Performance of the Indian Economy in the Era of Economic Reforms

 

Performance of the Indian Economy in the Era of Economic Reforms

Performance of the Indian Economy in the Era of Economic Reforms

The word reform means to form again. It also means to make better by making necessary changes. Performance of the Indian Economy in the Era of Economic Reforms

For instance, we say that a good teacher can reform the delinquent and truant students in a school.

Applied to the society or economy, it means much the same matter.

Thus we know that certain religious and social reforms took place in Indian society in the 19″ century.

When we talk of (necessary) economic reforms, in a similar vein we mean that certain changes are necessary to improve the performance of the economy and give it a new fillip.

Often,-the difference between these necessary changes and the earlier situation is of kind than of degree.

A mere tinkering with existing instruments and policies will not do; what required is to give the economy a new path, steer a new course, and provide a new framework.

 Now, reforms can be of many types, and there is no reason to think that the kind seen in India and elsewhere is the only one possible.

But for historical reasons, it so happened that since the 1950’s when several developing nations embarked on their journey of development.

A great faith placed on the state in most of these nations for steering the economy.

Performance of the Indian Economy in the Era of Economic Reforms

Some nations, like China and Cuba, were outright Socialist, with the machinery and productive resources almost entire owned and controlled by the state.

Others, like India, mixed economies, with a large private sector.

With pervasive state presence in the economy, and a host of controls and regulations.

In all of these nations, it began to be felt by the late 1970s, that the performance not matching the promise.

So, in almost all countries, the state began to lessen its control over the economy and open more areas of economic activity to the private sector.

In some cases the process of privatization imitated with selling part, or sometimes all, of ownership of state-owned companies.

Another important feature of these reforms increased integration of the nation with the international economy.

The earliest to carry out such reforms was China, which started reforms in 1978.

There could be other types of reforms.

Policymakers in some country might feel that the presence of the private sector is too high.

Hence, some industries ought to taken over by the state.

Also, that the state ought to increase its presence in the economy.

Indeed such events taken place in many countries in the 1940’s, 1950’s and 1960’s.

Performance of the Indian Economy in the Era of Economic Reforms

These policy steps also called reforms but this term was not in vogue then.

Thus, reforms came to acquire a specific connotation, and synonymous come called liberalization.

What does this term mean? In Block 3, you have come across the idea of liberalism.

So you know the classical notion of liberal.

It means greater faith in individualism, in individual enterprise, and individual liberty.

The role of the state lessened. Performance of the Indian Economy in the Era of Economic Reforms

The suffix satiation suggests that it is a process, an intensification of a trend.

Thus liberalization, simple put, increasing the process of making the economy more liberal.

This entails a two-fold process.

First, the private sector and private enterprise given greater play in the economy, and the role of the state reduced.

The role of the market enlarged.

Performance of the Indian Economy in the Era of Economic Reforms

Second, the economy integrated more with the global or international economy, with increased foreign trade and investment.

• You must have come across the term globalization. This means: greater integration of the world through increased flows of goods and services across national borders;
• Greater investment, capital and financial flows among countries; and
• Faster and quicker information and communication channels.

We often hear the term global economy or global village or the statement the world becoming smaller.

No doubt, globalization related to liberalization.

Some even consider globalization and liberalization both to be part of reforms. In the next unit, you will learn about globalization in greater detail.

There is a slight difference in the operation of the two processes.

Although liberalization implies a lesser role for the state, it still is a policy put into operation by the state.

The state takes a policy to lessen its own role particularly of regulation and ownership. Globalization on the other hand, is a partly autonomous process.

Performance of the Indian Economy in the Era of Economic Reforms

For example, forces in communications and information technology, such as the Internet, can arise spontaneous, and without design by governments, which intensify globalization.

There were some piecemeal attempts at domestic reforms since the 1970s.

In 1973, large industrial houses and foreign companies allowed to set up capacity in some basic and core industries.

The Report of the Narasimham Committee (1985) suggested that physical controls replaced by indirect controls in the form of fiscal incentives and disincentives.

Some measures taken to lower barriers to entry in industrial markets, limit the role of licensing, and giving some flexibility in using existing capacities.

However, little attention given to the policy of allowing closure of industry, the so called exit policy, and policy towards sick industries. Performance of the Indian Economy in the Era of Economic Reforms

What was the nature of the immediate crisis that prompted the policymakers to go in for reforms?

In June 1991, foreign exchange balance was down to $ 1 billion, which was just enough to pay for six weeks’ imports.

Performance of the Indian Economy in the Era of Economic Reforms

The economy was in a severe balance-of-payments crisis. At the same time, there was a severe fiscal crisis.

Although the economy had grown by over 5 per cent per mum in the second half of the 1980s.

This rate of growth was higher than in previous time-periods  this growth achieved at the cost of fiscal extravagance and wastefulness. Performance of the Indian Economy in the Era of Economic Reforms

In order to tackle the crisis, India had to approach the International Monetary Fund (IMF) and the World Bank for loans.b

In return, the IMF and the World Bank suggested certain structural adjustments such as reduction in fiscal deficit, devaluation of currency and opening up of the economy.

 Under the Structural Adjustment programme, the World Bank suggested reforms which called for changes in the basic structure of the economy.

It necessitated replacement of quantitative restrictions and resource allocation processes with market-based price signals and incentives.

As we mentioned earlier, there was some disenchantment with the industrial licensing system as well as with the controls in industry and some other areas such as financial markets

Performance of the Indian Economy in the Era of Economic Reforms

The overall objective conditionals was of MF to bring in Macroeconomic Stabilization, which required reduction in fiscal deficits (broad, the difference between government expenditure and revenues).

Balance of payments deficit (the difference between payments made to foreign countries and earnings from foreign countries).

We now discuss some measures towards domestic liberalization adopted in India since 1991.

In July and August 1991, the government announced a new Trade Policy (here trade means foreign trade).

The government made a statement on Industrial Policy.

The 1991 reform did away with industrial licensing, except for a few industries for location-related reasons or for environmental considerations.

Performance of the Indian Economy in the Era of Economic Reforms

The reforms also removed the requirement of import licenses, except for most consumer goods.

Restrictions eased for foreign direct investment ad portfolio investment (investment in financial markets).

Sectors where private (both domestic and foreign) investments earlier prohibited, such as power, saw private investments allowed.

Steps taken for disinvestment of equity in public sector enterprises (called privatization).

What still required are reforms of labour laws and the Industrial Disputes Act. The problem of industrial sickness tackled.

Other areas of reforms included easing restrictions in financial markets, and going from a fixed to flexible exchange-rate regime. 

The regulatory framework has also undergone substantial changes, particularly in telecom sector and financial markets.

Economic reforms also entailed severe changes for the reform of public enterprises, and even privatization of public enterprises.

Some other policy measures included exploring private participation in infrastructure like power and roads as well as giving thought on adoption of user charges in social sectors like health.