economic reforms & challenges 2012
DESCRIPTION
Analysis of India's Economic liberalization with a focus on Challenges ahead. The harder more politically controversial reforms that are needed to get India on a 10% growth pathTRANSCRIPT
Economic reforms
Rahul Reddy
The Indian Economy
Part 1:Historical Overview
Pre-Independence 1. Agrarian economy (70% GDP from Agri. in
1947)
2. Food-deficient
3. Colonial exploitation
4. Zamindari system
5. Traditional industries (Cotton Textiles – low value-addition)
Triumphant Institute of Management Education Pvt. Ltd.
• Resource poor economy• Role of investment for the Govt• Socialistic thinking
• Soviet Influence on world economists
• Optimally use of resources – Centralized planning
• License Raj• Sellers market• No incentive for Quality or innovation• Poor Customer service• Cost plus pricing, no efficiency incentive
Pre-LPG
Triumphant Institute of Management Education Pvt. Ltd.
• Shortage and premiums• Licenses cap production quantity• Waiting periods & Premiums
• Inward looking economy• High degree of protection• Forex shortages & FERA• Import substitution
• Fundamental Distrust of Business• Complex set of rules and regulation
• Taxes• High taxes & Low revenues• Tax evasion & Black markets• Distinctive to produce & earn
• Huge trade deficits & Foreign Borrowing• Forex Crisis
Pre-LPG
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• De – Licensing
• Import liberalization
• Phased reduction of tariffs
• Reform Taxation – Direct & Indirect
• Reduction in tax rates
• Simplified tax regimes
• Forex reforms
• Allowed FII & FDI
• Dividend repatriation
• Repeal of FERA
1st Generation Reforms
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Institution Building
• Stock Exchange reforms – SEBI• BOLT & NSE
• Demat
• Derivatives
• Banking sector reforms
• Bank Computerization
• Private bank licenses
• Legal framework reforms
• MRTP repeal
• Dividend repatriation
• Electronic commerce
• Successful
• Telecom reforms
• Banking Reforms
• Insurance – Life & Non Life
Work in Progress
• Infrastructure
• Roads, Power, Ports, Airports
• Non Starters
• Labor law reforms
• Disinvestment
• Bureaucracy & Red tape
• Company Law reforms
• BIFR & Exit Policy
2nd Generation Reforms
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Reform Objectives
• Acceptance of private sector as the engine of Economic growth
• Using Market forces and Competition to bring about efficiency – not regulation
• Bringing the benefits of foreign trade, foreign investment and technology to our economy
Lessons from Reforms
• In a large democracy with many lobby groups, progress would be slow
• Process of economic reforms has to be customized for each nation
• The sequencing of reforms is critical
• In a federal structure, state and local governments need to be involved
Gradual Approach
• Exchange rate reforms• 25% depreciation in two steps• Dual Exchange rate as a transitional measure
• Duties and tariffs• Weighted Avg Tariff 80% in 1991 to 30% in
1997
• Lack of Political consensus or Public support• Privatization• Labor law reforms
Sequencing of reforms
• Institution building• SEBI, TRAI, etc• Stock Market & Banking reforms
• Enabling legislation• Repeal of MRTP, FERA etc
• Caution• Currency convertibility• Financial Integration
Has it worked?
• GDP growth rate• Growth in national Income and Per capita
• Poverty alleviation• Significant poverty reduction• Through growth – Job and business creation• Through anti poverty schemes (Funded by
Higher Tax Collections)
• Creation of World class organizations• Indian MNC’s
Challenges Ahead
• Infrastructure
• Public investment Vs Subsidies
• Unlocking Manufacturing growth
• Agricultural growth & productivity
• Tax reforms & National markets
• Poverty alleviation or Income Inequality
• Governance
Infrastructure
• Key component of Economic growth• Can add 2-3 percentage points to GDP growth• Requires huge resources ($200 Bn – Power
alone)• Private sector participation, PPP• Extremely complex structural reforms
• Electricity• Ports/Airports (35% higher shipping cost, Much
Higher turnaround time)• Roads & Railways• Telecom
Public investment Vs Subsidies
• The Short term Long term balance
• Public investment• Infrastructure• Public Health• Primary education
• Subsidies• Food & fertilizers• Petro products• Electricity
Unlocking Manufacturing growth
• The 60-20 trap• 60% of Indians are in agriculture and earn about 20% of national
income• Will need to shift people from Agri to Industry and then services
• Red tape & remnants of License Raj• No of regulations and regulatory bodies• Time delays in permits and permissions
• Rigid Labor Laws• Applicable only to 6% of pop (organized sector)• Encourages Capital intensive production• Encourages outsourcing of production
• Land acquisition issues
• Flow of Talent to Services sector
• Lack of skilled, Trained manpower
Legal Reforms
• The Legal system has huge impact on the economy• Laws and rules• Regulators and Inspectors• Enforcers (Police and Judiciary)
• Laws and Rules• 1000s of Laws and Sub laws• Outdated, Ambiguous, Complex and often Contradictory
• Regulatory system• Large number of regulatory bodies with sweeping powers• Inspector Raj leads to Delays, harassment and corruption
Legal Reforms
• Police and Judicial system• Understaffed and ill trained police force• Overloaded judicial system• Delayed justice• No enforcement of contracts• Inadequate protection of property rights
• Solutions• Repeal, Rationalize and simplify rules and regulations• Dismantle inspector Raj, Change mindset• Increase courts and judges, reform procedures and
use technology
Agricultural growth & productivity
• Fragmented landholdings
• Under employment and Disguised unemployment
• Highly regulated markets• Mandi – Broker nexus
• Storage and transport
• Market distortions• Urea Vs Phosphate• Price Signals & Crop Choices
Agriculture reforms
• Free markets in agriculture
• Contract farming, Corporate – Farmer partnership• Better supply chain, Cold storages, Food processing and
exports
• Agri-Productivity• Seeds, Technology and practices
• Long term goal• Shift of employment from Agriculture to Industry and
Services• Consolidation of land holdings, better investments and
management
• Public Investment – Irrigation and infrastructure
Tax reforms & National markets
• Low Tax to GDP ratio
• Black money – Parallel economy
• Indirect tax reform• Goods and Service Tax• One national market
• Direct tax reform• Lower taxes• Elimination of Exemptions
• Job creation• Private sector, Manufacturing and Services• Education and skill development
• Entrepreneurship• Awareness, Information of opportunities• Availability of credit• Red tape and regulations ‘Inspector Raj’
• Social Security• Subsidies• NREGA• Public health• Direct Cash Transfer – Conditional cash transfer
Fiscal Consolidation
• Can we get Fiscal Deficit back under control?
• FD expected to hit 5.5% against Budget target of 4.6%
• Tax Buoyancy slows down due to Falling GDP growth
• Ever expanding Subsidy Bill• Petroleum, Fertilizer, Electricity, Food Security Bill
• Expenditure control• Huge increase in social sector outlay• Need to Focus on better efficiency in delivery systems
Subsidy Vs Direct Cash Transfer
• Direct Cash Transfer• In place of Fertilizer, Kerosene Subsidies• Using the UID (Aadhar) In a phased manner
• Advantages of DCT• Cuts leakages• Reduces administrative costs• Gives the poor a choice
• Disadvantages• Prone to misuse (Alcohol and Gambling)