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INDIA TRYING TO LIBERALISE:

ECONOMIC REFORMS SINCE 1991

INTRODUCTION

The foundation of credible national security is based on the level of economic prosperity and well-being of the population of any country. This is especially so for developing countries like India. The attainment of sustained high economic growth is a necessary condition for improving the national security and the quality of life of the people throughout the country. Many developing countries in the Asia-Pacific region, including China and India where nearly one third of the world’s population live, are currently going through economic transitions. The central objective of transition through economic liberalization is to improve the competitive efficiency of the economy in the global marketplace to sustain accelerated rates of economic growth and thereby continuously improve the security and well being of the people.

India launched its market-oriented economic reforms in 1991. China launched similar reforms from 1978 and is now well ahead of India in integrating its national economy with the global economy. However, India is slowly but surely catching up in this race. The contrast in the experiences of these two countries with economic reforms under radically different political systems is remarkable. While comparisons between China and India are often made by development analysts and are inevitable when we discuss economic transitions in Asia, a more realistic assessment of the experiences of both these major countries of Asia can only be made if we explicitly take into account the stark contrast in their political systems.

In India, post-1991 economic reforms have been evolutionary and incremental in nature. There have been delays and reverses in some areas due to the interplay of democratic politics, coalition governments, and pressure groups with vested interests. However, each of the five successive governments that have held office in India since 1991 have carried on these economic reforms, which have been based on market liberalization and a larger role for private enterprise.

WHY THE POST-1990 REFORMS? It is well known that from 1951 to 1991, Indian policy-makers stuck to a path of centralized economic planning accompanied by extensive regulatory controls over the economy. The strategy was based on an ‘inward-looking import

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substitution’ model of development. This was evident from the design of the country’s Second Five-Year Plan (1956-61), which had been heavily influenced by the Soviet model of development. Several official and expert reviews undertaken by the government recommended incremental liberalization of the economy in different areas, but these did not address the fundamental issues facing the economy.

India’s economy went through several episodes of economic liberalization in the 1970s and the 1980s under Prime Minsters Indira Gandhi and, later, Rajiv Gandhi. However, these attempts at economic liberalization were half-hearted, self-contradictory, and often self-reversing in parts.

In

contrast, the economic reforms launched in the 1990s (by Prime Minister P

V

Narasimha Rao and Dr. Manmohan Singh as his Finance Minister) were

‘much wider and deeper’ and decidedly marked a ‘U-turn’ in the direction of economic policy followed by India during the last forty years of centralized economic planning.

THE DRIVING FORCES BEHIND THE REFORMS

As in many developing countries, India also launched its massive economic reforms in 1991 under the pressure of economic crises. The twin crises were reflected through an unmanageable balance of payments crisis and a socially intolerably high rate of inflation that were building up in the 1980s and climaxed in 1990-91.

The current account deficit as a percentage of GDP peaked at a high of 3.1 percent (compared to an average level of 1.4 percent in the early 1980s). The inflation rate (as measured by point-to-point changes in the Wholesale Price Index) had also climbed to the socially and politically dangerous double-digit level, hitting 12.1 percent in 1990-91.

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TABLE 1: SELECTED MACRO ECONOMIC INDICATORS 1989-2003

Indicators

 

1989-90

1994-95

1999-00

2000-01

2001-02

2002-03

A.

Growth

of

GDP

5.6

6.3

6.1

4.4

5.6

4.4

(%)

B.

GDP

Growth

by

           

Sectors (%):

 

i.

Agriculture

 

2.7

4.9

0.3

-0.4

5.7

-3.1

ii.

Industry

6.7

8.3

4.0

7.3

3.4

6.1

Manufacturing

 

iii.

Services

6.7

6.0

10.1

5.6

6.8

7.1

C. Inflation (WPI Index (%)

Rate

9.1

10.4

4.8

2.5

5.2

3.2

D.

Current Account

 

-3.1

-1.1

-0.5

-0.5

n.a.

Balance as % of GDP

E.

Foreign Exchange

3.37

19.65

35.06

39.55

51.05

69.89

Reserves (US $ Bn.)

F.

Exchange

Rates

16.6

31.4

43.33

45.51

47.69

48.44

(Rs/US $)

G.

Rate of Growth of

           

i. Exports (%)

 

18.9

18.4

10.8

21.0

-1.6

20.4

ii. Imports (%)

 

8.8

22.9

17.2

1.7

1.7

14.5

iii.

Exports as

%

of

6.4

9.6

9.1

10.4

9.9

n.a.

GDP

iv.

Imports as % of

9.3

10.5

12.4

11.8

11.6

n.a.

GDP

H.

Fiscal Deficit as %

7.9

4.7

5.4

5.6

5.9

5.5

of GDP

 

Revenue Deficit as % of GDP

2.6

3.1

3.5

4.1

4.2

3.9

Saving Ratio as % of GDP

J.

22.3

24.9

24.1

23.4

24.0

n.a.

K.

Investment as %

24.9

25.4

25.2

24.0

23.7

n.a.

of GDP 2

 

Source: Ministry of Finance, Government of India, Economic Survey, (New Delhi, various years).

Most economic policy makers and analysts held widely convergent views on the causes of the unprecedented economic crisis faced by India in 1990-91. The root cause of the twin crisis could be traced to macro-economic mismanagement throughout the 1980s as reflected in an unsustainably high fiscal deficit, in particular the revenue deficit and the monetized deficit.

The central government’s fiscal deficit alone peaked at 7.9 percent as a percentage of GDP in 1989-90. Thus growing fiscal profligacy (and irresponsibility) and the unviable financing patterns of the fiscal deficit prevailing in the 1980s made high levels of annual GDP growth (peaking at 5.6 percent in 1989-90) unsustainable.

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Foreign-exchange reserves dwindled to a low of US$2.2 billion (with less than 15 days’ cover against annual imports). India stared bankruptcy in the face as it struggled to meet external debt obligations. Prime Minister Narasimha Rao converted the prevailing economic crisis into an opportunity to launch massive economic reforms. First, he introduced an economist (rather than a politician) into the Cabinet as Finance Minister and gave the new Minister his full support, allowing him to evolve and implement path-breaking economic reforms. The new economic policies radically departed from the economic policies and regulatory framework pursued in India during the previous forty years.

The Rao government recognized in 1991 that the time had come to reshape India’s economic policies by drawing appropriate lessons from the ‘East Asian Miracle’ based on more export-oriented and more globally connected strategies of development, as successfully practiced earlier by Japan and South Korea and also by the South East Asian tigers Malaysia, Singapore, Indonesia and Thailand.

The East Asian development model had been remarkably successful in achieving sustained high growth rates accompanied by rapid growth in the living standards of the people in just two decades. India had missed on both these fronts by relentlessly pursing import substitution and a relatively closed economy model of development.

The Rao government, after launching the relatively aggressive (by past Indian standards) reforms, was soon confronted with the political constraints of ‘competitive populism’ during elections held at the state level in 1993.

Therefore, the government adopted a ‘middle path’, furthering the economic reforms in an ‘incremental’ fashion in order to continue to extending their width and depth during the remainder of the government’s term.

Thus the claim that India had clearly transcended the so-called ‘Hindu rate of growth’ of GDP at 3.5 percent per annum (trend annual growth rate) achieved for the two decades of 1960s and 1970s and had moved over to higher annual average growth rate of 5.5 percent in the 1980s could not be accepted since the latter jump proved to be financially unsustainable.

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The major economic reforms launched during the full five-year tenure of the Narasimha Rao Government (1991-96) are highlighted below.

There are of course, lessons to be learnt by India from the ‘East Asian debacle’ of 1997-98 (the so-called ‘East Asian Financial Crisis) but these need not detract us here as most South Asian and Southeast Asian countries had overcome this crisis by 1999.

The government took two years to get over the immediate macroeconomic crisis, initially with the help of a balance of payments loan facility from the International Monetary Fund. The government came out with a clear enunciation of its vision and the objectives of its economic reforms only after regaining macro-economic stability. This was contained in the Discussion Paper on Economic Reforms brought out by the Ministry of Finance in July 1993. To quote:

The fundamental objective of economic reforms is to bring about rapid and sustained improvement in the quality of the people of India. Central to this goal is the rapid growth in incomes and productive employment… The only durable solution to the curse of poverty is sustained growth of incomes and employment…. Such growth requires investment: in farms, in roads, in irrigation, in industry, in power and, above all, in people. And this investment must be productive. Successful and sustained development depends on continuing increases in the productivity of our capital, our land and our labour. Within a generation, the countries of East Asia have transformed themselves. China, Indonesia, Korea, Thailand and Malaysia today have living standards much above ours…. What they have achieved, we must strive for.

ECONOMIC REFORMS Economic reforms launched since June 1991 may be categorized under two broad areas:

1. major macro-economic management reforms; and

2. structural and sector-specific economic reforms

Naturally, the attention of the new government that took office in June 1991 was primarily focused on crisis management dealing with the balance of payments. It was of the utmost importance to restore India’s international credibility by meeting its scheduled external debt liabilities and through maintaining a more realistic exchange rate consistent with market obligations.

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Achieving macro-economic stabilization was also an urgent priority, necessitating control of intolerably high inflation. It was recognized that macro-economic stabilization would provide a sound foundation for long-term structural economic reforms and accelerate the rate of economic growth in a sustained manner. This would be possible by removing distortions created by controls and by improving the competitive edge for Indian goods and services in global markets as well as in the markets of major regional trading blocs. Described below are the major economic reforms, with greater focus on structural economic reforms in selected sectors of the economy.

1. MACRO-ECONOMIC MANAGEMENT REFORMS

a) Control of Revenue Deficit

Macro-economic management reforms have focused on controlling the politically difficult problems of reducing the fiscal and (even more so) revenue deficits. The capital account deficit does not pose long-term problems as investment in productive capital made in the present, if prudently carried out, will generate an adequate income stream to pay for capital costs incurred and generate positive returns in the future.

India’s problem is primarily in the area of revenue deficits. From 1950 to 1980 the national budget was usually characterized by revenue surpluses and capital account deficit. However, after 1980, all (democratic) governments for political reasons had willingly allowed the revenue deficit to rise over the years to dangerously high levels, and had found it increasingly difficult to reduce. The revenue deficits reflected an excess of annual consumption expenditure by the government over its annual income. The deficit was caused by excessive employment in the government sectors, uneconomical pricing of goods and services by public sector enterprises, a growing interest burden, mounting subsidies, and rising defense expenditures. Downsizing the government (through the bureaucracy or public sector enterprises and banks) was also difficult and met staff resistance from the organized employees.

Attempts at Reducing the Fiscal Deficit Faced with the necessity of reducing the fiscal deficit in the crisis year of 1991-92, Finance Minister Singh attempted to reduce fertilizer and food subsidies in 1991-92 and to some extent in 1992- 93. Simultaneously, he (and several subsequent finance ministers) resorted to the softer options of reducing public investment expenditure and reducing public expenditure on social welfare services from 1991 to 1995. These

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measures did help reduce the fiscal deficit of the central government to 4.8 percent of GDP at the end of 1992-93. However, further cuts in fertilizer and food subsidies could not be carried out as these measures were opposed in Parliament and proved suicidal for the ruling Congress Party, which lost power in state elections in 1993-94. Meanwhile, the fiscal position of the state governments also started deteriorating. The combined fiscal deficit of the central government and the states climbed to the unacceptably high level of 10-11 percent of GDP in 2002-03. Some state governments have begun to address their fiscal deficit problems. The central government has recently started linking further transfers of resources to the states to the progress of state-specific economic reforms aimed at reducing deficits.

The good news for macro-economic management reforms is that the pre- 1990 pattern of ‘deficit financing’ (that is, the printing of currency) to meet the fiscal deficit has now been effectively curbed. The autonomy of the central bank (the Reserve Bank of India) in regulating the money supply to control inflation has been assured within the limits of monetary policy. This has led the government to resort to larger and larger domestic borrowing. The bad news is that government borrowings have risen so high that the economy is moving towards an ‘internal debt trap’. Further growth of internal debt needs to be curbed but the government is in no mood to close off this easy way of financing its rising fiscal deficit. The finances of most state governments are in even poorer shape and some have occasionally resorted to market borrowings to meet their payrolls.

b) Tax Reforms

Since 1991 several efforts have been made through the annual budget process to achieve tax reforms.

These have focused on:

(i)

expanding the tax base by including services (not previously taxed);

(ii)

reducing rates of direct taxes for individuals and corporations;

(iii)

abolishing most export subsidies,

(iv)

lowering import duties (covered below by us under structural reforms relating to trade policies/external sector);

(v)

rationalizing sales tax and reducing the cascading effect of central indirect taxes by introducing a Modified Value Added Tax and a soon- to-be implemented nationwide Value Added Tax;

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(vi)

rationalizing both direct and indirect taxes by removing unnecessary exemptions;

(vii)

providing for tax incentives for infrastructure It is estimated that the interest payments currently pre-empt more than 60 percent of the total revenue of the central government leaving very little resources for fresh public investment and export-oriented sectors, including setting up special (Export) Economic Zones; and

(viii)

simplification of procedures and efforts for improving the efficiency of the tax administration system especially through computerization.

c) Resource Generation through Divestment

The governments of India, both at the central and state government levels, have initiated divestment programs to sell government equity in several public-sector enterprises. Unfortunately, the sales proceeds have mostly been used to finance fiscal deficits rather than for fresh public investment, social sector spending, or reducing the interest burden on ballooning public debt.

STRUCTURAL ECONOMIC REFORMS

Structural reforms since 1991 have been sector-specific. The sectors subjected to reform have been carefully selected and the coverage of sectors under structural reforms has been extended over time. The major structural economic reforms carried out since 1991 have been primarily in the following areas: Trade Policy/External Sector; Industrial Policy; Infrastructural Sector Policies; Divestment/Privatization Policies; the Financial Sector; and in Policies for Attracting Foreign Direct Investment. The thrust of the reforms in all areas has been to open India’s markets to international competition, remove exchange rate controls, encourage private investment and participation in industry and, in the finance markets, to liberalise access to foreign capital and to ensure that foreign investment is not penalized merely for being foreign.

It may be pointed out that in the vital areas of macro-economic policy including fiscal policy monetary policy and exchange rate policy there is an overlap between macroeconomic stabilization policies and structural reforms. The long-term growth inducing roles of all macroeconomic policies can be considered under structural reforms. We focus here on sector specific reforms although overlaps exist with agro-economic policies in our discussion.

a) REORIENTATION OF PLANNING

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Consistent with the spirit of the market-oriented and private sector-led economic reforms launched since 1991, the government has reoriented the role of planning in India. It has been recognized that market forces and the state should be given roles that play to their comparative advantages and that they should work together as partners in the economic development of the nation. While private initiative should be encouraged in most areas of business activities, the state should increasingly play a pro-active role in areas in which the private sector is either unwilling to act or is incapable of regulating itself in the social interest. The areas in which the state has a comparative advantage over the private sector include poverty alleviation programs; human resource development; provision of social services such as primary health and primary education; and similar activities categorized as building human capital and social infrastructure. The state also has a new role in setting up independent regulatory authorities to encourage genuine competition and to oversee the provision of services by the private sector in critical areas such as utilities, water supply, telecommunications, and stock market operations to avoid the ill effects of speculation and to maintain a workable balance between the interests of the producer and the consumers. Economic liberalization in the organized manufacturing sector (subjected to rigid labor laws for retrenchment) has led to growth with very little additional employment. This can create serious social unrest and fertile ground for terrorist and other anti- social activities that attract unemployed youths in the absence of gainful employment. Market-based economic reforms also often lead to increasing disparities between the rich and the poor and between infrastructural backward and more developed states. The government has to intervene and calibrate the contents and speed of market-based economic reforms to more effectively addresses the specific areas of ‘market failures and weaknesses’ to optimize growth with social justice. The new role assigned to planning, consistent with market-based economic liberalization, can perhaps best be illustrated with the goals and the strategies incorporated in India’s Tenth Five- Year Plan (2002-07).

The Plan has targeted an annual growth rate of eight percent. Along with this growth target, the government has laid down targets for human and social development. Timely corrective actions will be proposed to ensure growth is accompanied by social justice. The key indicators of human and social development targeted under this Plan include: a reduction of the poverty rate by five percentage points by 2007; providing gainful employment to at least

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those who join the labor force during 2002-07; education for all children in schools by 2003; and an increase in the literacy rate to 75 percent by March 2007. The development strategy adopted for the Tenth plan envisages:

redefining the role of Government in the context of the emergence of a strong and vibrant private sector, the need for provision of infrastructure and the need for imparting greater flexibility in fiscal and monetary policies. With a view to emphasizing the importance of balanced development of all states, the Tenth plan includes a state-wise break-up of broad developmental targets including targets for growth rates and social development consistent with national targets. The Tenth Plan has emphasized the need to ensure equity and social justice, taking into account the fact that rigidities in the economy can make the poverty-reducing effects of growth less effective. The strategy for equity and social justice consists of making agricultural development a core element of the Plan, ensuring rapid growth of those sectors which are most likely to create gainful employment opportunities and supplementing the impact of growth with special programs aimed at target groups.

b) THE POLITICAL ECONOMIC DIMENSIONS OF THE REFORMS

India’s heterogeneity and unity in diversity through a stable democratic system must be appreciated. A country like India, with more than one billion people, some 16 officially recognized major languages, and vast ethnic and religious diversities, poses major governance challenges. India has achieved remarkable success in holding the country together. India had governed its economy through a policy regime of centralized planning accompanied by an extensive regulatory framework for more than forty years before it launched economic reforms in 1991. It has, therefore, not been easy to change the mindsets of policy makers (especially at the lower levels of bureaucracy) and of other beneficiaries of the entrenched regime. Building a political consensus on economic reforms across the various political parties with their vastly different ideologies has been a very difficult process. This has been especially true under coalition governments but also even when a single party has held a majority. Consensus building and reform implementation is complicated further when the central government and the states are in the hands of different parties (or coalitions). The rapidly increasing frequency of elections at the central and state levels during the post-1990 period of economic reforms has led the incumbent governments and the contesting opposition parties to resort to ‘vote-bank’ politics or ‘competitive populism’. The vested interests of groups such as trade unions, producers with licenses and holding monopoly interests, and

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bureaucrats with ‘rent seeking’ capabilities have often scuttled or delayed further market-based economic reforms. These factors explain well India’s ‘stalled’ reforms in certain areas directly hurting vested interests of selected lobby groups.

The growth of regional parties and their assumption of power in many Indian states has further delayed the percolation of central-level economic reforms down to the state level. Weiner has recommended the need for a change in the mindsets of state policy makers:

The pursuit of market-friendly policies by state governments requires a change in the mindsets of state politicians, new skills within the state bureaucracies, and a different kind of politics. More fundamentally, it requires rethinking on the part of state politicians, activists in non-governmental organizations, journalists and politically engaged citizens as to what is the proper role of government, and how and to what end limited resources should be used.

Considering the compulsions arising from the above political factors, Montek S. Ahluwalia explains the rational for adopting the ‘gradualist’ approach in implementing of economic reforms and the resultant ‘frustratingly slow’ pace of reforms (compared to East Asian standards):

The compulsions of democratic politics in a pluralist society made it necessary to evolve a sufficient consensus across disparate (and often very vocal) interests before policy change could be implemented and this meant that the pace of reforms was often frustratingly slow. Daniel Yergin (1998) captures the mood of frustration when he wonders whether the Hindu rate of growth has been replaced by the Hindu rate of change!

Finally, most (if not all) political parties implementing market-based economic reforms since 1990 have failed to ‘market’ these reforms to the masses as being highly beneficial for them. The opposition parties have often termed these reforms as ‘pro-rich’ and ‘anti-poor’. Ironically, even the Congress Party, which initiated the economic reforms when in power, has, as an opposition party, opposed some of them (such as further public-sector divestments) Varshney has made a valid distinction between ‘elite-based’ reforms versus ‘mass-based’ reforms. Market-based reforms have not drawn mass appeal nor aroused mass passions. This dichotomy between the concerns of the urban elite and the mass of the population has clearly defined the limits to economic reforms in India

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c)

STATE-LEVEL ECONOMIC REFORMS

To increase the effectiveness of the post-1990 economic reforms, they must be simultaneously extended from central to state governments and -below to the third tier of local governments. The maladies afflicting the finances of the state governments are similar in nature to those afflicting the central finances described earlier. According to the Reserve Bank of India, the Gross Fiscal Deficit of all the states of India (including the Union Territories) was estimated at 3.3 percent in 1991-92.

Throughout the 1990s the state governments also experienced a rapid rise in their revenue expenditures mainly through salaries, pensions, interest payments and subsidies (including free power to farmers in some states out of political considerations). This trend has ‘severely constrained the states’ ability to undertake development activities’ and to devote more funds to provide social services such as primary education. The situation worsened after the states were forced to follow the center to implement generous pay increases for government employees recommended by the Fifth Central Pay Commission in 1997-98. Despite initial resistance in the Communist Party-ruled state of West Bengal, all state governments (including West Bengal), in their own ways and suiting their own conditions, implemented economic reforms in the 1990s and are continuing these reforms broadly in line with the ongoing national economic reforms. This owes in part to enlightened self-interest combined with a healthy competitive spirit designed to improve their position and ranking among the states. There is also the states’ desire to avail themselves of larger transfers of development funds from the center, which the central government linked to economic reforms at the state level. Every state has recognized the need to attract private investment flows from both domestic and foreign investors. State governments have therefore progressively liberalized their policies and procedures on a competitive basis. Several of them have also explicitly recognized the need to improve human resource development and have progressively expanded activities to provide a better quality of life to the population of their states.

Incentives and Conditionalities The government of India has introduced a scheme called the States’ Fiscal Reforms Facility (2000-05). Under the Facility, the central government set up a five-year incentive fund ‘to encourage states to implement monitorable fiscal

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reforms’. Additional amounts by way of ‘open market borrowings’ are allowed if the state is faced with a structural adjustment burden. State governments may draw up a Medium Term Fiscal Reforms Programme (MTFRP) to achieve specified targeted reductions in their consolidated fiscal deficit, especially the revenue deficit.

The coverage of the MTFRP has been extended to cover a Debt Swap Scheme in order to help state governments reduce their growing public debt. This scheme is designed to help liquidate the burden of high-cost loans taken from the central government through the allocation of additional market borrowings at currently prevailing lower interest rates.

The major structural reforms carried out by several state governments include:

(i)

Measures to improve quality of life through improvements in basic public services such as primary health, primary education, and rural infrastructural services such as electricity, water, and roads. Madhya Pradesh has brought out the first state-level Human Resource Development Report. Other states have followed suit. The Planning Commission has also published a comprehensive National Human Development Report assessing human development nationwide and in the major states.

(ii)

Clustering high-tech industries and services (for example, in software parks).

(iii)

Setting up Special Economic Zones and Agri-Economic Zones to promote exports.

(iv)

Formulating state-level industrial policies to attract investments.

(v)

Power-sector reforms that restructure state Electricity Boards by separating generation, transmission and distribution activities, encouraging independent power producers in the private sector to invest in the power sector, and setting up independent state Electricity Regulatory Authorities.

THE PERFORMANCE OF THE INDIAN ECONOMY

Despite the slow pace of implementation of the economic reforms and certain hiccups and delays caused primarily by the compulsions of democratic politics, the performance of the Indian economy under the reforms carried out so far shows a mixed picture of notable achievements and weaknesses. The performance has been impressive on some fronts, satisfactory on several other

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fronts, and inadequate in certain respects. India has still to launch deeper (socalled ‘second-generation’) reforms in various areas to get the best results.

Areas of Impressive Performance

Through reform, India overcame its worst economic crisis in the remarkably short period of two years. Macro-economic stabilization reforms (along with structural economic reforms) were launched in June 1991.

Through prudent macro-economic stabilization policies including devolution of the rupee and other structural economic reforms the balance of payments crisis was clearly over by the end of March 1994. Foreign exchange reserves had risen to the more than adequate level of US$15.07 billion and the current account deficit as a percentage of GDP was nearly eliminated. Export growth rate at 20.0 percent in 1993-94 over the previous year was quite encouraging. Macro-economic stability has endured in the ten years of economic reforms to 2003. Foreign-exchange reserves peaked at US$70 billion at the end of March 2003 (and touched US$80 billion in June 2003). The current account ‘recorded a surplusequivalent to 0.3 percent of GDPin 2001-02’. Food stocks with the Food Corporation of India, held to ensure national food security, peaked at sixty million tons (compared to the required twenty million tons). It took longer to control inflation but this led to relatively more enduring results (excluding the impact of externally determined fuel prices). Since 2002, the country has enjoyed a low interest-rate regime. The Rupee had started appreciating against US$ after April 2003. These performance indicators have helped to provide an ‘enabling environment for the macroeconomic policy stance.’

India has also increasingly integrated its economy with the global economy. After half a century of inward-orientation, the share of India’s trade as a proportion of GDP rose from 13.1 percent in 1990 to 20.3 percent in 2000. By Indian standards this is an impressive performance. India’s economy has also successfully moved into a higher trajectory of growth and displayed strong - dynamism in selected sectors. This encouraging performance brightens the prospects for stepping up India’s growth rate and improving the competitive edge in the years to come through further appropriate economic reforms. The average annual growth rate of 5.8 percent achieved by the Indian economy during the years of economic reforms since 1992 is encouraging.

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Currently, after China, India is among the fastest-growing countries in Asia. Since the annual rate of population growth has slowed significantly to nearly 1.8 percent during the 1990s, per capita income has been growing at a healthier real rate of four percent per annum.

India’s growing middle class of more than 350 million people, with a reasonably affluent standard of living, provides a huge market for foreign corporations, especially since April 2003, when all quantitative restrictions on imports were lifted. Along with its fairly good growth rate (which, however, is far below the potential growth rate of eight percent targeted by India’s Tenth Five-Year Plan), India has been successful in reducing poverty. The poverty ratio (that is, people below the poverty line as a percentage of the population) as estimated by the Planning Commission at the national level came down from 36 percent in 1993-94 to 26.1 percent in 1999-2000. The poverty ratio during this period declined both in rural areas and in urban areas. There is little doubt that poverty in India has been reduced during the last decade. The Planning Commission has set a poverty ratio target of 19.3 percent by the end of the Tenth Plan period (to March 2007).

An important indicator of gains from economic reforms, reflecting the attractiveness of India as an investment destination, is shown by the increasing inflows of both FDI and Foreign Institutional Investment (FII) into India. Inflows of both FDI and FII into India have increased in the decade to 2002. On average, according to the Ministry of Finance’s Economic Survey, India has been attracting US$2.5 billion to US$3 billion and nearly US$4 billion in 2001- 02 in FDI per annum mostly in various infrastructural sectors such as large power and telecommunication projects. India’s economy under the reforms has made rapid strides in selected industrial areas and knowledge- and skill- intensive services. These specific growth areas have experienced significant restructuring under more competitive conditions in the marketplace through mergers and acquisitions and technological and managerial innovations. This has led to the achievement of recognizable increases in international competitiveness in a number of sectors including auto components, telecommunications, software, pharmaceuticals, biotechnology, research and development, and professional services provided by scientists, technologists, doctors, nurses, teachers, management professionals and similar professions. The spill over effects of India’s increasing international competitiveness have helped in improving the rate of growth of export earnings. They have also

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directly benefited Indian consumers by making better quality, lower-priced goods available.

Areas of Weakness

The most notable weakness of the reform process has been in fiscal consolidation. Indian governments at both the central and state levels have failed miserably to reign in growing revenue deficits and reduce the overall fiscal deficit. The foundations for a sustainable high growth rate in any economy lie in maintaining fiscal discipline. This has not been adequately achieved by Indian policymakers. Excessive use of market borrowing to cover budget deficits has often put upward pressure on interest rates and pre- empted (‘crowded out’) borrowings by the private sector. The structure of revenue expenditure and political obstacles to any reduction of subsidies and downsizing the government at all levels have been primarily responsible for the lack of progress on fiscal reforms. The real issue in restructuring government finances is ‘right-sizing’ the government by adequately increasing government expenditure on infrastructure of both the hard and soft varieties, based upon growing resources.

India’s record on social development expenditure has been poor considering Indian requirements and poor also in relation to many developing countries, including some of the least developed countries in Sub-Saharan Africa. The abysmally low ranking of India on the Human Development Indices computed by the United Nations bears testimony to this assertion India must bridge this social development gap by significantly increasing its public expenditure on social services if it wishes to achieve the targeted annual growth rate of eight percent set by the country’s Tenth Plan. As Ahluwalia has remarked, larger investment in the social sectors is ‘necessary not only because social development is an end in itself, but also as a precondition of accelerating growth’. The massive shift required in the pattern of government expenditure in India in favor of social sectors and infrastructure can only be carried out through structural fiscal reforms. The Fiscal Responsibility and Budget Management (FRBM) Act (2003) provides for complete elimination of the revenue deficit by 31 March 2008. This Act is, therefore, a step in the right direction. Despite ‘dilution’ of the original draft bill, it is important legislation because it sets the condition that the government can run a fiscal deficit only if borrowings are made to finance investments which will enhance productive capacity’.

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Another major weakness of the Indian economic reforms is the economy’s experience with ‘jobless growth’ in the post-1990 period. Rigid labor laws relating to retrenchments have constricted growth in the organized manufacturing sector. As a labor surplus country, there already exists a huge backlog of both ‘open’ and ‘disguised’ unemployment. With a growing population, every year adds to the labor force. Economic reforms have accelerated growth but failed to generate adequate employment. For example, the rural unemployment rate, after declining to 5.61 percent in 1993-94, rose to 7.21 percent in 1999-2000 as did the All-India (urban plus rural) rate of unemployment. If this disturbing trend is allowed to continue, it will breed social unrest and add to the ranks of terrorists and other anti-social elementsin the country.

Last but not least, the reforms have led to growing disparities between richer and poorer states (more and less developed, especially in terms of infrastructure) within India. Although the all-India average annual growth rate in the reform era has been on the order of 5.8 percent, this masks wide variations in inter-state growth rates, growth of per capita income, and social development. Most state governments are not well prepared to meet the challenges posed by globalization. The farming sector and the innumerable small-scale industrial units are vulnerable to the impact of global competition. The government and economic players in the private sector need to work more closely as partners to evolve strategies to meet the challenges of global competition more effectively.

THE ECONOMY IN THE INTERNATIONAL ARENA

The Indian economy has been moving towards closer integration with the global economy and with the leading regional trading blocs. This can be seen using three indicators:

(i)

Trade in goods and services as a proportion of GDP;

(ii)

Gross Private Capital (In)flows; and

(iii)

Gross Foreign Direct Investment as a proportion of GDP.

In all three areas, China has had the most outstanding performance and is clearly far ahead of India. However, within the constraints of democratic politics (which have forced India to adopt incremental and relatively ‘softer’ economic reforms), and despite being a late starter in the economic reform

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process, India can be seen to have done ‘reasonably well’ in globalizing its economy. The ratio of trade to GDP increased from 13.1 percent in 1990 to 20.3 percent in 2000. The proportion of Gross Capital Inflows to GDP during the same period increased from 0.8 percent to 3.0 percent. Gross Foreign Direct Investment as a percentage of GDP (which was zero in 1990) rose to 0.6 percent in 2000.

India’s trading relations with major regional trading blocs in 1990 and 2000 can be seen in Table 2. For the year 2000, APEC countries were India’s largest trading partners, accounting for 47.4 percent of India’s global exports and 57.4 percent of global imports. India has, therefore, shown keen interest in joining this forum. Unfortunately, APEC has currently imposed a moratorium on new membership. There is naturally a sharp contrast between India and East Asian countries in their relative rates of export growth due to sharp differences in their export strategies. The contrast is the sharpest when we compare India and China for the period 1950-2000. In 1950, both had roughly similar shares in world trade China pursued a more aggressive export strategy in 1978 when it created export-oriented Special Economic Zones in Southern China. By 2000, China had captured around 4.0 percent of world trade. In contrast, India’s share of world trade had stagnated at around 0.5 percent for the three decades 1960-1990.due to its inward-looking policies. By 2000, this share had moved up to 0.7 percent. India has formulated and is further strengthening its latest Medium Term Export Strategy (MTES) (2002-07), coinciding with the period of the Tenth Five-Year Plan. TABLE 2: TRENDS AND PROJECTIONS FOR INDIA’S EXTERNAL TRADE 2000-2025

The MTES for 2002-07 envisages the achievement of India’s target of one percent of global trade by 2007 and provides sector-wide targets for niche products and targets for selected niche markets. The active participation of state governments is being sought in establishing and strengthening Special Economic Zones (SEZ) modeled on Chinese SEZs and setting up AgriEconomic Zones to provide a strong push to raise the country’s export growth rate. The development of world-class infrastructure in the SEZs will take more time. A new labor policy regime allowing freedom for entrepreneurs in the SEZs to ‘hire and fire’ labor according to the needs of the market (as permitted in the highly successful Chinese SEZs) will have to be put in place to maximize gains from India’s SEZs. As of May 2003, eight SEZs had been approved and have became operational. More such SEZs will be set up in India in the future. India

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is trying its best to liberalize and to transform itself into a global player of consequence in the world economy by 2020. It has been ranked by the World Bank as the world’s fourth-largest nation in terms of the size of GNP measures in terms of Purchasing Power Parity (PPP) in 2001. Ahead of India in 2001 on this front were only Japan, the US, and China. The World Bank has projected that by the year 2020, China will take the top spot, followed by India. India’s economy clearly is on the move and most certainly has the potential to emerge as a global economic power within next twenty to twenty-five years. However, this potential can be made a reality only if India mobilizes adequate political will and quickly commits itself to design and fully implement the next phase deeper ‘second-generation reforms’. The concept of ‘second-generation’ reforms has been in the making for some years. However, these are yet to take concrete shape. Considering that India currently has no social security system in place for nearly 90 percent of its labor force employed in the unorganized sectors, India needs to evolve a well-calibrated approach to its future economic reforms. This would also be necessary to meet the challenges posed by the further intensification of the process of globalization. However, clear prioritization of future economic reforms in India will have to be laid down during implementation of the most critically needed ‘second-generation reforms’

THE NEXT GENERATION OF REFORMS The following are ten recommended areas of special focus in the second generation of economic reforms:

1. Political Reforms for Good Governance;

2. Re-engineering the Role of the government;

3. Administrative and Legal Reforms;

4. Strategic Management of the Economy with a focus on knowledgebased

HRD Activities;

5. Fiscal Prudence;

6. Agricultural Sector Reforms;

7. Industrial Restructuring;

8. Labor Sector Reforms;

9. Foreign Trade and Outward Investment Policies;

10. Financial Sector Reforms.

1. Political Reforms for Good Governance

Political reforms are urgently required in concert with economic reforms. Both

are essential to ensure good governance. A paradigm shift is required in the

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prevailing system of governance. Serving the people and putting their interests above the interests of the ruling elite must be the prime motivating force driving the reformed system of governance. Good governance can be ensured through the provision of an adequate quantity of public services and by improving their quality. Indian politicians need to become fully aware of the costs and benefits of economic reforms. Ruling politicians with limited terms in office are often guided by narrow and short-term motivations while formulating policies in the national interest. The Indian public at large also needs to be thoroughly educated on the inevitable need to bear short-term pain in order to reap the somewhat uncertain longer-term gains from economic reforms. Economic reforms in the future must be more people- centered. They must be given a human face so as to continuously enhance the social empowerments of the poorer and most vulnerable sections of the society. They must be gender-sensitive to improve the status of women and girls. The burden of adjustment to structural reforms must be more heavily borne by the richer sections of the society. Appropriate electoral reforms, including state funding of elections, will help to reduce the lobbying power of the entrenched vested interests.

2. Re-Engineering the Role of the Government

Reforms must be aimed at ‘right-sizing’ (often involving downsizing) the government. Governments must specialize in performing roles that they can perform better than free-market private enterprise. The government must expand its role in areas such as the provision of public goods, especially primary health, primary education and the creation of social infrastructures. The role of the Planning Commission must be changed to that of a strategic think tank. The mindset of the politicians and the administrators needs to be changed to accept the re-engineered role of government in the context of market-oriented economic reforms. The intensification of economic reforms at the state level needs to be given a higher priority in the future since most social services and infrastructural activities are primarily the responsibility of the state governments.

3. Administrative and Legal Reforms

No matter how good the design and intent of economic reforms, their success ultimately depends on efficient and speedy implementation through sensitive and responsive administrative and legal systems. Transparency and accountability must be guiding principles for the formulation and

implementation of policies and procedures. Improved administrative systems

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should be devised to ensure that merit subsidies directly benefit the targeted (generally the underprivileged) sections of society. Legal support services should be made available with more public funding and must be strengthened to provide justice to genuinely aggrieved sections of society more quickly and affordably.

Second-generation economic reforms also must focus on changing the mindset of administrators (especially at the grass-roots level) and of the judiciary (especially at the lower level) to support administrative and legal reforms that synergize with economic reforms for maximizing social welfare.

4. Strategic Management of the Economy

Macroeconomic management must be dovetailed with a well-formulated strategic national vision for the economy for the year 2020 (and beyond). Clarity, transparency and accountability (through identifiable responsibility centers) with properly designed incentive (and disincentive) systems should be the guiding principles governing strategic management of the economy. An appropriate code of conduct should be evolved and observed by economic actors under a new managerial system of governance. The strategic management of the Indian economy in the twenty-first century must focus on human resource development to promote knowledge-based and skill- intensive economic activities in line with India’s dynamic competitive advantage.

5. Fiscal Prudence

The fiscal deficit (especially the revenue deficit) needs to be quickly reduced.

India must sincerely implement the Fiscal Responsibility and Budget Management Act . Simultaneous action is required at both central and state levels to raise the tax-to-GDP ratio by expanding the tax base (for example, by taxing services and rich agriculturists) and improving tax administration (for example, through computerization). The revenue deficit must be brought to zero within five years.

6. Agricultural Sector Reforms

While some agricultural reforms have already been carried out, these are highly inadequate. Primacy must be given to the agriculture sector in all future reforms since many more jobs can be created in the agricultural sector, broadly defined, including activities related to rural industrialization and

overall rural development. Both on-farm and off-farm employment potential

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must be fully exploited. This will raise incomes of farmers and rural labor on a sustainable basis and provide a much-needed boost to demand for industrial products and services, thus spurring all-around economic growth. There is an urgent need to raise public investment in agriculture substantially. Areas needing investment include: irrigation; watershed development; rural infrastructure; drinking water; housing and sanitation. This will help raise the productivity of Indian agriculture to international levels and help in promoting rural (and interlinked urban) prosperity in India.

Second-generation reforms must reduce the perennial anti-agricultural bias by permitting free® exports of all primary products. This will provide a major boost to India’s exports consistent with the rules set by the World Trade Organization. Simultaneously, India must improve its marketing infrastructure. Agricultural reform will unleash high growth rates in agriculture, on which nearly sixty percent of India’s population is still dependent for employment. Agricultural prosperity will help to markedly reduce endemic rural poverty.

7. Industrial Restructuring

Industrial reforms must be geared to explicitly improve the productivity and international competitiveness of Indian industry by focusing on niche products and niche markets. Economic policy in this respect must facilitate mergers and acquisitions and the winding up of terminally ill enterprises in both the public and private sectors by restructuring bankruptcy laws. Massive restructuring is required of Public Sector Units. Most non-performing public sector units should be quickly sold through a privatization process that also safeguards the interests of workers through fair compensation for loss of jobs. Public sector enterprises should be governed by a commercial culture in which government holdings are no more than 26 percent of equity and are retained only to

preserve strategic control. It is of the utmost importance that microlevel reforms must supplement macro-level reforms in the future to achieve synergy. The private sector in India needs to become more international in its outlook to become more competitive and to increase its overseas presence through outward FDI.

8. Labor Reforms

A properly formulated labor policy must form the core of secondgeneration

reforms. This will require viable alternative social safety nets and effective

retraining and re-employment opportunities. Once satisfactory safety nets are

in place, more intensive competition should be injected into the labor market

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by allowing ‘hire and fire’ policies unambiguously linked to the productivity and profitability of micro-enterprises. The government should start by exempting units in the newly created Special Economic Zones from the rigors of labor laws. These measures would be of great help in redressing inefficiency

of workers in public enterprises and public services (such as health care in rural areas).

9. Foreign Trade and Outward Investment Policies

No economic reforms can succeed in India without ensuring adequate growth of exports of goods and services to ensure longer-term viability of its balance

of payments. While anti-dumping measures need to be strengthened to protect Indian industry from unfair import competition, the longer-term reforms must continue to lower import duties to levels comparable to those in leading Southeast Asian countries. Simultaneously, measures should be taken by the government to replace quantitative restrictions (wherever they still remain in place) through appropriately determined tariffs. The second generation of economic reforms must facilitate the growth of India’s own Multi-National Corporations (MNCs). The government must further liberalize outward foreign investment to allow potentially competitive Indian MNCs to establish production bases abroad and trade internationally. Finally, industry and government must make cooperative efforts to prepare Indian industry to meet the new and ever-emerging challenges posed by the new world trade order and the new world investment order being evolved under the World Trade Organization.

10.Financial Sector Reforms India must heed the lessons of the East Asian economic crisis and recovery, and attached the utmost urgency the next phase of financial-sector reforms. The high level of Non-Performing Assets plaguing long-term Development Financing Institutions and commercial banks must be dramatically reduced.

To summarize, greater competition in the financial sector with an appropriate exit policy to reduce overstaffing together, along with sound macro-economic policies, will help to lower the real rate of interest and spur investment and efficiency, thereby raising growth rates and benefiting consumers. Coupled with the current regime of falling interest rates, greater competition in the financial sector in general and among the commercial banks in particular will help to increase the rate of investment in the economy.

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Simultaneously, foreign insurance and pension funds should be allowed to operate with fewer restrictions to make more resources available to finance the modernizing of India’s infrastructure. Further policy and procedural reforms (especially in the power sector) will help to attract substantially higher investment in India’s infrastructural sectors. Finally, credible policy measures that protect investors, especially individual investors with small savings must be adopted. These measures, if effectively implemented, will help to revive growth in India’s capital and stock markets. It must be remembered at all times that the be-all and end-all of all economic activities is the consumer. Future economic reforms must aim to directly benefit Indian consumers through cost reductions, enhanced quality of goods and services, and by expanding customer choice through competition.

CONCLUSIONS Within the constraints of democratic politics and the relatively ‘soft’ nature of the economic reforms implemented since 1991, the Indian economy has reaped several welcome rewards from its reforms. These have strengthened the conviction that the broad direction of the reforms is right and, in that sense, made the reform process irreversible. However, India needs to launch a ‘second generation’ of economic reforms, with a more human face, if it is to reap their full potential. Politicians and administrators need to display greater pragmatism while designing and implementing future economic reforms. The reforms must be based on the long-term vision of transforming India into a global economic power in the next twenty to twenty-five years. It will be of the utmost importance that all sections of society are educated as to the long-term benefits of reform in order to mobilize public support. These reforms, therefore, will have to be drastically redesigned and politically ‘marketed’. Future economic reforms must be seen and experienced as not only good economics but also good politics. Two paradigm shifts in the reforms, backed up by the effective fulfillment of the promises made, will help to garner the support of the Indian people. First, these reforms must aim to raise the productivity of Indian labor and improve the work culture and, over time, provide significant rewards to the people of India by spurring growth, providing a higher level of real wages, and generating wider avenues for employment and re-employment. Growth with employment is the most effective strategy for eliminating poverty and improving the quality of life of the people.

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Second, the reforms must aim to directly benefit Indian consumers. Over a reasonable time span, the reforms must reduce prices of goods and services (including public goods), improve their quality, and allow much more freedom of choice by maximizing the benefits of healthy competition. This will further expand the size of the marketboth domestic and internationaland provide incentives to entrepreneurs to raise their investment, output, and employment.

A combination of more productive labor and pro-consumer economic reforms will be a win-win, proving to be both good economics and good politics. Visionary political statesmanship will be required for this. It should not be slogan-oriented but more result-oriented since it will likely be perceived and experienced as ‘pro-people’.

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Agrarian Crisis in India is a Creation of the Policy of Globalisation Mathew Aerthayil The people’s protest against Special Economic Zones in various parts of the country, including at Nandigram in West Bengal, stagnation in agriculture, import of foodgrains, widespread suicide of farmersall these are systems of simmering discontent in the agricultural sector. What is highlighted today in the national scene is the image of “incredible India” and “shining India”. We hear often about India as a country with a very high economic growth, a country with the highest numbers of billionaires in Asia, and a country of world renowned information technology. But we do not hear enough about the serious problems in agriculture. Those who govern us do not seem to be concerned about this problem; probably they do not want to. But we cannot easily ignore this problem any longer.

It was with the Structural Adjustment Programme (SAP) in 1991 that the policy of globalisation was concretely introduced in India. Based on this policy and the directives of the World Bank, International Monetary Fund and World Trade Organisation, the Indian economy was substantially overhauled. The Export-Import policy was liberalised; the import and customs duties of many products were drastically lowered or totally dropped so that they could be imported without any restriction. The government started reducing its investment in agriculture and the industrial sector allowing the private sector to take over. The restructuring of the public distribution system really affected the availability of foodgrains to the poor at subsidised rates. All such measures had implications for the farm sector. This article analyses how the policy of globalisation has affected agriculture in India.

Problems of Agrarian Sector and their Consequences

FIFTEEN years of economic liberalisation have adversely affected Indian agriculture. The most prominent manifestation of this is in the drastic decline in the growth rate of foodgrains. The rate of growth of agricultural output was gradually increasing in 1950-1990, and it was more than the rate of growth of the population. In the 1980s the agricultural output grew at about four per cent per annum. Thus India became self-sufficient in food and started exporting wheat and rice. But during the 10-year period after the start of liberalisation, the rate of growth declined to two per cent. According to the Mid-term Appraisal of the Tenth Five Year Plan (2002-07), the rate of growth of the GDP in agriculture and allied sectors was just one per cent per annum

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during the year 2002-05. As a result, per capita availability of foodgrains decreased; the growth rate of population became higher than that of foodgrains, and India started to import foodgrains at a much higher price than that in the domestic market.

Secondly, unemployment in the agricultural sector increased during the reform period as agriculture was not profitable due to the fall in the price of farm products. As a result, the number of people who are employed in the primary sector and the area under cultivation decreased, which in turn caused a decline in rural employment. According to the National Sample Survey, the annual rate of growth of the employment in the rural areas was 2.07 per cent in 1987- 1984, while it declined to a mere 0.66 per cent in 1993-2000, which corresponds to the period of liberalisation. It is not only the farmers but also the Dalits and tribals, who heavily depend on agriculture, became unemployed.

The suicide of farmers is the third fall-out of stagnation in agriculture. When agriculture was not yielding remunerative income, the life of the farmers became very desperate. Many of them committed suicide as a last resort. As revealed by Sharad Pawar, the Union Agricultural Minister, in the Lok Sabha in 2004, over one lakh farmers committed suicide in India after the economic reform started. According to the National Crime Records Bureau, 17,060 farmers committed suicide in the country in 2006 with Maharashtra having the highest number of (4453) suicide deaths. Punjab is the latest in the list of States having farmers’ suicide. This is a record in the agricultural history of India. It points to the acute nature of the problem which has affected the vast majority of the population, and which has created a real crisis. But unfortunately, the government and the people do not consider it a crisis; their lack of seriousness and lukewarm response to the problem points to this reality.

Reasons for the Agrarian Crisis

THERE is a need for analysing the reasons for the crisis to see whether there is any connection with globalisation and, if so, what measures could be adopted to face this challenge.

1. Liberal Import of Agricultural Products

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The main reason for the crash of prices of agricultural products, especially of cash crops, in India was removal of all restrictions to import these products. As, for example, when the Government of India reduced the import duty on tea and coffee from Sri Lanka and Malaysia, their prices in the domestic market got reduced drastically. Thus cultivation of such products became unprofitable and so their production was fully or partly stopped. Since the removal of quantitative restrictions and lowering of import duties were according to the restrictions of the World Trade Organisations (WTO), the crash in the prices of agricultural products is directly related to the liberalisation policy of the government.

2. Cutback in Agricultural Subsidies

In the post-reform period the government reduced different types of subsidies to agriculture, and this has increased the production cost of cultivation. According to Ramesh Chand, an economist, cutback in subsidy and control of fertilisers over the last few years has adversely affected the agricultural sector. It has increased the input cost and made agriculture less profitable. Since the decrease in subsidy to agriculture is part of the regulations of the WTO, it is related to the policy of globalisation.

3. Lack of Easy and Low-cost Loan to Agriculture

After 1991 the lending pattern of commercial banks, including nationalised banks, to agriculture drastically changed with the result that loan was not easily available and the interest was not affordable. This has forced the farmers to rely on moneylenders and thus pushed up the expenditure on agriculture. The National Commission for Agriculture, headed by Dr M.S. Swaminathan, also pointed out that removal of the lending facilities and concessions of banks during the post-reform period have accelerated the crisis in agriculture. When the farmers were not able to pay back loan with high interest, they fell into the debt trap. Studies show that most of the farmers’ suicides was due to the debt trap. It is part of the policy of privatisation that banks, even nationalised banks, look for profit over their social responsibilities to the people.

4. Decline in Government Investment in the Agricultural Sector

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Studies show that after the economic reforms started, the government’s expenditure and investment in the agricultural sector have been drastically reduced. This is based on the policy of minimum intervention by the government enunciated by the policy of globalisation. The expenditure of the government in rural development, including agriculture, irrigation, flood control, village industry, energy and transport, declined from an average of 14.5 per cent in 1986-1990 to six per cent in 1995-2000. When the economic reforms started, the annual rate of growth of irrigated land was 2.62 per cent; later it got reduced to 0.5 per cent in the post-reform period. The consequences were many. The rate of capital formation in agriculture came down, and the agricultural growth rate was also reduced. This has affected the purchasing power of the rural people and subsequently their standard of living.

5. Restructuring of the Public Distribution System (PDS)

As part of the neo-liberal policy, the government restructured the PDS by creating two groupsBelow Poverty Line (BPL) and Above Poverty Line (APL)and continuously increased the prices of foodgrains distributed through ration shops. As a result, even the poor people did not buy the subsidised foodgrains and it got accumulated in godowns to be spoiled or sold in the open market. As the in-take from PDS was less it has affected the food security of the poor, especially in the rural areas, and this has indirectly affected the market and the farmers.

6. Special Economic Zones

As part of the economic reforms, the system of taking over land by the government for commercial and industrial purposes was introduced in the country. As per the Special Economic Zones Act of 2005, the government has so far notified about 400 such zones in the country. Very often it is fertile land which has been acquired. According to Khasanoki, a writer, the government has acquired five million hectares of land for purposes other than agriculture between 1991 and 2003. This is almost half of what was acquired during the last 40 years. It was in the news that the government decided to acquire 10,120 hectares of land near Mumbai (almost one-third area of Mumbai) for the Reliance Company and reduced it to 5000 hectors due to public pressure. Since the SEZ deprives the farmers of their land and livelihood, it is harmful to agriculture. In order to promote export and industrial growth in line with globalisation the SEZ was introduced in many countries.

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Towards a Solution

THE agricultural crisis is affecting a majority of the people in India. The farmers who produce food materials for the country are in deep distress. The marginalised people like the Dalits and tribals, who depend on agriculture, are getting unemployed and struggling for their livelihood. The ordinary people, especially the poor, have lost their food security. The crisis in agriculture is a crisis of the country as a whole and so needs urgent attention. Some of the suggestions are being listed here.

1. Quantitative restrictions should be imposed on import of agricultural

products. Since the import policy was the major reason for the crash in prices of many agricultural products, there should be restrictions on the quantity and

customs duty of such products. Necessary import duty and quantitative restrictions should be imposed on imported goods to protect our farmers who should be given priority to the discipline of the WTO.

2. Subsidy and concessions given to agriculture but removed in the post-

reform period should be restored. This is a must to make agriculture remunerative. One of the main disputes in the Doha Round of talks at the WTO is the high subsidy given by the United States and European Union to their farmers in spite of the WTO regulation. India should assert its right to give sufficient subsidy to its farmers to offset the rising cost of cultivation and protect their livelihood.

3. Bank loans should be easily made available to the farmers, especially

since the input cost of agriculture has gone up. The government should seriously think of restoring the low rate of interest to farmers given by banks and other financial institutions as it had done before the reform period. In fact, the M.S. Swaminathan Commission for Agriculture has recommended a low rate of four per cent interest for the farmers.

4. The government should augment its investment and expenditure in the

farm sector. One reason for the agricultural stagnation is low government expenditure. Investment in agriculture and its allied sectors, including irrigation, transport, communication and farm research, should be drastically increased, and the government should aim at integrated development of the

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rural areas. Effecting Implementation of National Rural Employment Guarantee Scheme can also become a means of revival of the rural economy.

5. There is a need for periodic revision of the procurement prices for farm

produce making those remunerative. This will help the farmers to meet the increasing expenses for farm inputs and ensure at least remunerative income. According to the Swaminathan Commission, unless agriculture is made a profitable enterprise, its present crisis cannot be solved. The Commission has suggested 50 per cent more of the total production cost as supportive price for

foodgrains.

6. The government should revise the policy on Special Economic Zones as it

goes against the interest of farmers and the agricultural sector. It should not acquire fertile agricultural land for SEZs. When it does take over land for essential public utilities, it should give just compensation and initiate comprehensive rehabilitation measures. The recommendations of the Swamina-than Commission not to acquire land suitable for agriculture for non- agricultural purposes, to give adequate compensation for the acquired land and to distribute surplus land to the landless farmers should be seriously taken into account when the policy of SEZs is reframed. Over and above the policy of SEZs, there is a need for constitutional structures and mechanisms which will mandate the government, both Central and States, to implement the policy of relief and rehabilitation of people displaced due to SEZs and other developmental projects.

7. Bold steps should be taken to implement land reforms which were not

implemented in most States. Feudal structures and landlordism based on large holdings of land by high caste and class people even now tend to keep a majority of the people, especially Dalits and backward castes, in the rural areas under their control and domination. Neo-liberal policies with privatisation will only reinforce and strengthen these unjust and exploitative structures. Therefore, there is a need for conscious efforts and positive steps from the government side to implement land reforms. Surplus land acquired thus should be distributed to the Dalit and adivasi farmers. According to Amartya Sen, the Nobel Laureate, though the economic growth rate of India is impressive, India cannot play a significant role in the global economic scenario unless it completes land reforms.

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8.

The rural economy, particularly agriculture, will be greatly benefit if

programmes meant for economically backward sections, including the Integrated Child Development Schemes, mid-day meals for schoolchilden and the National Rural Employment Guarantee Scheme, are effectively implemented. Food security of the poor will be ensured if the public distribution system is efficiently run. All these programmes will increase the purchasing power of the rural people and indirectly help agriculture itself.

The agricultural sector in India is facing a crisis today. The globalisation process, which started in the 1990s, is the main reason for this crisis. The solution of the problem is not in a few “packages” but in drastic changes in the present economic policies related to agriculture. For this, the government should be ready to take bold steps. Farmers, agricultural labourers and people’s organisations in civil society should work collectively to assist and persuade the government to make the necessary changes. It is high time that the government and the people realised that India can become a real “superpower” only when the vast majority of the people, especially the farmers in the rural areas, become prosperous and are really empowered. The words of Dr M.S. Swaminathan are relevant here: “In a country where 60 per cent of people depend on agriculture for their livelihood, it is better to become an agricultural force based on food security rather than a nuclear force.”

Dr Mathew Aerthayil is the Director of the Indian Social Institute, Bangalore.

Sections About Mainstream

2006

2007

2008

April 12, 2008 April 19, 2008 April 26, 2008 April 5, 2008 August 16, 2008 August 2, 2008 August 30, 2008 August 9, 2008

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

December 20, 2008 - Annual Number 2008 December 6, 2008 February 16, 2008 February 23, 2008 February 9, 2008 January 26, 2008 July 12, 2008 July 19, 2008 July 26, 2008 July 5, 2008 June 07, 2008 June 14, 2008 June 21, 2008 June 28, 2008 March 1, 2008 March 15, 2008 March 22, 2008 March 29, 2008 March 8, 2008 May 10, 2008 May 17, 2008 May 24, 2008 May 3, 2008 May 31, 2008 November 1, 2008 November 15, 2008 November 22, 2008 November 29, 2008 November 8, 2008 October 11, 2008 October 18, 2008 October 25, 2008 October 4, 2008 September 13, 2008 September 20, 2008 September 27, 2008 September 6, 2008

2009

2010

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

2011

2012

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

National Income measures the volume of commodities and services turned out during a given period and counted without duplication. Its a flow and not stock. National Wealth measures the stock of commodities at a given point of time whereas National Income measures productive power of economy in a given period to turn out goods and services for satisfaction of human wants. Gross Domestic Product:

The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated. National income (NI) is the total income earned by the citizens of the national economy resulting from their ownership of resources used in the production of final goods and services during a given period of time, usually one year. Gross domestic product (GDP) is the total market value of all final goods and services produced within the political boundaries of an economy during a given period of time, usually a year. Although national income is generated by the production of gross domestic product, the value of production does not entirely result in earned income. In other words, national income can be derived from gross domestic product after a few adjustments.

Need for national Income statistics

1. View of countries entire economy

2. Contributions from various sectors

3. Reveals changes in country’s economy

4. Predicts with a limitation trends of future

e.g.

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

GDP 1950-51 30% 55% Agriculture 15% Industry Services GDP 2010-11 14% 28% 58% Agriculture Industry
GDP 1950-51
30%
55%
Agriculture
15%
Industry
Services
GDP 2010-11
14%
28%
58%
Agriculture
Industry
Services

Findings from the charts

1. Agriculture remained a major contributor for our GDP until the process of reform got service sector mobilised.

2. Share of agriculture reduced due to challenges of draught and movement to secured earnings propelled by shift in occupations

3. The share of agriculture reduced over a period of time and the factors responsible for such reduction

4. Components of agriculture allied services such as fishery, forestry also can be analysed

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

5.

Industry has increased steadily which primarily includes mining, manufacturing, electricity, gas and construction

6. Service sector components are trade, transport, storage communication, finance, insurance real estate Business services, community, social services

7. Increase in Manufacturing set up necessarily needs and drives improvement in service sectors.

Limitations of National Income estimations in India:

1. The output of non-monetised sector Agriculture carried on substantial basis Considerable portion used for self consumption. It becomes difficult to measure the imputed value non monetised portion which does not enter the economy

2. Non availability of data about the income of small producers or household enterprises Production and distribution at a very small level Rampant illiteracy Non maintenance of data Unorganised sectors

3. Absence of data on income distribution No data is generated for income distribution of households on persons. Consumption and savings of small households on a pilot basis was taken. Need for data compilation to measure the effects of growth process in low income household can be analysed

4. Unreported Illegal Income

Significant part of the economy operates as hidden economy Income goes unreported Accounts for about 40% of the total national Income Summary:

To get better understanding of the economy generation of real and viable data is necessary to study the history of the economy and to lay the path for growth while achieving the best possible solutions for overall upbringing of the community.

EURO CRISIS To get a better understanding of the complex linkages of the problems in Europe, one will look at them to be part of one big family. Accordingly,

Greece

Germany

is

the

elder

brother

of

Greece has lived beyond his means while Germany on the other hand has

37

T.Y.BCom (Hons.) Economics

Vidya Joglekar

managed its finances prudently. So while Greece is in debt, Germany has surplus. The problem is since Germany and Greece belong to the same family; Greece's problem is to an extent Germany's problem. So Germany has agreed to help his brother (Greece) but in return wants Greece to mend his ways. Like any elder brother would, Germany would like Greece to change his ways, become prudent with money, undergo some years of hardships and pay his debts. Germany requests Greece to do this since Greece belongs to the same family and Germany does not want the family name tarnished.

However, the problem is that on one hand, Greece would like Germany's help but on the other hand, may not want to follow the austerity measures. Greece

feels that Germany is resorting to bullying tactics and putting his independence at stake. This is putting pressure on Germany because Germany does not want

help unconditionally.

to

extend

Since Greece and Germany belong to the same family, Germany is in a deadlock in order to preserve the family name. The problem is that if Greece defaults and decides to walk out of the family, the other brothers of Germany such as Spain, Italy, Ireland, and Portugal who too have a debt problem, might

lose credibility and fall back on Germany to rescue them. Germany is afraid this could eventually lead to a split in the family. Since Germany otherwise is doing well in his business and at the same time is acting as the head of the family,

the split

is not something Germany wants.

Also, if Greece splits from the family, people at large might lose confidence in the family name and sell off the debt that the family owes them. If this happens, one might not lend any money to the family at standard market rates. This could hurt the family business and the family business activity could come to a stand-still. This is the reason why Germany is pestering Greece to mend his ways by following fiscal discipline. Unfortunately, some Greece politicians might be misleading people to believe that there is a solution to their debt problem without having to follow some discipline either by way of austerity or restructuring of economy for better productivity. They are stirring passion among the people by stating that Germany might want to take control of their lives and is a threat to Greece's sovereignty.

Election results that are slated in June will give an indication about the future

38

T.Y.BCom (Hons.) Economics

Vidya Joglekar

of Greece. If the Conservative Party comes to power, there is a chance that they will try to maintain fiscal discipline and keep the European Union intact. However, if the party that is opposing fiscal discipline measures comes to power, the Union might split and Greece may move out of Euro and go back to its original independent currency 'Drachma.”

Even if that were to happen, the value of Drachma could nosedive. While it would suit exports, imports would become very expensive. The debt problem may not get solved automatically. Greece might have to focus on enhancing productivity and competitiveness and may need to follow fiscal discipline. In essence, there is no short cut solution to escape debt.

Part II The study of economic policies necessitates study of important factors related to economic development

1. Human Resources

2. Human Development

3. Occupational Structure

4. Natural Resources

5. Infrastructure

6. Social Infrastructure

Human Resources Vital from economic point as human resources are not only instruments of production but also ends. Theory of demographic transition is evolved to measure death and birth rate and its impact on economic development First Stage: High Birth rate compensated with high death rate (typically ancient period when the miracles of medical sicence were unavailable) In such a case

the growth rate of population is not high as the effect of high birth rate is nullified by high death rate. Second Stage: Birth rate remains high but depletion of death rate resulting in acceleration of growth of population. Third Stage: Low death rate and equally low birth rate. Reasons behind it industrial revolution, education and improvement in economic condition. With reference to India The first stage occurred from 1891 to 1921 Second stage 1921 to 1951 control of various diseases and epidemics. Third stage 1951 to 1981 Population Explosion Record growth in population , sharp fall in death rate

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

India presently is in a stage in which it has high polulation growth with definite signs to slow down.

1200 1000 800 600 400 200 0 1891-1921 1921-1951 1951-1981 1981-2011
1200
1000
800
600
400
200
0
1891-1921
1921-1951
1951-1981
1981-2011

Polulation in Millions1200 1000 800 600 400 200 0 1891-1921 1921-1951 1951-1981 1981-2011 Increase ( Decrease)In Million

Increase ( Decrease)In Million1200 1000 800 600 400 200 0 1891-1921 1921-1951 1951-1981 1981-2011 Polulation in Millions

For economic development following factors are important to study when we evaluate human resources:

1. Sex composition in India

2. Poverty

3. Age Compostition

4. Density of population

5. Urabnisation

How population affects economic development:

1. Population growth and Per capital income High Rate of population has retarding effects on growth

2. Population and food supply Increase in population in rural areas allows lesser availability of marketable surplus thereby triggering inflation

3. Population and unemployment With existing backlog of unemployment generation of work does not match with population increase thereby enhancing pressure on economy

4. Burden on Social Facilities Time lag in investment in education, medical care and housing is huge which is wiped out by fast growing population

5. Lowered capital formation

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

A portion of GNP must be invested to keep per capital income at a constant level. Growth in population reduces the PCI. Causes a result of weaker getting poorer and rich getting richer Measures to control population in India

1. Spreading awareness through rural areas

2. Improving education for weaker section

3. Availability of means to control population in terms of medical facilities

4. Financial Incentives for family planning

Human Development A long and healthy life Literacy Rate Standard of living These three parameters define the Human Development Index. Human Development index when used to measure health, in India, Health has improved with increase in survival rate. In controversy there is a huge population which is under nourished due to existence of poverty. HDI when studied with perspective of Gender Related Development there is a gender bias in population which had impact in terms of having unequal opportunities of education and employment HDI as economic indicator Growth of urbanisation has strengthen, better education and medical facilities. India in on betterment path but has miles to go. Occupational Structure Developing country like india has majority of population enganged in agricultural activities resulting in Low Per Capital Income and equal emphasis on urbanisation and idustiralisation to aceelarate shift on Industries and Services to ensure increase in Per Capita Income In every economy the stages of occupation is a gradual shift from agriculture to industrial and then from strong industrial base to services which support self sustaining agriculture and robust industrialisation. In India the second stage of Industrial Revolution super headed by manufacturing could not sustain. The technological and communication boost , unavailability of means of income, ample availability of skilled unemployed labour Female contribution is more on unrecognised and unrewarding professions which do not form part of GDP. Between Urban and Rual the work participation of rural areas was more

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

Work Participation In 1981

60 50 40 30 20 Females 10 Males 0 Persons Total Rural
60
50
40
30
20
Females
10
Males
0
Persons
Total
Rural

Urban

Persons60 50 40 30 20 Females 10 Males 0 Persons Total Rural Urban Males Females

Males60 50 40 30 20 Females 10 Males 0 Persons Total Rural Urban Persons Females

Females60 50 40 30 20 Females 10 Males 0 Persons Total Rural Urban Persons Males

Work Participation In 2001

60 50 40 30 20 Female 10 Male 0 Persons Total Rural
60
50
40
30
20
Female
10
Male
0
Persons
Total
Rural

Urban

Persons60 50 40 30 20 Female 10 Male 0 Persons Total Rural Urban Male Female

Male60 50 40 30 20 Female 10 Male 0 Persons Total Rural Urban Persons Female

Female60 50 40 30 20 Female 10 Male 0 Persons Total Rural Urban Persons Male

42

T.Y.BCom (Hons.) Economics

Vidya Joglekar

Natural Resources It includes Land, Water, Fisheries, Forests, Mines, Marine, Climate, Topography Some known and some unknown. Eg. Topography is known and Mines unknown Renewable Solar Energy. Non Renewablee.g. oils. Careful use of nonrenewabe must be part of overall economic development In context to India lets us study land resources:

Barren Land, Not available for cultivation Grazing Land, permanent pastures Waste Lands, can not be cultivated for a period or necessarily converted to bushy land Fallow Land eg. Seeding area can not be cultivated for a year Agricultural Land, Available for agriculture Being an agricultural nation emphasis shall be on the improvement of agricultural land while ensuring we do not generate land less labourers. Forest Resources Recognise role of Tribles in forest Target Green Cover Discourage forest based insutries by giving alternative No private contractors Forest Land Reservation Water resources Reliance of Government on large dams. Intended to solve problems of irrigation failed. Resulted in mass corruption. One of the wettest countries in the world but facing draught as no means of conservation are seriously implemented. Control of floods, development of canal systems, rain water harvesting , control of water pollution are still dreams. Mineral Resources Oil and Natural Gas Crude Oil. Steady rise in Imports, Constant and insignificant domestic production. Heavy burden on exchequer Iron Ore Chepaest producer of steel in the world, due to high quality of iron ores at low cost Mineral Policy implemented as its a limited resources and non renewable. To control environmental damage, promote foreign trade, promote research and development. Emphasis on govt to control as Private Sector can not be held responsible for national wealth.

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

For example, India sells 100 units of produce at Rs 1000. This means as long as India spends Rs 1000, it can recover it by selling 100 units. At this stage, the

economy is balanced. Now, let's say India sells a liter of petrol at Rs 50 instead of Rs 75 (its true value) thus making a loss of Rs 25 per liter. To compensate for this Rs 25 loss, India will either borrow Rs 25 or print currency of Rs 25.Whatever be the case, for the additional Rs 25, India does not produce any goods. The number of units continues to remain at 100. In the absence of any real production, India will recover the Rs 25 from its citizens by spreading the

loss

units.

across

the

100

So, the system had 100 units and was sold at Rs 1000. However, due to the loss, an additional Rs 25 (borrowed money or printed currency) was added into the system. So while the units remained 100, the money in the system became 1025. While the price per unit in the previous situation was 1000/100 = Rs 10, now the price per unit would become 1025/100 = Rs 10.25. This is how the recovery takes place across all the units. In other words, the value of the rupee goes down because the same number of units is now purchased at a higher amount.

A very similar thing is happening in India. People are spending more than they are producing. This is causing fiscal deficit or a gap between what we spend and what we earn. So naturally, the value of money is eroding in the economy as explained in the earlier example. India does not produce enough petrol and

therefore imports because petrol is an essential commodity. As shown in our earlier example, the increase in petrol prices is not being passed on to the end consumer. Had the increase been passed on to the consumer, the system might have self regulated itself by way of the consumer and reducing the

higher prices.

consumption because

of

Since the price rise does not get fully passed on, the demand for petrol remains unabated and India has to import more quantity of petrol. This naturally leads to more paper money (or borrowing) in the economy without a commensurate increase of real goods in the economy. This means that the price of goods in the economy increases to offset the loss of petrol sales. Thus, instead of fewer people paying for the increase in the price of petrol, now they pay by way of higher prices of goods. This is what is commonly called inflation. So in essence, by rolling back prices, the people at large may not benefit as they are hit by inflation which erodes the value of their money. Infrastructure

44

T.Y.BCom (Hons.) Economics

Vidya Joglekar

Irrigation Reapid agricultural Development to ensure increase in cultivable land. Thereby creating opportunities for employment in rural areas Reducing the urban bias Goals partially achieved due to non availibilty of finance for funding costly irrigation. Resulting in landless labourers. Energy Direct correlation with economic growth Primary sources of energy: Coal, Oil Natural Gas, Electricity Non Commercial : Fuel wood , agricultural wastes(organic matter for compost, straw used as fodder, fuel for cooking purposes) , Animal Dungs Largest consumer transport sector. Means to come out of energy crisis:

Stepping up oil production, control consumption, avoid waste, expansion of electric power, substitution of oil by coal, Conservation of energy and dependence on renewable energy Improving distribution, improving private partnership without Monopoly Practices Transport Rails, Roads, Shipping Ports, Aviation Negatives Improvement in Roads, Poor Planning, Poor Quality of constructions, Coordination between Roads and Railways. Shipping Inland water transport undeveloped almost nil. No Attempt made to revive. Flood control navigation missing. Natural ports are supported but no modern ports built. Aviation Significant increase in air traffic, reduction of govt involvement from control to free economy Communication Postal popular once now limited in urban areas, still survives as important means of communication for massive rural sector Telecommunincation Phenomenal Growth, implementation of policies by Govt., Legislation introduced Banking & Finance Enhances trade, helps money as lubricant in the economy, propels growth Science & Technology Thurst on agricultural education and research. Research in industrial development stalled to sudden increase in service sector. Promotion on self reliance to save FX spent on buying technology. Emphasis on creating technology suitable in india.

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T.Y.BCom (Hons.) Economics

Vidya Joglekar

Social Infrastructure Education Provision of Primary and secondary education, improvement in distance education, education resulting in employment generation, availability of cheap finance for underpriviledged section, promotion of minimum education Health and Family Welfare, Improvement in immortality rate Stabilising the population Imrpovement of Government and Private Hosptials Strengthening exsiting systems and including new facilities Access to all for essential drugs and medicines Providing Health insurance Social security and Problems of social health to be tackeld.

46

T.Y.BCom (Hons.) Economics

Vidya Joglekar