08. However.
inflationary pressures started building up towards the last Overall and on revenue account
government having
fiscal defcits, both
quarter of 2007-08 and the inflation rate rose to 8.02 per committed itself to a policy of fiscalwereadjustment.
not
sustainable.
cent in March 2008. Ason August 9, 2008 the inflation rate The Central
touched the high levelof 12.8per cent. The second half of
government initiated a programme of
fiscal adjustment under which its fiscal deficit which wae
the year 2008-09 witnessed conditions of slowdown in the around 7.8 per cent of GDP in 1990-91, was reduced to 56
economy consequent upon recessionary conditions in the per cent in 1991-92 and stood at
3.3 per cent in 1992.g3
world economy. As a result, there was a drastic reduction The Central government also
programme for the mediumannounced
its fiscal adjustment
in the inflation rate and it dropped to just 0.18 per cent in term according to whichits
the week ended April 4, 2009. However, for the year as a fiscal deficit was expected to be brought
to 4 per cent by the mid 1990s. down to about 3
whole, the average annual inflation rate was as high as 8.3 However, the Central
per cent. The year 2009-10 started with a low headline WPI government foundit difficult to realise this goal. The fiscal
inflation of 1.3 per cent in April 2009, which moved into a situation in fact deteriorated in 1993-94 and the fiscal deficit
negative zone during June to August 2009. However, since of the Central government once
again rose to 7.0
September 2009 prices started rising sharply due to rise in of GDP. After this, there was a decline in fiscal per cent
deficit for
prices of primary articles, particularly food items. The four years but in 1998-99,the fiscal deficit again rose to 6.5
headline WPI inflation reached 10.23 per cent in March per cent of GDP. This was follwed by a reduction in fiscal
2010. Overallaverage inflation from April-December 2010 deficit. The government adopted the FRBM (Fiscal
at 9.4 per cent was the highest recorded in the last ten Responsibility and Budget Management) Act in 2004 and in
years. In terms of the consumer price index for industrial accordance with this Act, brought down the fiscal deficit to
workers (CPI-IW), inflation remained in double digits from 3.3 per cent of GDP in 2006-07 and 2.5 per cent of GDP
July 2009 to July 2010. Average WPI inflation rate during in 2007-08. However, the year 2008-09 witnessed amassive
2010-11 was as high as 9.6 per cent. CPI-IW inflation fiscal deficit of 6.0 per cent as, because of economic
remaining in single digit from August 2010 toAugust 2011, slowdown, tax revenues fell on the one hand, and the
briefly touched double digits at 10.06 per cent in September government announced a number of concessions and
2011. High inflationary conditions are a serious cause of increased publicexpenditure to boost demand in the economy
concern and to tackle this problem, the Reserve Bank of on the other hand. In 2009-10, the fiscal deficit of Central
ndia has resorted to an increase in rep0 rate and
reverse government rose further to 6.5 per cent of GDP. In 2010
rose to 5.9 per
epo rate by as many as 13 times during the period March 11, It tell to 4.9 per cent of GDP but again
cent of GDP in 20l|-12.
 Economic Rejorms and Labe
ndia,
fiscal
t h e

in ipublmbalicexpendi
ance hasture.beenIf caused mainly ralisotion
around
it is neCeSsary
25 per cent reduce thefiscal imbalance shortCX pendi
to
tu re on
.
of
( 0Overmment expenditure
gover
GDP. However, n ment period sOC1al cea
in he cleary Nonetheless servi
visible inthe iongthey are
are not quantifiable in 3

Containment
ofpublic constit u ted 29.\ per )
,* capital expenditure is essential, BalanceAt of Payments perin
alwavi there and i!

and social
tectors expendi
must t u res in key present halanca Adjupaystment
o
hdrguire concerted
effort at
not be
curtailed. precariOus as it
exchange reservetwasrose from The lovel
yments situatinn 14 1ot 25
af foreign
particularlythe containing the
ion expendirevenue.
consumptdefence March 1991to $ 304.8 n mengre $ 2 2 hillinn in
consisting mainly of ture of accurmulation of foreignbillion
erchang af end. March 2n|I. This
as ge raseres 1ggests har
expenditure,s
ministratile
subsidy payments expendi ture
and interest
the Indian Cconorny has rmoved to imevhat stahle and
sustainable balance of payments prsiticnin he gnct reforn
period. The current account deficit WAs 3pe ent of
forthe purpose of
Alhough
fiscal
adjmobilisation
ustreceive
ment GDP in
due to 1990-91
gOvernment but fell to O.44 per cent in 191 92 manly
iy,
of the expenditure
speca/effort at additional resourceshould the import compression which in turn adversely
affected
non-tax sources is also necessary. overall performance of the economy
and
Planning Commission, The According The government adopted?ia policy of import isberalisation
mayhaveto be generated byrequired
ajudiciousadditional In 1992-93 considering a relatively comfortable foreign
the tax base, mixture GACnange reserves position, This raised the balance of trade
-tax
sources,'8-The rationalising the tax rates and
government can also
deticit from $ 2,798 million in 1991-92 to S5.447 million
mobilise In 1992-93 and in the process the current account detcit
CSOUrCes
by targeting black which money climbed to 1.7 per cent of GDP. At this juncture the
Aimatedto be around 40 per cent of GDP. presently Situation appeared to be slipping out of control but in 193
Anareawherethhere is considerable scope for revenue 94 an impressive growth of exports of the order of 20
ahiisationis public
services. User per cent reduced the trade deficit bringing down the current
charges on publicly
utilities such as irrigation, electricity, water, account deficit to 0.4 per cent of GDP.
road 1994
-gided
and higher education are much below their cost The trade deficit widened to S 9.049 million in
per cent
provision. The overall recovery rates on services provided 93. This was due to a higher import growth of 34.3 there
per cent. However.
Central government are as low as about 35 per cent. and a lower export growth of 18.4
account. Hence,
wthe even lower at about 14 per cent for the services was some improvement in' the invisibles deficit of
current account
Theyare the year 1994-95 ended up with a
the State governments. Hence, unrecovered
Ovided by utilities are large and are a kind of subsidy $ 3,369 million which was around 1.0 per cent of GDP.
position and
AISSOff public
can justifiably raise user This was a sustainable balance of paymentsproblems. The
users. The government any financial
othe Y was not expected to present
oharges on public
utilities like electricity, irrigation, current account deficit, however, rose to 1.7 per cent of
nansportation and water. higher availability of
GDP in 1995-96. This reflected the
does not seem to be serious higher investment-saving
The government, however, external resources to bridge the 1996-97
mobilisation through raising the trade account during
bout additional resource gap. Developments on thecurrent account of the balance of
services. It has also failed to eased the pressure on the 1.2
TKOvery rates on publicutility subsidy payments and the current
account deficit declined to
expenditures and per cent of
out down its consumption continue to increase as per cent of GDP in
1996-97 and further to 0.6
witnessed a
payments. Its interest payments GDP in 2000-01. In
2001-02, the country
liquidate substantial part of the amounting to 0.7 per cent of
there Is no serious attempt to Having failed in adopting surplus on current account
tusüing stock of internal debt. government has opted for after a gap of 24 years).
GDP (this surplus had occurred the
surplus on current account in ir
ra corrective measures, the capital expenditures This was followed by a of GDP
reduction in amounted to 2.3 per cent
Sone soft options such as terms. A fall in capital expenditure next twO years. It has again witnessed
defici
id socialservices in real overall 2003-04. After this, the country 2004-0:
to cause an GDP in
was 0.4 per cent of
ygovernment is generally expectedwhilethe containment in current account. It a result o
decline in the rate of capitalformation, adversely affects the GDP in 2007-08. As
and 1.3 per cent of following global recessior
of
expenditure on social services formationin the economic slowdown in 2008-09 GD
capital widened to 2.3 per cent of
human The rate of gross to the current account deficit
well-being. GDPin 1990-91
public Sector fell from l0.6 per cent of effects of reduction
8per 2010-11. Adverse
cent t of GDP in
 Indian Economy
796

further to 2.8 per cent of GDp

in this year. This increased
in 2009. 10 and 2.7 ner cent
of GDP in 2010-11 (the
deficit in 2010-1| was 7.8 per cent
trade
of GDP while surplus
of GDP).
aTRUCTURAL REFORMS
Since July 1991 co
on invisibles account was
5.0 per cent

Policies relevant to the balance of

payments which
guided by
measures have been
side of the economy. under
Among tamprkentheseehensi
to ve
imtheprovemoreliberthealissuppl
ationy.
decades were
were adopted during the past tworeform considerations. In
are: uyTrade and capital
deregulation; flows, reforms; important
FiDinanci
sinyesaltmsector
nt andreforms.public(2YTndust
structural

enterpririsael
both stabilisation and problems arose largely
India's case, the balance of payments reforms; and
by export earnings. In
from inadequate coverage of importscoverage ratio was only Trade and Capital Flows Reforms
the beginning of the 1980s, this trade deficit. There Was Since-July 1991, the
52.4 per cent and led to a nmassive 1980s and |in 1990-91
some improvement in it
during the
66.2 per cent of the
series of reforms in the trade government introduced
has
integration of the Indian sector which are aimed to heln
export earnings accounted for about an unsustainable world. Among these reform economy better
with the
measures, rest of thofe
value of imports. Obviously even this was
position which required a series of
rate and the exchange rate regime.
moves on the exchange rupee in July 1991 and
againsttthe currencies of the leading subsequently devaldepruateicioantion
its
To begin with, in July 1991 there was a devaluation
of rupee by 18-19 per cent. This was followed
by the
introduction of the covertibility of
account and ithen for the
entire
industrialised countries,
the rupee first on
trade
liberalised exchange rate management system (LERMS) in current
account transactions.
liberalisation of import regime, substantial
the budget for 1992-93. Under this system, a dual exchange customs tarif rates, decanalisation of reduction i
rate was fixed under which 40 per cent of foreign exchange 'rade and wide ranging many tems teof
exports are important. measures to give a thrut
was to be surrendered at the official rate while the remaining
60 per cent was to be converted atN market determined The system of fixed
rate. The 1993-94 Budget adopted the unified exchange rate exchange
byAndia in September 1975 and sincerates was abandoned
SVstem. This system has been in operation since then. The then the system of
managed exchange rate tloat has been in operation. Under
experience with this system has been satisfactory as the the new system the rupee was
not expected to appreciate
period since 1993 has been marked by orderly conditions in against other currencies, causing a
the foreign exchange market, excepting a few episodes of competitiveness of the Indian decline in the international
exports. However, due to
volatility. The exchange rate management policy of the higher rate of inflation in India as compared to that in the
Reserve Bank in this period has been apolicy of 'managed \p developed countries, the real effective exchan
float regime' Le., the Reserve Bank has focused on rupee did not fall as much as the nominal effective exchange
managing volatility with no fixed target while allowing rate of the rupee. Hence, as already written earlier.
the
the vnderlying demand and supply conditions to determine government formally devalued rupee by 18-19 per cent in
the exchange rate movements over a period in aoderly July 199l to restore lndia's
way. According to the Reserve Bank, this policy has internationalcompetitiveness.
Thiswas followed by a liberalisation of the foreign trade
withstood the test of time by ensuring a judicious mixture regime through dismantling of some physical controls. Not
of flexibility' and 'pragmatism'. The annual average only the import procedures were simplified, a significant
exchange rate of the rupee in 2009-10 was $ l=47.44 number of items were also shifted outside the purview of
appreciating by 4.1 per cent to $ 1=45.56 in 2010-11. import licensing.
On point-to-point basis, the rupee depreciated by 16.2 per
cent from $1=744.65 on March 31, 2011 to $1 =753.26 tariffs, Astheafirst step towards a gradual reduction in the
1991-92 Budget had reduced the peak rate
on December 30, 2011. The sharp fall in rupee value may
be explained by the supply-demand imbalance in the domestic The import duty from more than 300 per cent to 150 per cent.
foreign exchange market on account of slowdown in FIl process of lowering the customs tariff rate was carried
inflows, strengthening of the US dollar in the international further in sutbsequent Budgets. The 1995-96 Budgetreduced
market due to the safe haven status of the US treasury, and the peak rate of import duty from 65 per cent to S0 per
in the 1997-98
heightened risk aversion due to the euro crisis that impacted cent. This was reduced to 40 per cent
financial markets across emerging market economies Budget, l2.5 per cent in the 2006-07 Budget and further
(EMEs)?. to 10 per cent in the 2007-08 Budget.
 Economic Reforms and Liberalisation 797
Over the past few
duty cuts havebeen made years, not
in the caseonly substantial import stagnation during the second half
of the 1960s
ores and industrial
concentrates,
telecommunications
of machine tools,
leather industry,
electronics
steel and the 1970%!" The long time taken by the proposals
industrial

import duties has alsosectors, but the prevailing systemandof icensing authorities to give clearance to the various
to be
been made it impossible for any project of importance
the purpose of
produced establishi
domestically and ng considerabl
a parity yin
rationalised with
prices of goods
completed within the scheduled time period. The industrial
Iicensing authorities often took exception to the attempts of
Farlier, large numberinofternationally.
a the industrial units to produce more than licensed
capacity.
be canalised thhrough publicexports and ipports used to Thus the objective of maximisation of output from a given
(wo decades, alarge sector Iicensed capacity got undermined. Moreover, the industrial
been number agencies(During
of export and impor theitems
last
licensing system as it had evolved over the years had
have
decanalised. Decanalisation
is an important step of imports
and
corruption
become a major source of political and bureaucratic throttle
external sector to towards opening of more areasexports and was being used by powerful vested interests to
the private sector. The governmentof the
also introduced a number
recent years. These
of
export promotion measures in
has
competition
MkBLimit on the size of the companies which was earlier
Units for promotinginclude establishment
exports from the
of Export Oriented nforced under the Monopoly and Restrictive Trade Practices
units
industrial
sectors, agricultural and allied Act has now been scrapped. This will allow
scheme.simplitication
of Export economies
introduction of Export Promotion Capital Goods
benefits of
to grow to optimum size and enjoy the
relaxation
scheme for the services Promotionof Capital Goods of scale. The anti-monopoly legislation until this
and convenient sector, adoption a more rational was made, had prevented many firms from growing to
criterion for recognition of export houses/ optimum size and thus achieve higher efficiency levels. The
Trading houses/Star Trading houses, industrial location policy has been both simplified and
of activity in Export broadening of areas
Processing Zones, duty free import for liberalised. The phased manufacturing programme under
exports under the advance licensing scheme, setting up of which domestic manufacturers were required to increase
Special Economic Zones (SEZS), and creation of an exporters' the domestic input-content of their products in a specified
grievance cell in the Ministry of
Commerce facilitateto period has also been abolished under the new industrial
action on problems being faced by exporters. policy. It is widely believed that these relaxations of the
Ome more schemes/measures have been Besides these,
introduced to regulatory apparatus governing the industrial activity in this
accelerate the country's transition to a globally-oriented country in the past have considerably eased the entry
economy, to stimulate growth by providing access to capital barriers which should make the industrial sector more
goods, intermediates and raw materials, and to enhance competitive both domestically and internationally. However.
technological strengths of the economy thereby improving a major limitation of the structural reform in the industrial
the global competitiveness of Indian exports. sector is that it has failed to evolve appropriate rules and
procedures regarding exit of unviable industrial units. The
The government has also liberalised capital flows in/ existing industrial exit policy is highly restrictive and time
yhe form of foreign direct investment (FDI) as a part of consuming. This is one factor which has led to widespread
the package of external sector reforms. Foreign companies industrial sickness.
are now allowed to use their trade marks, accept appointment
as technical or management advisers, borrow and accept It is widely believed that the regulatory mechanism
deposits from the public and repatriate profits etc. had led to widespread inefficiency in the industrial sector.
The government had, therefore, relaxed some of the industrial
Industrial Deregulation controls even before it committed itself to structural reforms
Historically, India'sdomestic economic activities have in 1991.The thrust of the new industrial policy announced
been subject to a wide array of physical controls. In the in July 1991 has been on deregulation of the industrial
industrial sector, such controls took various forms: industrial economy in a substantial manner and opening up a large
licensing which regulated entry and expansion; reservation number of industries to the private sector. The requirement
of a large number of industries for the public sector as of industrial licensing has been abolished for all but 5
well as small-scale sector; time consuming procedure product categories. These are alcohol, cigarettes, hazardous
required for the ext of industrial units; and price and chemicals, industrial explosives and electronics aeroscape
distribution controls on various industrial products. Jagdish and defence equipment (all types).
Bhagwatiand Padma Desai have been highly critical of this In another significant step, the number of industries
regulatory system.!º Isher J. Ahluwalia also blamed the reserved for the public sèctor has been reduced from17 to
industrial licensing system and bureaucratic controls for the 3. Now core industries like iron and steel, electricity, air
 798 Indian Economy
193
even
transport. shipbuilding. heavy machinery etc. and The Committee on
strategicindustry like defence production have been opened examine the country's Financial System was asked to
financial system
up for the private sector. components and to make and its
Public Sector Reforms and Disinvestment
the followigg:
for improving the
recommendations in respectvarious
of
The public sector was originally intended
to be the
was also
the Financial Systern, with efficiency and effectiveness
special of
engine of self-sustained economic growth. It
heights of the economy
reference to economy of
operations, accountability and profitability.
conceied to hold the commanding 2For infusing greater
fulfil
and to lead to technological advance. In order to
generate
system so as to enablethe bankscompetition
and other
into the financial
these roles, it was necessary for the public sector to
adequate investible surpluses. No doubt public sector
to respond more effectively to financial institutions
the credit
economy needs of the
contributed significantly to the expansion of the industrial XFor
base. Its role in diversifying the industrial structure has ensuring appropriate and effective
been no less. However, it has failed to generate sufficient
over the various entities in the
financial sector,
supervision
in
internal resources for its further expansion and, as a result.
the commercial banks and
term
The Committee was also lending institutions.
particular
has now become a major constraint on economic growth. required to review the existing
Under structural reforms, the government has decided to legislative framework and to suggest necessary
give greater managerial autonomy to public enterprises to w for implementing the recommendations. amendments
enable them to work efficiently. In addition to this, two i
AThe report of the Narasimham
System was placed before the Committee Financial
other key elements of the government's strategy for public on
enterprise reform are the promotion of increased private Parliament December
1991, and since then it has become a in
basis for
reformintroducing
sector competition in areas where social considerations are reforms in the banking sector. The major
not paramount and partial divestment of equity in selected measures
undertaken duríng the past few years are as follows:
enterprises.) 1 1.he level of the statutory
Equity amounting to ? 1,13,650 crore in public sector the cash reserve ratio (CRR) liquidity ratio (SLR) and
were
undertakings was disinvested to public sector financial during the 1980s for combating progressively raised
institutions, mutual funds, private corporates and general generated by large budgetary deficits.inflationary pressures
public upto 2011-12(Initially the government had talked of adversely affected the profitability of banksThis,
and
however.
disposing off burdensome loss-making PSUs wbile well them to charge high interest rates on their pressurised
performing PSUs were to be given autonomy to enable psector advances. The government has over the vears commercial
them to developas global Indiae-mutinational corporations. brouoht
down both statutory liquidiüty ratioand cash reserve
However. there is virtually no evidence of any such initiative in a phased ratio
manner. The
in practice. The government policy seems to be entirely was lowered down to 24 pereffective cent
statutory liquidity ratio
limited to selling off sharesof prime PSUs with the aim 8, 2008. was raised to with effect from November
25.0 per cent in November 2009
of bridging budget deficits. but again brought down to 24.0 per cent on
The cash reserve ratio was also broughtDecember
2010. 18,
Financial Sector Reförms down to 4.5
Avibrant, efficient and competitive financial system is per cent with effect from June 14, 2003. However, to
necessary to support the structural reforms in the real check liquidity overhang in the system the RBI hiked the
economy. As pointed out by the Tenth Five Year Plan, An CRR to 5 per cent in October 2005. It was raised in phases
important outcome of financial sector reforms is that it [ and stood at 9 per cent on August 30, 2008. However,
contributes to greater flexibility in the factor and product because of slowdown in the economy during the latter half
markets. Wth the real sector becoming increasingly market of the financial year 2008-09 following global recession,
driven and engulfed by a competitive CRR was lowered in stages and brought down to 5.0per
is need for a matching and environment there cent with effect from January 17, 2009 in a bid to increase
dynamic response
financial sector.""2 This is possible only if the from the credit growth. To check inflationary pressures in the
and efficiency of the financial
system improves.
productivity economy, the CRR was again raised in phases to 6.0 per
this in view, the
government set up
Keeping cent from April 24, 2010. However, because of slowdown
Committee
Financial System in 1991 and on Banking Sector on the in the economy during the last quarter of 2011-12, the CRR lo
in 1998
(Narasimham Reforms was reduced to 5.50 per cent on January 24, 2012 and
Committees). further to 4.75 per cent in March 2012 to inject permanent
liquidity into the system.
 Economic Reforms and 799
2.The RBIintroduced new Liberalisation
of income
recognition, prudential norms in respect| internal audit and
of bad debts and classification
capital of assets. . provisioning management information system and the
prescribedadequacy
control mechanisms.
standards were The
in accordanceminimum
with thecapital/ 8. Recovery of debts due to
banks and other financial
Committee norms Basel He nce. an
under which banks Institutions in the past has been unsatisfactory.
nintain
of the unimpaired capital funds
were required to
Act was passed in 1993 under which
Special Recovery
equivalent
aggregate of the risk-weighted assets.
to 8 per cent recovery of
Tribunals have been set up to facilitate quicker
expected to Banks were
io (CRAR)touch
sper cent capital to loan arrears.
by March risk-weighted asset
India and Indian banks 1996(Foreign banks operating in 9. The guidelines for
determining the maximum
made more flexible
permissible bank finance have been
required to attain 3 per operating abroad were,
cent by March 1993 andhowever, Banks will now have greater
freedorm in determining the
1994 respectively. The CRAR March borrowers and responding to
was raised from 8 working capital needs of the
per
ended Marct 2000. CRARcent
to 9per cent from the year local requirements in an appropriate
manner.
oommercial banks at end-March 2011 stood at 14.2 per for recommendations of the Narasimham
Following the above reform measures
cent(Now all banks groups have CRARmuch higher than Committee on Financial System the
major changes had taken
the minimum 9 per cent stipulated by the Reserve Bank were undertaken. Meanwhile,economic and institutional scene.
of India. place in the domestic
towards global integration of
n 3Commercial banks attaining capital Also, there was a movementcircumstances banking system
and prudential accounting standards had aadequacy norms
freedom to set
financial services. Under the
and better equipped to compete effectively
had to be stronger government
up new branches without the approval of the Reserve Bank
fast changing economic environment. The Reforms
in a
of India. Banks can now also had to rationalise their existing
appointed the Committee on Banking Sector Committee
thus Narasimham. The
branch network by relocating branches, opening of specialised under the Chairmanship of M. major recommendations
branches, setting up controlling offices etc. submitted its report in April 1998. Its
# Fhe RBI has announced guidelines for setting up are as follows:
and relatively weak
banks in the private sector. These banks should be financially Strong banks should be merged
closed. Mergersbetween
be
viable and should avoid concentration of credit and cross and unviable onesshould institutions may be
financial
holdings with industrial groups. Further, they will have to banks and development economic and commercial
considered if it makes
observe priority sector lending targets as applicable to other
banks. sense. with
have two or three banks
Ls. Number of interest rates slabs on banks
advances The country should ten national banks
in 1989-90 to 2 in the financial international orientation, eight to The third tier
were reduced from about 20 local banks.
unify interest rate structure and a large number of smaller geographical
year 1994-95. This attempt tocross-subsidy in the banking banks should remain confined to banks should take
of
aims at reducing the degree regions. The first and second
tier
rates in the banking system sector.
system. Moreover, interest situation prevailing care of the needs of the
corporate
compared to the recommended new and higher norms
have been liberalised, "The
1991. According to Montek S. Ahuwalia, banking
s. The Committee
suggested that the minimum
before interest rates in the for capital adequacy. It Assets Ratio (CRAR) be
rationale for liberalising flexibilityand encourage Capital to Risk-weighted its earlier level of 8 per
greater
system was to allow banks increased to 10per cent from
competition.'"13 has been
supervisory system of the RBI cent.
recapitalisation is not viable
6. The Board for Budgetary support for
the establishment of a new abandoned.
strengthened with of a Deputy and should thus be
Supervision under the chairmanship of eredit recovery.
Financial
The Board ensures implementation Legal framework is not adequate for
Governor of the RBI. management, asset
It should be strengthened.
with respect to credit capital
the regulations
income recognition, provisioning, Net non-performing assets for all banks be brought
classification, . year 2000 and to
operations. down to below 5 per cent by the
adequacy d treasury RBI and public
sector
3 per cent by 2002.
Agreements between the management and the of branches and staff.
made to improve the includes V. There should be rationalisation
bankshave beenperformance of the latter. This
quality of the
 800
Indian Economy

depoliticised under the RRI and the objectives of

S Bank boards should be promoting
poverty. Finally,there is a credit employ ment and
supervision.
9 The policy of licensing new
private sectoOr banks producing sectors, and a decline squeeze for
in credit the reduccintgy
commodi
may be continved.
India and small scale
deepening industry.
that results from The delivery rural
to
belief that the financial
set up subsidiaries
10, Foreign banks may be allowed tosubsidiaries or joint
or joint ventures in India.
Such ways neutralise these
effectslibhaseralisnotatiobeen
n would in myriad
ventures should be treated on par with other
private realised.l4
conditions with regard AN
banks and subject to the same
to branches and directed credit as
these banks. APPRAISAL OF ECONOMIC
regulation
REFORM
M. There has to be an integrated system of activities Since July 1991 the
supervise the
andsupervision to regulate and
of banks, financial institutions and non-bank
finance government has undertaken both
maçroeconomic stabilisation
companies. The agency for this purpose be renamed reforms astwo components of theprogrammesc and structural
economic reform
as the Board for Financial Regulation and Supervision As far as macroeconomic
stabilisation package.are
(BFRS). concerned, their performance has been mixed.programmes
For example
The second half of the 1990s saw the dangers as at end-May 2002, the inflation rate was
and it reached a high level of below 2per cent
associated with the mindless liberalisation in the financial 12.6 per cent as on August 9
sector world over. Incidents like those of the Barings Bank 2008. However, it fell subsequently and was only 0.18 per
cent on April 4, 2009. Intlation rate rose
and the bank failures during the South-East Asian crisis half of 2009-10, and touched the level again in the second
exposed the problems which arose from inadequate regulation of 7.3 per cent in
and supervision of banks. Hence, the Committee on Banking December 2009. During the year 2010-11, overall inflation
rate was as high as 9.6per cent. As far as
Sector Reforms under the Chairmanship of M. Narasimham are concerned, the
fiscal imbalances
particularly stressed on prudential measures like the increase which was fiscal deficit of the Central government
in the Capital to Risk-weighted Assets Ratio (CRAR), the per cent of 5.6 per cent of GDP in 1991-92 declined to 2 s
introduction of market risk on government securities, the cent of GDP in 2007-08. However, it rose to 6.0 ner
GDP in 2008-09 and further to 6.5 per cent of
stricter Non-Performing Assets (NPAs) norms and in GDP
provisioning requirements and the introduction of asset 2009-10. In 2011-12 it was 5.9 per cent of GDP. The
liability management guidelines, and risk management most important success has been registered in the extemal
guidelines. sector as foreign exchange reserves touched -the level of
$309.7 billion as at end-March 2008 and stood at $
In line with these recommendations of the Second 304.8
billion at end-March 2011.While the import cover of foreign
Narasimham Committee agarmut of measures to strengthen exchange reserves was just 2.5
months in
the banking system have been announced. Important to 14.4 months in 2007-08 and stood at 1990-91, it rose
measures from this point of view are: raising the CRAR to) 2010-11. 9.6 months in
9 per cent, strengthening prudential accounting norms, In the real sectors also, the structural reforms have
laying down Asset Liability Management (ALM) and Risk
shown mixed results. Since 1991-92 during the 21 yearsS
Management guidelines and directing the banks to provide
addtional information in the Notes to Accounts' in the period upto 2011-12, national income increased at the rate
balance sheets to increase transparency. In 2002, of 6.5 per cent per annum. In the first two years of
Securitisation, Reconstruction of Financial Assets and structural reforms, there was near stagnation in the industrial
Enforcement of Security Act was passed in order to provide sector. However, industrial production picked up in 1993
a satisfactory legal frame work for the recovery of bank 94 and the average rate of growth of industrial production
crediu. during the Eighth Plan turned out to be 7.4 per cent per
C.P. Chandrasekhar and Parthapratim Pal annum (same as the target). Industrial production slowed
examine financial liberalisation in India. They argue critically down in the latter half of 1990s with the result that the
the Indian experience with reform in the that average rate of growth during the Ninth Plan was only 5.0
financial sector per cent which was considerably less than the Ninth Plan
indicates that, inter alia, there are three important
of such liberalisation. First, there is outcomes target of 8.2 per cent per annum. However, industrial
increased financial production picked up strongly in the Tenth Plan and was as
fragility which the "irrational boom" in India's stock market
epitomises. Second, there is deflationary macroeconomic high as l1.6 per cent in 2006-07, the last year of the Plan.
during
The average rate of growth of industrial productionIndustrial
stance, which adversely affects public capital
formation the Tenth Plan was 8.2 per cent per annum.
 801
Economic Reforms and Liberalisation
growth rate was ashigh as 15.5 per cent in
first year of the Eleventh Plan. However, it 2007-08 -the recorded bigh rates of industrial
cast Asian countries which
2.5 per cent in 1970s and 1980s. in
following global 2008-09 because of economic slowdown
slipped to just growth during the decades of 1960s. structured blueprints
2009-10 and recession.
further It
to 8.2 perpicked upto 5.3 per cent in
Contrast, did so on the basis of some
and by a process of significant State
intervention. The case
declining to just cent in 2010-1| before I ne
2.8 per cent in of industrialisation in South Korea is quite revealing.
f growth of industrial production2011-12.
in the
The average rate
Eleventh
pursued a
government in that country steadfastly opposition
policy
from
of
the
6.9 per cent per annum. Plan was heavy industrialisation despite the stiff
Since 1990-91 there was a IMF and the World Bank. Judged against the experiences oT
and investment rates for three steep fall in both savings these countries, the interventionist strategy of the government
and investment rates showed
years. However,both savings In thiscountry can be criticised only for lack of dynarmism.
1995-96 to 2001-02the an upturn in
1994-95. the basis of our experience in the past t is patently
During On
saving rate was 24.0 per cent while Wrong to conclude that a well ariticulated industrial strategy
the investment rate was 24.9
per cent. Thus, both itive role to play
and investment rates savings and heayy State intervention have no pos
However, since
remained stuck at modest levels. in accelerating industrial growth.
2003-04, both saving and
have picked up strongly. In 2007-08, investment rates AWrong sequencing of reforms.distortions As a result of
saving rate was 36.8 Wrong sequencing of reforms, serious have
ner cent of GDP and
investment
GDP (highest in the entire period of rate was 38.1 per cent of surfaced in economic management. There are at least three
in 2010-11 was 32.3 per planning). Saving rate examples of wrong sequencing of revenue reforms. First, while for
cent and investment rate 35.1 per drastic reduction in fiscal deficit, deficit and even
cent. Some economists have argued that reduction of
spurious as in recent years errors and these increases are budget deficit the prerequisites are decisive
omissions were large. tax base,
non-de velopment expenditure and widening theprogramme
1f these are accOunted for, the
saving and investment rates the government has initiated fiscal correction
decline substantially. Moreover, as pointed out reductions
R. Nagaraj, one of the main recently by with surrendering of revenue through substantial Second,
reasons for sharp increase in intax rates and compression of capital expenditure.
saving and investmènt rates in recent years has been that
the saving and investment rates of a more obvious case of inappropriate sequencing relates to
private compression of government's capital expenditure and
have shown a sharp increase. However, corporate sector
the estimation contraction of public investment before ensuring that the
procedures adopted for this sector are faulty. According to private sector and the foreign investors will fill the gap. The
a study conducted by Rajakumar,, the actual level of gross third case of flawed sequencing is of liberal ising impots of
fixed capital formation in the private corporate sector is capital goods before adopting a strategy for technology
roughly one-half of the official estimates.!s advancement of the domestic capital goods sector. The
These modest gains from structural reforms latter was necessary for adopting outward orientedstrategy
notwithstanding,the economic reforms have beeD subjected of econgmic growth.
to various criticisms. The EPW Research Foundation has 3. Hasty pace of reforms. The rapid pace of reforms
pointed out that "the new economic policy is seriously has been determined by the controversial goal to globalise
flawed in conception... in its contents, strategy and approach the Indian economy quickly. This has led to rapid deterioration
and in many other respects."16 The shortcomings can be in the quality of industrial structure. EPW Research Foundation
broadly classified under five major categories: (i) absence points out, "A sharp reduction in industrial growth, reduction
of abroader development strategy; (i) wrong sequencing inthe growth of capital goods' industries, a relative shift of
of reforms; (i) hasty pace of reforms; (iv) prerequisites exports away from manufactures, and arresting of the
of reforms ignored; and (v) absence of human developmenf growth of industrial employment, have been some of the
goals as an integral parn of the strategy. (ih'agl ahaho glaring effects of rapid reforms without providing for some
These limitations are interrelated and together expose breathing time and appropriate checks and balances for the
the inherent flaws in the stabilisation and structural reforms Indian industry."1?
measures undertaken so far. A.Prerequisites of reforms ignored. The literature
1 1Absence of a broader development strategy. oH stabilisation and structural reforms is full of evidence
The focus of both macroeconomic stabilisation and that the shocks of these policies are better absorbed and
liberalisation is to create a competitive environment in industry their consequences for the well-being of the masses are
which entrepreneurialdecision-making willdepend entirely
very much reduced ñ the society has already reached a
on the market forces. The government's new industrial certain minimal level of human development. South Korea,
Malaysia and Thailand have been the successful cases in the
policy, therefore, lacks a well-defined strategy. The south
 Indian Economy
802

countries not only the soci). policies. If India's recent

recent past but in all these
cconomic structure was far more
egalitarian due to land
developnent
result of pro-market economi
policies, then, cin growth was really a
decentralised I markets only widespreadprinciple. there ought
the human to be very few costs,
reforms and such other measures but
indices like life cxpectanCY and
literacy rates were at higher
lower level before alevel -playing field; support democracy,
benefits: after all
while infant mortality was ant a
levels,
structural refomm programme. ought to create labour- cfficient use of compet
factors ofition creates
theyembarked on significant
situation is not at all
encouraging rapid employmnent growth;-intensive indust
terrns
production
of rialisation and thus
In contrast, the Indian development and socio towards the trade ought to shift
from the point of vicw of human
countryside,
economi structures. !8 since capital moves to capital- benefiting
-Scarce
the rural
areas in poor,of and
returns, regional search
However, India's inequalities
development goals as an ought to high
S. Absence of human experience has just decrease over time.
stabilisation and structural
integral part of the strategy. The implemented against a growth acceleration has been the opposite
reform programme in India is being been
transformation.
background of incomplete structural development and
accompanied
inequalities,.growing capital intensity of
the
by growing
widespread poverty, low level of human
and education
concentration of
stagnant growth in
ownership of private economy. growing
industry, and nearly
distorted pattern of expenditure on health employment in the
oriented towards the relatively well off
sections of the
reforms
industries. This evidence is more
that the development model beingconsistent with the viewAmanufacturing
society. Given these dismal conditions, structural pursued by
"pro-business model that rests on a fairly India it o
This requires that
must be undertaken with a human face. alliance of the political and the economic elite.narrow ruling
human development goals should be an integral part of the
strategy of structural adjustment. Unfortunately in
India no to Kohli, the problems posed by According
India's current pro-business
model of development include disquieting
such attempt has been made. 19 the quality of India's democracy. Thus, "Why implications for
Different people look at economic reforms from their should the
common people in a democracy accept a narrow ruling
own perspectives. First, there is the upper class, very alliance at the helm? Is ethnic and nationalistic mobilisation
happy with the reforms. They have all the white goods asubstitute for pro-poor politics? And, is India
domestically produced as well as the imported ones. Then stuck with a tw0-track democracy, in which common
increasingly
we have the middle class which sees in this an opportunity people are only needed at the time of elections, and then it
for its advancement to move to the upper class. Finally, is best that they all go home, forget politics, and let the
there is the lower class which asks, "What is there in this'rational' elite quietly run a pro-business show?",
for us?" The poor people want jobs and lower prices of, Kamal Nayan Kabra underlines that liberalisation policies
commodities they wish to consume. The beneficiaries ofl
period seek to accelerate growth ienonno
the reforms so far have been clearly the industrial and of the post-reform
commercial classes who were able to take advantage of the disequalisation which is an inevitable effect of economic
reforms being pursued in this country (See Box 61.2).
opening up of the economy, the liberalisation, and the
The Eleventh Plan document released in 2008 admits
productive and more so speculative activities they have
giver. rise to, "20 the fact that the growth process in the post-economic
reforms period has not been inclusive. The Deputy Chairman
Atul Kohli has presented a detailed analysis to prove
the Planning Commission, Montek Singh Ahluwalia,
that economicgrowth in the post-reform India was more of notes in the preface to the Plan, "The Eleventh Plan began
aresultof pro-business policies rather than pro-market
Box 61.2 Disequalising Growth in Post-Economic Reforms Period
Liberalisation seeks to accelerate growth by giving an uncontrolled, unregulated State supported free run of the economy lo ue we
and profitable in a globalising economy. s
do sections to make investments and run their enterprises in a manner they find 'rational'controllers
owners. and mobilisers of financial, tecnnlca
eeuomand support turns out, in effect, to be the exclusive preserve of the large unorganised sector and the people of
small
and managerial resources and of public policy support in the competitive game. Thus, the
supported and internationally
means face a squeeze owing to uneven competition from the free and lower duty imports as well as the State
0
linked local corporate behemoths. Huge hoards of black incomes and wealth with the richer sections create further nuraiessmall industries'
bureaucracy. The
nch and the emerging entrepreneurs due to the unchanging wooden, and generally unscrupulousLiberalisation has nt sparedtheretail
existence has been threatened by dereservation of several industries that usedto be their preserve.
trade and the rural sector either. India 2004-05
Survey.
Alternative Economic
Source: Kamal Nayan Kabra, "Disequalising Growth: The Achilles' Heel of Liberalisation", in
(Delhi, July 2005), p. 38.