Ans:
Meaning of Economic Reforms: Economic reforms or new economic policy refers
to various policy measures and changes introduced since 1991. The common
objective of all these measures is to improve productivity and efficiency of
the economy by creating a more competitive environment therein.
The reforms can be classified into two
broad categories:
A.
Liberalization,
privatization and globalization measures.
B.
Macroeconomic reforms
and structural adjustments.
Objectives
or Need of Economic Reforms/ New Economic Policy:
Need for economic reforms or New
Economic Policy was felt mainly because of the following reasons:
1.
Increase in Fiscal Deficit: prior
to 1991, fiscal deficit of the government had been mounting year after year on
account of continuous increase in its non-development expenditure. Fiscal
deficit means difference between the total expenditure and total receipts minus
loans. It is equivalent to total borrowings by the government. In 1981-82,
it was 5.4 per cent of gross domestic product (GDP). In 1990-91, it rose to 8.4
per cent of GDP. With a view to meeting fiscal deficit, the government is
obliged to raise loans and pay interest thereon. Thus, due to persistent rise
in fiscal deficit there was a corresponding rise in public debt and interest payment
liability. In 1980-81, interest payment on public debt amounted to 10 per cent
of total government expenditure. In 1991, amount of interest liability rose
further to 36.4 percent of total government expenditure. There was serious
apprehension that the government was fast heading for debt trap.
2.
Increase in Adverse Balance of Payments:
balance
of payment is the difference between total exports and total imports of a
country. When total imports exceed total exports, the balance of payments
becomes adverse. Government granted diverse kinds of incentives and concessions
to the exporters under export promotion program, yet the export did not rise to
the desired extent. It was mainly due to the fact that in international market
our exports could not complete in price and quality. All this was the direct
result of the policy of protection so liberally pursued by the government and
for so long. As against slow growth of exports there was rapid increase in
imports. As a result, balance of payments deficit increased very much. Deficit
of balance of payments had been rising continuously since 1980-81. For
instance, in 1980-81,balance of payments on current account was adverse to the
tune of Rs. 2,214 crore and it rose in 1990-91 toRs.17367crore. To meet this
deficit large amount of foreign loans had to be obtained.
3.
Gulf Crisis: On
account of Iraq war in1990-91, prices of petrol shot up. India used to receive
huge amount of remittances from Gulf countries in foreign exchange all that
stopped totally. Gulf crisis thus further accentuated already adverse balance
of payments position. This has increased balance of payments deficit very much.
4. Fall in
Foreign Exchange Reserves: in 1990-91India’s foreign exchange reserves fell
to
such a low level
that the same were not enough to pay for an import bill for even 10 days.
Foreign exchange
reserves that were Rs. 8151 crore in 1986-87 declined sharply to Rs. 6252
crore in
1989-90. The situation grew so acute that Chanderashekhar government had to mortgage
country’s gold to discharge its foreign debt servicing obligation.
5.. Rise in
prices: in
India prices continued to rise very high. Average annual rate of inflation
increased from
6.7 per cent to 16.7 per cent. Main reason for inflation or annual rate of
increase in
prices was rapid increase in the supply of money. This, in turn, was due to
excessive resort
to deficit financing by the government. Deficit financing implies borrowing
from Reserve
Bank of India by the government to meet its deficit. Bank offered this loan by
printing new
currency notes. Cost of production takes an upward jump due to high rate of
inflation. It
adversely affects domestic and foreign demand for our products.
6. Poor
Performance of Public Sector Undertakings (PSU): In 1951 there were just 5
enterprises in
public sector in India but in 2001 their number rose 232. Several thousand
crores of public
funds were invested therein. In the initial 15 years their functioning was
quite
satisfactory but thereafter most of these suffered losses. Because of their
poor
performance.
Public sector undertakings degenerated into liability.
On account of
the above compelling factors, it became inevitable for the government to adopt
New Economic
Policy. It was all the more necessary to increase industrial output and attract
foreign capital.
A. Main
Features of Economic Reforms or New Economic Policy
Liberalization: Liberalization
of the economy means to free it from direct or physical controls imposed by the
government. Prior to 1991, government had imposed several types
of controls on Indian economy, e.g., industrial licensing system; price
control or financial control on goods, import license, foreign exchange
control, restrictions on investment by big business houses, etc. these had
dampened the enthusiasm of the entrepreneurs to establish new industries. These
controls had given rise to corruption, undue delays and inefficiency.
Economic reforms therefore made a bid to reduce restrictions imposed on
the economy. Economic reforms were based on the assumption that market
forces could guide the economy in a more effective manner than government
control.
Measures Taken
for Liberalization
Following
measures have been taken under economic reforms for liberalization of Indian
economy:
1.
Abolition of Industrial Licensing and
Registration: The New Industrial Policy (NIP) is the first part of
the liberalisation measures. Under the NIP, industrial licensing has been
greatly liberalized. All industries, except a few specified ones, have been
de-licensed under the NIP and liberated from the clutches of control in a bid
to eliminate the obstacles to industrial growth. De-licensing of passenger car
industry, bulk drugs industry, consumer electronics industry, etc. became
landmarks and several new players entered these industries. Industries for
which licenses are still necessary are: Liquor, b) Cigarette, c) Defense
equipment’s, d) Industrial Explosives, e) Dangerous Chemicals, f) Drugs. Small
Scale Industry (SSI) dereservation, however, has not made much progress.
2.
Concession from Monopolies Act: according
to the provisions of Monopolies and
Restrictive
Trade Practices Act (MRTP Act) all those companies having assets worth more
than 100 crore
used to be declared MRTP firms and were subjected to several restrictions.
Now the concept
of MRTP has been done away with. These firms are now no longer required
to obtain prior
approval of the government, at the time of taking investment decisions.
3.
Freedom for Expansion and Production to
Industries: as a result of liberalization policy, industries
have been given the following freedom:
a)
Prior to liberalisation under the
provisions of old policy at the time of granting license government used to fix
maximum limit of production capacity. No industry could produce beyond this
limit. Now this limit has been removed.
b)
Producers are now free to produce anything
on the basis of demand in the market.
Previously, only those goods
could be produced which were mentioned in the licence.
4.
Increase in the Investment Limit of the
Small Industries: Investment limit of the small industries has been
raised to Rs. 1 crore so as to enable them to introduce modernisation. Investment
limit of tiny industries has also been increased to Rs. 25 lakh.
5.
Freedom to import Capital Goods: under
the policy of liberalisation. Indian industries will be free to buy machines
and raw materials from abroad in order to expand and modernize themselves.
Privatisation: In
the context of economic reforms, privatisation means allowing the private
sector to set up more and more of such industries as were previously
reserved for public sector. Under it, existing enterprise of the
public sector are either wholly or partially sold to private sector.
Measures adopted
for Privatisation
Following measures were adopted in
respect of privatisation under economic reforms:
Contraction of
Public Sector: Initially in the economic development of
India, public sector was accorded prime importance. As observed by Dr. Manmohan
Singh, priority was given to public sector in the hope that it would help
capital accumulation, industrialisation, development and removal of poverty.
But none of these objectives could be realised. Policy of contraction of public
sector was therefore adopted under the new economic reforms. Number of
industries exclusively reserved for public sector was sector was reduced from
17 to 4. Government has been divesting its stake in public sector undertakings
in the light of the redefinition of its role from being a provider of goods and
services to that of a policy-maker and facilitator. Between 1991-2002 the
Government has privatized assets worth US$ 6.3 billion. At present the
Government is considering disinvestment of the Shipping Corporation of India,
State Trading Corporation, Minerals and Metals
Trading
Corporation, among others. One of the biggest privatization programs that the
Government has initiated is the leasing of international
airports at the
four metropolitan cities of Delhi, Mumbai, Chennai, and Kolkata.
Globalisation:
Globalisation
means integrating the economy of a country with the economies of other
countries under conditions of freer flow of trade and capital and movement of
persons across borders.
“Globalisation may be defined as a
process associated with increasing openness, growing economic interdependence
and deepening economic integration in the world economy.”
Main components
of Globalisation of Indian economy are as under:
1. Increase in Foreign Investment:
under economic reforms, limit of foreign capital investment has been raised
from 40 per cent to 51 per cent. In 47 high priority industries foreign direct
investment to the extent of 51 per cent will be allowed without any restriction
and red tapism. Export trading houses will also be allowed foreign capital
investment up to 51 per cent. In this regard Foreign Exchange Management act
(FEMA) will be enforced.
2. Devaluation:
in
order to promote exports under the policy of globalisation, Indian rupee was devalued.
In July 1991, rupee was devalued to the extent of 20 per cent on an average.
The objective was export promotion, import substitution and attraction of
foreign capital.
3. Reduction
in tariffs: in order to render Indian economy beneficial
internationally, custom duties and tariff imposed on imports and exports are
being reduced gradually.
4. Export
Promotion: several measures have been taken to meet the deficit
of balance of payments. Exports have been promoted. Special facilities like
abolition of export duties, cheaper export credit and cuts in import duty have
been provided to the exports in order to increase the share of Indian exports
in world trade. The government also enhanced the duty drawback in respect of a
large number of items. The greater flow of bank finance to the export sector at
concessional rate also enhanced the competitiveness of exports.
5. Rupee
made Convertible: the government brought in partial
convertibility of the rupee in 1992-93 and full convertibility on the trade
account in 1993-94. The move supported the intention to give exchange rate
mechanism its due role in regulating the trade flow. It also served to
encourage exports.
B. Macroeconomic
Reforms and Structural Adjustments
The government brought about a
series of macroeconomic corrections, reforms of economic institutions and structural
adjustments. These included the followings:
• Fiscal
reforms
• Banking
Reforms
• Capital
market reforms
• Containment
of inflation and public debt
• Phasing
out of subsidies, dismantling of price controls and introduction of
market-driven
price
environment.
• Public
sector restructuring
• Exit
policy
Fiscal Reforms
The fiscal
reforms centered around reduction of fiscal deficits. Fiscal reforms mean
increasing the revenue receipts and reducing the public expenditure of the
government in a manner that production and economic welfare are not adversely
affected. Its main objective was to reduce fiscal deficit that stood at 8.5
percent of GDP in 1990-91, to 4 per cent. Several reforms has been to undertake
to achieve this objective, e.g., control over public expenditure, increase in
taxes, sale of share of public sector enterprise and increased price of public
sector products.
Banking Sector
Reforms
The
recommendations of the Narasimham Committee formed the basis of the banking
sector reforms. The
government carried out a phased reduction of Statutory Liquidity Ratio
(SLR) and
permitted a measure of freedom and flexibility to the banks in their
operations. The government also went in for partial disinvestment of its equity
in the nationalised banks. It also cleared the way for the setting up of a new
private sector banks I the country.
Capital Market
Reforms
Number of
development has taken place in the Indian capital market with the launching of
financial
reforms since July 1991. In the process the capital market is being rebuilt.
Some of the important developments that have taken place in the Indian market
(or the reforms that have been announced by the Central Government) are as below:
1. Setting up of
Securities and Exchange Board of India (SEBI) with autonomous power as a
regulatory
authority over various constituents of the Capital market.
2. Abolition of
the office of the Controller of Capital Issues (CCI) in 1992, which means that
the pricing of
new issues on the capital market will not be bureaucratically dictated.
3. Launching of
Over the Counter Exchange Of India (OTCEI) a place permitting smaller
companies to
raise funds.
4. Introduction
of Screen-based System: till 1994, trading on the stock market in India was
based on the
open outcry system. With the establishment of the National Stock Exchange in
1994, India
entered the era of screen-based trading. Within a short span of time,
screen-based
trading has
removed the open outcry system on all the stock exchanges in the country. The
key features of
this system are as follows:
• Buyers
and sellers place their orders on the computer.
• The
computer constantly tries to match mutually compatible orders on price and time
priority.
Insurance Sector
Reforms
Opening up of
the insurance sector is another important element of the reforms. This came
much later in the long sequence of reforms. The Malhotra Committee report on
the liberlisation of the insurance sector, had earlier recommended that foreign
insurance companies be allowed to operate in India preferably in Collaboration
with Indian Companies. The Insurance Regulatory and Development Authority
(IRDA) Act was passed by parliament in 1999. The Act paved the way for the
entry of private sector, including foreign private sector, into the insurance
business, which had been a government monopoly for decades. The move broke the
monopoly of the LIC in Life insurance and that of the GIC in health and general
insurance. The new Act provides statutory backing to the IRDA and seeks to
entrust it with the responsibility of regulating the insurance business in the
country. Under the Act, foreign equity up to26 per cent is allowed in domestic
insurance companies. It stipulates a minimum paid-up capital of Rs. 100 crore
each for companies in life insurance and general insurance.
Some
Achievements of Economic Reforms:
The moment
economic reforms were announced in July 1991, there was a feeling that the
Government was
loosening some of the controls. The difficulties and delays associated with the
earlier system of controls were now expected to vanish. Fourth largest economy
(US$ 3 trillion GDP) in terms of Purchasing Power Parity after USA, China and
Japan. The fundamentals of the Indian economy have become strong and stable.
The macro-economic indicators are at present the best in the history of
independent India with high growth, healthy foreign exchange reserves, and
foreign investment and robust increase the fundamentals of the Indian economy
have become strong and stable. The macro-economic indicators are at present the
best in the history of independent India with high growth, healthy foreign
exchange reserves, and foreign investment and robust increase in exports and
low inflation and interest rates. In addition, some of the major achievements
of economic reforms can be summed up as follows:
1. Growth rate
of the economy in terms of GDP growth picked up and reached a peak rate of
8.4 per cent in
2002-03. A unique feature of the transition of the Indian economy is that it
has
become the
second fastest growing economy of the world in the year 2003 - 04. In the
financial year
2004 - 05 the GDP growth has averaged 6.9% (estimated). India has recorded
one of the highest
growth rates in the 1990s. The target of the 10th five-year Plan (2002-07)
is 8% growth
rate.
2. India's
services sector grew by 9.4% in 2004-05. Foreign direct investments have
increased from
less than 0.05 per cent of GDP to more than 0.4 over cent of GDP in 2002-03.
3. The foreign
exchange reserves have reached a record level of US$ 138.84 billion in June
2005. The
comfortable situation of forex reserves has facilitated further relaxation of
foreign
exchange
restrictions and a gradual move towards greater capital account convertibility.
According to IMF
(2003 report) India's Forex Policies are in line with global best practices.
4. The foreign
exchange reserve has increased rapidly. In 1990-91, the foreign exchange
reserves were
enough to finance imports for 2.5 months. In 2002-03, they are enough to
finance imports
for11 months. Foreign Exchange Reserves (US$ 138.84 bn) now far exceed
Foreign Debt
(US$ 113 bn as on September 2004).
5. Short-term
debt is less than 4 per cent of the reserves.
In March 1991
Forex Reserves including gold stood at $5.8bn as against external debt of
$83 billion. The
external debt to GDP ratio has improved significantly from 38.7% in
1992 to 17.8% in
end of March 2004. This is one of the lowest among developing
economies.
External debt in December 2004 was 120.9 billion US dollars. Of these long-term
NRI deposits are
$ 27 billion, commercial borrowings $ 24 billion, multilateral debt $ 31
billion, and
bilateral debt $ 18 billion.
6. The rate of
industrial growth also started rising from 1993-94 onwards. It reached at peak
rate of 6.7 per
cent in 2002-03.
7. Average rate
of inflation has been reduced considerably, from nearly 13.6 per cent in 1991-
92 o
around 3.4 per cent in 2002-03.
8 The Government
has decided to (1) discontinue receiving aid from other countries except the following
nine: Japan, UK, Germany, USA, EU, France, Italy, Canada and the Russian
Federation and
(ii) to make pre-payment of all bilateral debt owed to all the countries
except the ones
mentioned above. Since July 2003, India has become a net creditor to IMF,
after having
been a borrower in the past.
9. The
Government has written off debts of US$ 30 million due from seven heavily
indebted
countries as
part of the "India Development Initiative" announced in February
2003. The
interest rate
continues to be reduced and is around 6%. This is the lowest in the last thirty
years and it is
stimulating consumption and investment.
10. Thanks to
the introduction of screen-based trading and electronic delivery, the stock
market has been veritably transformed. Their combined effect has been to reduce
the transaction costs in India’s stock market dramatically.
11. India is
becoming a production base and an export hub for diverse goods, from
agricultural products to automobile components to high-end services. Indian
firms are now part of global production chains — importing sub-assemblies,
adding value to them and re-exporting them.
12. Taking
advantage of its pool of high-quality scientific talent, international
corporations have established large R&D centers in India. All these
strengths have resulted in a greater
Integration of
the Indian economy with the world economy. Trade has risen from 21 per cent
to 33 per cent
of India's GDP in a decade.
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