Economic Reforms and Liberalization1.1 The Background1.2 TheMacroeconomic Crisis1.3 MacroeconomicReforms1.4 IndianEconomy Since Reforms1.
5 EconomicReforms and Vulnerable sections1.6 TheNext Round of ReformsThe BackgroundTraditionally the role of the government administration wasconfined to certain essential services like defence, law and order, etc. Withindependence, the Indian government has Launched a process of planned economicand social development towards improvement of living standards. In this processprivate sector activities in many areas were Regulated, and the governmentitself became one of the economic agents by establishing many commercial andindustrial enterprises.
The enormous pressure on the system and the change inthe global economic environment has led to economic reforms. The economic policy reforms focussed at redefining the roleof government administration through dismantling the regulatory framework inmany economic sectors. The aim is to integrate the Indian economy with theglobal economy for efficient use of available natural and human resources.The ‘reform’ of India’s foreign policy, and thereby ourpopular worldview, has gone on simultaneously with economic reform.The Macroeconomic CrisisAlthough the Indian economy grew more swiftly during the1980s than it had during previous decades, the proportion of the central government’sfiscal deficit grew over the decade as well.
By the mid-1980s, the fiscaldeficit was approximately 8 per cent of GDP, and it continued at that volumethrough the remainder of the 1980s. Inflation also grew over the course of the1980s, and stood at 10 per cent at the start of the 1990s. The public sector continued to absorb much of the country’sinvestment capital without contributing to the economy proportionately. Iraq’sinvasion of Kuwait in August 1990 and the ensuing Gulf War strained. The WorldBank pronounced that India, along with several other South Asian and East Asiancountries, was among the most adversely affected due to the escalation in oilprices, loss of foreign exchange earnings of workers in the Gulf region,displaced workers, and reductions in export profits.In the culmination of these dynamics, India found itselfwith foreign exchange reserves adequate to finance only two weeks of necessaryimports, a lowered investment rating that made additional loans more costly,and the prospect of defaulting on its international debt payments. Theimmediate task of the government was to re-establish macroeconomic stability,prevent a default on debt payments, and bring down inflation, all of which thegovernment accomplished despite being one of the most fragile governments sinceindependence.
Macroeconomic ReformsIn response to the internal economic crisis of 1990–91 andthe changing international situation, the Narasimha Rao government decided tointroduce economic reforms or the New Economic Policy (NEP). The NEP clearlyreflected certain global trends, like the collapse of the socialist economy andgrowing acceptance of economic globalization across the world. Although thereforms as a part of the process of liberalization and globalization wererevolutionary in nature, these were launched within the democratic framework ofthe country.
They marked a shift from the Nehruvian consensus of the 1950s to anew consensus around reforms. While the national goals set out at Independence remainedunaltered, the change came only in the strategy to achieve these goals—fromNehru- Mahalanobis development strategy to the new development strategy ofliberalization and economic reforms. The reforms programme consisted of macroeconomicstabilization (regulating the total demand in the economy) and structuralreforms.
While structural reform was a medium- and long-term programme, itdealt with sectoral adjustments and the problems on the supply side of the economyby bringing in dynamism and competitiveness to the economy. Crisis managementmeasures included use of gold to acquire foreign currency to meet payment obligations,devaluation of the rupee, reduction of imports and seeking finances frommultilateral financial institutions and bilateral donors. Structural reformsincluded liberalized trade and investment policies with emphasis on exports,industrial deregulation, disinvestment and public sector reforms, and reform ofthe capital markets and the financial sector. In this way, an attempt was madeto achieve a progressive economy by removing the internal controls.Indian Economy Since ReformsThe economic reforms, have led to considerableliberalization and freeing of international trade, and to some replacement ofwhat used to be called the ‘licence Raj ‘ (with pervasive bureaucratic controlover private economic initiatives). This has greatly added to businessopportunities in India and has also helped to consolidate India’s fastereconomic growth. Liberalization, has helped to free Indian entrepreneurs toseek global trade, and the success has been especially large in specificsectors such as information technology.
The telecom sector is a successful story of India’s economicreforms. The telecom sector underwent a revolution in the Indian-growth story.’The rate of growth of GDP from telecom accelerated from an average of 6.3 per centper annum during 1980–81 to 1991–92 to 18 per cent per annum during 1992–3 to2002–3.In the case of ports, private operators have been introducedand then the Tariff Authority of Major Ports was formed; in the civil-aviation sectors,new private airlines, new private airports and the beginning of an open skiespolicy are in evidence.Agricultural Growth Rate declined in the Reform PeriodThe agricultural growthdecelerated in the economic reform period (commencing in 1991). As is clear,the rate of growth of production of foodgrains fell from 2.
9 per cent per annumin 1980s to 2.0 per cent per annum in 1990s and stood at 2.1 per cent per annumin first decade of the present century. Redefining the Role of the StateThe adoption of the NEP (New Economic Policy) based onliberalization and privatization has given rise to a debate on the nature ofthe link between state and market.
The NEP does not imply a retreat of thestate. The state and the market are not substitutes for one another but they complementeach other further these two actors provide mutual checks and balances in sucha way that one can correct the failures of the other. The state needs toformulate policies to bring about improved transparency and greateraccountability, which form the basic pillars of good governance.India Vs ChinaThe overall performance of the economy may not have matchedthat of post-reform China (with its sustained growth rate of 8 to 10 per cent ayear), but India’s move from the rigid box of a 3 per cent growth rate to the 5to 8 per cent arena is certainly not a negligible development.India’s reduction of poverty has been far less rapid thanwhat has occurred in China since the economic reforms.
Economic Reforms and Vulnerable sectionsThe proportions of the Indian population with incomes belowthe standard poverty lines have fallen over the 1980s and 1990s.The Next Round of Reforms1991 reforms have been good but not enough. It needs to berealized that the benefit of reforms already taken up strongly depends on theamount and pace of future reforms. So there is a need to push up these reforms.The most important agenda of reform could be agricultural-sector reforms,power-sector and infrastructure reforms, tax reforms, reconsideration ofreservation policy to small- scale industry and further simplification of thebureaucratic process. Apart from economic reforms, large reforms in the legalsystem and governance are also needed.
If we want to achieve something big,then it requires big and fundamental changes in the policy; and the reformsprocess should not be confined only to the economic sector, but should lookbeyond it.