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Policy Framework for Economic

Development in India

Dr. K. Narayanan
Professor
Department of Humanities & Social Sciences, IIT Bombay
knn@iitb.ac.in
Presentation
• Meaning and Aspects of Policy
• Policy in action [inaction?]
• De-regulation and Liberalisation Measures
• SAP & Globalisation
• Economic reponse to policy changes
– Trade
– Technology
– FDI
Industrialisation Strategy
• Initiated in 1956 [Second Five Year Plan]
• Heavy industry biased
• Import Substitution and Export Pessimism
• Pattern of Investment largely guided by “Capital
constraint”
• Large role for Public Sector
• Metal and Metal based
• Public Investment in Infrastructure
Policy during the early Years
• Major Policy Initiatives
• Industrial Licensing : 1950s
• MRTP Act in 1969 to regulate
Monopolies
• FERA 1973 to regulate Foreign
Companies
• From Import Substitution to Export
Promotion
Policy Framework
• Regulatory Framework
• Product Specific and Capacity Licensing
• Imports in Consumer goods in banned list
• Price Control on many items enforced
through regulation on rate of return to
capital
• Restrictions on import of Technology
Broad Overview of
Industrialisation
• Increase in share of Industrial output in GDP
• Increase in Employment in the Industrial sector in
total employment
• Role of Manufacturing sector in Industries
• Capability to produce diversified commodities
• Importance to Small Scale sector
• Growth of unorganized sector within the
manufacturing.
Industrialization Experience
• However,
• Initial high growth could not be sustained
• Supply side bottlenecks including
infrastructure constraints and restrictive
trade and industrial policy
• Inadequate growth in demand
• Slow-down in public investment
• Less than minimum efficient scale
Policy Response during the 1980s

• Liberalisation in Imports of Capital goods


• Technology Policy Statement – 1983
• De-regulation Measures: Broad banding and
Capacity Re-endorsement
• Expansion of OGL list for imports
• Export Promotion
• Regulated Exchange Rate
Industrial response to Policy
Changes in the 1980s
• Turnaround in industrial growth, with changing
sectoral composition – away from metal and metal
based to chemical & micro electronic based
industries, role of consumer durable goods.
• However,
• BOP and Macro crisis by the end of 1980s.
Crisis and Reforms
• BOP and macro crisis in 1990-91
• Fiscal Crisis
• Structural Rigidities

• All these required the SAP &


Globalisation
The broad contours of the post 1991
economic policy reforms consisted of:

• 1. total abolition of industrial licensing except


initially for 18 in July 1991 and currently for six
industries related to security and strategic
environmental concerns;

• 2. the number of industries exclusively reserved


for public sector has been drastically reduced
currently to joust four;
1991 Policy – cont.
• 3. the abolition of Quantitative Restrictions
(QRs) on imports of most capital and
intermediate goods during the immediate
post-reform years and those on most
consumer goods in the recent years so that
all QRs on imports stand phased out;
1991 Policy – cont.
• 4. the gradual reduction of average levels and
rationalization of direct and indirect (excise and
customs) tax rates (by reducing the number of
multiple rates) along with the abolition of plethora
of exemptions meant for specific interest groups;
5. a transition to a market determined exchange rate
and current account convertibility with cautious
and limited moves toward capital account
convertibility;
1991 Policy – cont.
• 6. liberalization of private foreign direct and
portfolio investment;

7. move towards allowing entry of private
(domestic and foreign) investment into
infrastructure, particularly power and
telecommunications.
Role of FDI
• Moved away from suspicion to
encouragement
• FDI in number of industries
– Green field investments
– Acquisitions and takeovers
– Financial and technical collaborations
– Foreign institutional investtments
Changes in Technological Efforts
• Technological efforts of firms in developing
countries consist of acquisition from abroad and/or
in-house R & D efforts.
• Before Liberalization Indian industries followed
Import and Adapt Technology
- Japan also followed the same strategy.
• Given the Technological Paradigm, firms were
only allowed to traverse different technological
trajectories.
Restrictions
• Firms could not facilitate technology
diffusion of their learning capabilities with
policy imposed [licensing requirements]
restrictions
• Controls to defer growth of monopoly
power
Post Reforms:
• FDI facilitated technological paradigm
shifts.
• Threat of extinction made the existing firms
to follow through.
• Number of firms came up with new
products/designs based on their
technological learning.
Implications for foreign trade
• Import substitution helped growth of
exports but only to countries which have
similar resource and market conditions
– Africa & Middle East

– Select sectors became globally competitive,


even during regulated regime
• Auto components
Trade in the new policy regime
• Diversified exports
– Technology and skills based [IT sector]

Changing directions of foreign trade [reaching


much diversified destinations]

Overseas investments, both green field and


acquisitions in a number of industries
Role of Public Sector
• Played a very important role in nation
building for a long period
• Also becoming competitive
– Policy created pressure
• Dis-investment
– Strategic Sales and Initial Public Offer [IPO]
– Experience so far point out that we should not try to
throw the baby with the bath water
– Unit level disinvestments strategy is more successful
To sum up
• Policy framework provides the direction in
which the rate and pattern of economic
development can take place
• Role of Technology, Trade and FDI are
increasing
• WTO posing additional challenges
• Govt. can play an important role in
fostering high growth rate of the economy.