Second Generational reforms

Economic reform is a process that improves living standards, increases well-being, and
increases resilience to shocks to provide lasting and long-term results.
On the eve of independence, the then government adopted a closed economic structure to
protect the national interest. Moreover, the focus was on the rapid industrialization of
capital goods industries by laying down five-year plans. The successive five-year plans
introduced acts like MRTP, FERA, license raj, reservation of industrial sectors, and land
ceiling that choked the economy. Declining Public and private expenditure on agriculture
caused a fall in production levels followed by an inflationary situation caused due to war in
the Middle East. The macroeconomic underpinnings of the economy subsequently
deteriorated (fiscal deficit of 8.4%, current account deficit of 3.14%, high inflation of 17%,
enormous foreign debt, etc. in 1990–1991), and this placed significant pressure on the
Balance of Payments (BOP) front.
The scenario required reworking of the framework by enacting significant modifications in
the following areas: -
• The government removed the complex system of rules, permissions, and licenses
and ushered in an era of disinvestment.
• In nearly every area of economic activity, we have shifted a significant bias in favour
of state ownership of the means of production. This bias resulted in the expansion of
public sector businesses.
• Stopped pursuing an inward-looking trade strategy.
• Replaced FERA with FEMA - It provided more space for Indian business houses to
work with foreign currency.
• The government opened the economy through capital and current account
convertibility.
• The government reduced tax rates to create a conducive environment for growth.
• SEBI was created in 1998 to ensure transparency in the capital markets.
Despite the revolutionary nature of the 1991 reforms, India couldn't sustain the growth
triggered by them due to a lack of structural reforms.
Second-generational reforms emphasized fiscal, environmental, trade, agriculture, and
infrastructural changes to facilitate the growth of the Indian economy.
• Agriculture
1. Income growth led to the diversification of the demand for agricultural goods.
2. The government focused on agricultural infrastructure through massive public
investment in R& D, warehouses, cold storages, and the transportation industry.
• Fiscal reforms
1. The government legislated the FRBM act to ceil its budget expenditure.
2. The tax reforms introduced aimed to increase the tax base and boost its revenue.
• Trade policy
1. The new trade policy included an electronic clearance system that made the process
hassle-free for exporters and importers.
2. State-of-the-art infrastructure increased efficiency and added value to India's GDP.
3. One-stop centres reduced the time taken for importers and exporters to engage in
the trade of goods.
• Environment
1. The government established NGT to oversee compliance with environmental norms.
2. The strict legislature ensured the protection of the environment.
• Infrastructure
1. The government privatized many loss-making infrastructure developmental banks,
and the revenue recovered was invested in priority developmental projects.
2. A high-level committee monitored the projects undertaken by the government.
Impact analysis of the reforms

The reforms implemented in the late 1990s and 2000s gave results during the latter half of the
decade. The data collected by the world bank depicts an accurate picture of the growth story of
India.
 2004 onwards India’s growth trajectory picked up the pace which gave confidence to foreign
companies to invest in brown and greenfield projects. Even during the 2008 financial crisis, radical
economic changes protected the economy from external vulnerability.

Failure of Reforms
• In 2015 tax to GDP ratio amounted to 10.5% of GDP as compared to more than 30% in
developed countries.
• The average gestation period for infrastructural projects amounted to 10 to 12 years leading
to an increase in the costs of the project.
• The IL&FS fiasco was a result of bureaucratic inefficiencies and delays that cost India around
2% of its GDP.

India couldn’t reach its potential as many of the proposals couldn’t be implemented due to-

• Bureaucratic failure
1. Lack of effective communication between different departments led to rising costs
and delays in infrastructure projects.
2. Red tapism and departmental silos led to economic inefficiency.
3.
• Political failures
1. Policy inconsistency and political pressure forced the government to withdraw the
labour and farm laws.
2. Many major tax reforms couldn’t be implemented due to political instability.

• Judiciary
1. Since the inception of the NGT Act, the tribunal never functioned in its full capacity.
2. Lack of expertise in the functioning of the Tribunal.

• Corruption
Lack of transparency and accountability fostered a culture of bribes leading to an
inefficient system of Babu Raj.

• Legal system
The pendency of cases and lack of effective strength contributed to a loss of investor
confidence.

This led to the implementation of third-generational reforms that address the above issues
as follows-

1. PM Gati Shakti is a digital platform to bring 16 Ministries including Railways and

Roadways together for integrated planning and coordinated implementation of
infrastructure connectivity projects. The multi-modal connectivity will provide
integrated and seamless connectivity for the movement of people, goods, and
services from one mode of transport to another. It will facilitate the last-mile
connectivity of infrastructure and also reduce travel time for people.
 2. GST replaced more than a dozen levies like central excise duty, state levies, vat, and
central sales tax, promoting ease of doing business by ending unnecessary
paperwork and red-tapism. The tax reform increases tax compliance using AI
technology and vigilance.

3. Faceless Income Tax scheme simplifies the bureaucratic structure and eliminates the
culture of Babu Raj.

4. National grievance addressal system, monitored by the PMO, ensures the quality of
public services delivered by government bodies.

5. A high-level task force constantly monitors the performance of civil servants to

ensure maximum output delivery.

6. National Window scheme eases the departmental clearance process.

7. The government created One Nation One Market which realizes the vision of
doubling the farmer’s income SDG 2.

8. Alternate Dispute Resolution system to tackle civil cases of high commercial

importance.

The global economy is continually evolving, becoming steadily more complex and
interdependent. To tap the tremendous potential of globalization, each country is
responsible to its citizens and the rest of the world for adapting to the changing economic
landscape. This creates an obligation to revisit frequently the models of economic
development, the premises on which they are built, and the policy agenda that a country
derives from them.

GST IMPACT AND ANALYSIS ON THE INDIAN

ECONOMY
If the vision is clear, no amount of iceberg can sink the Titanic. GST is a vision, an ameliorative step
taken to fortify the economy, considered by many as a colossal tax reform since independence.

The Goods and service tax is potentially transformative for the Indian economy, adding as much as
two percentage points to the GDP, improving the ease of doing business, and encouraging foreign
direct investment.

The GST will replace more than a dozen levies like central excise duty, state levies, vat, and central
sales tax, promoting ease of doing business by ending unnecessary paperwork and red-tapism.
From the consumer's point of view, it will reduce the tax burden on the consumer and create a
common national market. While from the producer's point of view GST will make products more
competitive giving a boost to exports.

GST promises to simplify the indirect tax structure to realize the vision of the five trillion economy
dream but policy inconsistency and conflicts between the Union and state still impede our growth
potential.

In the financial year 2021-2022, the GST collection was 14,76,000, 29 % less than the expected rate,
giving rise to doubts over the effectiveness of the indirect tax reform. The idea behind GST was to
make the system more efficient by creating One Nation One Tax, but what the government didn't
foresee was its inability to create a robust legislative framework leading to inefficiency in tax
collection.

Information asymmetry refers to a market situation where an imbalance of power in transactions

exists, which leads to market failure. A similar phenomenon exists in our policy-making leading to
economic inefficiency.

Recommendations

• The government must focus on policy consistency to create a conducive environment for tax
collection.
• Secondly, the government must introduce a fixed GST rate structure to avoid confusion
amongst the residents. This will lead to an improvement in ease of compliance, monitoring,
and analysis while a drastic decrease can be expected in the cost to taxpayers and the
administration.
• Thirdly, the GST council should consist of technical experts with expertise in economics,
administration, accountancy, and law, rather than bureaucrats so that better decisions can
be taken with rigorous research.
• GST is a progressive step and holds tremendous potential. It is rightly pointed out that
spectacular achievements are always preceded by unspectacular preparations.

Thus, GST is a positive step towards shifting the Indian economy from an informal to a formal
economy. It is important to utilize experiences from global economies that have implemented GST
before us, to overcome the impending challenges.