Transcript ECONOMIC REFORMS IN INDIA

ECONOMIC REFORMS IN INDIA:
Dr. RAJ AGRAWAL
Period 1947- 1990
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The historical discontinuity after independence
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The Plan strategy
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A nation building exercise
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The experiment with socialism
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The Planning era
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A Critical Assessment::
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A rate of growth of average 3.2 per cent
High population growth denies a significant dent on
poverty
A huge public sector with minimum returns
A protective private sector
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Philosophy of Reforms
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To free the economy from the circumspection of socialist
equity in the form of pervasive state control on
production, low productivity, a distorted and disfunctional price system and a complacent overprotective private sector.
To establish the supremacy of individual and the role of
economic freedom
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Perspective: year 1990-91
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International reserve came down to $ 1.3 billion, less
than 1 month import bill, and India was on the verge of
default in foreign obligations [ short term debt]
Stagnant exports
India’s ratings down
High deficits in domestic budget
Public sector banks having large NPA
PSU incurring huge losses
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International Scene
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USSR’s disintegration… the currency rouble weakened
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Overall confusion on the efficacy of command economy
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Some east European countries came out of socialist
economic structure
Loss of credibility of the ‘command economy’ as
disturbing revelation came out on lower productivity
and disinformation about planning
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New Role of IMF
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The Washington consensus about the ‘transition
economies’
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Dismantle command economy structure
Reduce the size of government
Privatization of state undertakings
Reduce and remove budget deficit
Make currency stable and current account
convertible
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IMF and new WTO Regime
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New WTO regulations make domestic liberalization and
globalization an integrated one exercise
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Mechanism
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Dismantling of the license and permit raj so that the
rent-seeking system is abolished
Minimize the role of the state in production except in
some core and strategic areas
Reform of the legal system to end monopoly of any
group/ sector
Financial sector reforms
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continued
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Reform of the system to allow free
market mechanism by
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Dismantling the administered price mechanism
Inducing firms to set own targets of production
Removing all artificial barriers to unleash forces of
competition
Reforms of the tax system
Removal of trade barriers
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Financial sector reforms
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Fiscal reforms--- change in the budgetary process
makes the government accountable--- discipline in
revenue-expenditure process
Low inflation- low interest regime
Changes in the banking sector – making the system of bank credit
more transparent_ efficient appraisal system and accountability
for decision taking
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Notes on Banking Crisis
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Delegated screening and monitoring of borrowers on
behalf of depositors (mitigate information asymmetries).
Transformation of short-term, liquid deposits held by
households into illiquid liabilities issued by firms.
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Results of F.S. reforms
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Role of capital is appreciated and effort are on to make capital
cheaper at par world standard [ GOI yet to fulfill the just
demand of the corporate sector]
More transparent estimate of the need for investment in the
infrastructure sector--- how to mobilize the resources
One estimate puts the requirement as $50 billion
equivalent---role of foreign direct investment as
perceived by the government. Whether FDI is good for the
country is no longer the issue
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Current position of Reforms
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The reforms process has been slowed down__
Reasons
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Inability to carry out reforms in some crucial
sectors like legal infrastructure and education
Resistance by interested groups
Lack of political will
Role of powerful bureaucracy as they feel
threatened with diminutive public sector
A section of corporate sector beneficiary of old
system
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Reforms__ slowed down?
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India’s endemic problems
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Low literacy _ message of reforms not reaching
Archaic social structure__ at lower level of
society and furthest from the centre of
administration exploitation continues
Social and economic discrimination are
intertwined in the society
Lack of genuine administrative reforms at the
grass-root levels [panchayat system ]--
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Reforms slowed down?_
cont’d
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Even when panchayats exist, they are totally
dependent on state government for finance, that
erodes their power
Emergence of regional groups based on caste
Lack of accountability [ corruption index being at level
83 among 133 countries surveyed recently]
A permissive society????
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Slow reforms
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Some economic issues—
Wide gap between rural and urban areas regarding the
availability of public goods like potable water, health
services, primary education___ worse situation is that
sometime availability is dictated on caste lines
[ a MIT study on rural situation in AP , conducted by Dr.
A. Banerjee of MIT, USA ]
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No cushion from the lower side regarding social
security
Transparency in public policy lacking_ that
creates credibility gap__ a breeding ground of
violence
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India
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Let us see some developments in
economic scene
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India__ Growth rates in 1990s
ECONOMIC GROWTH
OF INDIA
8
7
5
4
3
2
1
2002
2000
1998
1996
1994
1992
0
1990
PERCENT REAL GDP
6
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India__ external sector
20
India__ international liquidity
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GNP of 12 countries[ as on 2001 ]
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USA
Japan
Germany
U.K.
France
China
Italy
Canada
Spain
Mexico
Brazil
India
Pop GNP
million b $
Rank
284
127
82
60
59
1272
58
31
40
99
173
1033
1
2
3
4
5
6
7
8
9
10
11
12
9901
4574
1948
1451
1377
1130
1123
662
587
550
529
474
GNP/C Rank
Dollars
34870
7
35590
4
23700 20
24230
16
22690 24
890 138
19470 30
21340
26
14860
39
5540 68
3060 89
460 161
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Real GDP growth rates of selected countries during
1990--- 2000 [ per cent]
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China
Ireland
India
USA
Japan
Russia
Ukraine
10.3
7.3
6.0
3.5
1.3
-4.8
-9.3
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Need of the hour
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Reforms of the infrastructure sector
 Education_ universities
 Legal system
 Sense of accountability
 A proper perspective of market mechanism
 Redefine the role of Government
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Need…….
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Spread of innovation
Incentive system
An effective supervision system as reform process
brings fragility also in the financial system.
WHY ECONOMIC FREEDOM IS NECESSARY AND FOR THAT A
CONGENIAL ATMOSPHERE IS TO BE CREATED __ THAT
SHOULD BE THE GOAL OF ECONOMIC REFORM
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Issue__ Economic Freedom
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Economic freedom__ parameters
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Trade Policy
Taxation
Government Ownership
Monetary Policy
Restrictions on Foreign Investment
Restrictions on Banking
Wage and Price Controls
Property Rights
Regulations
Black Market
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Freedom and income per capita
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Freedom and income
Average
Annual
Real per
Capita
GDP
Growth,
1980-1993
3
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
Repressed
Mostly
Free
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-20
China
Vietnam (97)
Indonesia
Thailand
Singapore
Philippines (97)
New Zealand
Malaysia (97)
Korea
Japan
India
Hong Kong (97)
Australia
Billions of U.S. $
Freedom__ bop of some countries[ 2001]
50
40
30
20
10
0
-10
30
Currency __ INR
[ a depreciating real exchange rate over time]
Rupee/$
45
40
35
30
25
20
15
10
5
0
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
Spot
PPP
Real Exchange Rate
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India’s exports to USA [ Issue is Capital flight]
Direction of Trade between India and US - I
12000
Value of Trade (mn $s)
10000
8000
India Exports
to US
6000
US Imports
from India
4000
2000
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
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India’s imports
Direction of Trade between India & US - II
4500
4000
Value of Trade (mn $s)
3500
India
Imports
from US
3000
2500
2000
US Exports
from India
1500
1000
500
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
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Restrictions in bop
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Import prohibitions applied since 1960 to a wide range of
consumer goods
The European Commission has received complaints from
business
The European Commission raised the issue in the framework of
the World Trade Organization (WTO)
Negotiations led to a progressive elimination of restrictions
between 2000 (for priority products) and 2003
Expected additional turnover for EU industry: 2 Billion €
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Restrictions
Country
Course of action
India
WTO dispute settlement system negotiated settlement
Korea
WTO dispute settlement system panel proceeding
Brazil
TBR procedure
Taiwan
Accession to the WTO
Ukraine
Consultations and the initiation of a
dispute settlement procedure under the
PCA
Mexico
Free trade agreement negotiation
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Global scene
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Next few slides we will see the experience of economic
transition in former command economies and its impact
on several parameters___ a cross-section sample
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Comparison
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We can make comparison with the transition process that
started in China ( 1985) and Russia ( 1989-90)
Russia__ lack of experience of running enterprise…. Corruption
in privatization of state enterprises….. Financial mess…..
Emergence of mafia
China___ lack of knowledge compensated by allowing foreign
capital free run in limited areas ( eastern provinces) __ slow
transition___ mess in financial system…. Large scale corruption
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Growth & agriculture
Growth of GNP per capita 1990-97 (in per cent per
year)
10
5
Slovenia
0
0
Poland
Slovak
Hungary
Rep.
Czech Rep.
10
Bulgaria 20
Estonia
Romania
30
40
-5
Belarus
Russia
Lithuania
Latvia Kazakhstan
Uzbekistan
Kyrgiz Rep.
-10
Ukraine
-15
Georgia
Moldova
Turkmenistan
Azerbaijan
-20
Share of agriculture in labor force 1990 (in per cent)
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Openness & share of agriculture
Actual exports less country-size-adjusted
exports 1990-97 (in per cent of GDP)
40
Estonia
30
Czech Rep.
Belarus
Latvia
20
Moldova
Slovenia
Lithuania
Slovak
Kazakhstan Uzbekistan
Rep.
Russia Ukraine
Bulgaria
Hungary
Azerbaijan
Romania Poland
10
0
0
10
20Georgia 30
40
Kyrgyz Rep.
50
60
-10
-20
Albania
-30
Share of agriculture in labor force 1990 (in per cent)
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Cross –section example: growth & openness_
1990 _97
Growth of GNP per capita 1990-97 (in per cent
per year)
10
5
0
Slovak Rep.
Hungary
0 Romania
-10
Slovenia
Poland
10
Bulgaria 20
-5
Lithuania
Kyrgyz
Rep. -10
Russia
Czech
Rep.
30
Estonia
40
Uzbekistan Belarus
Latvia
Kazakhstan
Moldova
Ukraina
Georgia
-15
Azerbaijan
-20
Actual exports less country-size-adjusted exports 19901997 (in per cent of GDP)
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Just for knowledge__ corruption and economic growth
Growth of GNP per capita 1990-97 (in per cent per
year)
10
5
Slovenia
Poland
Albania
Slovak Rep.
Romania
Czech Rep.
0
0
2
1
3
Bulgaria
4
Hungary
5
6
7
Estonia
-5
Belarus
Lithuania
Kazakhstan
Russia Latvia
Kyrgyz Rep.
Moldova
Uzbekistan
-10
Ukraine
-15
Georgia
Azerbaijan
-20
Corruption perceptions index 1999
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conclusion
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We are in the middle of the process of reforms….
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Only expectations about the better future
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End of discussion
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Reference:
1. Prem Sankar Jha, The Perilous Road to Reforms, Rupa &
Co., Calcutta, 2002.
2. World Bank__ World Economic Outlook_ 2002
3. Economic Reforms_ a position paper
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