What role do businesses that go tothe market play in the circular model?

Economic reforms in India since 1991?

INDIATRYING TO LIBERALISE:ECONOMIC REFORMS SINCE 1991CHARAN D. WADHVA1INTRODUCTIONThe foundation of credible national security is based on the level ofeconomic prosperity and well-being of the population of any country. This isespecially so for developing countries like India. The attainment of sustainedhigh economic growth is a necessary condition for improving the nationalsecurity and the quality of life of the people throughout the country.Many developing countries in the Asia-Pacific region, including China andIndia where nearly one third of the world's population live, are currently goingthrough economic transitions. The central objective of transition througheconomic liberalization is to improve the competitive efficiency of theeconomy in the global marketplace to sustain accelerated rates of economicgrowth and thereby continuously improve the security and well being of thepeople.India launched its market-oriented economic reforms in 1991. Chinalaunched similar reforms from 1978 and is now well ahead of India inintegrating its national economy with the global economy. However, India isslowly but surely catching up in this race. The contrast in the experiences ofthese two countries with economic reforms under radically different politicalsystems is remarkable. While comparisons between China and India are oftenmade by development analysts and are inevitable when we discuss economictransitions in Asia, a more realistic assessment of the experiences of both thesemajor countries of Asia can only be made if we explicitly take into account thestark contrast in their political systems.In India, post-1991 economic reforms have been evolutionary andincremental in nature. There have been delays and reverses in some areas dueto the interplay of democratic politics, coalition governments, and pressuregroups with vested interests. However, each of the five successivegovernments that have held office in India since 1991 have carried on these1 I thank Dr. N K Paswan for his help in preparing the statistical tables included in this paper.259ECONOMIC REFORM IN INDIA260economic reforms, which have been based on market liberalization and alarger role for private enterprise.WHY THE POST-1990 REFORMS?It is well known that from 1951 to 1991, Indian policy-makers stuck to apath of centralized economic planning accompanied by extensive regulatorycontrols over the economy. The strategy was based on an 'inward-lookingimport substitution' model of development. This was evident from the designof the country's Second Five-Year Plan (1956-61), which had been heavilyinfluenced by the Soviet model of development.2 Several official and expertreviews undertaken by the government recommended incrementalliberalization of the economy in different areas, but these did not address thefundamental issues facing the economy.3India's economy went through several episodes of economic liberalizationin the 1970s and the 1980s under Prime Minsters Indira Gandhi and, later,Rajiv Gandhi. However, these attempts at economic liberalization were halfhearted,self-contradictory, and often self-reversing in parts.4 In contrast, theeconomic reforms launched in the 1990s (by Prime Minister P V NarasimhaRao and Dr. Manmohan Singh as his Finance Minister) were 'much wider anddeeper'5 and decidedly marked a 'U-turn' in the direction of economic policyfollowed by India during the last forty years of centralized economic planning.6THE DRIVING FORCES BEHIND THE REFORMSAs in many developing countries, India also launched its massive economicreforms in 1991 under the pressure of economic crises.7 The twin crises werereflected through an unmanageable balance of payments crisis and a socially2 See Government of India, Second Five-Year Plan, (New Delhi, 1956).3 Reference may be made to following illustrative books for tracking down these 'tinkering'changes in the thinking of Indian policy makers and planners : Bimal Jalan ed., The IndianEconomy: Reforms and Prospects, (New Delhi : Viking Publishers, 1991); Charan D Wadhva ed.,Some Problems of India's Economic Policy (New Delhi : Tata McGraw Hill, 2ed 1977); and CharanD Wadhva, Economic Reforms in India and the Market Economy (New Delhi: Allied Publishers,1994), Ch. II.4 See for example, John Harris, 'The state in Retreat? Why has India experienced such HalfheartedLiberalization in the 80s? IDS Bulletin(Institute of Development Studies, Sussex,U.K.), Vol. 18, No. 4, 1987.5 Jeffrey D Sachs; Ashutosh Varshney; and Nirupam Bajpai eds., Indiain the Era of EconomicReforms (New Delhi, Oxford University Press, 1991), p.1.6 Charan D Wadhva, Economic Reforms, op.cit., p.xviii7 For details of magnitude and diagnosis of causes of this economic crisis, see Ibid.CHARAN WADHVA261intolerably high rate of inflation that were building up in the 1980s andclimaxed in 1990-91.8 This can be seen from the data provided in Table 1.9The current account deficit as a percentage of GDP peaked at a high of 3.1percent (compared to an average level of 1.4 percent in the early 1980s). Theinflation rate (as measured by point-to-point changes in the Wholesale PriceIndex) had also climbed to the socially and politically dangerous double-digitlevel, hitting 12.1 percent in 1990-91.TABLE 1: SELECTEDMACRO ECONOMIC INDICATORS1989-2003Indicators 1989-90 1994-95 1999-00 2000-01 2001-02 2002-03A. Growth of GDP (%) 5.6 6.3 6.1 4.4 5.6 4.4B. GDP Growth by Sectors (%):i. Agriculture & Allied 2.7 4.9 0.3 -0.4 5.7 -3.1ii. Industry, of Which Manufacturing 6.7 8.3 4.0 7.3 3.4 6.1iii. Services 6.7 6.0 10.1 5.6 6.8 7.1C. Inflation Rate (WPI Index (%)) 9.1 10.4 4.8 2.5 5.2 3.2D. Current Account Balance as % of GDP -3.1 -1.1 -0.5 -0.5 naE. Foreign Exchange Reserves (US $ Bn.) 3.37 19.65 35.06 39.55 51.05 69.89F. Exchange Rates (Rs/US $) 16.6 31.4 43.33 45.51 47.69 48.44G. Rate of Growth of :i. Exports (%) 18.9 18.4 10.8 21.0 -1.6 20.4ii. Imports (%) 8.8 22.9 17.2 1.7 1.7 14.5iii. Exports as % of GDP 6.4 9.6 9.1 10.4 9.9 naiv. Imports as % of GDP 9.3 10.5 12.4 11.8 11.6 naH. Fiscal Deficit as % of GDP 7.9 4.7 5.4 5.6 5.9 5.5I. Revenue Deficit as % of GDP 2.6 3.1 3.5 4.1 4.2 3.9J. Saving Ratio as % of GDP 22.3 24.9 24.1 23.4 24.0 naK. Investment as % of GDP 24.9 25.4 25.2 24.0 23.7 naSource: Ministry of Finance, Government of India, Economic Survey, (NewDelhi, various years).Most economic policy makers and analysts held widely convergent viewson the causes of the unprecedented economic crisis faced by India in 1990-91.The root cause of the twin crisis could be traced to macro-economicmismanagement throughout the 1980s as reflected in an unsustainably high8 This can be seen from all references cited in footnotes 1,2,4 and 5. In addition see, VijayJoshi and I.M.D. Little, India's Economic Reforms 1991-2001 (Delhi, Oxford University Press,1997).9 Other data used in the text (that is, not in the tables) is taken from Ministry of Finance,Government of India, Economic Survey (New Delhi, various years) unless otherwise noted.ECONOMIC REFORM IN INDIA262fiscal deficit, in particular the revenue deficit and the monetized deficit.10 Thecentral government's fiscal deficit alone peaked at 7.9 percent as a percentageof GDP in 1989-90. Thus growing fiscal profligacy (and irresponsibility) andthe unviable financing patterns of the fiscal deficit prevailing in the 1980smade high levels of annual GDP growth (peaking at 5.6 percent in 1989-90)unsustainable.11 Foreign-exchange reserves dwindled to a low of US$2.2 billion(with less than 15 days' cover against annual imports). India stared bankruptcyin the face as it struggled to meet external debt obligations.Prime Minister Narasimha Rao converted the prevailing economic crisisinto an opportunity to launch massive economic reforms. First, he introducedan economist (rather than a politician) into the Cabinet as Finance Ministerand gave the new Minister his full support, allowing him to evolve andimplement path-breaking economic reforms. The new economic policiesradically departed from the economic policies and regulatory frameworkpursued in India during the previous forty years.12The Rao government recognized in 1991 that the time had come toreshape India's economic policies by drawing appropriate lessons from the'East Asian Miracle' based on more export-oriented and more globallyconnected strategies of development, as successfully practiced earlier by Japanand South Korea and also by the South East Asian tigers Malaysia, Singapore,Indonesia and Thailand.13 The East Asian development model had beenremarkably successful in achieving sustained high growth rates accompaniedby rapid growth in the living standards of the people in just two decades. Indiahad missed on both these fronts by relentlessly pursing import substitutionand a relatively closed economy model of development.The Rao government, after launching the relatively aggressive (by pastIndian standards) reforms, was soon confronted with the political constraintsof 'competitive populism' during elections held at the state level in 1993.Therefore, the government adopted a 'middle path', furthering the economic10 For further details, see Wadhva, Economic Reforms, op.cit., ch. I.11 Thus the claim that India had clearly transcended the so-called 'Hindu rate of growth' ofGDP at 3.5 percent per annum (trend annual growth rate) achieved for the two decades of1960s and 1970s and had moved over to higher annual average growth rate of 5.5 percent inthe 1980s could not be accepted since the latter jump proved to be financially unsustainable.12 The major economic reforms launched during the full five-year tenure of the NarasimhaRao Government (1991-96) are highlighted below.13 There are of course, lessons to be learnt by India from the 'East Asian debacle' of 1997-98(the so-called 'East Asian Financial Crisis) but these need not detract us here as most SouthAsian and Southeast Asian countries had overcome this crisis by 1999.CHARAN WADHVA263reforms in an 'incremental' fashion in order to continue to extending theirwidth and depth during the remainder of the government's term.The government took two years to get over the immediate macroeconomiccrisis, initially with the help of a balance of payments loan facilityfrom the International Monetary Fund. The government came out with a clearenunciation of its vision and the objectives of its economic reforms only afterregaining macro-economic stability. This was contained in the DiscussionPaper on Economic Reforms brought out by the Ministry of Finance in July1993. To quote:The fundamental objective of economic reforms is to bring aboutrapid and sustained improvement in the quality of the people ofIndia. Central to this goal is the rapid growth in incomes andproductive employment… The only durable solution to the curse ofpoverty is sustained growth of incomes and employment…. Suchgrowth requires investment: in farms, in roads, in irrigation, inindustry, in power and, above all, in people. And this investmentmust be productive. Successful and sustained development dependson continuing increases in the productivity of our capital, our landand our labour.Within a generation, the countries of East Asia have transformedthemselves. China, Indonesia, Korea, Thailand and Malaysia todayhave living standards much above ours…. What they have achieved,we must strive for.14MAJOR ECONOMIC REFORMSEconomic reforms launched since June 1991 may be categorized undertwo broad areas:?? major macro-economic management reforms; and?? structural and sector-specific economic reformsNaturally, the attention of the new government that took office in June1991 was primarily focused on crisis management dealing with the balance ofpayments. It was of the utmost importance to restore India's internationalcredibility by meeting its scheduled external debt liabilities and throughmaintaining a more realistic exchange rate consistent with market obligations.Achieving macro-economic stabilization was also an urgent priority,necessitating control of intolerably high inflation. It was recognized that14 Government of India, Ministry of Finance, Department of Economic Affairs, 'EconomicReforms : Two Years After and the Task Ahead', Discussion Paper, New Delhi : July 1993,pp.1-2.ECONOMIC REFORM IN INDIA264macro-economic stabilization would provide a sound foundation for mediumandlong-term structural economic reforms and accelerate the rate ofeconomic growth in a sustained manner. This would be possible by removingdistortions created by controls and by improving the competitive edge forIndian goods and services in global markets as well as in the markets of majorregional trading blocs.I describe below the major economic reforms, with greater focus onstructural economic reforms in selected sectors of the economy.15MACRO-ECONOMICMANAGEMENT REFORMSMacro-economic management reforms have focused on controlling thepolitically difficult problems of reducing the fiscal and (even more so) revenuedeficits. The capital account deficit does not pose long-term problems asinvestment in productive capital made in the present, if prudently carried out,will generate an adequate income stream to pay for capital costs incurred andgenerate positive returns in the future.India's problem is primarily in the area of revenue deficits. From 1950 to1980 the national budget was usually characterized by revenue surpluses andcapital account deficits . However, after 1980, all (democratic) governmentsfor political reasons had willingly allowed the revenue deficit to rise over theyears to dangerously high levels, and had found it increasingly difficult toreduce. The revenue deficits reflected an excess of annual consumptionexpenditure by the government over its annual income. The deficit was causedby excessive employment in the government sectors, uneconomical pricing ofgoods and services by public sector enterprises, a growing interest burden,mounting subsidies, and rising defense expenditures. Downsizing thegovernment (through the bureaucracy or public sector enterprises and banks)was also difficult and met staff resistance from the organized employees.Attempts at Reducing the Fiscal DeficitFaced with the necessity of reducing the fiscal deficit in the crisis year of1991-92, Finance Minister Singh attempted to reduce fertilizer and foodsubsidies in 1991-92 and to some extent in 1992-93. Simultaneously, he (andseveral subsequent finance ministers) resorted to the softer options ofreducing public investment expenditure and reducing public expenditure onsocial welfare services from 1991 to 1995. These measures did help reduce thefiscal deficit of the central government to 4.8 percent of GDP at the end of15 I have drawn upon various annual issues of Economic Survey produced by the Government ofIndia(Ministry of Finance) for this section.CHARAN WADHVA2651992-93. However, further cuts in fertilizer and food subsidies could not becarried out as these measures were opposed in Parliament and proved suicidalfor the ruling Congress Party, which lost power in state elections in 1993-94.Meanwhile, the fiscal position of the state governments also starteddeteriorating. The combined fiscal deficit of the central government and thestates climbed to the unacceptably high level of 10-11 percent of GDP in2002-03. Some state governments have begun to address their fiscal deficitproblems. The central government has recently started linking further transfersof resources to the states to the progress of state-specific economic reformsaimed at reducing deficits.16The good news for macro-economic management reforms is that the pre-1990 pattern of 'deficit financing' (that is, the printing of currency) to meet thefiscal deficit has now been effectively curbed. The autonomy of the centralbank (the Reserve Bank of India) in regulating the money supply to controlinflation has been assured within the limits of monetary policy. This has ledthe government to resort to larger and larger domestic borrowing.The bad news is that government borrowings have risen so high that theeconomy is moving towards an 'internal debt trap'.17 Further growth ofinternal debt needs to be curbed but the government is in no mood to closeoff this easy way of financing its rising fiscal deficit. The finances of most stategovernments are in even poorer shape and some have occasionally resorted tomarket borrowings to meet their payrolls.Tax ReformsSince 1991 several efforts have been made through the annual budgetprocess to achieve tax reforms.18 These have focused on: (i) expanding the taxbase by including services (not previously taxed); (ii) reducing rates of directtaxes for individuals and corporations; (iii) abolishing most export subsidies,(iv) lowering import duties (covered below by us under structural reformsrelating to trade policies/external sector); (v) rationalizing sales tax andreducing the cascading effect of central indirect taxes by introducing aModified Value Added Tax and a soon-to-be implemented nationwide ValueAdded Tax; (vi) rationalizing both direct and indirect taxes by removingunnecessary exemptions; (vii) providing for tax incentives for infrastructure16 For details see Government of India, Economic Survey 2002-03.17 It is estimated that the interest payments currently pre-empt more than 60 percent of thetotal revenue of the central government leaving very little resources for fresh publicinvestment. See Economic Survey 2002-03.18 For details see the relevant official annual documents for the Union Budget usuallypresented by the Finance Minister to the Parliament each year on February 28, 2003.ECONOMIC REFORM IN INDIA266and export-oriented sectors, including setting up special (Export) EconomicZones; and (viii) simplification of procedures and efforts for improving theefficiency of the tax administration system especially throughcomputerization.19Resource Generation through DivestmentThe governments of India, both at the central and state government levels,have initiated divestment programs to sell government equity in severalpublic-sector enterprises. Unfortunately, the sales proceeds have mostly beenused to finance fiscal deficits rather than for fresh public investment, socialsectorspending, or reducing the interest burden on ballooning public debt.STRUCTURAL ECONOMICREFORMSStructural reforms since 1991 have been sector-specific. The sectorssubjected to reform have been carefully selected and the coverage of sectorsunder structural reforms has been extended over time. The major structuraleconomic reforms carried out since 1991 have been primarily in the followingareas: Trade Policy/External Sector; Industrial Policy; Infrastructural SectorPolicies; Divestment/Privatization Policies; the Financial Sector; and inPolicies for Attracting Foreign Direct Investment.20The thrust of the reforms in all areas has been to open India's markets tointernational competition, remove exchange rate controls, encourage privateinvestment and participation in industry and, in the finance markets, toliberalise access to foreign capital and to ensure that foreign investment is notpenalized merely for being foreign.2119 For the latest proposals for tax reforms, see the two (published) reports of the Committeeon Reforms of Direct and Indirect Taxes (Chairman Dr. Vijay L Kelkar), New Delhi :Government of India, Ministry of Finance, 2003.20 It may be pointed out that in the vital areas of macro-economic policy including fiscal policymonetary policy and exchange rate policy, there is an overlap between macroeconomicstabilization policies and structural reforms. The long-term growth inducing roles of all macroeconomicpolicies can be considered under structural reforms. We focus here on sectorspecificreforms although overlaps exist with agro-economic policies in our discussion. For anannual overview of structural reforms carried out in India, see Government of India EconomicSurvey for the relevant year (latest available being 2002-03).21 Financial sector reforms were initiated on the basis of two reports by the NarasimhamCommittee. Government of India, Ministry of Finance, Report of the Committee on FinancialSystem (Chairman : Mr. M Narasimham), New Delhi : November 1991; and Report of theCommittee on Banking Sector Reforms (Chairman : Mr. M Narasimham), New Delhi 1996.CHARAN WADHVA267Reorientation of PlanningConsistent with the spirit of the market-oriented and private sector-ledeconomic reforms launched since 1991, the government has reoriented therole of planning in India. It has been recognized that market forces and thestate should be given roles that play to their comparative advantages and thatthey should work together as partners in the economic development of thenation. While private initiative should be encouraged in most areas of businessactivities, the state should increasingly play a pro-active role in areas in whichthe private sector is either unwilling to act or is incapable of regulating itself inthe social interest. The areas in which the state has a comparative advantageover the private sector include poverty alleviation programs; human resourcedevelopment; provision of social services such as primary health and primaryeducation; and similar activities categorized as building human capital andsocial infrastructure. The state also has a new role in setting up independentregulatory authorities to encourage genuine competition and to oversee theprovision of services by the private sector in critical areas such as utilities,water supply, telecommunications, and stock market operations to avoid the illeffects of speculation and to maintain a workable balance between the interestsof the producer and the consumers.Economic liberalization in the organized manufacturing sector (subjectedto rigid labor laws for retrenchment) has led to growth with very littleadditional employment. This can create serious social unrest and fertile groundfor terrorist and other anti-social activities that attract unemployed youths inthe absence of gainful employment. Market-based economic reforms alsooften lead to increasing disparities between the rich and the poor and betweeninfrastructurally backward and more developed states. The government has tointervene and calibrate the contents and speed of market-based economicreforms to more effectively address the specific areas of 'market failures andweaknesses' to optimize growth with social justice.The new role assigned to planning, consistent with market-based economicliberalization, can perhaps best be illustrated with the goals and the strategiesincorporated in India's Tenth Five-Year Plan (2002-07).22 The Plan hastargeted an annual growth rate of eight percent. Along with this growth target,the government has laid down targets for human and social development.Timely corrective actions will be proposed to ensure growth is accompaniedby social justice. The key indicators of human and social development targeted22 See, Government of India, Tenth Five Year Plan 2002-07 (in three volumes) (New Delhi :Planning Commission, 2002).ECONOMIC REFORM IN INDIA268under this Plan include: a reduction of the poverty rate by five percentagepoints by 2007; providing gainful employment to at least those who join thelabor force during 2002-07; education for all children in schools by 2003; andan increase in the literacy rate to 75 percent by March 2007.The development strategy adopted for the Tenth plan envisages:redefining the role of Government in the context of the emergenceof a strong and vibrant private sector, the need for provision ofinfrastructure and the need for imparting greater flexibility in fiscaland monetary policies. With a view to emphasizing the importanceof balanced development of all states, the Tenth plan includes astate-wise break-up of broad developmental targets including targetsfor growth rates and social development consistent with nationaltargets. The Tenth Plan has emphasized the need to ensure equityand social justice, taking into account the fact that rigidities in theeconomy can make the poverty-reducing effects of growth lesseffective. The strategy for equity and social justice consists of makingagricultural development a core element of the Plan, ensuring rapidgrowth of those sectors which are most likely to create gainfulemployment opportunities and supplementing the impact of growthwith special programs aimed at target groups.23THE POLITICAL ECONOMIC DIMENSIONS OF THE REFORMSIndia's heterogeneity and unity in diversity through a stable democraticsystem must be appreciated. A country like India, with more than one billionpeople, some 16 officially recognized major languages, and vast ethnic andreligious diversities, poses major governance challenges. India has achievedremarkable success in holding the country together.India had governed its economy through a policy regime of centralizedplanning accompanied by an extensive regulatory framework for more thanforty years before it launched economic reforms in 1991. It has, therefore, notbeen easy to change the mindsets of policy makers (especially at the lowerlevels of bureaucracy) and of other beneficiaries of the entrenched regime.Building a political consensus on economic reforms across the variouspolitical parties with their vastly different ideologies has been a very difficultprocess. This has been especially true under coalition governments but alsoeven when a single party has held a majority. Consensus building and reform23 As summarized in Government of India, Economic Survey 2002-03, pp.41-42.CHARAN WADHVA269implementation is complicated further when the central government and thestates are in the hands of different parties (or coalitions).The rapidly increasing frequency of elections at the central and state levelsduring the post-1990 period of economic reforms has led the incumbentgovernments and the contesting opposition parties to resort to 'vote-bank'politics or 'competitive populism'. The vested interests of groups such as tradeunions, producers with licenses and holding monopoly interests, andbureaucrats with 'rent seeking' capabilities have often scuttled or delayedfurther market-based economic reforms. These factors explain well India's'stalled' reforms in certain areas directly hurting vested interests of selectedlobby groups.24 The growth of regional parties and their assumption of powerin many Indian states has further delayed the percolation of central-leveleconomic reforms down to the state level.Weiner has recommended the need for a change in the mindsets of statepolicy makers:The pursuit of market-friendly policies by state governments requiresa change in the mindsets of state politicians, new skills within thestate bureaucracies, and a different kind of politics. Morefundamentally, it requires rethinking on the part of state politicians,activists in non-governmental organizations, journalists andpolitically engaged citizens as to what is the proper role ofgovernment, and how and to what end limited resources should beused.25Considering the compulsions arising from the above political factors,Montek S. Ahluwalia explains the rational for adopting the 'gradualist'approach in implementing of economic reforms and the resultant 'frustratinglyslow' pace of reforms (compared to East Asian standards):The compulsions of democratic politics in a pluralist society made itnecessary to evolve a sufficient consensus across disparate (and oftenvery vocal) interests before policy change could be implemented andthis meant that the pace of reforms was often frustratingly slow.Daniel Yergin (1998) captures the mood of frustration when hewonders whether the Hindu rate of growth has been replaced by theHindu rate of change!2624 See, 'Introduction' in Jeffrey D. Sachs, Ashutosh Varshney and Nirupam Bajpai, op.cit.25 Myron Weiner, 'The regionalization of India's Politics and It's Implications for EconomicReforms' in Ibid., Ch. 8, pp.292-3.26 Montek S Ahluwalia, 'India's Economic Reforms: An Appraisal', in Ibid., pp.26-27. See alsoDaniel Yergin, The Commanding Heights, New York: Simon and Schuster, 1998.ECONOMIC REFORM IN INDIA270Finally, most (if not all) political parties implementing market-basedeconomic reforms since 1990 have failed to 'market' these reforms to themasses as being highly beneficial for them. The opposition parties have oftentermed these reforms as 'pro-rich' and 'anti-poor'. Ironically, even theCongress Party, which initiated the economic reforms when in power, has, asan opposition party, opposed some of them (such as further public-sectordivestments) Varshney has made a valid distinction between 'elite-based'reforms versus 'mass-based' reforms. Market-based reforms have not drawnmass appeal nor aroused mass passions. This dichotomy between the concernsof the urban elite and the mass of the population has clearly defined the limitsto economic reforms in India.27STATE-LEVEL ECONOMIC REFORMSTo increase the effectiveness of the post-1990 economic reforms, theymust be simultaneously extended from central to state governments and belowto the third tier of local governments.The maladies afflicting the finances of the state governments are similar innature to those afflicting the central finances described earlier. According tothe Reserve Bank of India, the Gross Fiscal Deficit of all the states of India(including the Union Territories) was estimated at 3.3 percent in 1991-92.28Throughout the 1990s the state governments also experienced a rapid rise intheir revenue expenditures mainly through salaries, pensions, interest paymentsand subsidies (including free power to farmers in some states out of politicalconsiderations). This trend has 'severely constrained the states' ability toundertake development activities' and to devote more funds to provide socialservices such as primary education.29 The situation worsened after the stateswere forced to follow the center to implement generous pay increases forgovernment employees recommended by the Fifth Central Pay Commission in1997-98.Despite initial resistance in the Communist Party-ruled state of WestBengal, all state governments (including West Bengal), in their own ways andsuiting their own conditions, implemented economic reforms in the 1990s andare continuing these reforms broadly in line with the ongoing nationaleconomic reforms. This owes in part to enlightened self-interest combined27 For further details, see Ashutosh Varshney, 'Mass Politics or Elite Politics?', in Jeffrey DSachs, Ashutosh Varshney and Nirupam Bajpai, op.cit., Ch.7.28 Reserve Bank of India, 'Finances of state Governments : 1992-93', in the Reserve Bank ofIndiaBulletin, March 1993.29 Government of India, Economic Survey 2002-03, op.cit, p.5.CHARAN WADHVA271with a healthy competitive spirit designed to improve their position andranking among the states. There is also the states' desire to avail themselves oflarger transfers of development funds from the center, which the centralgovernment linked to economic reforms at the state level. Every state hasrecognized the need to attract private investment flows from both domesticand foreign investors. State governments have therefore progressivelyliberalized their policies and procedures on a competitive basis. Several ofthem have also explicitly recognized the need to improve human resourcedevelopment and have progressively expanded activities to provide a betterquality of life to the population of their states.Incentives and ConditionalitiesThe government of India has introduced a scheme called the States' FiscalReforms Facility (2000-05). Under the Facility, the central government set up afive-year incentive fund 'to encourage states to implement monitorable fiscalreforms'. Additional amounts by way of 'open market borrowings' are allowedif the state is faced with a structural adjustment burden. State governmentsmay draw up a Medium Term Fiscal Reforms Programme (MTFRP) to achievespecified targeted reductions in their consolidated fiscal deficit, especially therevenue deficit.The coverage of the MTFRP has been extended to cover a Debt SwapScheme in order to help state governments reduce their growing public debt.This scheme is designed to help liquidate the burden of high-cost loans takenfrom the central government through the allocation of additional marketborrowings at currently prevailing lower interest rates.The major structural reforms carried out by several state governmentsinclude:(i) Measures to improve quality of life through improvements in basicpublic services such as primary health, primary education, and ruralinfrastructural services such as electricity, water, and roads. Madhya Pradeshhas brought out the first state-level Human Resource Development Report. Otherstates have followed suit. The Planning Commission has also published acomprehensive National Human Development Reportassessing humandevelopment nationwide and in the major states.30(ii) Clustering high-tech industries and services (for example, in softwareparks).30 Government of India, National Human Development Report 2001 (New Delhi : PlanningCommission, 2002).ECONOMIC REFORM IN INDIA272(iii) Setting up Special Economic Zones and Agri-Economic Zones topromote exports.(iv) Formulating state-level industrial policies to attract investments.(v) Power-sector reforms that restructure state Electricity Boards byseparating generation, transmission and distribution activities, encouragingindependent power producers in the private sector to invest in the powersector, and setting up independent state Electricity Regulatory Authorities.THE PERFORMANCE OF THE INDIAN ECONOMYDespite the slow pace of implementation of the economic reforms andcertain hiccups and delays caused primarily by the compulsions of democraticpolitics, the performance of the Indian economy under the reforms carried outso far shows a mixed picture of notable achievements and weaknesses. Theperformance has been impressive on some fronts, satisfactory on several otherfronts, and inadequate in certain respects. India has still to launch deeper (socalled'second-generation') reforms in various areas to get the best results.Areas of Impressive PerformanceThrough reform, India overcame its worst economic crisis in theremarkably short period of two years. Macro-economic stabilization reforms(along with structural economic reforms) were launched in June 1991.Through prudent macro-economic stabilization policies including devolutionof the rupee and other structural economic reforms the balance of paymentscrisis was clearly over by the end of March 1994. Foreign exchange reserveshad risen to the more than adequate level of US$15.07 billion and the currentaccount deficit as a percentage of GDP was nearly eliminated. Export growthrate at 20.0 percent in 1993-94 over the previous year was quite encouraging.Macro-economic stability has endured in the ten years of economicreforms to 2003. Foreign-exchange reserves peaked at US$70 billion at the endof March 2003 (and touched US$80 billion in June 2003).31 The currentaccount 'recorded a surplus-equivalent to 0.3 percent of GDP-in 2001-02'.32 Food stocks with the Food Corporation of India, held to ensure nationalfood security, peaked at sixty million tons (compared to the required twentymillion tons). It took longer to control inflation but this led to relatively moreenduring results (excluding the impact of externally determined fuel prices).Since 2002, the country has enjoyed a low interest-rate regime. These31 The Rupee had started appreciating against US$ after April 2003.32 Government of India, Economic Survey 2002-03, op.cit., p.3.CHARAN WADHVA273performance indicators have helped to provide an 'enabling environment forthe macroeconomic policy stance.'33India has also increasingly integrated its economy with the global economy.After half a century of inward-orientation, the share of India's trade as aproportion of GDP rose from 13.1 percent in 1990 to 20.3 percent in 2000. ByIndian standards this is an impressive performance.India's economy has also successfully moved into a higher trajectory ofgrowth and displayed strong dynamism in selected sectors. This encouragingperformance brightens the prospects for stepping up India's growth rate andimproving the competitive edge in the years to come through furtherappropriate economic reforms.The average annual growth rate of 5.8 percent achieved by the Indianeconomy during the years of economic reforms since 1992 is encouraging.Currently, after China, India is among the fastest-growing countries in Asia.Since the annual rate of population growth has slowed significantly to nearly1.8 percent during the 1990s, per capita income has been growing at a healthierreal rate of four percent per annum.India's growing middle class of more than 350 million people, with areasonably affluent standard of living, provides a huge market for foreigncorporations, especially since April 2003, when all quantitative restrictions onimports were lifted.Along with its fairly good growth rate (which, however, is far below thepotential growth rate of eight percent targeted by India's Tenth Five-YearPlan), India has been successful in reducing poverty. The poverty ratio (that is,people below the poverty line as a percentage of the population) as estimatedby the Planning Commission at the national level came down from 36 percentin 1993-94 to 26.1 percent in 1999-2000. The poverty ratio during this perioddeclined both in rural areas and in urban areas. There is little doubt thatpoverty in India has been reduced during the last decade. The PlanningCommission has set a poverty ratio target of 19.3 percent by the end of theTenth Plan period (to March 2007).An important indicator of gains from economic reforms, reflecting theattractiveness of India as an investment destination, is shown by the increasinginflows of both FDI and Foreign Institutional Investment (FII) into India.Inflows of both FDI and FII into India has increased in the decade to 2002.On average, according to the Ministry of Finance's Economic Survey, India has33 Reserve Bank of India, Annual Report 2001-02, Mumbai, Reserve Bank of India, p.1.ECONOMIC REFORM IN INDIA274been attracting US$2.5 billion to US$3 billion and nearly US$4 billion in 2001-02 in FDI per annum mostly in various infrastructural sectors such as largepower and telecommunication projects.India's economy under the reforms has made rapid strides in selectedindustrial areas and knowledge- and skill-intensive services. These specificgrowth areas have experienced significant restructuring under morecompetitive conditions in the marketplace through mergers and acquisitionsand technological and managerial innovations. This has led to the achievementof recognizable increases in international competitiveness in a number ofsectors including auto components, telecommunications, software,pharmaceuticals, biotechnology, research and development, and professionalservices provided by scientists, technologists, doctors, nurses, teachers,management professionals and similar professions. The spillover effects ofIndia's increasing international competitiveness have helped in improving therate of growth of export earnings. They have also directly benefited Indianconsumers by making better quality, lower-priced goods available.Areas of WeaknessThe most notable weakness of the reform process has been in fiscalconsolidation. Indian governments at both the central and state levels havefailed miserably to reign in growing revenue deficits and reduce the overallfiscal deficit. The foundations for a sustainable high growth rate in anyeconomy lie in maintaining fiscal discipline. This has not been adequatelyachieved by Indian policymakers. Excessive use of market borrowing to coverbudget deficits has often put upward pressure on interest rates and pre-empted('crowded out') borrowings by the private sector. The structure of revenueexpenditure and political obstacles to any reduction of subsidies anddownsizing the government at all levels have been primarily responsible forthe lack of progress on fiscal reforms. The real issue in restructuringgovernment finances is 'right-sizing' the government by adequately increasinggovernment expenditure on infrastructure of both the hard and soft varieties,based upon growing resources.India's record on social development expenditure has been poorconsidering Indian requirements and poor also in relation to many developingcountries, including some of the least developed countries in Sub-SaharanAfrica. The abysmally low ranking of India on the Human DevelopmentIndices computed by the United Nations bears testimony to this assertion.34Dreze and Sen remarked in 1995 that India's social development indicators in34 United Nations, Human Development Report, available annually at http://hdr.undp.org.CHARAN WADHVA2751991 (when reforms were launched) were lower than in several East andSoutheast Asian countries three decades ago.35India must bridge this social development gap by significantly increasing itspublic expenditure on social services if it wishes to achieve the targeted annualgrowth rate of eight percent set by the country's Tenth Plan. As Ahluwalia hasremarked, larger investment in the social sectors is 'necessary not only becausesocial development is an end in itself, but also as a precondition of acceleratinggrowth'.36The massive shift required in the pattern of government expenditure inIndia in favor of social sectors and infrastructure can only be carried outthrough structural fiscal reforms. The Fiscal Responsibility and BudgetManagement (FRBM) Act (2003) provides for complete elimination of therevenue deficit by 31 March 2008. This Act is, therefore, a step in the rightdirection. Despite 'dilution' of the original draft bill, it is important legislationbecause it sets the condition that the government can run a fiscal deficit only ifborrowings are made to finance investments which will enhance productivecapacity'.37Another major weakness of the Indian economic reforms is the economy'sexperience with 'jobless growth' in the post-1990 period. Rigid labor lawsrelating to retrenchments have constricted growth in the organizedmanufacturing sector. As a labor surplus country, there already exists a hugebacklog of both 'open' and 'disguised' unemployment. With a growingpopulation, every year adds to the labor force. Economic reforms haveaccelerated growth but failed to generate adequate employment. For example,the rural unemployment rate, after declining to 5.61 percent in 1993-94, roseto 7.21 percent in 1999-2000 as did the All-India (urban plus rural) rate ofunemployment. If this disturbing trend is allowed to continue, it will breedsocial unrest and add to the ranks of terrorists and other anti-social elements inthe country.Last but not least, the reforms have led to growing disparities betweenricher and poorer states (more and less developed, especially in terms ofinfrastructure) within India. Although the all-India average annual growth ratein the reform era has been on the order of 5.8 percent, this masks wide35 Jean Dreze and Amartya Sen, India: Economic Development and Social Opportunities, (New Delhi :Oxford University Press, 1995).36 M S Ahluwalia, op.cit., p.74.37 C Rangarajan, 'Focus on Revenue Deficit', Business Line (New Delhi), June 10, 2003, p.4ECONOMIC REFORM IN INDIA276variations in inter-state growth rates, growth of per capita income, and socialdevelopment.Most state governments are not well prepared to meet the challengesposed by globalization. The farming sector and the innumerable small-scaleindustrial units are vulnerable to the impact of global competition. Thegovernment and economic players in the private sector need to work moreclosely as partners to evolve strategies to meet the challenges of globalcompetition more effectively.THE ECONOMY IN THE INTERNATIONAL ARENAThe Indian economy has been moving towards closer integration with theglobal economy and with the leading regional trading blocs. This can be seenusing three indicators: (i) Trade in goods and services as a proportion of GDP;(ii) Gross Private Capital (In)flows; and (iii) Gross Foreign Direct Investmentas a proportion of GDP. In all three areas, China has had the mostoutstanding performance and is clearly far ahead of India. However, within theconstraints of democratic politics (which have forced India to adoptincremental and relatively 'softer' economic reforms), and despite being a latestarter in the economic reform process, India can be seen to have done'reasonably well' in globalizing its economy. The ratio of trade to GDPincreased from 13.1 percent in 1990 to 20.3 percent in 2000. The proportionof Gross Capital Inflows to GDP during the same period increased from 0.8percent to 3.0 percent. Gross Foreign Direct Investment as a percentage ofGDP (which was zero in 1990) rose to 0.6 percent in 2000.India's trading relations with major regional trading blocs in 1990 and 2000can be seen in Table 2. For the year 2000, APEC countries were India's largesttrading partners, accounting for 47.4 percent of India's global exports and 57.4percent of global imports. India has, therefore, shown keen interest in joiningthis forum. Unfortunately, APEC has currently imposed a moratorium on newmembership.There is naturally a sharp contrast between India and East Asian countriesin their relative rates of export growth due to sharp differences in their exportstrategies. The contrast is the sharpest when we compare India and China forthe period 1950-2000. In 1950, both had roughly similar shares in world trade.China pursued a more aggressive export strategy in 1978 when it createdexport-oriented Special Economic Zones in Southern China. By 2000, Chinahad captured around 4.0 percent of world trade. In contrast, India's share ofworld trade had stagnated at around 0.5 percent for the three decades 1960-90CHARAN WADHVA277due to its inward-looking policies.38 By 2000, this share had moved up to 0.7percent. India has formulated and is further strengthening its latest Medium-Term Export Strategy (MTES) (2002-07), coinciding with the period of theTenth Five-Year Plan.TABLE 2: TRENDS ANDPROJECTIONS FOR INDIA'SEXTERNAL TRADE 2000-2025Year Exports to Imports from1990 2000 2020 1990 2000 2020Actual/Projected A P p A P PIndia's Global Exportsand Imports (US $Billion)18.2 37.1 63.6 23.3 41.3 61.21. APEC-21 52.06 47.4 43.44 40.98 58.68 57.412. ASEAN-10 4.99 6.87 7.38 6.92 9.41 13.13. BIMSTEC-4 2.91 4.65 5.45 1.55 1.28 1.454. BISTEC-3 2.9 4.51 5.3 1.55 0.8 0.985. EU-15 27.6 24.76 25.14 36.62 25.72 23.796. GCC-6 5.21 7.17 7.71 8.7 21.05 32.577. IOR-ARC-18 13.55 19.26 22.22 13.4 20.93 30.768. NAFTA-3 17.13 19.65 16.08 11.2 10.14 11.019. SAARC-7 2.65 4.12 4.52 1.78 0.47 0.68Note : A-Actual and P-ProjectedAPEC - 21: Asia Pacific Economic CooperationASEAN-10: Association of South East NationsBIMSTEC-4: Bangladesh-India-Myanmar-Sri Lanka-Thailand EconomicCooperationBISTEC-3:Bangladesh-India-Sri Lanka-Thailand Economic CooperationEU-15: European UnionGCC-6: Gulf Cooperation CouncilIOR-ARC-19: Indian Ocean Rim Association for Regional CooperationNAFTA-3: North America Free Trade AreaSAARC-7: South Asia Association for Regional CooperationSource : Charan D. Wadhva, "India's External Sector" Chapter - 12 in theReport of Research Project on India-2025: A Study of the Social, Economic and PoliticalStability, Centre for Policy Research, New Delhi, May, 2003.38 As per World Bank's annual World Development Report, various issues and other sources.ECONOMIC REFORM IN INDIA278The MTES for 2002-07 envisages the achievement of India's target of onepercent of global trade by 2007 and provides sector-wide targets for nicheproducts and targets for selected niche markets.39 The active participation ofstate governments is being sought in establishing and strengthening SpecialEconomic Zones (SEZ) modeled on Chinese SEZs and setting up Agri-Economic Zones to provide a strong push to raise the country's export growthrate. The development of world-class infrastructure in the SEZs will take moretime. A new labor policy regime allowing freedom for entrepreneurs in theSEZs to 'hire and fire' labor according to the needs of the market (aspermitted in the highly successful Chinese SEZs) will have to be put in placeto maximize gains from India's SEZs. As of May 2003, eight SEZs had beenapproved and have became operational. More such SEZs will be set up inIndia in the future.India is trying its best to liberalize and to transform itself into a globalplayer of consequence in the world economy by 2020. It has been ranked bythe World Bank as the world's fourth-largest nation in terms of the size ofGNP measures in terms of Purchasing Power Parity (PPP) in 2001. Ahead ofIndia in 2001 on this front were only Japan, the US, and China. The WorldBank has projected that by the year 2020, China will take the top spot,followed by India.India's economy clearly is on the move and most certainly has the potentialto emerge as a global economic power within next twenty to twenty-five years.However, this potential can be made a reality only if India mobilizes adequatepolitical will and quickly commits itself to design and fully implement the nextphase deeper 'second-generation reforms'.The concept of 'second-generation' reforms has been in the making forsome years. However, these are yet to take concrete shape. Considering thatIndia currently has no social security system in place for nearly 90 percent ofits labor force employed in the unorganized sectors, India needs to evolve awell-calibrated approach to its future economic reforms. This would also benecessary to meet the challenges posed by the further intensification of theprocess of globalization. However, clear prioritization of future economicreforms in India will have to be laid down during implementation of the mostcritically needed 'second-generation reforms'.39 Government of India, Export Import Policy 2002-07, New Delhi : Ministry of Commerce2002.CHARAN WADHVA279THE NEXT GENERATION OF REFORMSThe following are ten recommended areas of special focus in the secondgeneration of economic reforms:1. Political Reforms for Good Governance;2. Re-engineering the Role of the government;3. Administrative and Legal Reforms;4. Strategic Management of the Economy with a focus on knowledgebasedHRD Activities;5. Fiscal Prudence;6. Agricultural Sector Reforms;7. Industrial Restructuring;8. Labor Sector Reforms;9. Foreign Trade and Outward Investment Policies;10. Financial Sector Reforms.Political Reforms for Good GovernancePolitical reforms are urgently required in concert with economic reforms.40Both are essential to ensure good governance. A paradigm shift is required inthe prevailing system of governance. Serving the people and putting theirinterests above the interests of the ruling elite must be the prime motivatingforce driving the reformed system of governance. Good governance can beensured through the provision of an adequate quantity of public services andby improving their quality. Indian politicians need to become fully aware of thecosts and benefits of economic reforms. Ruling politicians with limited termsin office are often guided by narrow and short-term motivations whileformulating policies in the national interest. The Indian public at large alsoneeds to be thoroughly educated on the inevitable need to bear short-termpain in order to reap the somewhat uncertain longer-term gains fromeconomic reforms.Economic reforms in the future must be more people-centered. They mustbe given a human face so as to continuously enhance the socialempowerments of the poorer and most vulnerable sections of the society.They must be gender-sensitive to improve the status of women and girls. Theburden of adjustment to structural reforms must be more heavily borne by thericher sections of the society. Appropriate electoral reforms, including state40 For a discussion of the required political reforms in India, see Subhash C. Kashyap, PoliticalReforms for Good Governance: A Policy Brief (New Delhi: Shipra Publications, 2003).ECONOMIC REFORM IN INDIA280funding of elections, will help to reduce the lobbying power of the entrenchedvested interests.Re-Engineering the Role of the GovernmentReforms must be aimed at 'right-sizing' (often involving downsizing) thegovernment. Governments must specialize in performing roles that they canperform better than free-market private enterprise. The government mustexpand its role in areas such as the provision of public goods, especiallyprimary health, primary education and the creation of social infrastructures.The role of the Planning Commission must be changed to that of a strategicthink tank. The mindset of the politicians and the administrators needs to bechanged to accept the re-engineered role of government in the context ofmarket-oriented economic reforms. The intensification of economic reformsat the state level needs to be given a higher priority in the future since mostsocial services and infrastructural activities are primarily the responsibility ofthe state governments.Administrative and Legal ReformsNo matter how good the design and intent of economic reforms, theirsuccess ultimately depends on efficient and speedy implementation throughsensitive and responsive administrative and legal systems. Transparency andaccountability must be guiding principles for the formulation andimplementation of policies and procedures. Improved administrative systemsshould be devised to ensure that merit subsidies directly benefit the targeted(generally the underprivileged) sections of society. Legal support servicesshould be made available with more public funding and must be strengthenedto provide justice to genuinely aggrieved sections of society more quickly andaffordably.41 Second-generation economic reforms also must focus onchanging the mindset of administrators (especially at the grass-roots level) andof the judiciary (especially at the lower level) to support administrative andlegal reforms that synergize with economic reforms for maximizing socialwelfare.Strategic Management of the EconomyMacroeconomic management must be dovetailed with a well-formulatedstrategic national vision for the economy for the year 2020 (and beyond).Clarity, transparency and accountability (through identifiable responsibilitycenters) with properly designed incentive (and disincentive) systems should bethe guiding principles governing strategic management of the economy. An41 See Subhash C Kashyap (ed.), The Citizen and Judicial Reforms under Indian Polity (New Delhi :Universal Law Publishing Company, 2002).CHARAN WADHVA281appropriate code of conduct should be evolved and observed by economicactors under a new managerial system of governance. The strategicmanagement of the Indian economy in the twenty-first century must focus onhuman resource development to promote knowledge-based and skill-intensiveeconomic activities in line with India's dynamic competitive advantage.Fiscal PrudenceThe fiscal deficit (especially the revenue deficit) needs to be quicklyreduced. India must sincerely implement the Fiscal Responsibility and BudgetManagement Act . Simultaneous action is required at both central and statelevels to raise the tax-to-GDP ratio by expanding the tax base (for example, bytaxing services and rich agriculturists) and improving tax administration (forexample, through computerization). The revenue deficit must be brought tozero within five years.Agricultural Sector ReformsWhile some agricultural reforms have already been carried out, these arehighly inadequate. Primacy must be given to the agriculture sector in all futurereforms since many more jobs can be created in the agricultural sector, broadlydefined, including activities related to rural industrialization and overall ruraldevelopment. Both on-farm and off-farm employment potential must be fullyexploited. This will raise incomes of farmers and rural labor on a sustainablebasis and provide a much-needed boost to demand for industrial products andservices, thus spurring all-around economic growth.There is an urgent need to raise public investment in agriculturesubstantially. Areas needing investment include: irrigation; watersheddevelopment; rural infrastructure; drinking water; housing and sanitation. Thiswill help raise the productivity of Indian agriculture to international levels andhelp in promoting rural (and interlinked urban) prosperity in India.Second-generation reforms must reduce the perennial anti-agricultural biasby permitting free® exports of all primary products. This will provide a majorboost to India's exports consistent with the rules set by the World TradeOrganization. Simultaneously, India must improve its marketing infrastructure.Agricultural reform will unleash high growth rates in agriculture, on whichnearly sixty percent of India's population is still dependent for employment.Agricultural prosperity will help to markedly reduce endemic rural poverty.Industrial RestructuringIndustrial reforms must be geared to explicitly improve the productivityand international competitiveness of Indian industry by focusing on nicheproducts and niche markets. Economic policy in this respect must facilitateECONOMIC REFORM IN INDIA282mergers and acquisitions and the winding up of terminally ill enterprises inboth the public and private sectors by restructuring bankruptcy laws. Massiverestructuring is required of Public Sector Units. Most non-performing publicsector units should be quickly sold through a privatization process that alsosafeguards the interests of workers through fair compensation for loss of jobs.Public sector enterprises should be governed by a commercial culture in whichgovernment holdings are no more than 26 percent of equity and are retainedonly to preserve strategic control. It is of the utmost importance that microlevelreforms must supplement macro-level reforms in the future to achievesynergy. The private sector in India needs to become more international in itsoutlook to become more competitive and to increase its overseas presencethrough outward FDI.Labor ReformsA properly formulated labor policy must form the core of secondgenerationreforms. This will require viable alternative social safety nets andeffective retraining and re-employment opportunities. Once satisfactory safetynets are in place, more intensive competition should be injected into the labormarket by allowing 'hire and fire' policies unambiguously linked to theproductivity and profitability of micro-enterprises. The government shouldstart by exempting units in the newly created Special Economic Zones fromthe rigors of labor laws. These measures would be of great help in redressinginefficiency of workers in public enterprises and public services (such as healthcare in rural areas).Foreign Trade and Outward Investment PoliciesNo economic reforms can succeed in India without ensuring adequategrowth of exports of goods and services to ensure longer-term viability of itsbalance of payments. While anti-dumping measures need to be strengthened toprotect Indian industry from unfair import competition, the longer-termreforms must continue to lower import duties to levels comparable to those inleading Southeast Asian countries. Simultaneously, measures should be takenby the government to replace quantitative restrictions (wherever they stillremain in place) through appropriately determined tariffs.The second generation of economic reforms must facilitate the growth ofIndia's own Multi-National Corporations (MNCs). The government mustfurther liberalize outward foreign investment to allow potentially competitiveIndian MNCs to establish production bases abroad and trade internationally.Finally, industry and government must make cooperative efforts to prepareIndian industry to meet the new and ever-emerging challenges posed by theCHARAN WADHVA283new world trade order and the new world investment order being evolvedunder the World Trade Organization.Financial Sector ReformsIndia must heed the lessons of the East Asian economic crisis andrecovery, and attached the utmost urgency the next phase of financial-sectorreforms. The high level of Non-Performing Assets plaguing long-termDevelopment Financing Institutions and commercial banks must bedramatically reduced.To summarize, greater competition in the financial sector with anappropriate exit policy to reduce overstaffing together, along with soundmacro-economic policies, will help to lower the real rate of interest and spurinvestment and efficiency, thereby raising growth rates and benefitingconsumers. Coupled with the current regime of falling interest rates, greatercompetition in the financial sector in general and among the commercial banksin particular will help to increase the rate of investment in the economy.Simultaneously, foreign insurance and pension funds should be allowed tooperate with fewer restrictions to make more resources available to finance themodernizing of India's infrastructure. Further policy and procedural reforms(especially in the power sector) will help to attract substantially higherinvestment in India's infrastructural sectors.Finally, credible policy measures that protect investors, especiallyindividual investors with small savings must be adopted. These measures, ifeffectively implemented, will help to revive growth in India's capital and stockmarkets. It must be remembered at all times that the be-all and end-all of alleconomic activities is the consumer. Future economic reforms must aim todirectly benefit Indian consumers through cost reductions, enhanced quality ofgoods and services, and by expanding customer choice through competition.CONCLUSIONSWithin the constraints of democratic politics and the relatively 'soft' natureof the economic reforms implemented since 1991, the Indian economy hasreaped several welcome rewards from its reforms. These have strengthenedthe conviction that the broad direction of the reforms is right and, in thatsense, made the reform process irreversible. However, India needs to launch a'second generation' of economic reforms, with a more human face, if it is toreap their full potential. Politicians and administrators need to display greaterpragmatism while designing and implementing future economic reforms. TheECONOMIC REFORM IN INDIA284reforms must be based on the long-term vision of transforming India into aglobal economic power in the next twenty to twenty-five years.It will be of the utmost importance that all sections of society are educatedas to the long-term benefits of reform in order to mobilize public support.These reforms, therefore, will have to be drastically redesigned and politically'marketed'. Future economic reforms must be seen and experienced as notonly good economics but also good politics.Two paradigm shifts in the reforms, backed up by the effective fulfillmentof the promises made, will help to garner the support of the Indian people.First, these reforms must aim to raise the productivity of Indian labor andimprove the work culture and, over time, provide significant rewards to thepeople of India by spurring growth, providing a higher level of real wages, andgenerating wider avenues for employment and re-employment. Growth withemployment is the most effective strategy for eliminating poverty andimproving the quality of life of the people.Second, the reforms must aim to directly benefit Indian consumers. Over areasonable time span, the reforms must reduce prices of goods and services(including public goods), improve their quality, and allow much more freedomof choice by maximizing the benefits of healthy competition. This will furtherexpand the size of the market-both domestic and international-and provideincentives to entrepreneurs to raise their investment, output, and employment.A combination of more productive labor and pro-consumer economic reformswill be a win-win, proving to be both good economics and good politics.Visionary political statesmanship will be required for this. It should not beslogan-oriented but more result-oriented since it will likely be perceived andexperienced as 'pro-people'.

What role do businesses that go tothe market play in the circular model?

Add your answer:

What is the difference between GDP ndp and gnp?

Economic reforms in India since 1991?

What are the roles of the AU in maintaining peace in Africa?

Suki is walking on a circular path arounda park. If the circle has a diameter of3 km, how far does she walk Answer tothe nearest kilometre?

Why were Indians necessary tothe missions?

What can you do to help HIV?

What is 106 tothe nearest hundred?

What is 818712 rounded tothe nearest 10000?

Round 3.725 tothe nearest hundredth?

What is 98.4321 rounded tothe nearest hundred?

What is 15.839 rounded tothe nearest hundredth?

How do you get a Rashberry?

Can you connet tothe psp the usb to the PS3?

What is 41236 rounded tothe nearest 10?

Resources

Top Categories

Product

Company