New Economic reforms and its impact on indian economy till date

Overview

The balance-of-payments crisis witnessed by India in the early 1990s resulted in unleashing of a comprehensive economic reform package, comprising macroeconomic stabilisation and structural adjustment policies. The major components of the initial reform package were related to trade, industry and reform of government finances. The objective of trade policy reform was to create an environment, which would provide an impetus to export while, at the same time, reducing the degree of regulation and licensing control on foreign trade. Industrial reforms were aimed at providing greater competitive stimulus to domestic industry through deregulation. Fiscal reform was aimed at curbing unproductive government expenditure, so as to direct public expenditure toward providing essential public services of a high quality like basic education, health, sanitation, physical and social infrastructures and social security, and to increase tax and non-tax revenues. Subsequently, reform initiatives were made in many other sectors such as telecommunication, electricity, aviation industry, information technology, etc. All these reforms envisaged to place India on a higher growth trajectory by inducing greater efficiency and competitiveness in all spheres of economic activity.

The outcome of the reform process is by and large mixed. India is no longer regarded as a closed economy and a country of scarcity. The world now looks at India as a future economic power house. Nothing could have exemplified this image change better than the economic reforms initiated in the 1990s. The growth of Indian economy, although not much higher than that registered during the 1980s, accelerated in the 1990s to 6 percent. But this is certainly higher than the “Hindu rate of growth” of 3.5 percent a year, registered during the first three decades after independence. Food stocks and foreign exchange reserves are now plentiful. In the macroeconomic and financial spheres, inflation has been contained, external debt indicators have improved, exchange rate is flexible and the country is free of financial repression. Trade reforms by way of removal of import restrictions and reduction of import duties have helped to increase exports, reduce cost of production, infuse better technologies in the process of production and supply consumers with better choice of products. Increased private sector participation in crucial sectors like banking, insurance, aviation and telecommunication has resulted in remarkable improvement in choices for the consumers and service delivery. More importantly, liberalisation has provided innumerable opportunities for starting and innovating new business ventures, as evident from the remarkable success of Indian software Industry. In short, with economic liberalisation, Indian economy has become much more dynamic and integrated with the world economy.

Despite these achievements, reforms have brought numerous negative effects and challenges to the Indian economy, which, if not addressed, could seriously undermine whatever success the country has achieved through reforms. The high growth achieved in the 1990s is sourced mainly to the booming service economy without any meaningful contribution from the traditional agricultural and industrial sectors. Moreover, the growth achieved during the 1990s was not smooth. In the first five years of the reform period, the acceleration of gross domestic product (GDP) growth was remarkable. But after that it slowed down, particularly in the later years of the 1990s due to collapse of agriculture and industrial growth. Indeed, the drop in GDP growth in these years would have been much steeper but for the extraordinary buoyancy of services. This growth pattern raises questions of sustainability of India’s economic growth. The agrarian economy has been facing severe crisis for quite some time, but reforms have failed to address the issue. Reforms were expected to improve the performance of Indian industry by infusing more efficiency into the sector. But what happened during 1990s was a slump in industrial growth and industrialists view the future with great gloom. As regards employment, although reforms have generated new employment opportunities in some sectors such as information technology and telecommunication sectors, it resulted in falling employment in some others like small-scale industries, manufacturing and government sector. The fact that it is the underprivileged, rural people and people with limited/lesser training skill who are most affected by this changing employment fortunes, undermines the credibility of reforms day by day. The falling growth of agriculture and industrial sectors has only aggravated the problem. Still, there is no consensus yet on the key question of whether reforms have helped reduce poverty. The data put out by various sources provide a conflicting picture. Another challenge thrown out by reforms is the growing inter-regional disparities. Growth in the 1990s has been unevenly distributed across regions. Economies of some dynamic states like Maharashtra, Tamil Nadu and Gujarat are surging ahead, while the poorer states have stagnated. This could put pressure on the federal system and upset polity in the future, since the bulk of the population lives in poorer states such as Uttar Pradesh and Bihar. One important objective of structural reforms initiated in the 1990s is to restructure the finances of the governments. However, nothing significant has been achieved till date. The governments both at the national and state levels continue with their fiscal profligacy. Whatever little the central government has managed up to 1999 has been cancelled by the deteriorating fiscal position of the state governments from the second-half of the 1990s. Certain sectoral reforms such as power sector reforms have failed to achieve the stated objectives and the future of these reforms also appears bleak. In the reforms initiated in 1991, the emphasis was on reforms of product markets by abolishing industrial licensing and import barriers. These reforms, however, left out the factor markets such as labour markets. Until now the government has not been able to initiate the process of reforms in this crucial sector.

Against this background, this book is an attempt to make a performance assessment of various reforms measures initiated in India since early 1990s. The articles in this book critically evaluate the reforms undertaken till recently in various sectors of the Indian economy. The book consists of three sections. The first section deals with the achievements of macro economic reforms. External sector reforms and sectoral reforms are covered in the next two sections.

The first article, which is a summary of the article “The Triumph of India’s Market Reforms: The Record of the 1980s and 1990s” by Arvind Panagariya and summarized by Geetanjali M Padoshi addresses the question whether the credit for economic development in the 1990s be solely attributed to the reforms or the growth achieved in 1980s also needs to taken into consideration. A detailed analysis reveals three points (a) growth during 1980s was patchy and the last 3 years contributed 7.6 percent annual growth; (b) the high growth in the last three years in 1980s was accompanied by significant liberalisation under the then reigning government; (c) growth was partially stimulated by expansionary policies that involved large accumulation of debt which resulted in economic crisis of 1991. The author observes that economic growth in 1980s was characterized by fragility and volatility as compared to the robust growth during 1990s. The reforms undertaken in 1980s have enabled us to undertake bolder and far reaching reforms in the 1990s. The author concludes that the Indian experience confirms the importance of liberal reforms to sustained growth.

In the second article “Is India a Success Story of Economic Liberalisation?” Jayati Ghosh makes an attempt to evaluate the benefits of liberalisation process to the Indian economy. The author observes that although economic reforms have resulted in the absence of major financial crisis and rapid expansion of IT-enabled services, the majority of Indian population experience fragile and insecure material conditions. The author evaluates the benefit of economic reforms in terms of growth rates by sector, growth rates of employment and trends in poverty. The author asserts that the period since 1990s witnessed deceleration in agricultural output growth, fluctuating manufacturing performance and expansion of the services sector. The 1990s were marked by very low rates of employment generation both in rural and urban sectors. Agricultural employment witnessed the largest slump owing to technological and cropping pattern changes that reduce the labour demand in agriculture. The author observes that the rate of decline of poverty has slowed down but has become more uneven as a result of increased income inequalities. These over the period have accentuated certain longer-term structural features of Indian society, whereby more privileged groups have sought to perpetuate and increase their control over limited resources and channels of income generation in the economy. The author concludes the article with emphasis on the need to rethink, modify and reverse some of the polices adopted as a part of the economic reforms in the country.

The third article “India’s Economic Reforms: Impact on Poverty” by Arvind Chaturvedi and Dr. V Upadhyay explore the impact of 14 years of economic reforms in removal/reduction of the extent of poverty, removal of the gaps of economic inequality and inter-state levels of disparity in standard of living. The article is divided into four parts. The first part gives comprehensive literature of studies examining the impact of economic reforms on poverty. The second part analyses the relationship between the impact of economic indicators and per capita expenditure in the economy for the pre and post-reform periods to see change, if any, in the determinants and their impact using simple and multiple regression. The third section discusses the impact of reforms on consumption expenditure, per-capita income and human development indices. It also attempts to observe the consistent presence of regional disparities in macro level indicators of people belonging to different states. The last part examines the differential impact of reforms in different geographical regions of the country. The main conclusions emerging from the paper are (a) per capita income and expenditure have consistently recorded higher growth in the post-reform period as compared to the pre-reform period; (b) poverty ratios on an average have fallen but the disparity has widened; (c) during the reform period, the states have witnessed an increased growth along with a widening disparity. The better off states have maintained their supremacy in poverty rankings as well as Net State Domestic Product (NSDP).

Charan Singh in his article “Financial Sector Reforms and the State of Indian Economy” makes an assessment of the reforms in banking sector, external sector and financial markets since 1991. It is argued that a carefully designed and diligently sequenced reforms since 1991 have led the economy to consistently record high growth rates despite several domestic and external shocks. As part of reforms, prescribed statutory ratio for banks was lowered in a phased manner considering the development of money and securities market and government deficit; financial markets have developed; and regulatory and supervisory institutions have been established. The dismantling of administered rate regime has aided the development of financial markets and broad based ownership of government securities. Since 1991 external sector management has helped in building foreign exchange reserves through non-debt creating flows to restrict short-term debt and maintain acceptable level of current account deficits. However, the pace of reforms with regard to disinvestment and pricing of public utilities, labour regulations and compensations has been slow owing to the difficulty of implementation. Moreover, reforms in the fiscal policy have also been slow to yield results.

In the fifth article “Fiscal Reforms in India: An Assessment” R Sthanumoorthy attempts to assess the extent to which the fiscal reforms initiated in the 1990s contributed to improve the finances of the central and state governments. It is shown that reforms of 1990s led to a reduction of fiscal deficit of the central government. But states’ fiscal deficit is on the rise particularly from 1997-98. Causing concern has been the increased use of borrowed (fiscal deficit) funds by both the centre and states for meeting their current expenditure requirements. In line with the falling fiscal deficit of the centre in the 1990s, its debt burden has declined. On the contrary, the debt burden of the states, although much lower than that of the centre, has increased continuously over the years as percentage of GDP. Total expenditure of the centre declined in the 1990s, whereas that of states has recorded a marginal increase in the 1990s. However, the later years of 1990s witnessed a significant surge in the total expenditure of both the centre as well as states due to Pay Commission awards. An examination of the composition of the total expenditure of the centre and states shows that a significant portion of the expenditure of the centre and states is directed toward meeting current expenditure commitments. The tax to GDP ratio of combined tax revenue of the centre and states registered a declining trend during the 1990s. This suggests that the tax reforms of the 1990s at the national level have not helped to prop up the tax-GDP ratio of the country. More importantly, the decline in the tax-GDP ratio in the 1990s is attributable purely to the decline in the ratio of central taxes and, this, in turn, is due to a fall in the ratio of indirect taxes of the centre. These results suggest that a greater scrutiny of the tax reforms introduced at the central level during the 1990s is needed.

In his article “Disinvestment and Privatisation in India: Assessment and Options” R Nagaraj discusses the Indian experience with respect to disinvestment and privatization. According to the author disinvestment was initiated by selling undisclosed bundles of equity shares of selected central public sector enterprises (PSEs) to public investment institutions that utilized the shares in the secondary stock market. As the stock market remained subdued for much of the 1990s, the disinvestment targets remained vastly under met. The author also discusses the legal issues in the disinvestment and privatization process, privatization at the state level, employment in PSEs, performance of the PSEs after the disinvestment and privatization process. The author states that as sale of equity has quantitatively been modest in relation to the size of public sector in India it is hard to judge the efficacy of the reform effort. It is argued that the prospects for disinvestment and privatization remain limited as bulk of the public investments is in infrastructure and industries of strategic importance. The author suggests Japanese and German style interlocking of ownership of complimentary PSEs with banks to enforce greater managerial accountability and encourage long-term outlook of output growth and acquisition of technological capabilities.

In the seventh article “Macroeconomic Reforms and a Labour Policy Framework for India”, Jayati Ghosh examines the analytical issues that emerge with reference to macro economic reform processes as well as the possibilities of maintaining basic goals with respect to rights and conditions of workers in the current national and international contexts. The specific elements of neo-liberal reforms process addressed in the article relate to the role of state; structural adjustment and liberalisation at the sectoral level; industrial policy; trade liberalisation; reforms in agriculture and financial sector and exchange rate policy. The author observes that many of the public policies that contributed to more employment and less poverty in the rural areas were reversed in the last decade. The macroeconomic strategy from 1991 was associated with continued stagnation in the employment generation and declining employment in the public sector. It is argued that employment generation and poverty reduction cannot be tackled adequately through a macroeconomic policy that relies on liberalisation and deregulation to deliver growth. The government should address these issues in the context in a broader economic policy framework.

The eighth article “Economic Reforms and Regional Disparities in Economic and Social Development in India” by K R G Nair attempts to enquire into the nature and causes of changes in inter-state disparities in the levels of economic and social development of India with a greater focus on comparison between the pre- and post-reform periods. The author observes that the pattern of regional change in the pre and post-reform period has been different. With regard to per capita Net State Domestic Product (NSDP) the post-reform period shows divergence as compared to no indications of either divergence or convergence in the pre-reform period. The growth in NSDP has been accompanied at the regional level by much higher employment in the pre-reform era than the post-reform one. The author asserts that in regional disparities in small scale or unregistered manufacturing there are no signs of convergence or divergence in the pre-reform period, but there are definite signs of divergence in the post-reform period. The regional disparities in the agriculture and allied sectors there are evidence of inter-state convergence in the pre-reform era; there are no indications of any kind in the post-reform period.

The first article in the second section “India’s External Reforms: Modest Globalisation, Significant Gains” by Arvind Virmani analyses the impact of external sector reforms undertaken following the balance of payments (BoP) crisis of 1990-91. It is argued that the liberalisation of India’s external sector during the past decade was extremely successful in meeting the BoP crisis of 1990 and putting the BoP on a sustainable path. These reforms improved the openness of the Indian economy vis-à-vis other emerging economies. The main lesson of the nineties is that liberalisation of the current and capital account increases the flexibility and resilience of the BoP. This applies mainly to trade, invisibles, equity capital, and the exchange market. Still, much remains to be done. India’s economy is still relatively closed compared to its competitors. Further, reduction of tariff protection and liberalisation of capital flows will enhance the efficiency of the economy and, along with reform of domestic policies, will stimulate investment and growth. The impact of fiscal profligacy on the external account has become indirect and circuitous with the implementation of external sector reforms. The negative long-term effects of fiscal profligacy are more likely to be felt in future on the growth rate of the economy and the health of the domestic financial sector.

“India’s Trade Reform: Progress, Impact and Future Strategy” by Arvind Panagariya and summarized by Geetanjali M Padoshi discusses the impact of trade reforms initiated in India since 1991 on trade flows, efficiency, and growth. A perusal of external sector policies adopted in India brings out three distinct phases. The period of 1950-1975 saw tightened government controls. This was followed by a period (1976-1991) in which the economy witnessed some liberalisation measures. Finally from 1992 onwards extensive liberalisation was undertaken. The period of late 1970s witnessed the realization of adverse effects of tight import restrictions on profitability by industrialists. The introduction of export incentives especially after 1985 neutralized the anti-trade bias of import controls. The growth rate of the economy increased from 3.5 percent during 1950-1980 to 5.6 percent during 1981-91 on account of liberalisation and expansionary fiscal policy. The fiscal expansion was unsustainable and plunged the economy in balance of payments crisis in 1991. To counter the crisis, the government launched a comprehensive and systematic reforms program which is in effect even today. The reforms initiated consisted, among others, liberalisation of trade in goods and services. The above policy change has brought important changes in the trade flows. The exports of goods and services grew 10.7 percent in the 1990s against 7.4 percent witnessed in the 1980s. The pace also picked up on the imports side with the growth rate rising from 5.9 percent in 1980s to 9.2 percent in 1990s. The share of services in total services and goods exports rose from 19.6 percent in 1990 to 33.1 percent in 2001. Remittances from overseas Indians and software exports grew rapidly. As regards efficiency gains from trade reforms, studies suggest that the trade liberalisation undertaken till date had the potential to increase the GDP permanently by 2 percent, approximately. The consumers were supplied with better products. The bulk of the benefits from liberalisation evidently comes from faster growth.

The third article by Nagesh Kumar “Liberalisation, Foreign Direct Investment Flows and Development: Indian Experience in the 1990s” reviews the Indian experience with foreign direct investment (FDI) and its quality since 1991, in a comparative East Asian Perspective. The impact of economic reforms on FDI is being discussed by analyzing the trends and patterns in FDI inflows in the 1990s, determinants of FDI inflows in India, impact of FDIs in terms of various parameters of development and emerging trends in multi national enterprises (MNEs) in knowledge based industry in India. The author observes that although the magnitude of FDI flows has increased, in the absence of policy direction, the bulk of them has gone into services, software technology and consumer durables. The importance of FDI as a source of capital and output generation has risen, but its impact on direct investment and growth is mixed. India’s experience with respect to fostering export-oriented industrialization with the help of FDI has also been much poorer than most East Asian economies. The author argues that liberalisation of FDI policy may be necessary but not sufficient for expanding FDI inflows. Attention to macroeconomic performance indicators such as growth rates of industry through public investments in socioeconomic infrastructure and other supporting policies and creation of a stable and enabling environment, along with liberalisation policies, would lead to increased FDI flows.

In the third section, the first article “Farm Sector Performance and Reform Agenda” by Rip Landes and Ashok Gulati analyses the structural and policy-induced changes in agriculture since the reforms of 1991. The authors observe the impact of non-agricultural reforms on agriculture, in terms of rising incomes and improved relative prices for agriculture. The analysis reveals that although the demand and improvements in sectors in terms of trade have strengthened, the agricultural productivity has slowed down and investments have remained weak. These could be attributed to performance of India’s structural policies. After assessing the agricultural policy, the authors suggest reforms in the following areas (a) grain producer price policy, (b) removal of export restraints; (c) protection of oil seeds and oils; (d) market and regulatory reform and (e) public investment. The authors conclude by emphasizing the need to fill the analytical gaps in the reform agenda so as to push forward the same.

The second article “Economic Reforms and Industrial Structure in India” by Sudip Chaudhuri and summarized by S Bhaskaran examines the impact of economic reforms initiated in India during the 1990s on its industrial performance. The analysis reveals a disappointing overall performance in both output growth and employment. Economic reforms were expected to result in rapid and sustained growth of output and employment, thereby leading to poverty reduction. An analysis of the registered manufacturing sector suggests that such expectations have not materialized. Value added growth in the registered manufacturing sector achieved after reforms have not been able to surpass that achieved before reforms. The industrial base of the country has become shallower. In contrast to the pre-reform period, between 1990-91 and 1997-98, more than half of the growth has been accounted for by consumer goods. The industrial employment situation is hardly encouraging. Annual rate of growth of employment of workers has been negative in five out of nine years in the 1990s. Labour intensity has gone not only in the capital-intensity goods but also in labour-intensive goods. This disappointing performance must be attributed to the policy of import liberalisation and reduced role of government on demand pursued under economic reforms.

The next article by Leena Mary Eapen titled “Impact of Electricity Reforms on the Performance of the Indian Power Sector”, critically reviews the reforms undertaken in the power sector since the past one decade and evaluates the outcome. The main objectives of the reform process were to (a) attract private investment in the power sector, (b) make the State Electricity Boards (SEBs) commercially viable and (c) reduce dependence of SEBs on government assistance. To achieve these objectives, private investment in the power sector was allowed and restructuring of SEBs was initiated with the objective of making them commercially viable. The author through her analysis demonstrates that there is no significant improvement in the performance of power sector, particularly SEBs, even after a decade of reforms. However, she asserts that efficient implementation of the reforms is the only alternative as SEBs are financially unviable and there is little prospect of getting money from the state budget.

The final article of the book “Telecommunications Reform and the Emerging ‘New-Economy’: The Case of India” by Moazzem Hossain and Rajat Kathuria critically evaluates the economic and regulatory reform brought into the telecommunications sector, the emergence of the “new” economy and the challenges for India in managing the newly emerged economic opportunities. The author discusses the reform agenda in the telecommunications sector by discussing the National Telecom Policy 1994 and the New Telecom Policy 1999. The role of regulatory players—Department of Telecommunications and Telecom Regulatory Authority of India—is also discussed. Despite the telecom policy and the telecom regulation being controversial, telecommunication sector has been the fastest growing sector in the economy. The analysis of India’s telecom sector presents a picture of “managed competition”. The technological changes have led to cost reduction and expanded scope of product choice. Following the widespread adoption of market-based approaches to the supply of telecommunications services, there is also a growing consensus that regulators should not be involved in the detailed management of the sector. Under the given market-based approach and the current regulatory framework in place, the telecommunications industry has contributed to the establishment of a new sector in the economy driven by software and information technology enabled services. It is argued that the emergence of new economy has taken place owing to the growth in technology and innovation of knowledge based goods and services along with globalization of economic activity.