PUBLIC FINANCE & MACROECONOMIC

ADJUSTMENT
WORKSHOP ON PUBLIC POLICY IN INDIA
SOUTH CAMPUS, UNIVERSITY OF DELHI.

TANVIR AEIJAZ
DEPARTMENT OF POLITICAL SCIENCE
RAMJAS COLLEGE
14TH FEBRUARY, 2013

MACROECONOMIC
ADJUSTMENT
MEANING
Fiscal Policy

CONTEXT
Policy regime

NEED
Intervention

PARADIGM SHIFT
Transition

Transition from Import

Substituting Industrialization (ISI)
to Trade Led Growth (TLG)
Features of ISI Policy

Strategy of economic development by late

industrializers
Infant industry argument : Planned
industrialization using internal economies of
scale (Mahalanobis)
Industrial Protection
Heavy industrialization in closed economy
High tariff and quantitative restrictions
Over-valued exchange rates (dual rates)
Subsidies
Licensing

Consequences of ISI
Low productivity and inefficiency on account of
Problems of optimal protection and subsidy: no incentive
for cost-cutting
Location (identification) of infant industry
Rent seeking behaviour
Problems of PSU, Manufacturing industry
GVA per worker very low relative to US
Erosion of Indias competitiveness in international market

From command politics to demand politics

Politics of subsidy
Revenue decline
Government expenditure on non-economic/nondevelopmental activity rose
Direct effect on clout of organized labour and industry
Unsustainable fiscal situation: Gross fiscal deficit

 Fiscal crisis
Mal-functioning of ISI driven policy
Infant industry did not mature
Income distribution remained highly skewed
Increased demand for redistribution with low
productivity

Government initiatives
Setting up of committees
Reports suggesting that India needed imports
and reduced government intervention
Growing imports need to be premised on
increasing capacity to export.
Rajiv Gandhi-Ahluwalia recipe

 Balance of Payments crisis

Trade deficit equivalent to the saving-investment
gap
Downgrading of Indias credit rating due to

Rise in debt-service ratio

High dependence on commercial borrowing
Increase in debt-export ratio
Gulf War and oil shocks
Budget deficit and public debt
Recession in OECD countries

Frantic moves to gain foreign exchange

Failure to secure forex even by mortgaging gold
NRIs withdrawing their investments
On the cusp of liquidity crisis

Steps
In the backdrop of Washington Consensus

Dani Rodrick (One

Economics, Many Recipes)

Agreement between IMF, Government and industry

IMF lender of the last resort
FICCI, ASSOCHAM and CII supporting trade and
investment liberalization
New Industrial Policy, July 1991-NRF
Gradual reduction in trade protection
Increased incentives for export promotion
Current account convertibility
Abolition of industrial licensing
FDI, FII, Liberalization of FERA
Private players in infrastructure sector
Tax holidays etc

Conclusion
Irreversibility of the new regime
Global governance through multi-lateral
agencies
Institutions embedded in the new policy
structure

Neo-liberal recipe