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ECONOMIC REFORMS &
LIBERALIZATION
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THE ORIGIN OF ECONOMIC CRISIS
The origin of the crisis in 1991 : careless
macro management of the economy during the
1980s led to large and persistent macroeconomic
imbalances. The widening gap between the revenue and
expenditure of the government - growing fiscal
deficits whichhad to be met by borrowing at
home.
Large current account deficits in the balance of
payments financed by borrowing from abroad.
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THE ORIGIN OF ECONOMICCRISIS
Three Aspects
Fiscal imbalance
Fragile balance of payments situation
Inflationary pressures
The Crisis Made Economic Reforms Necessary
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TWO DISTINCT STRANDS OF REFORMS
Macroeconomic StabilizationDemand-side Management
Control of inflation (low and stable inflation)
Sustainable Fiscal position
Sustainable Balance of payments position
Structural AdjustmentSupply-side Management
Trade and capital flows reforms
Industrial deregulation
Disinvestment and public enterprise reforms
Financial sector reforms
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MACROECONOMIC STABILIZATION:
DEMAND-SIDE MANAGEMENT
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FISCALADJUSTMENT
Fiscal adjustment is necessary for dealing withproblem ofhigh inflation
Fiscal deficit
Beginning of 1970s: less than 4 per cent of GDP
1990-91 :7.8 per cent of GDP 1993-94: 7.0 per cent
1994-95: 5.7 per cent of GDP
The inflation rate: 7 per cent in 1993,
Over 10 per cent per annum in 1993-94 and 1994-95.
The government committed itself to a policy offiscal adjustment.
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FISCALADJUSTMENT
The FRBM (Fiscal Responsibility and Budget
Management) Act in 2004 : brought down the
fiscal deficit to 3.5 per cent of GDP in 2006-07
and 2.7 per cent of GDP in 2007-08.
2008- 09 massive fiscal deficit of 6.2 per cent
because of economic slowdown
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FISCALADJUSTMENT
In India, the fiscal imbalance caused mainly by imprudent
increase in public expenditure.
In 2007- 08, the government expenditure constituted 28.4
per cent of GDP.
Government's capital expenditures in key infrastructural
and social sectors should not be curtailed.
Limit the non development expenditure- subsidies, interest
payments, defense etc
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FISCALADJUSTMENT
Additional revenues by a judicious mixture of broadening
the tax base, rationalizing the tax rates and through non-
tax sources
Can also mobilize resources by targeting black money- 40per cent of GDP.
User charges on publicly provided utilities such as
irrigation, electricity, water, road transport and higher
education are much below their cost of provision.
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BALANCE OF PAYMENTSADJUSTMENT
At present balance of payments situation is not as
precarious as it was in 1990-91.
The level of foreign exchange reserves : $ 309.7 billion
end-March 2008 but fell to $ 252.0 billion at end-March2009 as a result of capital outflows following global
recession in 2008-09
Somewhat stable and sustainable balance of payments
position in the post-reform period
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BALANCE OF PAYMENTSADJUSTMENT
Liberalized exchange rate management system
(LERMS) in the Budget for 1992-93.
A dual exchange rate fixed : 40 per cent of foreign
exchange earnings to be surrendered at official rate 60 per cent to be converted at market determined
rate.
1993-94 Budget adopted unified exchange rate regime
60 : 40 ratio was extended to 100 per cent conversion. Thus India has been following the market determined
exchange rate system since 1993.
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BALANCE OF PAYMENTSADJUSTMENT
The exchange rate management policy of the Reserve
Bank
Policy of 'managed float regime
Reserve Bank has focused on managing volatility withno fixed rate target while allowing demand and supply
conditions to determine exchange rate movements in
an orderly way.
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MACROECONOMIC STABILIZATION:SUPPLY-SIDE MANAGEMENT
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STRUCTURAL REFORMS
Since July 1991 liberalization measures have
been undertaken to improve the supply-side of
the economy. Among these the more important
are :
Trade and capital flows reforms
Industrial deregulation
Disinvestment and public enterprise reforms
Financial sector reforms
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TRADE AND CAPITAL FLOWS REFORMS
Export promotion measures in recent years:
Export Oriented Units for promoting exports from the
agricultural and allied sectors
Broadening of areas of activity in Export ProcessingZones
Duty free import for exports
Setting up of Special Economic Zones (SEZs)
Access to capital goods, intermediates and raw materials- improving the global competitiveness of Indian exports.
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INDUSTRIAL DEREGULATION
In India in the industrial sector controls tookvarious forms:
industrial licensing which regulated entry and
expansion;
reservation of a large number of industries for the
public sector as well as small scale sector;
time consuming procedures required for the setting of
industrial units;
price and distribution controls on various industrial
products.
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INDUSTRIAL DEREGULATION
Long time taken by the industrial licensing authorities togive clearance to proposals
Projects could not be completed within time
Licensing authorities often denied industrial units rightto produce more than licensed capacity.
Maximization of output from a given licensed capacity gotundermined.
Policy of price control: resulted in misallocation of
resources and disregard to costs. Licensing system led to political and bureaucratic
corruption
Used by powerful vested interests to throttle competition.
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INDUSTRIAL DEREGULATION
Limit on the size of the companies which was earlier
enforced under the Monopoly and Restrictive Trade
Practices Act has now been scrapped.
This will allow industrial units to grow to optimum sizeand enjoy the benefits of economies of scale
The industrial location policy has been both simplified
and liberalized
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INDUSTRIAL DEREGULATION
New industrial policy July 1991 : deregulation of
the industrial economy and opening up a large
number of industries to the private sector.
These relaxations eased t
he entry barriers w
hich
should make the industrial sector more
competitive
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INDUSTRIAL DEREGULATION
The requirement of industrial licensing has been
abolished for all but 5 product categories.
These are alcohol, cigarettes, hazardous chemicals,
industrial explosives, electronics aerospace anddefense equipment (all types).
Core industries like iron and steel, electricity, air
transport, shipbuilding, heavy machine industries, etc.
opened up for the private sector
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PUBLIC SECTOR REFORMS AND
DISINVESTMENT
Public sector originally intended to be the engine of
self-sustained economic growth.
Hold the commanding heights of the economy, lead to
tech
nological advance. Generate adequate investible surpluses.
Public sector contributed to the expansion of the
industrial base.
Failed to generate sufficient internal resources for itsfurther expansion
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PUBLIC SECTOR REFORMS AND
DISINVESTMENT
Government gave greater managerial autonomy to
public enterprises
Promoted private sector competition in areas where
social considerations are not paramount Partial divestment of equity in selected enterprises
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PUBLIC SECTOR REFORMS AND
DISINVESTMENT
Equity amounting to Rs. 51,609 crore in publicsector undertakings was disinvested to publicsector financial institutions, mutual funds,
private corporate and general public till 2007-08.
Had talked of disposing of loss-making PSUs,well performing PSUs were to be givenautonomy
No evidence of any such initiative in practice.
Government policy limited to selling off sharesof prime PSUs
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FINANCIAL SECTOR REFORMS
A vibrant, competitive financial system is
necessary to support the structural reforms in
the real economy.
Over the years, the Indian banking and thefinancial system has made impressive progress
in terms of both geographical spread and
functional reach.
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FINANCIAL SECTOR REFORMS
Brought down both statutory liquidity ratio and cash
reserve ratio in a phased manner.
Commercial banks attaining capital adequacy norms
and good accounting standardsh
ave been given freedomto set up new branches without the approval of the RBI.
Banks can now also rationalize their branch network by
relocating branches, opening of specialized branches,
setting up controlling offices, etc.
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AN APPRAISAL OF ECONOMIC
REFORMS
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AN APPRAISAL OF ECONOMIC
REFORMS
Since July 1991 the government has undertaken
both stabilization programs and structural
reforms as two components of the economic
reform package.
The objectives of the stabilization and structural
reform programs have been achieved only partly
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AN APPRAISAL OF ECONOMIC
REFORMS
The annual point to point inflation rate which
was below 2 per cent till the end of May 2002,
rose to as high as 12.6 per cent on August 9,
2008.
As far as fiscal imbalances are concerned, the
fiscal deficit of the Central government which
was 5.6 per cent of GDP in 1991-92 declined to
2.7 per cent of GDP in 2007-08.
However, it rose to 6.2 per cent of GDP in 2008-09
6.8% (budget estimate) of GDP in 2009-10.
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AN APPRAISAL OF ECONOMIC
REFORMS
In the real sectors, the structural reforms have
shown mixed results.
Since 1991-92 till 2008-09, GDP increased at the
rate of 6.4 per cent per annum. In the first two years of structural reforms, there
was near stagnation in the industrial sector.
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AN APPRAISAL OF ECONOMIC
REFORMS
Industrial growth picked up in the Tenth
Plan period
Industrial growth - 11.6 per cent in 2006-
07
Industrial growth averaged 8.2 per cent
per annum over the Tenth Plan period.
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AN APPRAISAL OF ECONOMIC
REFORMS
During 1995-96 to 2001-02 saving rate was 23.5
per cent of GDP while the investment rate was
24.5 per cent of GDP
Since 2002-03, both
saving and investment ratehave picked up strongly.
Saving rate in 2007-08 was 37.7 per cent of GDP
while investment rate was 39.1 per cent of GDP
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AN APPRAISAL OF ECONOMIC
REFORMS
The Eleventh Plan began well, economy grew at
the rate of 7.7 per cent per year in the Tenth
Plan.
8.9 per cent growth
in th
e firsth
alf of 2010-11,India continues to be one of the fastest growing
economies in the world
The industrial sector recorded a growth of 9.5 per
cent during April-November 2010
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AN APPRAISAL OF ECONOMIC
REFORMS
GDP at constant (2004-05) prices in the year
2009-10 shows a growth rate of 7.4 per cent
Growth rate in agriculture, forestry and fishing
sector in 2009-10 : 0.2 per cent manufacturing sector : 10.8 per cent
The per capita income (at 2004-05 prices) during
2009-10 is Rs. 33,588, growth rate of 5.6 per cent
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AN APPRAISAL OF ECONOMIC REFORMS
Growth in the Indian economy steadily increased :1979 -
2003, averaging 5.7% per year Has seen a decade of 7%+ growth
Indias economy has been one of the stars of globaleconomics in recent years, growing 8.2% in 2004, 9.6% in2006 and 9.2% in 2007
GDP growth of 6.7% in 2008-09 GDP growth of 7.2% in 2009-10
GDP growth pegged at 8% plus for 2010-11
This has reduced poverty by 10%
India became the second fastest growing major economy inthe world, next only to China
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AN APPRAISAL OF ECONOMIC REFORMS
Agriculture is the predominant occupation inIndia, accounting for 60% of employment.
Service sector accounts for 28% of employment
Industrial sector accounts for 12% ofemployment
The share of agriculture and allied sectors inGDP has declined gradually from 18.9% in
2004-05 to 14.6% in 2009-10.During the same period, the share of industryhas remained the same at about 28%
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AN APPRAISAL OF ECONOMIC
REFORMS
The share of services has gone up from 53.2%in 2004-05 to 57.2% in 2009-10
Performance of the Indian service sector
significant.
Industrial sector growing at 8.2%, 2009-10
while it grew at 3.9% in 2008-09
Service sector growing at 8.7%, growth of
9.8% in 2008-09Manufacturing growth from 3.2 % in 2008-09
to 8.9 % in 2009-10.2009-10 economy grew by 7.9%.
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GDP and Related Indicators
GDP and Related
Indicators
2008-09 2009-10
GDP (current market
prices) Growth Rate
12.7% 10.6%
GDP (2004-05 prices)Growth Rate
6.7% 7.2%
Savings Rate% of GDP 32.5% NA
Capital Formation (rate)%
of GDP
34.9% NA
Per Cap. Net National
Income
(factor cost at current
prices)
Rs 40141 Rs 43749
Population 1154 million 1170 million
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SHORTCOMINGS OF ECONOMIC REFORMS
Absence of a broader development strategy:
wrong to conclude that a well designed industrial
strategy & heavy State intervention have no
positive role to play in industrial growth e.g. SKorea
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SHORTCOMINGS OF ECONOMIC REFORMS
Wrong sequencing of reforms: fiscal
correction done through reduction in tax rates &
compression of capital expenditure, compression
of government expenditure without ensuring that
private investors fill the gap, liberalizing imports
of capital goods before adopting strategy for
technology advancement of domestic capital
goods sector
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SHORTCOMINGS OF ECONOMIC REFORMS
Hasty pace of reforms: deterioration in quality
of industrial structure- reduction in industrial
growth, reduction in growth of capital goods
industries, shift of exports away from
manufacturers, arresting growth of industrial
employment
Prerequisites of reforms ignored: shock of
reforms reduced if society has reached certain
minimal level ofhuman development e.g. SKorea, Malaysia & Thailand
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SHORTCOMINGS OF ECONOMIC REFORMS
Absence of human development goals as
integral part of the strategy:
Incomplete structural transformation, poverty, low
level ofhuman development, poor health, education,
unemployment, access to public services etc Lack of
basic requirements for a decent living
Nutrition standards, access to education and basic
health, water supply and sewerage.
Disadvantaged groups, the Scheduled Castes and
Scheduled Tribes , minorities benefited less than they
should have.
Regional imbalances have emerged across and even
within States.
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IS THE GROWTH MODEL SUSTAINABLE?
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IS THE GROWTH MODEL SUSTAINABLE?
A new spirit of economic freedom - one of themost exciting emerging markets
A series of ambitious economic reforms-deregulation, stimulating foreign investment
India firmly into the front ranks of the rapidlygrowing Asia Pacific region
No conflict between its political and economicsystems.
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IS THE GROWTH MODEL SUSTAINABLE?
Skilled managerial and technical manpower
A middle class whose size exceeds the populationof the USA or the European Union - a distinct
cutting edge in global competition Growth of skill intensive activities
- IT services
- Pharmacy and Bio technology
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IS THE GROWTH MODEL SUSTAINABLE?
Growth in the manufacturing sectorcomplemented the countrys excellent growthmomentum.
The growth rate of the manufacturing sector rosesteadily from 8.98% in 2005, to 12% in 2006.
Robust investment and high savings rates.
Gross capital formation as a percentage of in GDP
rose from 22.8% in 2001, to 35.9% in 2006.Gross rate of savings as a proportion to GDP
registered solid growth from 23.5% to 34.8% forthe same period.
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ISTHE
GROWTH
MODE
L SUSTAINABL
E?
A services led economy
A narrow manufacturing sector
Socio-economic reforms Institutional and infrastructure bottlenecks in
the system
International trade: behind China in trade of
goods, but a major exporter of servicesA slow opening up to international trade and
investment
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IS THE GROWTH MODEL
SUSTAINABLE?
Can India skip the stage of industrialization?
The limits of specialization in skill intensive activities
Services cannot be the engine of development before themanufacturing sector develops
Have a small direct impact on employment
Indias low cost labor unutilized
Tends to increase divergence among states
May have adverse effects on other sectors
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IS THE GROWTH MODEL
SUSTAINABLE?
Employment: jobless growth since 1990s
Infrastructure a major bottleneck
Poverty and inequality
Public deficit and debt- limited funds
Infrastructure
Education, health, basic amenities
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IS THE GROWTH MODEL
SUSTAINABLE?
India currently accounts for only 1.5% of worldtrade as of 2007
Steady growth over the last two decades butuneven
Uneven growth across social groups, economicgroups, geographic regions, and rural andurban areas
Unemployment rate is 7.2% (2007)
60% of Indias 1.1 billion population living offagriculture, droughts and floods increasing,poverty alleviation-a major challenge.
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IS THE GROWTH MODEL
SUSTAINABLE?
Cross the double digit growth barrierMake development more inclusive
Correct weaknesses in government systems,structures and institutionsFiscal ConsolidationReview public spending, mobilize resources
and gear them towards building theproductivity of the economy
Areas of concern - double digit food inflation,the ambiguous nature of recovery in exportsand fiscal pressures
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Employment by sectors, 1990-2005,in %
67
52
13
19
2128
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 2005
Services
Industry &bat.
Agriculture
Share of
services in
employment
(28%) smaller
than in GDP
(51%)
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LONG TERM PROSPECTS: GROWTH
POTENTIAL
Demographic trends: a window of opportunity
- Strong increase in working age population
- Dependency rate falling
Actual growth will depend on level of savings
and investment
It also depends on the pace of reforms andliberalization
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An Economic Idea of India
Strengthsy sustained growth at 6.4 for
over a decade
y strong export potential, currenta/c deficit low
y healthy forex reserves
y low external debt
y political consensus on reforms
y deepening financial sector
y knowledge base advantagedemographic surge
Weaknessesy fiscal deficit high, debt GDP ratio
high
y fiscal situation of states worsey inadequate infrastructure, huge
funding need
y unsatisfactory investment climate
y rising gap between rich and poor
states, peopley dependence on oil imports,
monsoons
y social indicators below world
average