Indian economic reforms

Introduction
• It was during Narasimha Rao’s government in 1991, that India met
with the economic crisis which occurred due to its external debt.
• Due to debt, the government was not able to make the payments for
the borrowings it had made from the foreign countries.
• The government had to adopt new measures to reform the
conditions of the Indian economy.
• There were many programs and initiatives introduced primarily
consisted of liberalization, privatization, and globalization.
The Crisis of 1991 and the Reforms

• The crisis of 1991 happened largely due to inefficient management of

the economy of India in the 1980s.
• The revenues that government was generating were not enough to
meet the ever increasing expenses.
• Thus, the government had to borrow to pay for the debts and thus
was caught in a term called debt-trap.
• Debt-trap is the deficit that occurs due to an increase in government
expenses in comparison to the government’s revenue.
• Due to the failure of earlier economic policies till 1990 there was a need for
need for new economic policies.
• The situation was worsening as India had foreign reserves which could last
only for the next two weeks.
• There was a shortage of new loans and Indian people living abroad (NRIs)
were withdrawing money in large amounts.

• There was a little confidence for international investors towards the Indian
economy.
• These points will highlight the need for a new economic policy in India.
Crisis in Gulf countries, increase in fiscal deficit, prices rising, the worse
balance of payments, public sector units (PSUs) performing badly, and
many more.
The Emergence of New Reforms

• India approached the world and international monetary fund for loan
and received $7 million to manage their crisis.
• As a result to this, international firms and agencies expected that
India will open up the door in the country by removing various
restrictions majorly on private sector and thereby removing the trade
restrictions between India and the other foreign countries.
• India agreed to the terms and conditions and as a result, new reforms
were introduced. These economic reforms in India are structurally
classified as liberalization, globalization, and privatization.
Liberalization
• Liberalization was brought up with the fact that any restrictions which
became a hindrance to development and growth will be put to an
end.
• Largely, this reforms made government regulations and policies lose.
It allowed for opening up of economic borders for foreign investment
as well as multinationals.
• There were many economic reforms introduced under liberalization.
These included expansion of production capacity, abolishing industrial
licensing by the government, de-reserving producing areas, and
freedom to import goods.
Features of Liberalisation :
• Freedom of opening/starting production units.
• Use of new machines and technology.
• No government interference in production.
• Free flow of foreign investment.
Objective of liberization
• The main objectives of the liberalisation policy are as follows:
• To increase international competitiveness of industrial production,
foreign investment and technology.
• To increase the competitive position of Indian goods in the
international markets.
• To improve financial discipline and facilitate modernisation.
• To decrease the debt burden of the country.
Privatization

• Privatization largely refers to giving more opportunities to the private

sector, such that the role of the public sector is reduced.
• The main objectives of privatization are reducing the workload of the
public sector, providing better goods and services to the end users,
improving the government’s financial condition, and many more.
• Privatization is a way to allow the entry of foreign direct investments
and bringing healthy competition into the economy.
Features of Privatization
• 1. New Concept
• Privatization is a new concept which has emerged in the last two decades.
• 2. Universal Concept
• The concept of privatization has emerged not only in India but it has developed all over the world. The countries like USA, UK,
Japan, India etc. Has adopted this ideology.
• 3. Wide Concept
• It is a wise idea. It involves not only the transfer of public sector to private hands but it limits government involvement in the
economic activities and protects the s private sector.
• Thus, it involves a large number of activities such as reduce government shares then economic sector the d expansion of the
private sector.
• 4. Economic Democracy
• It is a mean of establishing economic democracy. It provides the chance to the private sector to operate in economic activities
freely.
• 5. Process
• Privatization is a process which goes on continuously. It cannot be completed in a certain period. It is a process which takes its
shape slowly.
• 6. Private Sector in Place of Public Sector
• The private sector is being developed in place of the public sector in the process of privatization.
• 7. Reduction in State Dominance
• It is a process in which state dominance is reduced in the economic sphere.
• 8. Assumption
• The privatization is based on the assumption that the private sector is more efficient in the
management and control of an enterprise than the public sector
• 9. New Strategy
• It is a new strategy to face the challenges emerged in the economic sphere recently.
• In the process of privatization, the private sector takes the task of economic development of the
country.
• 10. Wide Area
• Privatization is a wide concept. It involves various activities such as denationalization, decontrol,
deregulation, economic liberalization.
Scope of Privatization

• 1. Ownership Measures
• The set of measures which transfer ownership of public Enterprises, fully or partially, lead to
privatization. The higher the proportion of transfer of ownership to the individual Cooperative or
corporate sector, The greater is the degree of privatization.
(1) Total Denationalisation
• It implies a complete transfer of ownership of a public Enterprise in the private hands.
(2) Joint Venture
• It implies the partial introduction of private ownership. The range of private ownership depends
upon the nature of the enterprise and government policy in this regard.
(3) Liquidation
• It implies the sale of assets to someone who may use them for the same purpose or some other
purpose depending upon the preference of the buyer.
(4) Management Buyout
• It is a special version of denationalization. It implies the sale of assets to the Employees.
• 2. Organizational Measure

(1) Holding Company

• A holding company structure may be changed in such a way that the government limits its control intervention to Apex level
decisions and leaves the operating companies within the arrangement to a sufficient degree of autonomy in decision-making
within the framework of market forces.

(2) Leasing
• A public enterprise while retaining Ownership may lease out to a private bidder for a specific period for use.
• The government ensures the right of obtaining profits as per our agreement, on the other hand, tenure ownership is expected to
lead to improve efficiency or lower the cost of operation.
(3) Restructuring
• To being public sector enterprises under market discipline, it would be desirable to go in for two forms of restructuring:
• (1) Financial restructuring can be affected in the sense that accumulated losses are written off and capital composition is
rationalized in respect of debt-equity ratio.
• (2) Basic restructuring may be affected by redefining the set of commercial activities which the enterprise will undertake
henceforth.
• 3. Operational Measures
• These measures are intended to improve the efficiency of the
organization, even when full denationalization has not been
undertaken. They, in fact, inject the spirit of commercialization in
public Enterprises.
• The measures include grant of autonomy to public enterprises in
decision-making, for the provision of incentives to blue-collar as well
as White-Collar employees consistent with increasing efficiency or
productivity, freedom to acquire certain inputs from the market by a
system of “Constructing” instead of producing them within the
enterprise, development of proper investment criteria etc
Objectives of privatization

• To improve the operational efficiency of Public Enterprises.

• To develop competitive efficiency in the industries.
• To generate resources for a deficit budget.
• For the globalization of domestic Industries.
• To invite foreign capital.
• To earn foreign currency through export promotion.
• To exploit the natural resources of the country with efficiency
• To emerge wide public ownership on the economic resources of the company country.
• To create an environment for Rapid industrialization.
• Accord priority to the Welfare activities by the government.
• To operate public enterprise on commercial basis.
• To free the government from The Loss-making Enterprises.
• To protect the industrial peace
Globalization

• Globalization in simpler terms is to connect with the world. In this

context, globalization means the integration of the economy of India
with that of the world. Thus, it encourages private and foreign
investment and also foreign trade. Globalization attempts to establish
the links in such a way that the Indian happenings can be met by the
world or vice versa.
Features of globalization
• 1. World Markets
• One of the key features of present-day globalization is access to the world markets. Did you dream about reaching clients from all around the world
twenty years ago? This has been made possible by globalization. Global consumers demand world-class variation and quality of products. It can
provide a high-rocket speed development rate for local markets!
• 2. Global products standardization
• If you want to reach the markets all over the world, you will need to be able to satisfy the standards of the global market. The customers will be your
judges. If the quality of your goods and services are low, you will be kicked out of the market.
• 3. Sharing of ideas
• Globalization provides an interesting concept of sharing ideas; this is one of its basic features. This is also how different variations of rock, pop, and
rap cultures appear in the world. The fact that this ideas are worth sharing makes globalization a good accelerator for spreading them.
• 4. Raising standards
• does not only increase the standards and quality of products, but the quality of life itself. More and more people have increased their living standards
due to global trends. The citizens of one country can see how other people live in the world and adapt the good ideas, that way they can also demand
an increase in the standard of living in their countries. Moreover, it can provide a chain reaction where people will be motivated to take their fates
into their hands and change everything around them!
• 5. Freedom standards
• One of the major fears of any anti-globalist is the fear of a united country or government under the rule of few, however, globalization also results in
the spreading of freedom standards. This includes the freedom of speech and human rights. Nonetheless, it is still quite difficult to spread these
standards all over the world because some countries oppose them; but as well all know, freedom cannot be stopped.
Objective of globalization
• Macro-economic and employment generation policy
• Improving the productivity of employment.
• Balanced regional development
• Social sector
• Employment guarantee program
• Raising productivity in informal sector
• Promotion of skill development
• Organizations of working peers
Major Highlights on the Economic Reforms in India

• During the reform period, the growth in service was increasing, while
the agriculture sector saw a decline, and the industrial sector was
fluctuating.
• The opening up of the Indian economy led to a sharp increase in the
FDIs and foreign exchange reserve.
• This foreign investment includes foreign institutional investment and
direct investment.
• India is one of the successful exporters of engineering goods, auto
parts, IT software, textiles during the time of the reforms.
• The price rise during the reforms was also kept under control
Failures of the Economic Reforms in India

• The agriculture sector was neglected and the public investment in this sector was reduced and
hence the infrastructure areas were affected.
• The subsidies on the fertilizers were removed and hence it led to an increase in the cost of
production which affected many marginal and small farmers.
• Further, many policies were introduced which reduce the import duties on agriculture products,
reduce the minimum support price increased the threat of international organizations competing
with th3 the local farmers.
• The industrial sector saw uneven growth.
• The imports were made cheaper as a result of which the demand for the industrial goods
reduced.
• The globalization which allowed for free trade between the countries affected adversely on the
local industries and thus affected employment opportunities.
• The reforms led to an increase in economic colonialism.
• It also led to the erosion of culture.
• The investments in many infrastructural facilities like power supply were inadequate.
Recent economic reforms
• 1. Agricultural reforms

• With more than half the population of India dependent on a sector that contributes less than 18% to GDP, agriculture has been a policy puzzle that has remained unresolved since Independence. Essentially, the problem of agriculture is really a problem of serial market failures.
The first market failure is the State’s inability to deliver livelihood to small and marginal farmers. The second market failure is the encouragement of inefficient asset protection: convincing a farmer to sell his land for industry and shift there in person with family, is difficult due to
pricing on the asset side and lack of skills on the income side — the farm remains a poor farmer’s sole dependable possession. Finally, the third market failure is the sector being plagued by the politics of entitlement of the rich, wealth and powerful farmers, who, with the help of
middlemen, are able to manipulate prices of output on the one side and, in case of land sales, are able to get change of land use to their benefit on the other. The complexity of resolution, therefore, magnifies. Other issue such as farming techniques or productivity are easier to
address.

• By focusing on doubling farmers’ incomes by 2022, the Modi government is on the right track — it has set its eyes on delivering livelihood security to the farmer in the 21st century rather remain trapped in the 20th century idea of providing food security to the nation. The Model
Agricultural Land Leasing Act, 2016, is one such step in this direction that could create the base on which to increase crop productivity. In Season 1, Modi delivered the ideas; in Season 2, he should translate them into cash. India’s political economy being what it is, the
elephantine question remains unanswered: given that apart from the cultivation of opium, agriculture falls completely under the State List as per the Seventh Schedule of the Constitution, why should the Central government concern itself with this sector at all? The Centre
exiting agriculture would be the best reform — let the states do their duty.

• 2. Infrastructure reforms

• India’s infrastructure story is like a badly-written novel, with several authors across multiple ideologies scripting a patchy, chaotic path with no climax in sight. Of what we know, there are two things we are clear about. First, the government does not have the resources to build a
21st century infrastructure for India. And second, private sector money is willing to make good the shortfall. What is needed is to rethink infrastructure policymaking that takes these two sectors into account. This means, designing policies that leave room for a changing dynamic
of financing patterns or technological disruptions, for instance, and allowing contractual renegotiations where necessary.

• Communicating with stakeholders across the spectrum through policy disclosures and transparency (putting every rule and regulation up for public debate before enforcing it, for instance) would go a long way in building a stable consensus. Further, capacity building needs
expertise, and expertise requires knowledgeable people. Finally, the regulatory environment must become an enabler rather than a hurdle. Modi must end the deterioration of regulatory bodies into sinecures for retired bureaucrats. Merit and expertise must be the dominating
consideration, a cadre should be its currency of execution, youth the face of delivery. On the policy side, every rule must have a reason for existence, a logic that supports that reason, and which rests on the foundations of a cost-benefit analysis (benefits must outweigh costs).
Oversight of infrastructure through a regulator is really an outsourcing of the government’s lawmaking powers to deliver outcomes. Therefore, while being independent on the functional side, regulators must remain accountable on the governance of infrastructure creation side.

• 3. Land reforms

• The foundations of all infrastructure creation and manufacturing is land. It is an economic factor of production that has become a highly politicised and emotive subject. Poorly-conceived and shabbily-executed snatching of properties of the poor has killed the credibility of land
acquisition. Between 1947 and 2004, about 25 million hectares of land (more than the area of United Kingdom) has been acquired for various purposes — building dams or special economic zones. This has displaced 60 million people (about the population of Italy), a third of
whom are yet to see any resettlement. As a result, the inherent suspicion of and aversion to giving up land for ‘national causes’ is backed by a cultural and inter-generational memory of exploitation. Better to hold on to land at any cost rather than to trust the state, goes the
underlying thought.

• Land reforms, therefore, need to keep a 21st century India in mind. They need to be driven by the need to build infrastructure and smart manufacturing that create jobs and bring prosperity to the people. In terms of public policy, first India needs to define what ‘public purpose’
is — the 31 December 2014 Ordinance attempted to narrow the definition and limit it to strategic and national security, but it has lapsed. Next, India’s land needs clean titling, for which another model law can be drafted that can be executed by States, as in the case of GST.
Finally, the private sector can take over huge tracts of wastelands and convert them into connected islands of manufacturing. All along, creating infrastructure must go hand in hand with building factories, residences and towers. In Season 2, Modi can create an enabling legal
infrastructure, but the execution will have to be done by the States. He must nudge the NDA-governed states to take lead.

• 4. Labour reforms

• A Left-dominated economic discourse has created a maze of laws that capital must negotiate in order to build factories. Nobody is arguing for the absolute supremacy of capital as a factor of production over labour. But it is ridiculous for a $3 trillion economy going on $10 trillion
to have 37 Central laws and six amendments — there are six laws that relate to wages alone, separate laws for disparate sectors (beedi and cigar workers, newspaper employees, working journalists, cine workers and cinema theatre workers, to list just four). This shows two
things. First, our lawmakers don’t know how to draft laws based on firm principles. And second, there is an element of political grandstanding and entitlement disbursement to serve slivers of workers, lending an impression that a particular constituency is being helped rather
than the entire labour force. We need a deeper study of these laws and compress them into two parts — one for physical aspects such as safety, the other for financial aspects such as wages and social security.

• Such is the scale and complexity of laws that the Inspector Raj combined with litigation has become par for the course. A simple concept of wages, for instance, has as many as eleven definitions in the corpus of Indian labour legislation. Each piece of labour legislation that needs
to be enforced requires the maintenance of a separate register and submission of annual returns to the authority designated in the Act and its rules. This not only wastes valuable time and costs money but also adversely affects the implementation of labour standards, besides
ironically making the cost of compliance higher than the cost of violation. There are 429 different types of scheduled employments that have created more than 1,200 minimum wages. These laws belong to the colonial period, not for a 21st century India. The problem is not in
redrafting laws, rules and regulations; most ideas are already on the intellectual table. The challenge is to effectively communicate these ideas to the entitled. As Modi said in his 23 May 2019 speech, he will need to reach out to trade unions and persuade them to loosen up. The
window of factory-based jobs is small — robotics and artificial intelligence is disrupting this world.

• 5. GST 2.0

• In Season 2, Modi needs to simplify the goods and services tax (GST) system — it is perhaps the lowest of the low-hanging fruit. The hard part of putting together the backend for India’s most complex single reform — one Constitutional amendment, four Central laws, 29 State
laws and 1 notification for the Union Territories — is behind us. Bringing politics and economics together over three decades, making the GST one of the longest reforms in Independent India, the law brings eight Central taxes and nine State taxes under a single tax. All rates,
compliance and administrative issues are decided by the GST Council — that comprises government representatives of all States sitting with the Central government. Such a wide-ranging reform brings with it its own problems, and in the case of India it was an unduly high
compliance burden on small businesses and the initial sputtering of the all-digital GST Network. These cobwebs have been cleared and India’s indirect tax structure is in tune with that of 140 countries across the world. This was GST 1.0.

• Modi’s second term requires a deeper push. GST 2.0 needs to deliver outcomes in the form of greater tax collections. There are two major changes needed. First, Modi needs to bring real estate, electricity, fuel and alcohol for human consumption under its fold. All these are