Indian Economy | Two Decades of Economic Reforms—India Download PDF
Economic Reforms Encapsulated
In the previous three sections, we had seen India in three different perspectives: first— domestic, second—external and third—global perspective. There is a need to integrate all the perspectives to see the Indian outlook in view of the rapidly changing global environment, into the future, tasks ahead and the challenges before the economy. However, first, we also need to take stock of the economic reforms of the last two decades, which have been discussed, but in separate sections, being multi-sectoral in nature.
As we had discussed the global transition, post-Independence, the economic reforms of 1991 can be said to be transition towards a newer India, shift in the outlook and a different orientation from the previous inward-looking to outward-looking. It is also a reflection of the mood of the government of greater faith in the market and private players and their larger role in the economy. Here, an attempt is being made to provide a holistic and comprehensive review of the ecdhomic reforms initiated since 1991.
Even though it is widely believed that 1991 was the beginning of reforms in India, reforms date back to previous years. However, these were piece meal, specific and micro- oriented and were witnessed more as ‘changes’ rather than reforms. The policy of 1991 marked the character of ‘changes’ changing to ‘reforms’, reflecting a distinct priority and documented as a policy not done earlier.
The other aspect of the reform is that they were largely initiated by the BOP crisis, necessitating pledging of gold by India and the resultant loan from the IMF, which has led to the initiation of economic reforms of 1991. Economic reforms are the process, the commencement of a journey and is a continuous process, shifting gears and moving to next levels in the journey. As an economy, this journey can never end and neither can reform. There can be a slowdown, a pause, but eventually would have to be resumed again.
First-and-Second Generation Reforms
Though reforms are generic but governments for their own understanding prefer to use terminologies ‘first-and-second generation reforms’. First generation reforms are the first level, central government-driven, directed at addressing the cause of the crisis, structural rigidities in different product markets such as industrial, trade and financial sectors of economies. These are also those which can be implemented with relative ease, through an administrative order of the government and quick to deliver results.
The second generation reforms run deeper into the economy beyond the product markets, requiring involvement of the state governments and broad level consensus across political parties. These are also time-consuming as they may require amendments and changes in many legislations and various acts. They could address areas such as labour reforms, exit policy privatization, competition policy, etc.
The main distinction between the two lies in their priority and ability to implement and deliver with ease. They are not sequential and can be undertaken simultaneously. It depends on how critical they are and the general levels of acceptability within the government and the political system.
Review of Economic Reforms in India
Most of the reforms in India since 1991 are broadly first-generation reforms, across various sectors, except some which could be characterized as second-generation, but more focused on first-generation reforms. They have been central government-driven in their area of domain. They have been discussed sector-wise in the previous sections, but are being revisited, to facilitate a greater cohesive comprehension.
Industrial sector reforms are as follows:
(1) The industrial policy of 1991 also known as the policy of liberalization marked the dismantling of the industrial licensing system, larger role for the private sector and move towards a competitive environment.
(2) This has allowed the expansion of the private sector, greater maturity and their presence in all sectors of the £conomy including core industries such as oil, power and other critical industries.
(3) There has been diversification of the industrial base with a large number of industrial
goods being produced. ‘
(4) The public and private sector are now operating in a competitive environment bringing out the mixed economy character very clearly.
(5) The private sector post-reforms have helped to increase the industrial growth and lifted the overall plane of economic growth.
(6) The private sector has gone aggressively for global acquisitions helping them to emerge as global players in the international market. For example, Tata-Corus Jaguar, TCS, Videocon, ONGC, etc.
(7) Public sector also has been given greater autonomy for operational flexibility in the competitive environment.
It has led to establishing India as a market economy with pricing of most industrial goods as market-determined, except for certain petro goods.
The increased production of private sector and their growth in the last two decades has been impressive leading to higher growth and also increased overall investments in the economy which will make a 10 per cent overall growth, a reality, in the not too distant future.
Financial Sector Reforms
Hie financial sector reforms in the banking sector was largely driven by the ‘Narasimham Committee’ recommendations which allowed for liberal entry of private and foreign banks letting for greater competition, diversified products and vastly improved services. Major areas of reform in the banking sector were as follows:
(1) Liberal entry of private sector and foreign banks. It is as part of the reforms that today there are also private sector banks operating along with the public sector banks.
(2) Public sector was given greater autonomy to function in a competitive environment and frame-independent policies based on broad framework provided by RBI.
(3) Interest rates both the deposits as well as advances were deregulated and each bank was free to decide on the interest rates it chose to offer.
(A) Similarly, in respect of lending rates while banks were free to decide on the interest rate they would charge, they had to publish the lowest rate of interest. They would charge to their best clients known as the benchmarked prime lending rate (BPLR).
More recently during 2010, RBI has asked the banks to adopt the base rate of interest, and that no lending would be done by banks below their respective published base rate of interest.
(5) Banking was made more transparent, stress on full disclosure of both the good as well as bad assets.
(6) There was standardization and uniform income recognition, asset classification and provisioning norms for the banking sector.
For the first time, a uniform definition was given to non-performing assets (NPAs) known as the 90 days norms. Thus, interest on loans given if not received within the stipulated time period would need to be classified as an NPA.
(7) Realizing that banking is risky business having normal risks in lending and to safeguard interest banks were required to adhere to ‘capital adequacy’ norms in terms of international best practices (more about”this later in this section).
The overall objective was to bring in greater competition in the banking sector by allowing for better products and improved services and fine-tuned interest rates to support the financial needs of a growing economy like India and enable bigger banks in India to emerge as global banks. Insurance-sector reforms were driven by the ‘Malhotra Committee’ recommendations which, for the first time opened the insurance sector, even though partially, to the private sector, from the complete government-dominated insurance sector.
The insurance sector has been opened up 100 per cent for the.private sector but restricted to 26 per cent equity participation for foreign insurance companies. Post-reforms a large number of insurance companies in the private sector have become operational in the country.
One of the major aspects of reforms has been in the areas of taxation of moving to a Value-added Tax (VAT) system and conversion of the sales tax regime into homogenized state VAT. A still far ambitious reform which will provide for an efficient indirect tax regime is moving to a uniform goods and services tax (GST). Similarly, the direct tax code once made operational would considerably simplify the direct tax system providing for far greater tax compliance.
Trade Sector Reforms
However, the most profound impact has been through the trade sector reforms, an integral part of economic reforms much wider in nature.
(a) These reforms has given the clear signal of opening the economy and larger role for exports, capital flows and a competitive, efficient and productive domestic economy.
(b) More specifically, reforms covered moving towards a market-determined exchange rate, replacing FERA with FEMA, current account convertibility and fairly open capital account and liberalized external commercial borrowings by the private sector.
(c) It also liberalized the foreign investment policy to attract foreign investment and eased restrictions on capital inflows.
(d) These measures have been largely responsible for increasing exports and increased share in global trade of goods and services.
(e) The external transactions are now over 100 per cent of the GDP, built-up foreign exchange reserves providing an import cover of over 7 months as against barely seven days during 1991.
However, the most notable aspect of reforms has been the fact, that not only India got out of the crisis, not only repaid but prepaid its liabilities to the IMF and has turned as a Tender from a borrower’ to the INfF. It has earned the status of an emerging economy, changed the global perspective of India and now having a larger say in global matters. It has emerged as the second fastest growing economy of the world after China, in a short time of just about two decades. ‘
Where the Economic Reforms Have Not Delivered?
What we have just covered is the positive side of the reforms, however, it also has shades
of grey areas which is a matter of concern.
(1) The overall growth even though higher from the past and also in relation to other economies, has been fairly uneven, or exclusive but not inclusive. –
(2) The benefits of growth have been confined to few not broad-based to benefit the masses.
(3) It is not led to the desired degree of expansion in employment opportunities, normally associated with, high levels of growth. Employment in the manufacturing sector has stagnated.
(4) The growth has been highly skewed, accentuating inter-state and intra-state inequalities. It has virtually left the (Bihar, MP, Assam, Rajasthan, Uttar Pradesh) states untouched.
(5) The ‘license Raj’ has been abolished but replaced by a bigger hindrance of the ‘inspector Raj’.
(6) Bureaucratic control has solely changed its face has moved from direct to indirect such as pollution control boards, environmental clearances, etc.
(7) Levy and collection of excise duties is still complex.
(8) The earlier nexus between the politics and business, despite the reform process, has only got stronger.
The above has not happened essentially because the government has virtually pressed the
‘pause’ button of economic reforms with a large unfinished agenda of:
(1) The government could be said to have gone ‘soft’ on bolder reforms. Labour market reform, which is not even being considered by the government, despite it being fundamental, in the changed circumstances and to provide the much needed link between growth and employment opportunities.
(2) Further, unshackling the private sector from the myriads of indirect interface with the government.
(3) Bringing on board the state governments to share the passion of driving the reforms deeper across states.
(4) Pushing through to make the NCLT functional at the earliest as it is one of the components of an exit policy, seen as a facilitator to the process of liberalization.
(5) Privatization has virtually been put on the back burner with only disinvestment in public sector being considered. This is a retrograde step and at least a platform should be created for building a broad-based consensus.
(6) Loss-making public sector continues to act as a drain and no efforts made to see how they can be integrated in a liberalized market economy.
(7) The banking sector despite reforms is largely dominated by the public sector and no efforts at their consolidation or privatization for their long-term sustainability.
(8) Efforts at reforms in the insurance sector have been half-hearted, with the dominance of the government, despite the fact that insurance in market is fairly under developed and lacking penetration.
(9) The FDI policy still has a number of structural issues and potential road blocks to foreign investment. FDI in organized retail, raising sectoral caps for insurance business by foreign companies are key aspects of reforms.
Unfinished Agenda of Economic Reforms
The government has a fairly long list of the unfinished agenda in economic reforms, which is not presently considered as a priority but would become critical in driving the reforms not only deeper but sustainable in the future as the economy steps into the global environment. It has political compulsions in a democratic framework and gets limited by the lack of consensus on many bolder reforms.
It is not to say that it should coercively drive bolder reforms, but at least do those which fall in its domain, less controversial, and for the bolder reforms, flag them, create appropriate platforms for discussions and over a period of time, with consensus implement them. At a still broader level, reforms other than economic also influence economies such as police, judicial, bureaucracy and many such smaller reforms can have a profound impact, by spreading positive sentiments of growth and welfare in the economy.
It can be said, all these reforms economic or otherwise are centred around’ the government but what about the government itself? It is also a candidate for reform itself. The speed of decision-making, better inter-ministerial coordination, leaner government structure, technology-enabled, proactive and not reactive character, are all relatively simple to implement and send positive signals in the economy.
It is in these, not able to implement 1000 of smaller reforms, it can be said that reforms in India have slowed down, if not paused by the government and not because of its in ability to push through bolder norms. It is not the ability to push bolder reforms which is being questioned, but as mentioned previously, in their ability to flag them and provide a platform for a broad-based consensus, which is being questioned. The other is government¬reforming itself, which is relatively easy but still difficult requires a strong will and still more important a decisive discipline and a consciousness of their larger responsibilities towards the national interests rather than party interests.
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