INDIAN ECONOMY SINCE 1991
After forty
years of
planned development, India has not been able to achieve a strong industrial
base and become self-sufficient in the production of food grains.Nevertheless,
a major segment of the population continues to depend on agriculture for its
livelihood. The economy was facing problems of declining foreign exchange,
growing imports without matching rise in exports and high inflation. India
changed its economic policies in 1991 due to a financial crisis and pressure
from international organizations like the World Bank and IMF. In 1991, a crisis
in the balance of payments led to the introduction of economic reforms in the
country. Important features of india’s economic reforms are discussed in this chapter.
LIBERALISATION
Liberalization was
introduced to put an end to these restricions and open up various sectors of
the economy. Though a few liberalization measures were introduced in 1980s in
areas of industrial licensing, export- import policy, technology up gradation,fiscal
policy and foreign investment,reform policies initated in 1991 were more
comprehensive. Let us study some important areas such as the industrial sector,
financial sector, tax refoems,foreign exchage markets and trade and investment
sectors which received greater attention in and after 1991. Deregulation of
industrial sector: In india, regulatory mechanisms were enforced in various
ways (i) industrial licensing under which every entrepreneur had to get
permission from govemment officials to
start a firm, close a firm or to decide the amount of goods that could be produced (ii) privete
sector was not allowed in many industries(iii)some goods could be produced
only in small scale industries (iii)
some goods could be produced only in small scale industries and (iv)controls on
price fixation and distribution of selected industrial products.
The reform policis
introduced in and after 1991 removed many of these restrictions. Industrial
licensing was abolished for almost all but product categories-alcohol,cigarettes,
hazardus chemicals industrial explosives, electronics, aerospace and drugs and
pharmaceuticals. The only industries which are now reserved for the public
sector are defense equipments, atomic energy generation and railway tranport.
Many goods produced by small scale industries have now been allowed to
determine the prices.
Financial Sector
Reforms: The finacial sector in india is controlled by the Reserve Bank of
India(RBI). The RBI decides the amount of money that the banks can keep with
themselves, fixes interest rates, nature of lending to various sector of
financial sector. This means that the financial sector may be allowed to take
decisions on many matters without consulting the RBI.
The reform policies led to the establishment of private
sector banks, Indian as well as foreign.
Foreign investment
limit in banks was raised to around 50
per cent. Those banks which fulfill
certain cinditions have been given freedom to set up new branches without the
approval of the RBI and rationalize their existing branch networks. Though
banks have been given permission to generate resouces from india and abroad,
certain aspects have been ratained with the RBI to safeguard the interests of
the account-holders and the nation.
Foreign institutional investors (fll) such as merchant
bankers, mutual funds and pension funds are now allowed to invest in indian
financial markets.
Tax Reforms: Tax
reform are concerned with reforms i govenment’s taxation and public expenditure
policies which are collectively known as its fiscal policy. There are two types
of taxes:direct and indirect. Direct taxes consist of taxes on incomes of
individuals as well as profits of business enterprises. Since 1991,there has
been a continuous reduction in the taxes on individual incomes as it was felt
that high rates of income tax were an important reason for tax evasion. It is
now widely accepted that moderate rates of income tax encourage savings and
voluntary disclosure of income, the rate of corporation tax, which was very
high earlier, has been gradually reduced. Efforts have also been made to reform
the indirect taxes, taxes levied on commodities. Another component of reforms
in this ares is simplification. In order to encourage better compliance on the
part of taxpayers many procedures have been simplified and the rates also
substantially lowered.
Foreign Exchange
Reforms: The first important reform
in the external sector was made in the foreign exchange market. In 1991, as an
immediate measure to resolve the balance of payments crisis, the rupee was
devalued against foreign currecies. This led to an increase in the inflow of
foreign exchange. It also set the tone to free the determination of rupee value
in the foreign exchange market from government control. Now, more often than
not, markets deternment exchange rates based on the demand and supply of
foreign exchange.
Trade and
Investment Policy Reforms: Liberalization of trade and investment regime
was initiated to increase international competitiveness of industrial
production and also foreign investments and technology into the economy. The
aim was also to promote the efficiency of the local industries and the adoption
of modern technologies.
In order to protect domestic industries, India was following a regime of quantitative
restrictions on imports . This was encouraged through tight control over
imports and by keeping the tariffs very high.
These policies reduced efficiency and competitiveness
which led to slow growth of the manufacturing sector.
The trde policy reforms aimed at (i) dismantling of
quqntitative restrictions on imports and exports (ii) reduction of tariff rates
and (iii) removal of indian goods in the international markets.
PRIVATISATION
It implies shedding of the ownership or managment of a
government owned enterprise. Govenment companies can be converted into private
companies in two ways (i) by withdrawal of the government from ownership and management of public sector
companies and or (ii) by outright sale of public sector companies.
Privatization of the public sector undertakings by selling off part of the
equity of PSU to the public is known as disinvestment. The purpose of the
sale,according to the government. Was
mainly to improve financial discipline and facilitate modernization.
The government has also made attempts to improve the
efficiency of PSUs by giving them autonomy in taking managerial decisions. For
instance, some PSUs have been granted special status as navaratnas and mini
ratnas
GLOBALISATION
Globalization is the outcome of the policies of
liberalization and privatization. Although globalization is generally
understood to mean integration of the economy of the country with the world
economy, it is a complex phenomenon. It is an outcome of the set of various
policies that are aimed at transfoming the world towards greater
interdependence and integration. It involves creation of networks and
activities transcending economic, social and geographical boundaries.
Globalization attempts to establish links in such a way that the happenings in
india can be influenced by events happening miles away. It is turning the world
into one whole or creating a borderless world.
Outsourcing:
This is one the important outcomes of the globalization process. In
outsourcing, a company hires regular service from extenal sources,mostly from
other countries,which was previously provided internally or from within the
country. As a form of economic activity, outsourcing has intensified, in recent
times, because of the growth of fast modes of communication, particularly the
growth of Information Techololgy(IT).
World Trade Organization (WTO): The WTO was founded in 1995 as the successor
organization to the General Agreement on Trade and Tariff(GATT).GATTwas
establish in 1948 with 23 countries as the global trade organization to
admimister all multilateral trde agreements by providing equal opportunities to
all countries inthe international market for trading purposes. WTO is expected
to establish a rule based trading regime in which nations cannot place arbitary
restrictions on trade.
INDIAN ECONOMIY
DURING REFORMS:
AN ASSESSMENT
The
reform process has completed one and half decades since its, introduction. Let
us now look at the performance of the indian economy during this period. The
growth of GDP increased from 5.6 per cent during 1980-91 to 6.4per cent during
1992-2001. This shows that ther has been an increase in the overall GDP growth
in there form period. During there form period, the growth of agriculculture and industrial
sectors has declined whereas the growth of service sector has gone up. This
indicates that the growth is mainlydriven by the growth in the service sector.
The Tenth Plan (2002-07) has projected the GDP growth rate at 8 per cent. In
order to achieve such a high growth rate,the agriculture,industrial and service
sectors have to grow at the rates of 4,9.5and 9.1 percentage points
respectively.However, some scholars raise apprehensions over the project ion of
such high rates of growth as unsustainable.
The foreign investment, which includes foreign direct
investment and foreign institutional investment, has increased from about US $
100million in 1990-91 to US $ 150 billion in 2003-04. There has been an
increase in the foreign exchage reserves from about US $ 6 billion in 1990-91
to US $ 125 billion in 2004-05. At present, india is the sixth largest foreiign
exchange reserve holder in the world.
Reform in
Agriculture : Reforms have not been able to denefit agriculture, where the
growth rate has been decelerating. Public investment in agriculture sector
especially in infrasructure, which includes irrigation, has been reduced in the
reform period. Further, the removal of fertilizer subsidy has led to increase
in the cost of production, which has severely affected the smalland marginal
farmers. Moreover, since the commencement of WTO, this sector has been
experiencing a number of policy changes such as reduction in import duties on
agricultural products, removal of minimum sopport price and lifting of quanititative
restrictions on agricultural products; these have adversely affected indian
farmers as they now have to face increased international competition.
Reforms in
industry: In a globalized world, developing countries are compelled to open
up their economies to greater flow of goods and capital from developed
countries and rendering their industries vulnerable to imported goods. Cheaper
imports have, thus, replaced the demand for domestic goods. Domastic manufacturers are facing competition from imports.
The infrastructure facilities, including power supply, have remained inadequate
due to lack of investment. Globalization is, thus, often seen as creating
conditions for the free movement of goods and services from foreign counntries
that adversely affect the local industries and employment opportunities in
developing countries.
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