IED Chapter 3

Cards (60)

  • Economic reforms in India arose from 1991
  • Steep fall in foreign exchange reserves: Not sufficient for even a fortnight of imports
  • Unfavorable Balance of Payments (BOP): Imports grew at a high rate without matching export growth
  • Huge burden of external debt: Government unable to make repayments on borrowings from abroad
  • High rate of price inflation: Prices of essential goods rose sharply
  • Huge burden of fiscal deficit in the government budget: Expenditure exceeded income, leading to borrowing to finance the deficit
  • India received a $7 billion loan from the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) to manage the crisis
  • To avail the loan, India had to:
    • Liberalize and open up the economy by removing restrictions on the private sector
    • Reduce the role of the government in many areas
    • Remove trade restrictions between India and other countries
  • Dr. Manmohan Singh was the Finance Minister of India in 1991
  • India announced the New Economic Policy (NEP) after agreeing to the conditionalities of the World Bank and IMF
  • The NEP includes stabilization measures and structural reform measures
  • Stabilization measures are short-term measures to correct weaknesses in the balance of payments and control inflation
  • The aim of stabilization measures is to maintain sufficient foreign exchange reserves and control rising prices
  • Structural reform policies are long-term measures to improve the efficiency of the economy and increase international competitiveness
  • Structural reform policies aim to remove rigidities in various segments of the Indian economy
  • The government initiated policies under three heads: liberalization, privatization, and globalization
  • Liberalization was introduced to put an end to restrictions and open various sectors of the economy
  • A few liberalization measures were introduced in the 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy, and foreign investment
  • Reform policies initiated in 1991 were more comprehensive
  • Deregulation of the Industrial Sector:
    • Industrial licensing was abolished for almost all product categories except for alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals
    • Industries reserved for the public sector are a part of atomic energy generation and some core activities in railway transport
    • Many goods produced by small-scale industries have been de-reserved
    • In most industries, the market determines the prices
  • Financial Sector Reforms:
    • Role of RBI changed from regulator to facilitator of the financial sector
    • Foreign investment limit in banks raised to around 74%
    • Banks fulfilling certain conditions can set up new branches without RBI approval and rationalize existing branch networks
    • Foreign Institutional Investors (FII) like merchant bankers, mutual funds, and pension funds can invest in Indian financial markets
  • Tax Reforms:
    Direct taxes:
    • Continuous reduction in taxes on individual incomes since 1991
    • Gradual reduction in the rate of corporation tax
    Indirect taxes:
    • Goods and Services Tax Act 2016 introduced to simplify and unify indirect tax system in India
    • GST subsumed value-added tax, service tax, excise duty, and sales tax
    • Procedures simplified and rates lowered to encourage taxpayer compliance
  • Foreign Exchange Reforms:
    • In 1991, rupee was devalued against foreign currencies to resolve balance of payments crisis
    • Devaluation led to an increase in foreign exchange inflow
    • Rupee value determination in the foreign exchange market freed from government control
  • Trade and Investment Policy Reforms:
    • Import licensing abolished except for hazardous and environmentally sensitive industries
    • Quantitative restrictions on imports of manufactured consumer goods and agricultural products fully removed from April 2001
    • Export duties removed to increase competitive position of Indian goods in international markets
  • Privatization implies shedding the ownership or management of a government-owned enterprise
  • Government companies are converted into private companies in two ways:
    • By the withdrawal of the government from ownership and management of public sector companies
    • By the outright sale of public sector companies
  • Disinvestment: Privatization of public sector enterprises by selling off part of the equity of PSEs to the public
  • The purpose of the sale was mainly to improve financial discipline and facilitate modernization
  • Envisaged that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs
  • Government envisaged that privatization could provide a strong impetus to the inflow of FDI
  • Maharatnas, Navratnas, and Miniratnas are identified by the government to improve efficiency, infuse professionalism, and enable them to compete more effectively in the liberalized global environment
  • Given greater managerial and operational autonomy to take various decisions to run the company efficiently and increase profits
  • Examples of public enterprises with their status:
    • Maharatnas:
    • Indian Oil Corporation Limited
    • Steel Authority of India Limited
    • Navratnas:
    • Hindustan Aeronautics Limited
    • Mahanagar Telephone Nigam Limited
    • Miniratnas:
    • Bharat Sanchar Nigam Limited
    • Airport Authority of India
    • Indian Railway Catering and Tourism Corporation Limited
  • Globalization:
    • Integration of the economy of a country with the world economy
    • Transforming the world towards greater interdependence and integration
    • Turning the world into one whole or creating a borderless world
  • Outsourcing:
    • Company hires regular services from external sources, mostly from other countries
    • Services like legal advice, computer service, advertisement, and security are outsourced
    • Many services such as BPO, record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice, and teaching are outsourced to India
    • Modern telecommunication links, including the Internet, are used to digitize and transmit data in real time across continents and national boundaries
    • India is a destination for global outsourcing due to low wage rates and availability of skilled manpower
    • WTO agreements cover trade in goods and services to facilitate international trade through the removal of tariff and non-tariff barriers, providing greater market access to all member countries
  • World Trade Organisation (WTO):
    • Founded in 1995 as the successor organization to GATT
    • Administers all multilateral trade agreements
    • Provides equal opportunities to all countries in the international market for trading purposes
    • Expected to establish a rule-based trading regime to prevent arbitrary trade restrictions
    • Aims to enlarge production and trade of services, ensure optimum utilization of world resources, and protect the environment
  • India's Commitment to the WTO:
    • Reduction in tariff rates
    • Removal of quantitative restrictions
  • Positive Impacts of Globalization:
    • Increased economic growth
    • Improved standards of living
    • Increased access to technology
    • Increased cultural understanding