ECONOMIC REFORMS IN INDIA:

Dr. RAJ AGRAWAL

Period 1947- 1990

 The historical discontinuity after independence

 The Plan strategy

 A nation building exercise

 The experiment with socialism

2
The Planning era

 A Critical Assessment::

 A rate of growth of average 3.2 per cent

 High population growth denies a significant dent on
poverty
 A huge public sector with minimum returns
 A protective private sector

3
Philosophy of Reforms

 To free the economy from the circumspection of socialist

equity in the form of pervasive state control on
production, low productivity, a distorted and dis-
functional price system and a complacent over-
protective private sector.

 To establish the supremacy of individual and the role of

economic freedom

4
Perspective: year 1990-91
 International reserve came down to $ 1.3 billion, less
than 1 month import bill, and India was on the verge of
default in foreign obligations [ short term debt]

 Stagnant exports
 India’s ratings down
 High deficits in domestic budget
 Public sector banks having large NPA
 PSU incurring huge losses

5
International Scene
 USSR’s disintegration… the currency rouble weakened

 Overall confusion on the efficacy of command economy

 Some east European countries came out of socialist

economic structure

 Loss of credibility of the ‘command economy’ as

disturbing revelation came out on lower productivity
and disinformation about planning

6
New Role of IMF
 The Washington consensus about the ‘transition
economies’
 Dismantle command economy structure
 Reduce the size of government
 Privatization of state undertakings
 Reduce and remove budget deficit
 Make currency stable and current account
convertible

7
IMF and new WTO Regime

 New WTO regulations make domestic liberalization and

globalization an integrated one exercise

8
Mechanism
 Dismantling of the license and permit raj so that the
rent-seeking system is abolished
 Minimize the role of the state in production except in
some core and strategic areas
 Reform of the legal system to end monopoly of any
group/ sector
 Financial sector reforms

9
continued
 Reform of the system to allow free
market mechanism by
 Dismantling the administered price mechanism
 Inducing firms to set own targets of production
 Removing all artificial barriers to unleash forces of
competition
 Reforms of the tax system
 Removal of trade barriers

10
Financial sector reforms

 Fiscal reforms--- change in the budgetary process

makes the government accountable--- discipline in
revenue-expenditure process

 Low inflation- low interest regime

 Changes in the banking sector – making the system of bank credit

more transparent_ efficient appraisal system and accountability
for decision taking

11
Notes on Banking Crisis

 Delegated screening and monitoring of borrowers on

behalf of depositors (mitigate information asymmetries).

 Transformation of short-term, liquid deposits held by

households into illiquid liabilities issued by firms.

12
Results of F.S. reforms
 Role of capital is appreciated and effort are on to make capital
cheaper at par world standard [ GOI yet to fulfill the just
demand of the corporate sector]

 More transparent estimate of the need for investment in the

infrastructure sector--- how to mobilize the resources
 One estimate puts the requirement as $50 billion
equivalent---- role of foreign direct investment as
perceived by the government. Whether FDI is good for the
country is no longer the issue

13
Current position of Reforms
 The reforms process has been slowed down__
Reasons
 Inability to carry out reforms in some crucial
sectors like legal infrastructure and education
 Resistance by interested groups
 Lack of political will
 Role of powerful bureaucracy as they feel
threatened with diminutive public sector
 A section of corporate sector beneficiary of old
system

14
Reforms__ slowed down?
 India’s endemic problems
 Low literacy _ message of reforms not reaching
 Archaic social structure__ at lower level of
society and furthest from the centre of
administration exploitation continues
 Social and economic discrimination are
intertwined in the society
 Lack of genuine administrative reforms at the
grass-root levels [panchayat system ]--

15
Reforms slowed down?_
cont’d
 Even when panchayats exist, they are totally
dependent on state government for finance, that
erodes their power

 Emergence of regional groups based on caste

 Lack of accountability [ corruption index being at level
83 among 133 countries surveyed recently]

 A permissive society????

16
Slow reforms
 Some economic issues—
 Wide gap between rural and urban areas regarding the
availability of public goods like potable water, health
services, primary education___ worse situation is that
sometime availability is dictated on caste lines
 [ a MIT study on rural situation in AP , conducted by Dr.
A. Banerjee of MIT, USA ]

 No cushion from the lower side regarding social

security
 Transparency in public policy lacking_ that
creates credibility gap__ a breeding ground of
violence

17
India

 Let us see some developments in

economic scene

18
India__ Growth rates in 1990s

ECONOMIC GROWTH
OF INDIA
8

6
PERCENT REAL GDP

0
1990

1992

1994

1996

1998

2000

2002
19
India__ external sector

20
India__ international liquidity

21
GNP of 12 countries[ as on 2001 ]
 Pop GNP Rank GNP/C Rank
 million b $ Dollars

 USA 284 9901 1 34870 7

 Japan 127 4574 2 35590 4
 Germany 82 1948 3 23700 20
 U.K. 60 1451 4 24230 16
 France 59 1377 5 22690 24
 China 1272 1130 6 890 138
 Italy 58 1123 7 19470 30
 Canada 31 662 8 21340 26
 Spain 40 587 9 14860 39
 Mexico 99 550 10 5540 68
 Brazil 173 529 11 3060 89
 India 1033 474 12 460 161

22
Real GDP growth rates of selected countries during
1990--- 2000 [ per cent]

 China 10.3
 Ireland 7.3
 India 6.0
USA 3.5
 Japan 1.3
 Russia -4.8
 Ukraine -9.3

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Need of the hour

 Reforms of the infrastructure sector

 Education_ universities

 Legal system

 Sense of accountability

 A proper perspective of market mechanism

 Redefine the role of Government

24
Need…….
 Spread of innovation
 Incentive system
 An effective supervision system as reform process
brings fragility also in the financial system.

 WHY ECONOMIC FREEDOM IS NECESSARY AND FOR THAT A

CONGENIAL ATMOSPHERE IS TO BE CREATED __ THAT
SHOULD BE THE GOAL OF ECONOMIC REFORM

25
Issue__ Economic Freedom

26
Economic freedom__ parameters
 Trade Policy
 Taxation
 Government Ownership
 Monetary Policy
 Restrictions on Foreign Investment
 Restrictions on Banking
 Wage and Price Controls
 Property Rights
 Regulations
 Black Market

27
Freedom and income per capita

28
Freedom and income

3
2.5
Average 2
Annual 1.5
Real per
1
Capita
0.5
GDP
0
Growth,
1980-1993 -0.5
-1
-1.5
Repressed Mostly
Free

29
 Billions of U.S. $

-20
-10
10
20
30
40
50

0
Australia
Hong Kong (97)
India
Japan
Korea
Malaysia (97)
New Zealand
Philippines (97)
Singapore
Thailand
Indonesia
Vietnam (97)
China
Freedom__ bop of some countries[ 2001]

30
Currency __ INR [ a depreciating real exchange rate over time]

Rupee/$

45
40
35
30
Spot
25
PPP
20
Real Exchange Rate
15
10
5
0
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998

31
India’s exports to USA [ Issue is Capital flight]

Direction of Trade between India and US - I

12000

10000
Value of Trade (mn $s)

8000 India Exports

to US

6000 US Imports
from India

4000

2000

0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year

32
India’s imports

Direction of Trade between India & US - II

4500

4000

3500
Value of Trade (mn $s)

3000 India
Imports
2500 from US

2000
US Exports
from India
1500

1000

500

0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

33
Restrictions in bop

 Import prohibitions applied since 1960 to a wide range of

consumer goods
 The European Commission has received complaints from
business
 The European Commission raised the issue in the framework of
the World Trade Organization (WTO)
 Negotiations led to a progressive elimination of restrictions
between 2000 (for priority products) and 2003
 Expected additional turnover for EU industry: 2 Billion €

34
Restrictions

Country Course of action

WTO dispute settlement system -
India negotiated settlement
WTO dispute settlement system -
Korea panel proceeding

Brazil TBR procedure

Taiwan Accession to the WTO

Consultations and the initiation of a

Ukraine dispute settlement procedure under the
PCA

Mexico Free trade agreement negotiation

35
Global scene

 Next few slides we will see the experience of economic

transition in former command economies and its impact
on several parameters___ a cross-section sample

36
Comparison

 We can make comparison with the transition process that

started in China ( 1985) and Russia ( 1989-90)

 Russia__ lack of experience of running enterprise…. Corruption

in privatization of state enterprises….. Financial mess…..
Emergence of mafia

 China___ lack of knowledge compensated by allowing foreign

capital free run in limited areas ( eastern provinces) __ slow
transition___ mess in financial system…. Large scale corruption

37
Growth & agriculture

10

Growth of GNP per capita 1990-97 (in per cent per

5
Slovenia Poland

Slovak
Rep. Hungary Romania
0
Czech Rep.
0 10 Bulgaria 20 30 40
Estonia
year)

-5
Belarus Uzbekistan
Lithuania
Russia Latvia Kazakhstan Kyrgiz Rep.
-10
Moldova
Ukraine
Turkmenistan
Georgia
-15
Azerbaijan

-20
Share of agriculture in labor force 1990 (in per cent)

38
Openness & share of agriculture

40

Actual exports less country-size-adjusted

Estonia
30

exports 1990-97 (in per cent of GDP)

Czech Rep.
Belarus
Latvia
20 Moldova
Slovenia Lithuania
Slovak Kazakhstan Uzbekistan
Rep. Russia Ukraine
Bulgaria
10
Hungary
Azerbaijan
Romania Poland
0
0 10 20Georgia 30 40
Kyrgyz Rep.
50 60

-10

-20
Albania

-30
Share of agriculture in labor force 1990 (in per cent)

39
Cross –section example: growth & openness_
1990 _97

10

Growth of GNP per capita 1990-97 (in per cent

5
Poland Slovenia

Hungary Slovak Rep.

0
-10 0 Romania 10 Bulgaria 20
Czech
30 40
per year)

Rep. Estonia

-5
Lithuania Uzbekistan Belarus
Kyrgyz Latvia
Russia Kazakhstan
Rep. -10
Moldova
Ukraina
Georgia
-15
Azerbaijan

-20
Actual exports less country-size-adjusted exports 1990-
1997 (in per cent of GDP)

40
Just for knowledge__ corruption and economic growth

10

Growth of GNP per capita 1990-97 (in per cent per

5
Poland Slovenia

Albania
Slovak Rep.
0 Romania Czech Rep. Hungary

0 1 2 3
Bulgaria 4 5 6 7
Estonia
year)

-5
Uzbekistan Belarus
Kazakhstan Lithuania
Russia Latvia
-10 Kyrgyz Rep.
Moldova
Ukraine

-15 Georgia
Azerbaijan

-20
Corruption perceptions index 1999

41
conclusion
 We are in the middle of the process of reforms….

 Only expectations about the better future

42
 End of discussion
 Reference:
 1. Prem Sankar Jha, The Perilous Road to Reforms, Rupa &
Co., Calcutta, 2002.
 2. World Bank__ World Economic Outlook_ 2002
 3. Economic Reforms_ a position paper

43