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Research Paper on Economic Reforms an Unfinished Agenda

Research Paper on Economic Reforms an Unfinished Agenda

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Research Paper on Economic Reforms: An unfinished agenda
Research Paper on Economic Reforms: An unfinished agenda

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Economic Reforms in India: An Unfinished Agenda

*VISHAL KUMAR
**MRS. SAVITA
INTRODUCTION_______________________________________________________
A foreign exchange crisis in 1991 induced India to abandon decades of inward-looking socialism and adopt economic reforms that have converted the once-lumbering elephant into the latest Asian tiger. Faced with a foreign exchange crisis in 1991, India embarked on gradual, erratic, but persistent economic reforms that in two decades transformed its living standards and place in the world. In 1991 India was viewed globally as a bottomless pit for foreign aid, periodically hit by food and foreign exchange crises and hamstrung by an immense web of controls imposed in the holy name of socialism and then used by politicians to line their pockets and build patronage networks. Early that year, The Economist magazine carried a survey on India titled ―The Caged Tiger,‖ which concluded sorrowfully that India would remain trapped in its cage, unable to join other Asian tigers that had become ―miracle economies.‖ Many analysts saw India as a lumbering elephant, in stark contrast to the Chinese tiger. The reform process in India was initiated with the aim of accelerating the pace of economic growth and eradication of poverty. The process of economic liberalization in India can be traced back to the late 1970s. However, the reform process began in earnest only in July 1991. It was only in 1991 that the Government signaled a systemic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of Government. The economic reforms initiated in 1991 introduced farreaching measures, which changed the working and machinery of the economy. These changes were pertinent to the following:  Dominance of the public sector in the industrial activity  Discretionary controls on industrial investment and capacity expansion  Trade and exchange controls  Limited access to foreign investment  Public ownership and regulation of the financial sector

A BRIEF HISTORY OF 20 YEARS OF REFORMS___________________________
After independence in 1947, India followed a socialist pattern of development, emphasizing selfsufficiency and public-sector dominance. It was inward looking and skeptical of markets and international trade. In the 1970s, marginal income tax rates went as high as 97.75 percent, on top of which a wealth tax of up to 3.5 percent was levied to promote the garibi hatao (abolish poverty) policies of Indira Gandhi. Yet poverty did not fall at all in the three decades after independence, and GDP growth averaged just 3.5 percent per year (the so-called ―Hindu Rate‖ of growth), just half of what had been achieved by Asian tigers with outward-looking, marketfriendly policies. India’s GDP Growth Accelerates
1950-80 1980-92 1992-2003 2003-2010 GDP Growth % 3.5 5.5 6.0 8.5

Source: Calculated from tables in Government of India, Economic Survey 2010–11

Meanwhile Deng Xiaoping had revolutionized China. India turned away from socialism to half-baked liberalism. and it ended in tears when India ran out of foreign exchange in 1991. and so suffered the ignominy of being overtaken by Bangladesh in this sector. a new record. showing that the market was the way to go. it emerged as a major power in brain-intensive industries ranging from computer software and medical tourism to auto exports and research and development (R&D). No party dared liberalize very restrictive labor laws. But. yet—in part because it was a relatively closed economy—the country survived without serious damage. to everybody’s surprise. inconsistent. But within two years the reforms restored India’s finances. more in sorrow than ideological triumph. Narasimha Rao. This was too successful to reverse. Rajiv Gandhi was widely expected to win the general election in June 1991 but was assassinated by a Sri Lankan terrorist. and in the three years from 1994 to 1997 India averaged 7. Opposition parties accused India of having sold out to the International Monetary Fund and swore to reverse the reforms when they came to power. and so India continued down the reform path even when other political combinations came to power.5 percent GDP growth. Indian entrepreneurs were wary of setting up large labor-intensive factories for exporting items like garments.Some economic liberalization plus runaway public spending helped accelerate GDP growth to 5. But. In 2000 India was seen as globally competitive in services but not industry. proving that India had not just cheap labor but world-class skills. The recession of 2001 led to greater outsourcing of software and business services. Growth took a hit. There was no Ronald Reagan or Margaret Thatcher in India: reform was a very pragmatic process. and the Congress Party formed a fragile minority government headed by a political lightweight. both economic and political conditions were highly unfavorable. India’s restrictive labor laws made it virtually impossible to shed workers in any company with over 100 workers. So. of export-led growth based on labor-intensive industries. after taking time to adjust to liberalization and globalization (which was . The reform process was halting. yet the overall direction remained unaltered.5 percent in the 1980s. making it clear that more socialism was not the answer. No party won an absolute majority in that election. where the Chinese juggernaut crushed all opposition. Labor inflexibility meant India could not follow the path set by the other Asian tigers. and sometimes partially reversed. Indeed. this was the period when India’s computer software industry rose to prominence. In the next decade it marched up the value chain. and without having to go hat in hand to the IMF like so many other Asian neighbors. But this was based on unsustainable borrowing. and India built on that opportunity. The Soviet Union was collapsing. The Asian financial crisis of 1997–99 was the first test of the resilience of Indian reforms. And so. without imposing new controls on capital inflows. playing a leading role in developing software to thwart the so-called Y2K problem. and so India failed to make its mark in labor-intensive industries. moving steadily into higher and higher levels of technology.

imports. These reservations were whittled away gradually over more than a decade. Far from suffering a fiscal squeeze on social spending. close to the average for southeast Asian countries. but most Indian companies comfortably held their own. banking. Earlier it was as high as 300 percent. skeptics abounded. especially in telecom. but private investment in infrastructure and other areas previously reserved for the government has transformed the country. acquiring companies across the globe. A few Indian companies were indeed taken over by multinational corporations. and the effective rate for many items is around 7 percent. and many new Indian giants emerged. such spending rose to new heights. Indeed. Foreign investment has been liberalized in most areas. Indian industries greatly improved their productivity and in many areas became globally competitive. The financial sector used to be a virtual government monopoly but has now been liberalized with the entry of several private and foreign players. Despite such waste. They predicted that opening up and cuts in import duties would cause massive unemployment and de-industrialize India. They warned that multinational giants would rapidly take over the Indian economy and that Indian companies would go bust or become subservient underlings of foreigners.opposed by an influential quasi-protectionist section of industry called the Bombay Club). though much remains to be done in service industries like retail. some social indicators did not improve quickly and India’s proportion of underweight children—a measure of . India enjoyed a record increase in literacy in the two decades of reform. hitting the poor. However. failure to reform service delivery meant that much of the additional revenue was wasted or diverted to the undeserving. Far from getting deindustrialized. and several more for the public sector. Leftist critics predicted that India was going down the World Bank-International Monetary Fund (IMF) path that had supposedly resulted in a ―lost decade‖ of economic growth in Africa and Latin America in the 1980s and warned that India would suffer a similar fate. and insurance. Back in 1991 more than 800 items were reserved for production by small-scale industries. Privatization has been very limited. One measure of how far India has come is that in 1991 Finance Minister Manmohan Singh’ s first budget brought the maximum import duty down—to a still whopping 150 percent. India began to rival China in making acquisitions abroad. though the sector remains heavily regulated. technology. They also warned that the fiscal stringency imposed by the IMF would strangle social spending and safety nets. Controls on industrial production. and 70 percent of banking is still in government hands.5 percent growth in the 2000s. Today the standard import duty is down to 10 percent. However.‖ India became a miracle economy averaging 8. while corruption flourished. Far from suffering a ―lost decade. and dozens became multinationals in their own right. financed by booming revenues that accompanied booming GDP growth. When India started down this reform path 20 years ago. and poverty fell substantially. Every one of these dire predictions turned out to be wrong. Indian industry rose to new heights with the abolition of controls. and foreign exchange have been abolished or hugely relaxed.

and enforcement of contracts (182nd). an expanded Education for All scheme along with a Right to Education Act. However. castes. red tape. This is one reason India remained far down in the Human Development Index of the United Nations.49 percent of GDP in 2005–06 to 7.7 percent. Strict controls on land ownership and the movement of goods thwart agricultural growth. Innovations in the reform era include a rural employment guarantee program. and religious groups. Powerful trade unions ensure that there is no accountability from teachers. Indian states are beginning to improve business conditions but have a long way to go. getting construction permits (177th). The Doing Business report of the World Bank places India at just 134th of 183 countries. This reflects controls. Many analysts also worry that inequality is rising. states. waste. and other deliverers of government services. a large unfinished agenda of economic reform remains. Meanwhile the federal government continues with significant curbs on investment in infrastructure. India comes close to the global bottom in ease of starting a business (165th). THE UNFINISHED AGENDA________________________________________ Even after two decades of reform. a rural health mission. and castes have benefited substantially. showing it has a long way to go before it can be called business-friendly. health workers. Economic Freedom and Doing Business The Heritage Foundation’s 2011 Index of Economic Freedom ranks India at just 124th of 183 countries. even after significant liberalization by the federal government. natural resources. the poor have not benefited enough. But the unfinished agenda remains large. and poor states are getting left behind even as Maoist insurrection in many states worsens. so poor people increasingly switch to paid private schools and doctors. Social Spending and Waste Social spending has boomed along with the economy. Twenty years after reforms began. often a product of half-baked reform. education.V. Supposedly free government schools and health centers barely function. special programs for rural infrastructure and urban problems. the financial sector.5 million) which will take 320 years to clear according to Andhra Pradesh High Court judge V. Rigid labor laws have not been amended at all and prevent India from moving into labor-intensive industries that could employ millions. and leakages on a monumental scale. Social spending broadly defined rose from 5. India holds the world record for legal case backlogs (31. There is plenty of evidence that poor people. Rao. These criticisms are mostly exaggerated or plain wrong. and delay (mostly at the state government level). the Indian public is angry at high corruption arising out of crony capitalism. and schemes targeted at poorer sections. a forthcoming Food Security Act to greatly expand subsidized food for the poor. The Fraser Institute’s 2010 Economic Freedom of the World report ranks India a bit better at 87th of 141 countries.27 percent in 2009–10. as does an even larger unfinished agenda for governance reform. these schemes are dogged by corruption. Major . and retail. absenteeism is rampant and bribes are constantly demanded for supposedly free services.malnutrition—was the third-worst in the world at 46.

However. low weight. Politicians misuse powers of arrest and prosecution to protect wrongdoers in their own ranks and to target opposition groups. iron. but the biggest bottlenecks are in skilled labor. Nutrition is a bigger problem than hunger. This is one reason why Maoists have come up in remote areas— they hold courts and implement instant rough justice. . Vast areas of rural India have very few police.641. data from the National Nutritional Monitoring Board show some improvement. This works out to 10. It’s called a miracle economy. The government school system is deplorable. Anemia affects over 80 percent of the population in several states. Both government and private colleges are highly unsatisfactory in both quality and quantity. and millions leave school functionally illiterate. Calorie intake is falling despite rising income—poor people want to switch to superior. despite rapid GDP growth. and poor people complain that the few rural police are bought off by richer landowners and traders. Child malnutrition. courts. India ranks a shocking 182nd of 183 countries according to the World Bank. affects 46.administrative reforms are needed to change incentives and make service providers accountable to the people they serve. A saving grace is that while civil cases go on forever. and iodine are on the future agenda. tasty foods rather than get more calories out of basic foods. Order. and Justice The police and courts have a terrible record and are seen as founts of corruption and injustice. Voucher programs can give parents the choice of sending kids to private schools and colleges.7 percent of all Indian children. and this is highly valued by all businesses including foreign ones. Nutrition India has some of the worst nutritional indicators in the world. India needs a huge improvement in education and vocational training if it is to fully harness its demographic dividend. or forms of administrative redress. Indian courts are speedy and effective in checking arbitrary actions by the government. India has 14. By global standards Indian children suffer from stunting.2.576 judges as against approved and budgeted posts of 17. Law. Cases drag on for decades. Skill Shortages Every sector in India (including farming and construction) complains today of a labor shortage. India’s court case backlog guarantees that many legal controversies will never be settled at all. measured by low weight for age. In enforcement of contract. filling a void created by state absence.5 judges per million population. and many criminals die of old age before being convicted beyond all appeals. A family health survey suggests virtually no improvement in child malnutrition between 1998–99 and 2005–06. India has less than one policeman per thousand people against the United Nations standard of 2. against the Indian Supreme Court’s suggested norm of 50 per million. and wasting. so nutritional education and fortification of food with vitamins. The puzzle is that malnutrition and anemia affect high income groups too. but the real miracle is how it manages to grow fast despite such a flawed institutional base. The government should allow for-profit schools (currently banned) as well as easy entry of foreign universities into India. worse than in any African country.

This ranks India 87th out of 178 countries. including cases of murder. This was up from 128 such politicians in the 2004 elections. power. stoking criticism that liberalization amounts to a ploy to enrich politicians and business cronies alike. rape. as suggested by the Corruption Perception Index of Transparency International. and telecom are all connected with the three top areas of corruption—natural resources. and government contracts. Not everyone recognizes the problem as one of insufficient liberalization that leaves too much space for political discretion and favoritism. and bureaucrats. which provides huge kickback opportunities. rising corruption in these three areas has been so brazen as to make politicians richer and the public angrier than ever before. 150 of 542 seats were won by politicians with criminal records. not just to provide cleaner government but to accelerate infrastructure provision. and so the thugs are wooed by political parties and join politics to stall cases they face. an ombudsman with teeth) to investigate corruption by ministers and top politicians. Roads. Politics is widely seen as business. and government contracts).3 in 2010. India has actually improved its score slightly over the years. foreign exchange permits). exemplified and amplified by television channels. railways. However. monopolies clearance. from 2. However. Most surveys show that people think corruption is getting worse. This deterioration of political morality is intimately linked with the rise of bigticket corruption and of the public anger against it. The situation is about as bad in the state legislatures. Possible reforms include independent institutions (like the proposed Lokpal. and theft. Another proposal is to decree legal seniority for all cases against . and this is now affecting politics where it hurts—in election results. it seems possible that India is experiencing more public outrage rather than more corruption. with the biggest culprits being politicians.Corruption This is the hottest political topic in India today. and this tends to offset rising corruption in areas of political allocations (natural resources. the police. This may be because corruption has been abolished by deregulation in several areas (industrial licenses. too. import licenses. This is a structural shift linked to the rise of an assertive middle class. public anger over corruption has exploded. and politicians as millionaires. Criminals in Politics In the 2009 elections. ports. No agricultural land can be converted into nonagricultural land for industry or services without government permission. That is a hopeful sign. After decades of increasing criminality and corruption in politics and the bureaucracy. behind China (78th) but well ahead of Bangladesh (134th) and Pakistan (143rd). and this is connected with corruption. India needs more open.7 out of 10 in 2002 to 3. Infrastructure A major barrier to growth in the coming years will be insufficient infrastructure. real estate. This translates into a deplorable form of political clout. The inability of courts to convict people beyond appeals means thugs can use money and muscle with impunity. land. transparent procedures and the abolition of political discretion in these areas. in that order. Private coal mining is still not permitted save for captive industrial consumption.

CONCLUSION_____________________________________________________ India’s unfinished reform agenda includes two main areas: economic reform and governance reform. After all.5 percent growth and give India miracle-economy status. ―The Caged Tiger. Of the two. Free competition and a level playing field for business are not possible without decent governance Reform of the policejudicial system will not just improve crime detection and redress of grievances. and the telecom spectrum are auctioned transparently and not handed out to favored parties. Lecturer in Commerce. May 4.com.No. Dev Samaj College for Women.indiabudget. for example.No. November 8. Ferozepur City. www. an essential condition for dynamic competition. ―India and Bretton Woods II. is often referred to as 2010–11. Indeed. that will not only check corruption but will also help make productivity more important than political connections. Eliminating corruption from government contracts will mean not only cleaner politics and administration but more bidders for every contract.  Aditya Matoo and Arvind Subramanian. economic reform has already been deep enough to produce 8.elected legislators. but the same cannot be said for governance.-9914023332 **Mrs. Eliminating criminals from politics will not just signal that crooks and cronies cannot gain immunity by joining politics. If land. 2008. governance reform lags far behind and is thus more important.nic. M.  Economic Advisory Council to the Prime Minister.  India’s fiscal year runs from April 1 to March 31. the real miracle is that India has grown so fast despite so much misgovernance.  World Bank/International Finance Corporation. Whereas economic reform can improve governance in key areas. FY 2011.in.  Government of India. but will reduce a significant cause of corruption and rent-seeking and can thus help create freer markets and increased comp REFERENCES:  Clive Crook.  Government of India. Once thugs find that getting elected expedites rather than stalls their criminal trials. M. Email: vkfzr@hotmail.-99141-23332 . Ferozepur City. July 2010.  Census Commissioner of India.‖ Economic and Political Weekly. 2010).‖ The Economist. good governance is desirable in itself and it is an essential ingredient for faster economic growth. ―Economic Outlook for 2010/11‖ New Delhi. 1991. reducing costs and speeding up projects. Economic Survey 2010– 11 ______________________________________________________________________________ *Vishal Kumar. which will automatically become cleaner. it will also improve contract enforcement and protection of property rights. Assistant Professor in Commerce. The Economic Survey 2010–11. Dev Samaj College for Women. Census of India 2011. Doing Business 2011 (Washington: World Bank. mineral licenses. Savita. they will lose interest in joining politics.

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