Economic Reforms India[1]

8/2/2019 Economic Reforms India[1]

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ECONOMIC REFORMS IN INDIA: Impacton Business

Dr. Sukumar Nandi

Indian Institute of Management

Lucknow


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3/29/2012 Economic Reforms: Impact onBusiness_ S. Nandi 2

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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3/29/2012Economic Reforms: Impact on

Business_ S. Nandi 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 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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Economic Reforms: Impact on


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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Documents

Economic Reforms India[1]