1 Economic Reforms

8/11/2019 1 Economic Reforms

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Business & Environment


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Business Exchange of goods and services for mutualbenefitsInstitution organized and operated to providegoods and services for the purpose of private

gainsIs a human activity of converting resources intogoods and services for the purpose of wealthcreation.Human activity carried out by the unified effortsof different categories of people. To producewealth through production and distribution of

goods and services.


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Characteristics of BusinessOld

Unified Human activity

Continuous (going concern)Focuses production andexchange of goods andservices for value

Aiming wealth and demandcreation

Economic, legal, social andcultured activityEncourages saving and capitalformationProvides

Form utilityTime utilityPlace utility

Can have different ownershipsPrivatePublicGovernment

Involves risk and returns

Its an art, science and system

NewTrustee of social and national

resourcesInstrument for social changeMaximization of opportunitiesCreation of employmentInnovative and dynamicInterdisciplinary and pluralistic

approachFocus on customersatisfaction


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Business Environment

Consists of all those factors that have abearing on the business.The Business survival, success, andsustenance depends on its ability tounderstand, align, adapt and predict theenvironmentEnvironment can be broadly segregatedinto External and Internal factors


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EnvironmentInternal

Owners/Top managementEmployeesResources, R&D capabilitiesCorporate Culture & Values

Mission, vision, Goals, Strategy, PoliciesIndustrial Relations & Team spiritCompensation systems and career progression

Task (operating Environment)Customers/consumersCompetitorsLaws, rules and regulationsSuppliers and vendors

External


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External Environment

PhysicalEconomicTechnologicalDemographic

GlobalLegalSocialCultural

PoliticalEthicalHistoricalNatural


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Business and Environment

InterdependenceDynamismMedium of change

UncertaintiesControllable and uncontrollable factorsResponsibilities towards environment

Focus on changing scenario andadaptability


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Why?

Understanding and being prepared as perinternal and external environmentKnowledge of problems, threats,challenges and opportunities

AdaptabilityTo understand the policies of governmentand act accordinglyIncreasing profitabilityFor long and short term planning andstrategy formulation


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Economic Reforms

in India


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History

Around 50 to 100 years before ourindependence in 1947, there was hardly anydiscernible economic growth in the whole Indian

sub-continent. Per capita income was stagnant,perhaps declining over that whole long period.

After independence, annual per capita growthbroke out of this long period of slumber and wasin the range of 1 to 1.5 per cent for about 30years or so until around 1980.


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History

After 1980 it increased to about 3-4 per cent,which was a major departure in our recordedhistory.There was a full blown economic crisis at theend of the 1980sThe balance of payments came under severepressure, and a realistic threat of sovereign

default loomed over us.Fiscal deficits had increased significantly overthe 1980s; and inflation began to creep up to thelate teens.


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History

Financial system is viewed as a tool in the hands ofgovt. for developmental process.Characterized by

Socialist pattern of economy Administered interest rates, industrial licensing and controlDominant public sector, limited competitionUneconomic and inefficient production systems at highcostFunds used for govt. expenditure and credit to prioritysector and that too at subsidized rates


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History

Domestic savings achieved by levying heavy taxes,suppressing consumptionDespite rise in savings, greater dependence on aid

and assistance on abroad resulting in mounting fiscaldeficitResource mobilization subjected to various controlswhich prevented the process of price discovery.


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A rate of growth of average 3.2 per centHigh population growth denies a significantdent on poverty

A huge public sector with minimum returns A protective private sector

A Critical Assessment


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Philosophy of Reforms

To free the economy from the suspicion ofsocialist equity in the form of pervasive statecontrol on production, low productivity, a

distorted and dis-functional price system and acomplacent over-protective private sector.

To establish the supremacy of individual and therole of economic freedom


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Perspective: year 1990- 91

International reserve came down to $ 1.3 billion, lessthan 1 month import bill, and India was on the verge ofdefault in foreign obligations [ short term debt]Stagnant exportsIndias ratings down High deficits in domestic budgetPublic sector banks having large NPA

PSU incurring huge losses


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Mechanism

Dismantling of the license and permit raj so thatthe rent-seeking system is abolishedMinimize the role of the state in production

except in some core and strategic areasReform of the legal system to end monopoly ofany group/ sector

Financial sector reforms


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Reform of the system to allow freemarket mechanism by

Dismantling the administered price mechanismInducing firms to set own targets of productionRemoving all artificial barriers to unleash forcesof competitionReforms of the tax systemRemoval of trade barriers


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What Has Been Done

Macroeconomic Reforms and FiscalStabilizationsMicroeconomic Reforms


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What Has Been Done

Macroeconomic Reforms and FiscalStabilizations

Fiscal Policy (Taxation)Monetary PolicyTrade PolicyExchange Rate Management


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What Has Been Done

Fiscal PolicyOver the whole reform period, both thepersonal income tax and corporate tax rates

have gradually been brought down to 30 percent, along with considerable simplification .The rates in case of customs duties havebeen brought down from an average of 110per cent in 1991 (with highs over 400 percent)to a non agricultural peak of 12.5 per cent in2006.


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What Has Been Done

Fiscal PolicyThere has been massive simplification of theexcise tax structure to achieve a central rate

(CENVAT) of 14 per cent (apart from a fewexceptions like food products, textiles andsome optical fibers that attract lower taxrates).Excise, which is levied at the manufacturingstage, is now essentially levied as a VAT(Value Added Tax) so that cascading isavoided.


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What Has Been Done

Fiscal PolicyThe service tax has been introduced in orderto tax the whole economy more fairly and to

reduce the excessive burden on one sector,the manufacturing sector.Introduction of the Fiscal Responsibility andBudget Management Act (FRBM) in 2004,

which enjoins the government to eliminateits revenue deficit and reduce its fiscal deficitto 3 per cent of GDP by 2009.


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What Has Been Done

Fiscal PolicySimilar acts have been passed by most stategovernments (23 states so far). So fiscal

responsibility has now become part of ourlegislative commitments.Overall, the fiscal reform process spanningboth the central and state governments overthe last 15 years has been truly wide ranging.


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What Has Been Done

Monetary PolicyElimination of automatic monetization*Reduction of statutory pre-emption of the

lendable resource of banks and interest ratederegulation.There was a consequent movement fromdirect to indirect instruments of monetary

policy.

* http://www.business-standard.com/article/economy-policy/backdoor-monetization-110042600081_1.html


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What Has Been Done

Trade ReformsThe trade regime has undergone massivechange with the removal of quantitative

restrictions along with rationalization of thetariff structure.There has been a massive reduction in thenumber of tariff rates and the peak rate of tariffhas been reduced from around 400 per cent to12.5 per cent for nonagricultural products.


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What Has Been Done

Exchange Rate Management Among the first reform moves was an ex antereal devaluation of the exchange rate in 1991

and a move of the exchange rate regime fromthat of a crawling peg towards a marketdetermined one, though somewhat managed.With the change in the exchange rate regimeand accomplishment of trade reforms thecurrent account is now open along with limitedcapital account convertibility.


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What Has Been Done

Exchange Rate ManagementThe exchange rate regime focuses onmanagement of volatility without a fixed rate

target and the underlying demand and supplyconditions determine the exchange ratemovements in an orderly way.


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What Has Been Done

Micro Economic ReformsIndustrial deregulationInfrastructure reformsFinancial sector strengthening

Agriculture Reforms


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What Has Been Done

Industrial deregulationMassive deregulation of the industrial sector,in fact, constituted the first major package of

reforms in July 1991.The obsolete system of capacity licensing ofindustries was discontinuedThe existing legislative restrictions on theexpansion of large companies were removed


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What Has Been Done

Industrial deregulationPhased manufacturing programmes wereterminated;

The reservation of many basic industries forinvestment only by the public sector wasremoved.Restrictions that existed on the import of

foreign technology were withdrawn. A new regime welcoming foreign directinvestment was introduced.


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What Has Been Done

Industrial deregulationOne area of industrial reform that has beensluggish has been the removal of restrictionsthat exist on investment in most labor usingindustries known as small scale industryreservations.In 1991 as many as 836 industries werereserved for investment by only small firms,defined by the level of investment. Thenumber of these industries has come down to326 by 2006.


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What Has Been Done

InfrastructureThe major reforms in roadways were

imposition of a fuel cess

To finance highway constructionThe commissioning of the National HighwayDevelopment ProjectPMGSY (Prime Minister's Gram Sadak Yojana or

the Rural Roads Programme).


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What Has Been Done

InfrastructureIn case of ports private operators have beenintroduced and then the Tariff Authority of

Major Ports (TAMP) formedIn civil aviation new private airlines, newprivate airports and the beginning of an openskies policy are in evidence.With deregulation, introduction of the privatesector and formation of the TelecomRegulatory Authority of India (TRAI).


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What Has Been Done

InfrastructureUrban infrastructure is another area where reformhas been inadequate and thinking has just begun.

In transportation, considerable reforms have takenplace in air and road transportation. Although there has been noted improvement infinancial performance of railways in the last couple

of years, there is need for much greater structuralreforms for this vital transportation system to be putin a sound sustained growth path.


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What Has Been Done

Financial Sector ReformsIntroduction of operational autonomy and partialdisinvestment of public ownership in public sectorbanksEntry of new private and foreign banks and permissionfor FDI and portfolio investment in banking.The introduction of partial private sector ownership inpublic sector banks and their consequent listing hasbeen extremely important for market orientation ofthese banks and transparency in their accounts andoperations.


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What Has Been Done

Financial Sector Reforms Among other segments of the financial sector, newprivate insurance companies have been introducedwith limited foreign ownership.

A new regulator, the Insurance Regulation andDevelopment Authority (IRDA) has been formed togovern the insurance industry.The Securities and Exchange Board of India wasformed as the capital market regulator; a new moderntechnology oriented stock exchange was formed (theNational Stock Exchange, NSE)Private sector mutual funds allowed and encouraged


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India From Socialist to MarketEconomy

Prior to 1947 there was no public sector barring afew instances include railways, postal &telegraph, ordinance and aircraft factories etc

Characterised byweak industrial base, heavy unemployment, low income, saving and investments,

poor infrastructural facilities,weak financial support,funds and managerial capability starved private sector

Expansion of PSU was an integral part ofIndustrial Polic 1956


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India From Socialist to MarketEconomy

Assumption was that the big planned govt.intervention and control could

Accelerate industrial and agricultural production

Reduce unemployment and poverty Ensure sustainable and equitable economic growth ofdifferent sectors of economy and societyFocus and support


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Let us see some developments

in economic scene


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India: Growth rates in 1990s

ECONOMIC GROWTH

OF INDIA

0

1

2

3

4

5

6

7

8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

P E R C E N T R E A L G D P


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India: External Sector


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India: International Liquidity

Documents

1 Economic Reforms