IED Chapter 3

• 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