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Economic Systems, Planning and Reforms in India

Economic Systems, Planning and Reforms in India

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Economic Environment and Policy (EEP) Session-3

Economic Systems, Planning and Reforms in India Dr. Tarun Das, Professor, IILM

Prof. Tarun Das, IILM

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Contents of this presentation
1. Economic Systems 2. Types and dimensions of planning 3. Economic Planning in India 4. Background of reforms in India 5. Scope of reforms in India

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4. Economic Systems

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4.1 Various Economic Systems
• Economic system means economic relations among various economic agents as regards ownership of resources, modes of production, distribution and consumption of goods and servics. It represents the sum total of institutions, arrangements and methods to deal with fundamental problems of an economy. Economic system determines who owns the means of production; who provides labour; and how relative shares of wages, interests, rents and profits are determined. In brief an economic system defines the institutional framework regulating business. Economic systems can be broadly classified as Capitalist, Socialist and mixed.

• •

• •

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4.2 Market Economy or Capitalism of socialism and According to Karl Mark, regarded as father

• • • • • •

communism, there are two distinct groups of people- Capitalist (who owns huge assets) and the Proletariat (who does not possess any assets). In a capitalist society, means of production are owned and controlled by the capitalists. Proletariat owns only labor. It lacks bargaining power, provides cheap labor and makes significant contribution to output. But a major share of national income is taken away by the capitalist in the form of rents, interests and profits. There exist wide disparities of incomes of the rich and the poor. High income inequalities and significant poverty ratios are dominant features of capitalism. Capitalism is often called free market economy which is not planned or controlled by a central authority and where government intervention is minimum. Govt makes basic rules and regulations for market players and formulates public policies for addressing inequalities and market imperfections. USA and Canada are the very good examples of market economy.

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• In a socialist economy, means of production are owned and controlled by the state. Individual consumers and producers loose their sovereignty. • Govt sets the rules and goals for the nation under which economic agents are made to work accordingly. • There is small level of inequality justified by the differences of individual capabilities. • The institution of private property does not exist to perpetuate inequality. • People contributes to the public exchequer according to their capacity to pay, but receives govt transfers according to their needs. There is fair distribution of national income among people by the state.

4.3 Centrally Planned/ Socialist Economy

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4.4 Command and Communist Economy
• It is the extreme form of centrally planned economy. This system refers to the political and economic development proposed by Karl Marx and developed and implemented by V.I. Lenin. • Under this system people rule both politically and economically and there is a classless society. • Totalitarian system of govt ruled by single authoritarian party. • All means of production are owned and controlled by the govt which also determines types, quantity, quality and prices of goods and services to be produced. • The Command economy has the following broad principles: (1) Cooperation; (2) Collectivization; (3) public ownership of property; (4) Equality and (5) Central planning and People’s planning. • China, former Soviet Union, Vietnam, and Cuba are best examples of Command Economy.
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4.5 Mixed Economy
• Mixed economic system is the middle path between free market economy and the pure socialist economy. It allows the co-existence of both private and public sectors. • Indian economy is a very good example of mixed economy. • Since independence and beginning of planning Indian govt has adopted the basic principle of “Growth with social justice and equity”. • Initially, many heavy industries were reserved for the public sector as these sectors are associated with high risk, low profitability, high capital/output ratio, long gestation period ad lumpiness of huge capital. • Since 1991 govt has adopted new economic policy and has opened most of the sectors for private investment. • Govt is also encouraging public-private partnership.
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4.6 Public Policies in India
• Since July 1991 Indian government has initiated wide-ranging reforms in trade, industry, financial and public sectors. • To improve efficiency, productivity and international competitiveness of Indian industries and to impart dynamism to overall growth process and systems. • Emphasis is on the role of market economy and the so-called LPG (Liberalization, Privatization and Globalization).
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4.7 Reorientation of Public Policies
 To create enabling environment for PublicPrivate Partnership (PPP);  To link fiscal incentives to productivity;  To streamline public investment programs;  To repair market failures;  To strengthen structures and institutions;  To put emphasis on multi-stakeholders consultations, flexibility, decentralization, selectivity, prioritization, outputs, outcomes, implementation, evaluation, monitoring and co-ordination of policies and programs.

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4.8 Redefining the role of Bureaucracy There is a distinct change of the mind set and role of the government officials:  From a controller to an enabler  From a supplier to a facilitator  From an operator to a policy maker  From a regulator to a trustee of social equity and environmental sustainability.

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4.10 Markets and Institutions
 Efficient markets are central for rapid and successful economic development.  But, the real markets are neither competitive nor perfect. Government’s role is to repair market failures and to correct market imperfections by strengthening institutions.  Institutions play an important role in developing fair, competitive, inclusive, efficient and integrated markets.  Institutions are also essential for implementing and evaluating public policies.  Institutions include organisations, rules, regulations, laws, conventions and informal norms.

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Successful development requires sound and strong public institutions:  To protect property rights,  To regulate market agents,  To maintain macro-economic stability,  To ensure social equity and justice,  To provide social safety nets,  To resolve conflicts. All these help in reducing transactions costs and provide incentives for competition.
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4.11 Role of Public Institutions

4.12 Building Efficient Institutions  Institution building is diverse involving all stakeholders viz. policymakers, corporate bodies and civil society.  It is an evolutionary and cumulative process, and requires open mind by all stakeholders to accept new ideas and innovations and to reward merits.  Most of the institutions that support markets need to be developed by the government for regulating, stabilizing and legitimizing their scope and functions.

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4.13 Institutions for Good Governance Good Governance requires the development and strengthening of the following institutions:  Economic and political institutions- Law and order, tax administration, social security systems, regulatory institutions, labour laws.  Independent audit- financial, physical performance and policy audit.  Independent judiciary,  Free Press,  Private voluntary organisations (NGOs, self help groups, Consumers Welfare Associations, and Civil Societies).
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4.14 Progress until now
 Significant progress has been made in India in these respects since 1991.  Indian economy today is more liberal and open, and there is greater participation of people in development.  Regulatory bodies have been set up for seaports, airports, telecom, electricity, insurance, pension, (POL under consideration).  Govt is setting up Competition Commission  Although progress is slow, outdated laws and Acts are being amended.
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1.1 Types of Planning
Policy planning versus physical planning Indicative planning versus target setting Consistency versus optimizing approach Sectoral versus economy wide planning Selective versus all purpose planning Learning versus blue print approach Consultancy versus dirigist approach Monitoring trends versus forecasting future Sound public investment programs versus overall investment planning
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1.2 Dimensions of Planning
Macro planning (National level) Meso (Middle level- States, UTs) Spatial (over space- SEZs, EPZs) Regional (over regions- planning for North Eastern States) Local (Municipalities, Corporations) Sectoral (over industries/ sectors) Micro (at unit levels- corporate planning) Inter temporal (over time) Intergenerational (over generations)

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1.3 Desirable characteristics of an Ideal Planning Model
Internal consistency Comprehensiveness Dynamic to take care of changes over time Unique and stable solutions Easy testing and calibration of the model with the help of available data, computer capacities and algorithms, statistical techniques • Model should be continually tested, reviewed, calibrated, monitored, updated, simulated and improved to make it more realistic. • • • • •

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1.4 Economic Planning in India (1)
 Since the beginning of the five year plans in 1951 Indian govt has adopted a mixed economic system guided by “Socialistic Pattern of Society” and basic objective of “Growth with Social Justice and Equity”.  Although basic objective remains the same, the emphasis and the type of planning model differed in subsequent five year plans.  Over the years Indian economy has become more liberal, more globalized and more people oriented.

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1.5 Economic Planning in India (2) Plan and Planning Focus on Ave.
period Model First Plan Harrod (1951-56) Domar Agriculture/ rural sector 3.6 4.3 2.9

growth

2nd Plan Mahalanobis Heavy (1956-61) Model Industry Third Plan Leontief Public Sector (1961-66) input-output enterprises Plan Holi- Swaminatha Green day(66-69 n Model Revolution
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Plan and period

1.6 Economic Planning in India (3)
Planning Model Focus on

Ave. growth 4.8

5th Plan Sukhomaya Poverty (1974-79) Chakravarty reduction Annual No Model (1979-80) Control of inflation

-4.9 5.6

Sixth Plan Sukhomaya Industrial (1980-85) Chakravarty Liberalisation 7th Tarun Das, IILM Leontief Prof. Plan (1985-90) InputEEP Session-3

ICT, Transport

5.7 22

Plan and Planning period Model

1.7 Economic Planning in India (4)
Focus on

Ave. growth 6.2 5.5 7.8

8th Plan Leontief (1992-97) InputOutput 9th Plan As above (1997-02) 10th Plan As above (2002-07) 11th Plan As above
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Growth and Poverty reduction As above As above

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Faster and

9%

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Economic Reforms in India

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2.1 Background of Economic Reforms in India • It is well known that in 1990-91 India faced an unprecedented foreign exchange crisis due to adverse impact of the Gulf war n the Indian economy. • Our foreign exchange reserves dwindled to less than $1 billion sufficient to finance only two weeks imports of essential items. • Non-resident Indians started withdrawing their deposits at a faster speed. • International credit rating organizations downgraded Indian scrips.

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• Windows of international commercial lending were closed for Indian corporate bodies as they lost confidence on the Indian economy. • At home there was fall of industrial output, high inflation at 16 percent and widespread unemployment. • In order to create International confidence the government o India had to lift gold physically from the chest of the Reserve of Bank of India at Bombay and deposit it with the Bank of England at London and the Bank of Japan at Tokyo.

2.2 Background of Economic Reforms in India

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2.3 Core Objectives of Reforms
• At that time in July 1991 the new govt with Narasimha Rao as PM and Manmohan Singh as Finance Minister lost no time to initiate wide-ranging reforms in trade, industry, financial and public sectors; • To improve efficiency, productivity and international competitiveness of Indian industries and to impart dynamism to overall growth process. • Emphasis is on the role of market economy and the so-called LPG (liberalization and privatisation along with globalization).
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2.4 Indian Economy in Pre-Reforms Period
 Mixed economy, but too closed  Far behind world-wide globalization
 High level of control, licenses and regulation  Monopolistic practices in public utilities  Complex tax regime with high rates

 High tariff walls & QRs on imports  Rigid factor markets-land, labour, capital  High fiscal deficits and public debt  Precarious balance of payments
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2.5 Rationale for Reforms
Over control, over regulation, licensing and high taxes and duties resulted in :
Low efficiency and productivity High transactions cost Corruption and rent seeking Non-optimal allocation of resources Sub-optimal choice of size, technology and location of industries Low quality but high prices of products Bureaucratic inefficiency and red tape
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2.6 Unique Features of Reforms
 Gradual, Step by Step, Evolutionary and Cumulative Approach, not a Big Bang, Shock Therapy or Revolutionary Approach  General political consensus  Strong emphasis on “human face”  Sovereignty and nationality constraint  Agency constraint- ideology of party in power  Preference for national-level decentralization  Prioritisation and sequencing of reforms  No write-off / rescheduling of external debt  Practically no sacrifice made by people

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2.7 Challenges of reforms
 To break the nexus among vested interests so that reforms can be implemented,  To change the mind-set of all policymakers and bureaucrats to accept change,  To achieve sustained growth with equity and social justice so that fruits of reforms reach everybody,  To involve all stakeholders in the process of development, because we know that no reforms can succeed unless we are able to take the people along with us.
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2.8 Reorientation of Public Policies
 To create enabling environment for publicprivate partnership  To link fiscal incentives to productivity  To streamline public investment programs  To reorient planning for multi-stakeholders consultations, flexibility, decentralisation, selectivity, monitoring and co-ordination  To repair market failures  To strengthen structures & institutions
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MAJOR REFORMS

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3.1 Macro adjustment policies
• Macro adjustment policies can be broadly divided into two groups- stabilization policies and structural reforms. • While stabilization policies aim at reducing macro economic imbalances by attacking demand, structural reforms aim at increasing supply and improving productivity and growth by encouraging competitiveness, efficiency and dynamism of industries and the corporate sector.

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3.2 Economic Reforms since 1991
Structural Reforms Stabilisation Policies • Reforms in agriculture, • Fiscal policies industry and infrastructure • Monetary policies • Reforms in trade and • Exchange rate policy external sector • Tariff policy • Financial sector reforms • Wage-income policy • Public sector reforms • Administered price • Social sector reforms • Factor market reforms policy - Land, Labor, Capital

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3.3 Paradigms of Reforms since 1991
Pre-Reforms Period 1.Quantitative licensing on trade and industry 2. State regulated monopolies of utilities and trade 3. Govt control on finance and capital markets 4.Restrictions on foreign investment and technology
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Post Reforms Period 1.Abolition of industrial and trade licensing 2.Removal of state monopolies, privati-sation & divestment 3.Liberalisation of financial and capital markets 4.Liberal regime for FDI, portfolio investment, foreign technology

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3.4 Paradigms of Reforms since 1991
Pre-Reforms Period 5.Import substitution and export of primary goods 6.High duties & taxes with multiple rates and large dispersion 7.Sector-specific monetary, fiscal and tariff policies 8.End-use specific, multiple & controlled interest rates
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Post Reforms Period 5.Export promotion and export diversification, no import bias 6.Significant reduction and rationalisation of all taxes and duties 7.Sector-neutral monetary, fiscal and tariff policies 8.Flexible interest rates without any end-use

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3.5 Paradigms of Reforms since 1991
Pre-Reforms Period 9.Foreign exchange control, no convertibility of rupee 10.Multiple and fixed exchange rates 11.Administered prices for minerals, utilities, essential goods 12.Tax concessions on exports and savings
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Post Reforms Period 9.Abolition of exchange control, full convertibility on current A/C 10.United and market determined exch.rates 12.Abolition of all administered prices except for few drugs 12.Rationalised and being phased out
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3.6 Paradigms of Reforms since 1991
Pre-Reforms Period 13.Explicit subsidies on food, fertilisers, and some essential items 14.Hidden subsidies on power, urban transport, public goods, POL 15.General lack of consumers protection and other rights
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Post Reforms Period 13. No change, budget subsidies on LPG and kerosene introduced 14.No change, but user charges are being rationalised, and subsidies targeted 15.Acts governing consumer rights, IPR, independent regulatory authority

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3.7 Paradigms of Reforms since 1991
Pre-Reforms Period 16.Central planning, discretion, high degree of bureaucracy 17.Outdated Companies Act 18. No exit policy for land and labour 19.Outdated legal system and commercial laws
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Post Reforms Period 16.Decentralisation, sound institutional framework, reforming civil services 17. No change- corporate governance and social responsibility introduced. 18. No change in labor policy, little change in land markets 19. No change

3.8 Industrial Sector Reforms
Status in Nov 2008 Status in June 1991 (a)Govt.licensing required (a)Licensing abolished for most industries which except for 9 industries which account for less accounted for 66% of than 10% of production new investment (b)MRTP Act amended. (b)Restrictions on expansion under MRTP ( c)Many items dereserved. ( c)Reservation of 836 (d)Only four viz.defense, items for SSI units atomic energy,some (d)18 major industries minerals, rail reserved reserved for public sector for public sector.
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3.9 Public Sector Reforms
Status in June 1991 Status in Nov 2008 (a)Budget support to (a) Budget Support PSEs: 1.5% of GDP abolished. (b) Price and purchase (b)No price preference, preference for PSEs but purchase ( c) Preferential treatment preference exists for bank credits ( c) No preferential treatment for bank credits (d) No hard budget constraints (d) MOUs strengthened (e) No disinvestment (e) Divestment allowed (f)SICA does not include (f)SICA amended to sick PSUs cover sick PSUs
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3.10 External Sector Reforms
Status in Nov 2008 Status in June 1991 (a)Fixed exchange rate (a)Exchange rate is market determined determined by RBI (b)QRs on 91% of imports (b)Most QRs removed (c)Most items (c)Imports of 55 goods decanalised canalised (d)Abolished except for (d)439 items of exports minerals & agriculture are s.t. export licenses (e)Abolished (e)Export taxes on agro (f)Fully convertible on products & minerals current account, (f)Rupee not convertible partially convertible on capital account.

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3.11 External Sector Reforms
Status in June 1991 Status in Nov 2008 (g)Strict Exchange control (g)FERA replaced by and FERA FEMA (h)Restrictions on foreign (h)FDI liberalised, no investment and restrictions on technology transfer technology transfer (i)Restrictions on joint (i)Liberalised ventures abroad (j)Direct export subsidies (j)Abolished on specific sectors (k)High tariff walls (k)Significant reduction of import duties

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3.12 Financial Sector
 Capital markets • Establishment of SEBI as regulator • Liberalisation in primary/ secondary markets  Banking • Major Steps taken for tackling NPAs • Reduction of government equity • Reduction in CRR, SLR & lending rates  Insurance  Opened for private and foreign participation Establishment of IRDA as a regulatory entity
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3.13 Progress of Financial Sector Reforms
Status in June 1991 • Indian firms not allowed to raise funds from foreign stock exchanges • Portfolio investment by foreign investors in Indian companies not allowed • Foreigners not allowed to buy G-secs
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Status in Nov 2008 • Indian firms allowed to raise foreign funds by GDR, ADR, FCCBs & offshore funds • FIIs, NRIs and OCBs allowed to buy stocks in Indian markets s.t. overall limit of 74% • FIIs/ NRIs/ OCBs allowed to buy G-secs
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3.14 Fiscal Reforms
 Fiscal Responsibility and Budget Management Act 2003  Reduction and Targets on fiscal deficit, revenue deficit and public debt  Simplifying rules and procedures  Strengthening tax administration  Widening tax base & enhancing buoyancy  Rationalisation and Reduction of rates

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3.15 Social Sector
 Greater involvement of states  Revamping of poverty alleviation and employment generation programmes  High priority to: • Universal education • Basic health • Drinking water • Sanitation • Women and child development
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4.1 Second Generation Reforms
Emphasis on • Reforms at Micro, Sectoral and State Levels • Reforms in Factor Markets- Land and Labour • Agriculture reforms • Infrastructure financing • Targeting of Subsidies • Hard budget constraints and control of contingent liabilities
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Greater thrust on rural infrastructure Review of Essential Commodities Act Focus on micro finance, rural credits Introduction of Kisan credit cards Amendment of Acts relating to agrobased products Setting up Agricultural Export Zones Expansion of futures and forwarding trading to agricultural products Watershed development
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4.2 Agricultural Reforms

4.3 Infrastructure Development
New Electricity Act 2003 Reforms in SEBs for Energy audit, commercialisation of distribution and restructuring of SEB Accelerated Power Development and Reform Enactment of Energy Conversation Act 2001 Larger funds for National Highway Development Model BOT schemes for roads/ bridges Corporatisation of DOT and sea ports Private investment in airports Convergence Act covering telecommunications, IT and broadcasting
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4.4 Financial sector
Establishment of Clearing Corporation Screen based trading in G-securities Replacement of Public Debt Act by Government Securities Act Reduction of govt equity in banks Voluntary Retirement Scheme (VRS) in banks Setting up of Asset Reconstruction Companies Legislation on securitisation Legislation to facilitate foreclosure in banking sector Private banks, insurance, provident companies allowed

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4.5 Industry
• Abolition of SICA and BIFR
• • • • • • • • Competition Commission set up Companies Act being amended Dereservation of SSI sector Petroleum sector liberalised Privatisation of PSEs Amendment in Industrial Disputes Act Amendment in Contract Labour Act Phased decontrol in fertilisers

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4.6 Human Development
Greater outlay on social sectors Better micro-credit facilities to women Enhancing social security cover for landless labourers and children in BelowPoverty-Line families Educational loan facilities for students Private Pension Fund set up social insurance for old age
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4.7 Fiscal Reforms
 Fiscal Responsibility and Fiscal Responsibility Act 2003  Expenditure control
• Downsizing government departments • Reduction of controlled interest rates

 Revenue enhancement
• • • • Introduction of VAT at state level Single rate of central excise @ 16% Expansion of service tax Enlarging scope of TDS

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4.8 Future Agenda
 Coordinating state level reforms  Accelerated privatisation  Liberalisation of labour and land laws  Strengthening regulation in infrastructure  Development of debt and bond markets  Provident and pension fund reforms  Thrust on state provision of basic needs  Rationalisation of user charges for public utilities

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Thank you Have a Good Day

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