INDIAN ECONOMY ASSIGNMNET.

ASHISH GOYAL
2017010085
Introduction to Economic Reforms:
Economic reforms in India refer to the structural
adjustments that were initiated in 1991 with the aim of
liberalising the economy and to accelerate its rate of
economic growth. The Narsimha Rao Government, in
1991, introduced the economic reforms in order to restore
internal and external confidence in the Indian economy.
The reforms aimed at bringing in greater participation of
the private sector in the growth process of the Indian
economy. Policy changes were introduced with respect to
industrial licensing, technology up gradation, removal of
restrictions on the private sector, foreign investments and
foreign trade.
The reforms were aimed at attaining a high rate of
economic growth, reducing the rate of inflation, reducing
the current account deficit and overcoming the balance of
payments crisis. The important features of the economic
reforms were Liberalisation, Privatisation and
Globalisation, popularly known as LPG.

Need for Economic Reforms:

The economic reforms introduced by the Government of
India in 1991 brought in a number of neo-liberal policies
aimed at rapid economic growth. The reforms were
targeted at various sectors such as the industrial sector,
trade, public sector, financial sector, etc.
The need for the introduction of the reforms was because
of the following factors:
1. Poor Performance of the Industrial Sector:
Before the introduction of economic reforms, the
industrial sector suffered due to bureaucratic controls.
The industries had to obtain several licenses, permissions
2. Adverse Balance of Payments:
India faced a severe economic crisis during the end of
1980s. India was unable to meet its international debt
obligations and was pushed to a situation of near
bankruptcy. The foreign exchange reserves were insufficient
to pay the import bills. The Balance of Payments deficit
could not be financed beyond a certain point.

Some of the factors responsible for the crisis were:

(i) Rising level of expenditure over revenue;
(ii) Heavy government borrowing;
(iii) Inefficient utilisation of resources;
(iv) Excessive protection to domestic industries;
(v) Inefficient management of public sector enterprises;
(vi) Lack of technological development and innovation;
(vii) Lack of investments in research and development.

3. Rise in Fiscal Deficit:

Amidst the political instability and balance of payment crisis,
there was a rising fiscal deficit. This was mainly due to the
increase in the non- developmental expenditure of the
government. The government had to borrow huge sum of
money to finance the deficit and to meet the interest
obligations on these debts.
The government was in a debt trap. Thus, there was a need
to bring in reforms in order to reduce the non-developmental
expenditure and to bring about a fiscal discipline.

4. Inflation:
Due to continuous borrowing by the government in order to
meet its mounting expenditure, there was a rapid increase in
the money supply. The government resorted to deficit
financing wherein the RBI financed the borrowings by the
Government of India by printing currency notes. This leads
to a rise in the money supply. When money supply
increased, the demand for goods and services also rose,
thereby increasing their prices and causing an inflationary
situation.

5. The Gulf War:

The Gulf war during 1990-91 had a significant impact on the
supply of oil. As a result, the price of oil shot up, increasing
India’s foreign currency outlays. The Gulf crisis also affected
the flow of foreign currency into India. The NRI deposits
were moving out of India and remittances from Indians
employed abroad were also affected during the war.
This further depleted the foreign currency reserves with the
RBI. India, thus, had no other option but to look towards
IMF for financial assistance.

Amidst the political instability, high inflation, rising fiscal

deficit, balance of payment crisis and immense pressure
from the international organisations such as IMF and World
Bank, India introduced the economic reforms in 1991. With
the introduction of economic reforms, many restrictions on
the industrial sector were removed.
Reforms were made in the trade, industrial and financial
sector. The fiscal reforms aimed at mobilising private
investments to boost the infrastructure growth in India.
Reforms in the monetary policy aimed at controlling the
inflation rate and ensuring smooth flow of resources to the
industrial sector. Foreign trade policy removed several trade
restrictions. Therefore, India started heading towards
becoming a market oriented economy.
6.Iraq War:
In 1990-91, war in Iraq broke, and this led to rise in petrol
prices. The flow of foreign currency from Gulf countries
stopped and this further aggravated the problem.

7. Dismal Performance of PSU’s (Public Sector

Undertakings):
PSU’s are enterprises wholly owned by Govt. have invested
crores of Rs. in these enterprises. These are no performing
well due to political interference and became big liability for
Govt.

8. Fall in Foreign Exchange Reserves:

Indians foreign exchange reserve fell to low ebb in 1990-91
and it was insufficient to pay for an import bill for 2 weeks.
In 1986-87 foreign exchange reserves were Rs. 8151 crores
ad in 1989-90, it declined to Rs. 6252 crores. Then
Chandershekhar Govt. had to sell Gold to meet the import
liability. So Govt. had to think about policy of liberalisation.

Economic reforms that await Modi Season 2

In his 23 May 2019 speech, one of the points Prime Minister
Narendra Modi made was to rethink wealth redistribution (for the
poor) and wealth creation (for those who want to end poverty).
This essay explores seven big problems that Modi must initiate, if
not deliver, in Season 2 of the NDA government. All are known.
But with Verdict 2019 giving a greater political force to Modi’s
next five years, we hope some of them will make the grade, or at
least, in experiential learnings from 70 years of India’s
policymaking continuum, would sow the seeds of change for
future governments to take forward.
 1. Agricultural reforms
With more than half the population of India dependent on a sector
that contributes less than 18% to GDP, agriculture has been a
policy puzzle that has remained unresolved since Independence.
Essentially, the problem of agriculture is really a problem of serial
market failures. The first market failure is the State’s inability to
deliver livelihood to small and marginal farmers. The second
market failure is the encouragement of inefficient asset protection:
convincing a farmer to sell his land for industry and shift there in
person with family, is difficult due to pricing on the asset side and
lack of skills on the income side — the farm remains a poor
farmer’s sole dependable possession. Finally, the third market
failure is the sector being plagued by the politics of entitlement of
the rich, wealth and powerful farmers, who, with the help of
middlemen, are able to manipulate prices of output on the one side
and, in case of land sales, are able to get change of land use to
their benefit on the other. The complexity of resolution, therefore,
magnifies. Other issue such as farming techniques or productivity
are easier to address.

2. Infrastructure reforms
India’s infrastructure story is like a badly-written novel, with
several authors across multiple ideologies scripting a patchy,
chaotic path with no climax in sight. Of what we know, there are
two things we are clear about. First, the government does not have
the resources to build a 21st century infrastructure for India. And
second, private sector money is willing to make good the shortfall.
What is needed is to rethink infrastructure policymaking that takes
these two sectors into account. This means, designing policies that
leave room for a changing dynamic of financing patterns or
technological disruptions, for instance, and allowing contractual
renegotiations where necessary.
Communicating with stakeholders across the spectrum through
policy disclosures and transparency (putting every rule and
regulation up for public debate before enforcing it, for instance)
would go a long way in building a stable consensus. Further,
capacity building needs expertise, and expertise requires
knowledgeable people. Finally, the regulatory environment must
become an enabler rather than a hurdle. Modi must end the
deterioration of regulatory bodies into sinecures for retired
bureaucrats. Merit and expertise must be the dominating
consideration, a cadre should be its currency of execution, youth
the face of delivery.

3. Land reforms
The foundations of all infrastructure creation and manufacturing is
land. It is an economic factor of production that has become a
highly politicised and emotive subject. Poorly-conceived and
shabbily-executed snatching of properties of the poor has killed
the credibility of land acquisition. Between 1947 and 2004, about
25 million hectares of land (more than the area of United
Kingdom) has been acquired for various purposes — building
dams or special economic zones. This has displaced 60 million
people (about the population of Italy), a third of whom are yet to
see any resettlement. As a result, the inherent suspicion of and
aversion to giving up land for ‘national causes’ is backed by a
cultural and inter-generational memory of exploitation. Better to
hold on to land at any cost rather than to trust the state, goes the
underlying thought.
4. Labour reforms
A Left-dominated economic discourse has created a maze of laws
that capital must negotiate in order to build factories. Nobody is
arguing for the absolute supremacy of capital as a factor of
production over labour. But it is ridiculous for a $3 trillion
economy going on $10 trillion to have 37 Central laws and six
amendments — there are six laws that relate to wages alone,
separate laws for disparate sectors (beedi and cigar workers,
newspaper employees, working journalists, cine workers and
cinema theatre workers, to list just four). This shows two things.
First, our lawmakers don’t know how to draft laws based on firm
principles. And second, there is an element of political
grandstanding and entitlement disbursement to serve slivers of
workers, lending an impression that a particular constituency is
being helped rather than the entire labour force. We need a deeper
study of these laws and compress them into two parts — one for
physical aspects such as safety, the other for financial aspects such
as wages and social security.

5. GST 2.0
In Season 2, Modi needs to simplify the goods and services tax
(GST) system — it is perhaps the lowest of the low-hanging fruit.
The hard part of putting together the backend for India’s most
complex single reform — one Constitutional amendment, four
Central laws, 29 State laws and 1 notification for the Union
Territories — is behind us. Bringing politics and economics
together over three decades, making the GST one of the longest
reforms in Independent India, the law brings eight Central taxes
and nine State taxes under a single tax. All rates, compliance and
administrative issues are decided by the GST Council — that
comprises government representatives of all States sitting with the
Central government. Such a wide-ranging reform brings with it its
own problems, and in the case of India it was an unduly high
compliance burden on small businesses and the initial sputtering
of the all-digital GST Network. These cobwebs have been cleared
and India’s indirect tax structure is in tune with that of 140
countries across the world. This was GST 1.0.
Modi’s second term requires a deeper push. GST 2.0 needs to
deliver outcomes in the form of greater tax collections. There are
two major changes needed.
6. Direct taxes reforms
Both the leading national political parties of India, the Bhartiya
Janata Party (BJP) and the Indian National Congress (INC) share
one thing in common: both have felt the need for, and followed it
up with, legislative proposals for direct taxes reforms. And not
without reason. In a country where just 46.7 million individuals
and 1.1 million firms paid income tax in 2017-18, leaving a huge
chunk outside the tax network, this needs a policy rethink and
legislative intervention. The current tax infrastructure comprising
laws, rules, regulations and the army of officials executing it —
needs a reorganisation. Between the complexity of tax laws on the
one side and a rent-seeking tax bureaucracy on the other, the case
for staying out of the tax network and evading taxes is strong.

7. Financial sector reforms

As a consumer of financial services, we don’t think in regulatory
silos, created to gift sinecures to retired bureaucrats. For instance,
if we want to create long term wealth, we don’t ask whether we
are buying a mutual fund, an insurance policy or a pension plan —
all three deliver the same product, packaged differently, with
different costs, and varying levels of transparency and disclosures.
For each of these we have a separate regulator, established by law,
writing rules and regulations, with fuzzy objectives. On the other
side, it is essential for the government to attract capital into the
economy through financial products, convert savings into
investments, and drive India towards a $10 trillion economic
powerhouse. The financialisation of the economy stands on the
shoulders of financial products, from banking and funds to
insurance, pensions and securities. In Season 2, Modi needs to
bring these together into a new and elegant financial architecture.

Submitted by: Ashish Goyal (2017010085)

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