ECONOMIC REFORMS IN INDIA:

Dr. RAJ AGRAWAL

2

Period 1947- 1990

The historical discontinuity after independence

The Plan strategy

A nation building exercise

The experiment with socialism

3

The Planning era

A Critical Assessment::

A rate of growth of average 3.2 per cent High population growth denies a significant

dent on poverty A huge public sector with minimum returns A protective private sector

4

Philosophy of Reforms

To free the economy from the circumspection of socialist equity in the form of pervasive state control on production, low productivity, a distorted and dis-functional price system and a complacent over-protective private sector.

To establish the supremacy of individual and the role of economic freedom

5

Perspective: year 1990-91

International reserve came down to $ 1.3 billion, less than 1 month import bill, and India was on the verge of default in foreign obligations [ short term debt]

Stagnant exports India’s ratings down High deficits in domestic budget Public sector banks having large NPA PSU incurring huge losses

6

International Scene USSR’s disintegration… the currency rouble

weakened

Overall confusion on the efficacy of command economy

Some east European countries came out of socialist economic structure

Loss of credibility of the ‘command economy’ as disturbing revelation came out on lower productivity and disinformation about planning

7

New Role of IMF The Washington consensus about the

‘transition economies’ Dismantle command economy structure Reduce the size of government Privatization of state undertakings Reduce and remove budget deficit Make currency stable and current account

convertible

8

IMF and new WTO Regime

New WTO regulations make domestic liberalization and globalization an integrated one exercise

9

Mechanism Dismantling of the license and permit raj so that

the rent-seeking system is abolished Minimize the role of the state in production

except in some core and strategic areas Reform of the legal system to end monopoly of

any group/ sector Financial sector reforms

10

continued

Reform of the system to allow free market mechanism by

Dismantling the administered price mechanism Inducing firms to set own targets of production Removing all artificial barriers to unleash

forces of competition Reforms of the tax system Removal of trade barriers

11

Financial sector reforms

Fiscal reforms--- change in the budgetary process makes the government accountable--- discipline in revenue-expenditure process

Low inflation- low interest regime

Changes in the banking sector – making the system of bank credit more transparent_ efficient appraisal system and accountability for decision taking

12

Notes on Banking Crisis

Delegated screening and monitoring of borrowers on behalf of depositors (mitigate information asymmetries).

Transformation of short-term, liquid deposits held by households into illiquid liabilities issued by firms.

13

Results of F.S. reforms Role of capital is appreciated and effort are on to make

capital cheaper at par world standard [ GOI yet to fulfill the just demand of the corporate sector]

More transparent estimate of the need for investment in the infrastructure sector--- how to mobilize the resources

One estimate puts the requirement as $50 billion equivalent---- role of foreign direct investment as perceived by the government. Whether FDI is good for the country is no longer the issue

14

Current position of Reforms The reforms process has been slowed down__

Reasons Inability to carry out reforms in some crucial

sectors like legal infrastructure and education

Resistance by interested groups Lack of political will Role of powerful bureaucracy as they feel

threatened with diminutive public sector A section of corporate sector beneficiary

of old system

15

Reforms__ slowed down?

India’s endemic problems Low literacy _ message of reforms not

reaching Archaic social structure__ at lower level of

society and furthest from the centre of administration exploitation continues

Social and economic discrimination are intertwined in the society

Lack of genuine administrative reforms at the grass-root levels [panchayat system ]--

16

Reforms slowed down?_ cont’d Even when panchayats exist, they are totally

dependent on state government for finance, that erodes their power

Emergence of regional groups based on caste Lack of accountability [ corruption index being at

level 83 among 133 countries surveyed recently]

A permissive society????

17

Slow reforms Some economic issues— Wide gap between rural and urban areas

regarding the availability of public goods like potable water, health services, primary education___ worse situation is that sometime availability is dictated on caste lines

[ a MIT study on rural situation in AP , conducted by Dr. A. Banerjee of MIT, USA ]

No cushion from the lower side regarding social security

Transparency in public policy lacking_ that creates credibility gap__ a breeding ground of violence

18

India

Let us see some developments in economic scene

Let us see some developments in economic scene

19

India__ Growth rates in 1990s

ECONOMIC GROWTHOF INDIA

0

1

2

3

4

5

6

7

81

99

0

19

92

19

94

19

96

19

98

20

00

20

02

PE

RC

EN

T R

EA

L G

DP

20

India__ external sector

INDIA'S MERCHANDISE TRADE

10

20

30

40

50

60

1990 1992 1994 1996 1998 2000

IMPORTS

EXPORTS

21

India__ international liquidity

INTERNATIONAL RESERVES AND FOREIGN DEBT OF INDIA

5

10

15

20

25

30

35

40

45

1993-Q3 1994-Q3 1995-Q3 1996-Q3 1997-Q3 1998-Q3 1999-Q3 2000-Q3 2001-Q3

INTERNATIONALRESERVES

DEBT SECURITIES ISSUED ABROAD

SHORT-TERMCOMPONENT

Source: Joint BIS-IMF-OECD-World Bank Statistics

22

GNP of 12 countries[ as on 2001 ]

Pop GNP Rank GNP/C Rank

million b $ Dollars

USA 284 9901 1 34870 7 Japan 127 4574 2 35590 4 Germany 82 1948 3 23700 20 U.K. 60 1451 4 24230 16 France 59 1377 5 22690 24 China 1272 1130 6 890 138 Italy 58 1123 7 19470 30 Canada 31 662 8 21340 26 Spain 40 587 9 14860 39 Mexico 99 550 10 5540 68 Brazil 173 529 11 3060 89 India 1033 474 12 460 161

23

Real GDP growth rates of selected countries during 1990--- 2000 [ per cent]

China 10.3 Ireland 7.3 India 6.0 USA 3.5

Japan 1.3 Russia -4.8 Ukraine -9.3

24

Need of the hour

Reforms of the infrastructure sector Education_ universities Legal system Sense of accountability A proper perspective of market mechanism Redefine the role of Government

25

Need……. Spread of innovation Incentive system An effective supervision system as reform process

brings fragility also in the financial system.

WHY ECONOMIC FREEDOM IS NECESSARY AND FOR THAT A CONGENIAL ATMOSPHERE IS TO BE CREATED __ THAT SHOULD BE THE GOAL OF ECONOMIC REFORM

26

Issue__ Economic Freedom

27

Economic freedom__ parameters

Trade Policy Taxation Government Ownership Monetary Policy Restrictions on Foreign Investment Restrictions on Banking Wage and Price Controls Property Rights Regulations Black Market

28

Freedom and income per capita

29

Freedom and income

-1.5-1

-0.50

0.51

1.52

2.53

Average Annual

Real per Capita GDP

Growth, 1980-1993

Repressed MostlyFree

30

Freedom__ bop of some countries[ 2001]

-20

-10

0

10

20

30

40

50

Bil

lio

ns

of

U.S

. $

Aus

tral

ia

Hon

g K

ong

(97)

Indi

a

Japa

n

Kor

ea

Mal

aysi

a (9

7)

New

Zea

land

Phi

lippi

nes

(97)

Sin

gapo

re

Thai

land

Indo

nesi

a

Vie

tnam

(97

)

Chi

na

31

Currency __ INR [ a depreciating real exchange rate over time]

Rupee/$

05

1015202530354045

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

Spot

PPP

Real Exchange Rate

32

India’s exports to USA [ Issue is Capital flight]

Direction of Trade between India and US - I

0

2000

4000

6000

8000

10000

12000

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Val

ue

of

Trad

e (m

n $

s)

India Exportsto US

US Importsfrom India

33

India’s imports

Direction of Trade between India & US - II

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Val

ue o

f Tra

de (

mn

$s)

IndiaImportsfrom US

US Exportsfrom India

34

Restrictions in bop

Import prohibitions applied since 1960 to a wide range of consumer goods

The European Commission has received complaints from business

The European Commission raised the issue in the framework of the World Trade Organization (WTO)

Negotiations led to a progressive elimination of restrictions between 2000 (for priority products) and 2003

Expected additional turnover for EU industry: 2 Billion €

35

Restrictions

Country Course of action

India WTO dispute settlement system - negotiated settlement

Korea WTO dispute settlement system - panel proceeding

Brazil TBR procedure

Taiwan Accession to the WTO

UkraineConsultations and the initiation of a dispute settlement procedure under the PCA

Mexico Free trade agreement negotiation

36

Global scene

Next few slides we will see the experience of economic transition in former command economies and its impact on several parameters___ a cross-section sample

37

Comparison

We can make comparison with the transition process that started in China ( 1985) and Russia ( 1989-90)

Russia__ lack of experience of running enterprise…. Corruption in privatization of state enterprises….. Financial mess….. Emergence of mafia

China___ lack of knowledge compensated by allowing foreign capital free run in limited areas ( eastern provinces) __ slow transition___ mess in financial system…. Large scale corruption

38

Growth & agriculture

-20

-15

-10

-5

0

5

10

0 10 20 30 40

Share of agriculture in labor force 1990 (in per cent)

Gro

wth

of

GN

P p

er

ca

pit

a 1

99

0-9

7 (

in p

er

ce

nt

pe

r ye

ar)

Slovenia Poland

Azerbaijan

Georgia Turkmenistan

Ukraine

Uzbekistan

RomaniaHungarySlovakRep.

Czech Rep.Bulgaria

Estonia

Belarus

KazakhstanLithuania

LatviaRussia

Moldova

Kyrgiz Rep.

39

Openness & share of agriculture

-30

-20

-10

0

10

20

30

40

0 10 20 30 40 50 60

Share of agriculture in labor force 1990 (in per cent)

Act

ua

l e

xp

ort

s le

ss c

ou

ntr

y-si

ze-a

dju

ste

d

ex

po

rts

1990

-97

(in

pe

r ce

nt

of

GD

P)

Estonia

Czech Rep.Belarus

MoldovaUzbekistan

SloveniaSlovak Rep.

Hungary

Albania

Kyrgyz Rep.Georgia

KazakhstanUkraine

Bulgaria Russia

Lithuania

RomaniaAzerbaijanPoland

Latvia

40

Cross –section example: growth & openness_ 1990 _97

-20

-15

-10

-5

0

5

10

-10 0 10 20 30 40

Actual exports less country-size-adjusted exports 1990-1997 (in per cent of GDP)

Gro

wth

of

GN

P p

er

cap

ita

199

0-97

(in

pe

r ce

nt

pe

r ye

ar)

Poland Slovenia

Romania Czech Rep.

Slovak Rep.

Bulgaria

Azerbaijan

GeorgiaUkraina

Moldova

Kyrgyz Rep.

BelarusUzbekistan

RussiaLatvia

Lithuania

Estonia

Kazakhstan

Hungary

41

Just for knowledge__ corruption and economic growth

-20

-15

-10

-5

0

5

10

0 1 2 3 4 5 6 7

Corruption perceptions index 1999

Gro

wth

of

GN

P p

er

ca

pit

a 1

99

0-9

7 (

in p

er

ce

nt

pe

r ye

ar)

Albania

Azerbaijan

Belarus

Bulgaria

Czech Rep.

Estonia

Georgia

Hungary

Kazakhstan

Kyrgyz Rep.

LatviaLithuania

Moldova

Poland

Romania

Russia

Slovak Rep.

Slovenia

Ukraine

Uzbekistan

42

conclusion We are in the middle of the process of

reforms….

Only expectations about the better future

43

End of discussion Reference: 1. Prem Sankar Jha, The Perilous Road to Reforms,

Rupa & Co., Calcutta, 2002. 2. World Bank__ World Economic Outlook_ 2002 3. Economic Reforms_ a position paper