eco india reforms
TRANSCRIPT
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ECONOMIC REFORMS IN
INDIA
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Section B_Group 2
Ravi barun (68)
Arib khan (69)
Arjun arya(71)
Kaushik patel(94)
Anurag mathur(99)
Jerin john(128)
ECONOMIC REFORMS IN INDIA
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Pre 1990 scenario in India..
Till 90s India was a more of a Socialist economy.
i.e. -Dominant role of government
-Import substitution
-Huge investments in public sector and in capital goods.
Permit Raj
-High tariffs and quantitative restrictions
Heavy dependence on agriculture income-72% employment
Indias GDP rose from 3.5 to 5% in 80s.
The volume of exports grow after decades of independence.
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Manufacturing growth in public sector was around 7-8% after years of
degrading performance.
Late 80s and early 90s scenario:
The central govt. fiscal deficits increased from 6% of GDP to above 9% in
a time period of 1980s-90.
Nationalization of industries and financial institutions50% of industrial assets was owned by government
Subsidized 90000 sick units
Nationalized 100% of banks
Export policy
Decline of export growth from 6.5%(1950)-3.6%(1970)
Cash Assistance scheme
Registered exporters policy
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Reasons that led to 1991 crisis..
In 1991 India experienced a classic external payments crisis high fiscal deficit,
external borrowing to finance it, rising debt service commitments and resulting
inflation, inadequate adjustments in the exchange rate and a deteriorating current
account
The economic crisis was primarily due to the large and growing fiscal imbalances
over the 1980s. During mid eighties, India started having balance of payments
problems. Precipitated by the Gulf War, Indias oil import bill swelled, exports
slumped, credit dried up and investors took their money out. Large f iscal def ic i ts,
over time, had a spill over effect on the trade deficit cumulating in an external
payments crisis. By the end of 1990, India was in serious economic trouble.
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The other shock was the slow economic growth in Indias export markets.
and in the U.S. Indias largest export destination fell from 3.9 percent in
1988 to1 percent in 1991.
Conditions in another major export market the Soviet Union had also
worsened due to the oil shock.
World growth had also declined from 4.5 percent in 1988 to 2.25 percent in
1991.Consequently, Indias export growth was only 4 percent in 1990-91.
Petroleum import costs in 19901991 increased by half to US$5.7 billion.
Continued
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The gross fiscal deficit of the government (center and states) rose from 9.0
percent of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent
in 1990-91. For the center the gross fiscal deficit rose from 6.1 percent of GDP
in 1980-81 to 8.3 percent in 1985-86 and to around 12% in 1990-91.
Since these deficits had to be met by borrowings, the internal debt of the
government accumulated rapidly, rising from 35 percent of GDP at the end of
1980-81 to 53 percent of GDP at the end of 1990-91.
The foreign exchange reserves had dried up to the point that India could barely
finance three weeks worth of imports.
INFLATION REACHED 12.1% during the crisis.
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FOREIGN EXCHANGE RESERVES (INCL. GOLD AND SDRS) (US $BN.)
1990-91 5.831991-92 9.221992-93 9.831993-94 19.25
1994-95 25.191995-96 21.691996-97 26.421997-98 29.37
Source: M S.Ahluwalia 2000; RBI Annual Reports
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INTERNAL & EXTERNAL REASONS THAT BREDFOR CRISIS
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The Immediate response was to secure an emergency loan of$2.2 billion
from the International Monetary Fund by pledging 67 tons of India's gold
reserves as collateral.
The Reserve Bank of India had to lift 47 tons of gold to the Bank of England
and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.
IMMEDIATE RESPONSE..
National sentiments were outraged and there was public outcry The Chandra
Shekhergovernment had collapsed
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P.V. Narasimha Rao took over as Prime Minister in June, the crisis forcing him to
rope in Manmohan Singh as Finance Minister, who unshackled what was then
called the 'caged tiger'.
The Rao government ushered in several reforms that are collectively termed as
liberalization in the Indian media. Although, most of these reforms came because
IMF required those reforms as a condition for loaning money to India in order to
overcome the crisis.
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Main Features Of EconomicReforms
ECONOMICREFORMS
LIBERALISATION
PRIVATISATION
GLOBALISATION
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New Economic Policy 1991
New Economic Policy (1991)
Industrial Sector Reforms
Public Sector PolicyIndustrial Licensing Policy MRTP Act
External Trade Reforms
Foreign Investment Foreign Technology
Agreements
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Public Sector Policy.
Existence of large number of chronically sick public enterprises incurringheavy losses, operating in a competitive market and serving little or no
public purpose
Measures:
Portfolio of public sector investments reviewed with a view to focus the
public sector on strategic, high tech and essential infrastructure
Public Enterprises which are chronically sick and which are unlikely to
be turned around referred to the Board for Industrial and Financial
Reconstruction (BIFR) for revival/rehabilitation schemes
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Part of the governments shareholdings in the public sector would be
offered to mutual funds, financial institutions, the general public and
workers to raise resources and encourage wider public participation
Instilling professionalism in board of public sector companies
Greater thrust on performance improvement and greater autonomy to
management
Contd..
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Industrial Licensing Policy.
Role of the government changed from that of only exercisingcontrol to one of providing help and guidance by making essential
procedures fully transparent and by eliminating delays
Industrial licensing to be abolished for all projects except for a short
list of industries related to securities and strategic concerns.
In projects where imported capital goods are required, automatic
clearance will be given in cases where foreign exchange availability
is ensured through foreign equity.
Location other than cities of more than 1 million population, there will
be no requirement of obtaining industrial approvals from the central
Government except for industries subject to compulsory licensing.
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List of Industries..
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MRTP ACT
Monopolies and Restrictive Trade Practices Act, 1969 was amended. The
important objectives were:
Prevention ofconcentration of economic power in the hands of few which
will be detrimental to the common interest; and
Regulation of monopolistic, restrictive and unfair trade practices.
Hence, the MRTP Act now concerned only with the prohibition of monopolistic,
restrictive and unfair trade practices followed by the industrial undertakings and
the trading communities.
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Major Economic reforms /solutions to crisis.
Indias economic policy-making can be illuminated by examining five key
sets of decisions:
Devaluation
IMF programme
A new exchange rate regime and changes in the RBIs role
Carefully managed opening up to foreign investment
Financial sector reform
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Devaluation.
It refers to decline in value of a currency with respect to other currencies,
which is most of the times brought by central bank.
Value of money is decreased
Encourages exports and discourages imports
Trade deficit decreases .
Employment increases, demand for domestic goods and services increases.
All above leads to foreign reserve currency. So that later the trade can be
done easily.
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IMF approached.
As India was going through so many reforms during the 1991 period it needed
a huge amount of money.
And India largely got what it wanted. In a November 1991 stand-by agreement
the IMF promised to provide $2.2 billion over a period of twenty months.
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FOREIGN INVESTMENT.
Aimed at encouraging foreign trading companies to assist Indian exporters
in export activities:
Approval was given for direct foreign investment upto 51% foreign
equity in high priority industries
Import of the components, raw materials and intermediate goods, and
payment of know how fees and royalties would be governed by the general
policy applicable to other domestic units, the payment of dividends would be
monitored through the Reserve Bank of India
Majority foreign equity holding upto 51% equity would be allowed for
trading companies primarily engaged in export activities
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Foreign Technology Agreements.
In order to inject the desired level of technological dynamism in
Indian industry Automatic permission will be given for foreign
technology agreements in high priority industries up to a lump
sum payment of Rs. 1 crore, 5% royalty for domestic sales or 8% for
exports, subject to an overall limit of 8% of sales over a 10 year
period from date of agreement or 7 years from commencement of
production. .
No permission will be necessary for hiring of foreign technicians,
foreign testing of indigenously developed technologies.
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Financial Sector Reform.
Interest rates on term loans and on the bulk of debt instruments in capital
markets have been decontrolled and deposit interest rates
have been increased.
Full statutory powers will be given to the Securities and Exchange Board ofIndia (SEBI) to regulate, promote, and monitor Stock Exchanges in India
correspondingly the functions of the Controller of Capital Issues are being
redefined.
The private sector is now allowed to establish Mutual Funds.
RBI supervision over commercial banks and other financial institutions.
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Tax reforms.
Since 1991 several efforts have been made through the annual budget
process to achieve tax reforms. These have focused on:
Expanding the tax base by including services (not previously taxed);
Reducing rates of direct taxes for individuals and corporations;
Abolishing most export subsidies,Lowering import duties
Rationalizing sales tax and reducing the cascading effect of central indirect taxes
by introducing a Modified Value Added Tax and a soon-to-be implemented
nationwide Value Added Tax. Providing for tax incentives for infrastructure and export-oriented sectors,
including setting up Special (Export) Economic Zones;
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Reducing fiscal deficits..
Faced with the necessity of reducing the fiscal deficit in the crisis year of
1991-92, Finance Minister Singh attempted to reduce fertilizer and food
subsidies in 1991-92 and to some extent in 1992-93. Simultaneously, he (and
several subsequent finance ministers) resorted to the softer options of
reducing public investment expenditure and reducing public expenditure on
social welfare services from 1991 to 1995. These measures did help reduce the
fiscal deficit of the central government to 4.8 percent of GDP at the end of 1992-
93. However, further cuts in fertilizer and food subsidies were opposed in
Parliament and proved suicidal for the ruling Congress Party, which lost power in
state elections in 1993-94.
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Positive Aspects: Fulfilled a long-felt demand of the corporate sector for declaring in very
clear terms that licensing was abolished for all industries except 18
industries which included coal, petroleum, sugar, motor cars, cigarettes,
hazardous, chemicals, pharmaceuticals and some luxury items
Business houses intending to float new companies or undertake
substantial expansion were not required to seek clearance from the
MRTP Commission
Bottlenecks created by the bureaucracy were struck down by thissingular decision of the Government
Overall relief in the dismantling of industrial licensing and regime of
controls
Evaluation of New Economic Policy - 1991
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Evaluation of New Economic Policy - 1991
Negative Aspects:
Policy regarding Foreign Capital:
Assertions by critics assert that the welcome foreign capital may
lead us to selling of our sovereignty to multinationals.
Prudence demanded that utmost care to be taken to invite foreign
capital in high priority industries only.
Monitoring of payment of dividends by RBI
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Second Generation Reforms
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Increase in the rate of economic growth.
Control over fiscal deficit
Promoting FDI
Decline in deficit of BOP
Reduction in poverty
Objectives of second generation reforms..
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Second Generation Reforms .
The 2nd
generation reforms focus on 4 areas in particular: The financial system paying greater attention to the soundness of
banking systems and encouraging greater transparency and the
liberalization of capital accounts.
Good governance-By improving public resource management and
transparency of the economic and regulatory environment for private sector
activity
Composition of fiscal adjustment- Reducing unproductive expenditures
such as military spending and focusing spending on social sectors
Deeper structural reform- including civil service reform, labour market
reform, trade and regulatory reform, and agrarian reform.
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Defense production was opened up for Indian private sector with unto 26
per cent foreign equity.
Reduction in the minimum Government ownership in nationalized banks
from 51 to 33 per cent
FDI limit was raised to 49 per cent in banking sector
100 per cent foreign investment on domestic route has been allowed in
pharmaceutical sector , airport ,mass rapid transport systems andtownships
Reforms.
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100 per cent FDI allowed in hotel and tourism industry.
In the telecom sectorFDI up to 74 per cent has been permitted to
Internet service providers.
Contd..
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Custom duty was significantly reduced
Corporate tax was brought down to 30%
State level sales tax to VAT
Introduction of Fiscal Responsibility and Budget Management Act 2004
Extension of service tax to 51 services
Reforms contd.
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CAUSES OF PRESENT ECONOMIC SLOWDOWN
AND NEED FOR REFORMS
1. RISING INFLATION
Inflation adversely impacts the poor more than the rich or the middle classes
and results in further widening of gap between rich and poor.
When inflation is driven by high food prices , the consequences are
magnified since the economically weaker section spend more than half of
their incomes on food.
2. INEFFECTIVE MONETORY POLICIES
To keep check on inflation, government started tightening liquidity by
increasing interest rates which has contributed to a slowdown of
investments in industry and capital formation.
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3. WEAKENING RUPEE
The depreciation in the value of the Indian Rupees results in the
jumping of trade deficit by 56 per cent between 2010-11 and 2011-12.
More than half of the Indias import bill is accounted for two items-
crude oil and gold- are inelastic and Indias export market in the West
have shrunk drastically due to Great Recession
4. REDUCTION IN FIIs AND FDIs
FII and FDI are also reduced as investors are taking larger amountto their home countries even as some domestic industrialists prefer
to invest outside India rather than at home.
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5. RAMPANT CORRUPTION
Who doesnt know about
a. 2G scam
b. Coalgate
c. CWG scam
d. Adarsh Housing Society scam
e. Karnataka illegal mining scam
f. ISRO's S-band scam
Instead of ensuring transparency in the manner in which natural resources
are valued and allocated, government policies have been opaque,
resulting in a plethora of allegations of corruption and nepotism.
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6. POLITICAL PARALYSIS
No support from its coalition partners and
opposition in major initiatives taken up by ruling
party resulting in parliamentary dysfunctional.
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PRESENT REFORMS.
1. FDI in Multi-Brand Retail
Up to 51% FDI in multibrand retail trading has been permitted
A foreign investor would be required to invest a minimum of USD
100 million, with at least 50% invested in backend infrastructure
within three years of its initial investment.
At least 30% of products must be sourced from local small
industries
Retail outlets may only be set up in city with a population
exceeding 1 million.
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2. FDI in Civil Aviation
Foreign airlines will be permitted to invest up to 49%
of the paidup capital of Indian Companies
3. FDI in Broadcasting
FDI in broadcasting carriage sector hiked from 49% to 74%
4. FDI in Power Trading Exchanges
Foreign investment up to 49% (with an FDI limit of 26% and FII
investment limit of 23% of the paidup capital) has been permitted in
power trading exchanges
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5. Divestment of PSUs
The government approved the sale of its minority stakes in four PSUs,
namely, Hindustan Copper, Oil India, MMTC and National Aluminium
Company Limited, with a view to raise up to INR 15,000 crores
6. New tax cuts for business and introduction of a more transparent , non-
retrospective tax regime for investors & various schemes for Investors in the
equity market and boost the domestic investment (RGES)
7. Hike in diesel fuel prices by 14%
8. Curtailing the subsidy on natural gas cylinders
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2011-2012: 6.52010-2011:9.5
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Fiscal Deficit (% of GDP)Centre States Consolidated
1990-91 6.6 3.3 9.4
1996-97 4.1 2.7 6.4
2002-03 5.9 4.7 10.1
2003-04 4.8 4.4 8.4
2004-05(Revised)
4.5 3.8 8.3
2005-064.3 3.7
7.7
Source: Rao (2005), Table A4, RBI (2005a), Table 11
2009-10: 7.4%2010-11: 6.5%
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2012: 295235.2 US$ Mn2011: 2 US$ Mn
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WHAT CAN BE THE FUTURE REFORMS?
SPV(Special Purpose Vehicle) for PPP projects
Push infrastructure PSUs to spend their cash surplus
Clear private sector dues by PSUs and ministries
Set up Coordination Committee among related ministries
Use SEB bailout to clean up power sector
Map Land Using GIS and zone it
Speed up road construction
Ecommerce
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RECAP
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From : Finance minister (1991) To : Prime minister(2004- in office)
Two decades have passed but India still stands on the same growth rate facingsimilar problems and no solutions with same man holding power for around adecade who changed the scenario in 2 years..
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