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.