Economic Liberalization

INDIAN ECONOMY IN GLOBAL CONTEXT

“No force on earth can stop an

idea whose time has come”
- Victor Hugo
 The Economic Crisis of 1990s
Higher fiscal deficit
• Imprudent spending
• Fiscal deficit increased from 5.1% of GDP during early 1980s to
8.4% during 1990–1991
Adverse balance of payment situation
• India’s current account deficit rose from 1.35% of GDP in
1980–1981 to 3.69% of GDP in 1990–1991
• External debt rose from 12% of GDP in 1980–1981 to 23% of
GDP at the end of 1990–1991
• FERs dwindled to a low of US$1.2 billion
High inflation rates
• Inflation increased to 11.3% during 1990–1991.
• Reasons: Deficit financing and supply side bottlenecks

Economic Reforms in India

 Macroeconomic Stabilization
Fiscal Policy Reforms
• Abolition of export subsidies in 1991–1992;
• Partial restructuring of fertilizer subsidy in 1992–1993;
• Phasing out the budgetary support to loss making PSUs;
• Restricting development expenditure in initial years
Tax Reforms
• Expanding the tax base by including services;
• Reducing rates of direct taxes for individuals and corporations;
• Abolishing most export subsidies and lowering import duties;
• Rationalizing sales tax and , introducing a MODVAT and VAT;
• Rationalizing both direct and indirect taxes by removing unnecessary
exemptions;
• Tax incentives for infrastructure and export-oriented sectors, setting
up SEZs;
• Simplification of procedures, efficiency of the tax administration,
computerization

Macroeconomic Stabilization
…continued
Balance of Payment Reforms
• Peak rate of custom duty reduced
• Rupee devaluation by 24% in 1991
• Market determined exchange rate system
Monetary Policy Reforms
• Elimination of automatic monetization,
• Interest rate deregulation
Control of Inflation
• Short-term solution: introducing fiscal and monetary discipline
• Long-term solution: improving output and supply of goods and
services
 Structural Adjustment Reforms
Industrial Policy Reforms
• Removal of industrial licensing
• De-reservation of PSUs , Disinvestment
Financial Sector Reforms
• Reduction in SLR & CRR
• Market determination
• of interest on government securities
• Interest rate deregulation
• Estb. of SEBI, NSE, IRDA; Bombay Stock Exchange was corporatized
Agriculture Sector Reforms
• Removal of restraints on inter-state movement of food grains
• Restructuring of PDS
• Relaxation of restrictions under the Essential Commodities Act
• Removal of some marketing restrictions on crop produce
Infrastructure Sector Reforms
• TRAI, NHDP, New civil aviation policy, port development, electricity
reforms

Impact of Economic Reforms

on Indian Economy
A. Case for Economic Reforms
The Growth Turnaround
• Third-largest GDP in the world in PPP terms and fifth largest in terms
of nominal GDP
• Per capita income is up from $375 per year in 1991 to around $2,000
today
• Annual GDP growth rose from 3.5% in 1950–1980 and 5.5% in
1980–1992 to an average of 8% since 2003.
Industrial and Service Sector Performance
• Private sector has become an active participant in the economy
• Manufacturing and construction sector -spectacular growth
• India has become one of the most sought after FDI destination
Attitude Toward Reforms
• Removal of hundreds of archaic laws
• Ranking up in ease of doing business
 Impact of Economic Reforms
on Indian Economy …continued
B. Case Against Economic Reforms
Impact on Poverty and Inequality
• Widening income gap since 1991
• 27.5% of Indians are multidimensionally poor.
Jobless Growth
• Labor force participation rate has declined
• Sharp reduction of women in the workforce.
Structural Bottlenecks
• Reforms in Labor laws; Privatization of PSUs needs to be speeded up;
MSMEs to be scaled up in terms of growth and productivity; Trade
liberalization must be continued; Infrastructure Reforms; Power
Sector Reforms; Agriculture Reforms, Bureaucracy Reforms