THE POLITICAL ECONOMY OF ECONOMIC REFORM

The 1991 Balance of Payments [BOP] crisis

forced India to procure a $1.8 billion IMF loan and acted as a tipping point in Indias economic history The BOP crisis immediately confronted P.V. Narasimha Raos newly elected Congress government to appoint a non-political figure, economist Manmohan Singh, as finance minister in a gesture that symbolized Raos desire to chargeforward with economic reform In response to the crisis, the government immediately introduced stabilization measures to reduce the fiscal deficit

Contd..
The fiscal tightening and devaluation of the rupee

by approximately 25% adequately reduced the current account deficit. Yet, the crisis itself did not spur the significant changes India needed.

FURTHER STABILIZATION REFORMS

The stabilization efforts of 1991 successfully

warded off financial collapse and demonstrated that Raos government could be trusted to develop and implement sound economic policy It was clear the status quo was unsustainable and that India needed to better integrate with the global economic system. Breaking with tradition, the new Congress government went beyond traditional short-term stabilization efforts and began addressing the underlying causes of Indias economic woes

Contd..
Led by Singh, the government initiated a reversal

of the historic policies of regulation and government intervention. Rakesh Mohan, who served as Secretary of the Department of Economic Affairs, believes that the experience of enacting smaller reforms in the 1980s gave Raos team the confidence to react swiftly with broader reforms like
market- determined exchange rates liberalization of interest rates

reductions in tariffs

Contd..
Appealing to the Indian aspiration of self-

sufficiency, controversial reforms in areas like taxation, financial services and public sector management were developed and approved by Indian committees rather than by external bodies like the World Bank or IMF The government also selected these early reforms carefully, fearing that with Indias constant cycle of elections, any setback at the polls would damage the reforms momentum. Thus, the government attacked glaring problems but also avoided politically costly changes

FISCAL AND ADMINISTRATIVE REFORMS

Initial fiscal reform focused on politically feasible

revenue-related issues like rationalizing the tax structure Rao and Singh had to abandon their initial attempts to curb the deficit through spending cuts, and by 1996, the annual deficit had climbed back to 1991 levels 10.5% of GDP The center government drove an initiative to move the country toward a Value-Added Tax system, and by 2005, most state governments had adopted it According to Delhis Secretary of Finance Sanjeev Khairnar, the VAT contributed 70% of Delhis total revenue collection, but many others questioned the extent of its implementation

Contd..
The distribution of responsibilities between state

and central governments in tax collection and public good provision has created perverse incentives, with states and municipalities poorly utilizing resources and failing to deliver. Local governments also suffer from even greater fiscal problems. Tax evasion is rampant, with some business and public leaders estimating that a mere 20% of taxable revenue is actually collected.

Contd..
The poor performance of the government only

exacerbates the tax-evasion problem. Ultimately, greater cooperation among the different levels of government is needed to coordinate decision making, expenditure targeting, and tax collection procedures.

FINANCIAL SECTOR REFORMS

In order to liberalize the financial sector, Rao

established committees to research and make recommendations regarding financial system modernization, deregulation, and lending improvements. Before the 1990s, regulations limited the ability of the Indian financial sector to efficiently allocate resources. Efforts to privatize and introduce competition were approached cautiously, due to the political sensitivity of these reforms Changes did not impact the banking workforce or management structure,banks remain overstaffed and poorly managed

INTERNATIONAL TRADE AND INVESTMENT REFORMS

Indias trade policy prior to the 1991 reforms was

characterized by high tariffs and import restrictions. Foreign-manufactured consumer goods were entirely banned, and capital goods, raw materials, and intermediate goods for which domestic substitutes existed were importable only through a bureaucratic licensing process. Although foreign ownership in some Indian companies was permitted, investors faced complications that included a subjective licensing process, high regulation upon approval, and equity-holding caps.

Contd..
India has come a long way toward opening its

borders to trade exports and imports grew at 19% and 30% in 2004 and 2005 respectively and both Congress and the BJP are committed to increasing free trade. Investment has increased throughout the past decade and a number of important industries like aviation and construction have raised or eliminated caps on foreign investment.

Contd..
Despite the benefits of outside technical

expertise, many fear that increased foreign investment will lead to lost jobs and threaten domestic businesses. The Communist Party and many labor unions are vocal supporters of such small-scale industries and fight against liberalizing foreign investment. Tariffs also remain among the highest of the developing world.8 This further confirms that, with a 2003 trade deficit of around $17 billion, Indias exports are not yet competitive on global markets

INDUSTRIAL SECTOR REFORMS

Indias industrial policy was one of the areas most

changed by the economic liberalization of the 1990s. During the following decade, India transitioned from a centrally planned and operated economy to a market-driven economy, reflecting a global trend toward less regulated economies. Most government-operated industries in India are now privatized,though some political contention still exists over the removal of reservation schemes

INFRASTRUCTURE REFORMS
Infrastructure remains perhaps the greatest drag

on Indias current growth prospects. Major public work projects, however, present implementation challenges, particularly due to corruption. Whats Been Done Previous infrastructure reforms: Invested, with limited success, in improving airports and road networks; Privatized successfully a small number of ports and roads; Improved the reach of the telecom sector.

Contd
The Way Forward

India needs to: Implement major public works projects, taking advantage of public-private partnerships where possible; Continue to increase tele-density among its population, as India remains way behind countries like China and Thailand; Increase transparency in implementing infrastructure projects; Invest in a variety of renewable sources like ethanol and wind energy.

LABOUR REFORMS
Although Indias restrictive labor laws are not a

problem during times of expansion and do not affect high-skilled workers in the software and R&D sectors, they discourage further private investments, particularly in the manufacturing sector.
Whats Been Done Labor

markets remain one of the most regulated sectors of the Indian economy as labor reform was not addressed in the early 1990s.

Contd
The Way Forward

A more flexible labor policy will support business development and enhance Indias growth. In particular, policies should be designed to: Remove restrictions on laying-off workers; Moderate benefits obtained by unions; Deregulate wage practices.
Labor reforms should be coupled with the

creation of a stronger social safety net to support affected employees.

AGRICULTURE REFORMS
As the majority of the labor force still works in

agriculture, reform of this sector is essential for widespread growth and to reduce income inequalities. Reform measures should enhance both production and marketability of the countrys agricultural production.29 Additionally, changes will allow some Indian agriculturalists to find income alternatives while they gain greater skills necessary for work in the manufacturing sector. Whats Been Done Agriculture has been largely ignored in the reforms of the last 15 years due to entrenched interest groups.

Contd.
The Way Forward

Substantial

deregulation of the agricultural sector is necessary in order to increase Indias competitiveness in world markets. To achieve this, the government should: Eliminate subsidies that have largely benefited interest groups rather than poor farmers, in order to align incentives and liberate resources from state budgets; Reallocate these freed-up resources toward urgent public interventions, such as building roads, irrigation channels, and refrigeration facilities.

PRIVATIZATION REFORMS
Public enterprises account for nearly half of

Indias capital stock and enjoy commanding market shares in industries like mining, smelting, banking, and railways. Most, however, exhibit poor productivity of labor and capital. The government has taken concrete steps for encouraging private entry into sectors previously dominated by the public sector. Disinvestment in the form of transfer of a part of the ownership of state owned enterprises to the public is another form of privatization undertaken by the government.

Impact of reforms in INDIA

The annual inflation rate was raised to 4.4. Fiscal imbalances have not been corrected. Central govt. contribution to GDP alone raised to

5.9% and state central govt. s together contributing 10% to the total GDP.
Stock of foreign exchange reserves was high in

$79.2 billion.

Limitations

Shortcomings of policy, mainly classified under 5 categories. i) Absence of broader development strategy ii) Wrong sequencing of reforms. iii) Hasty pace of reforms iv) Prerequisites of reforms ignored v) Absence of human development goals.

1. Absence of broader development strategy.

Main aim of macro economic stabilization and

liberalization is to create healthy competition in industry.

But our govt. failed to implement this due to improper

strategy and lack of dynamism.

So we can conclude that, only application of heavy

state interventions & industrial strategies cant accelerate the growth of nation.

2. Wrong sequencing of industrial growth

Due to wrong sequencing of reforms economic

management suffered with serious distortion. Substantial reductions in tax rates and compression of capital expenditure is implemented to reduce nondevelopment expenditure and tax rates. Compression of govt.s capital expenditure and contraction of public investment. Liberalizing imports of capital goods without any agreements for tech. advancements.

3. Hasty pace of reforms

Rapid pace of reforms led to rapid decline the quality

of industrial structure.
Sharp reduction in industrial growth of capital goods

increased the imports thereby increasing the industrial employment as many people were engaged in importing the goods from other countries.

4. Prerequisites of reforms ignored

Before applying economic reforms govt. must

measure human development indices like life expectancy & education levels.
But in India, human development and socio-economic

structures are not up to the level.

But our govt. did not monitored all these things. They simply applied the reforms which is very

successful in case of Malaysia and south-Korea.

5. Absence of human development goals

At the time of reforms, India is in dismal condition with

wide spread poverty, incomplete structural transformation low level of human development distorted pattern of expenditure on health and education and low rate of economic growth.
So the structural reforms must be undertaken with a

human face.

REFERENCES
Mishra S. K. & Puri V. K. (2009), Economic

Reforms and Liberalisation, Indian Economy

Economic Reforms in India, retrieved from

http://harrisschool.uchicago.edu/news/pressreleases/ipp%20economic%20reform%20in%20in dia.pdf

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