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ECONOMIC REFORMS IN INDIA: Impacton Business
Dr. Sukumar Nandi
Indian Institute of Management
Lucknow
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Period 1947- 1990
The historical discontinuity after independence
The Plan strategy
A nation building exercise
The experiment with socialism
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The Planning era
A Critical Assessment::
A rate of growth of average 3.2 per cent
High population growth denies a significant dent onpoverty
A huge public sector with minimum returns
A protective private sector
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Philosophy of Reforms
To free the economy from the circumspection of socialistequity in the form of pervasive state control onproduction, 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 ofeconomic freedom
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Perspective: year 1990-91 International reserve came down to $ 1.3 billion, less
than 1 month import bill, and India was on the verge ofdefault in foreign obligations [ short term debt]
Stagnant exports
Indias ratings down
High deficits in domestic budget
Public sector banks having large NPA
PSU incurring huge losses
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International Scene USSRs disintegration the currency rouble weakened
Overall confusion on the efficacy of command economy
Some east European countries came out of socialisteconomic structure
Loss of credibility of the command economy as
disturbing revelation came out on lower productivityand disinformation about planning
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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
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IMF and new WTO Regime
New WTO regulations make domestic liberalization andglobalization an integrated one exercise
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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
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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 ofcompetition
Reforms of the tax system
Removal of trade barriers
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Financial sector reforms Fiscal reforms--- change in the budgetary process
makes the government accountable--- discipline inrevenue-expenditure process
Low inflation- low interest regime
Changes in the banking sectormaking the system of bank credit
more transparent_ efficient appraisal system and accountability
for decision taking
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Notes on Banking Crisis Delegated screening and monitoring of borrowers on
behalf of depositors (mitigate information asymmetries).
Transformation of short-term, liquid deposits held byhouseholds into illiquid liabilities issued by firms.
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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 justdemand of the corporate sector]
More transparent estimate of the need for investment in theinfrastructure sector--- how to mobilize the resources
One estimate puts the requirement as $50 billionequivalent---- role of foreign direct investment as
perceived by the government. Whether FDI is good for thecountry is no longer the issue
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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
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Reforms__ slowed down? Indias endemic problems
Low literacy _ message of reforms not reaching
Archaic social structure__ at lower level ofsociety and furthest from the centre ofadministration exploitation continues
Social and economic discrimination areintertwined in the society
Lack of genuine administrative reforms at thegrass-root levels [panchayat system ]--
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Reforms slowed down?_contd
Even when panchayats exist, they are totallydependent on state government for finance, thaterodes their power
Emergence of regional groups based on caste
Lack of accountability [ corruption index being at level83 among 133 countries surveyed recently]
A permissive society????
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Slow reforms
Some economic issues
Wide gap between rural and urban areas regarding theavailability of public goods like potable water, healthservices, primary education___ worse situation is thatsometime 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 ofviolence
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India
Let us see some developments ineconomic scene
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India__ Growth rates in 1990s
ECONOMIC GROWTH
OF INDIA
0
1
2
3
4
5
6
7
8
1990
1992
1994
1996
1998
2000
2002
PERCENTREALGDP
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India__ external sector
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India__ international liquidity
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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
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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
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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 __ THATSHOULD BE THE GOAL OF ECONOMIC REFORM
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Issue__ Economic Freedom
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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
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Freedom and income per capita
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Freedom and income
-1.5-1
-0.5
0
0.5
1
1.5
2
2.5
3
Average
AnnualReal per
Capita
GDP
Growth,
1980-1993
Repressed Mostly
Free
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Freedom__ bop of some countries[ 2001]
-20
-10
0
10
20
30
40
50
BillionsofU.S.
$
Aus
tra
lia
Hong
Kong
(97)
India
Japan
Korea
Ma
lays
ia(97)
New
Zea
lan
d
Philipp
ines
(97)
Singapore
Tha
ilan
d
Indones
ia
Vietnam
(97)
China
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Currency __ INR[ a depreciating real exchange rate over time]
Rupee/$
0
5
10
15
20
25
30
3540
45
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Spot
PPP
Real Exchange Rate
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Indias 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
ValueofTrade(mn$s)
India Expor ts
to US
US Imports
from India
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Indias 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
Va
lueo
fTra
de
(mn
$s
)
India
Imports
from US
US Exports
from India
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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
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Restrictions
Country Course of action
IndiaWTO 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 adispute settlement procedure under thePCA
Mexico Free trade agreement negotiation
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Global scene
Next few slides we will see the experience of economictransition in former command economies and its impacton several parameters___ a cross-section sample
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Comparison
We can make comparison with the transition process thatstarted in China ( 1985) and Russia ( 1989-90)
Russia__ lack of experience of running enterprise. Corruptionin 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) __ slowtransition___ mess in financial system. Large scale corruption
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Growth & agriculture
-20
-15
-10
-5
0
5
10
0 10 20 30 40
Share of agriculture in labor force 1990 (in per cent)
GrowthofGNPpercapita1990-97(inp
ercentper
year)
Slovenia Poland
Azerbaijan
Georgia Turkmenistan
Ukraine
Uzbekistan
RomaniaHungarySlovakRep.
Czech Rep.Bulgaria
Estonia
Belarus
Kazakhstan
LithuaniaLatviaRussia
Moldova
Kyrgiz Rep.
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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)
Actua
lexportslesscountry-size-adjusted
exports1990-97(inpercentof
GDP)
Estonia
Czech Rep.Belarus
MoldovaUzbekistan
SloveniaSlovak
Rep.
Hungary
Albania
Kyrgyz Rep.Georgia
KazakhstanUkraine
Bulgaria Russia
Lithuania
RomaniaAzerbaijan
Poland
Latvia
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Crosssection 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)
GrowthofGNPpercapita1990-97
(inpercent
peryear)
Poland Slovenia
Romania Czech
Rep.
Slovak Rep.
Bulgaria
Azerbaijan
GeorgiaUkraina
Moldova
Kyrgyz
Rep.
BelarusUzbekistan
RussiaLatvia
Lithuania
Estonia
Kazakhstan
Hungary
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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
GrowthofGNPpercapita1990-97(inp
ercentper
year)
Albania
Azerbaijan
Belarus
Bulgaria
Czech Rep.
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyz Rep.
LatviaLithuania
Moldova
Poland
Romania
Russia
Slovak Rep.
Slovenia
Ukraine
Uzbekistan
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conclusion
We are in the middle of the process of reforms.
Only expectations about the better future
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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
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