Economic reforms in

INDIA since 1991: Has

Gradualism worked?
Presented By:
Group 2
Anshul Sharma(14PGP002)
Suraj Dhende(14PGP015)
Pradeep Choudhary(14PGP028)
Rohit Krishnan(14PGP041)
Vishnu KC(14PGP053)

Indias growth Performance after

1991
Gradualist Approach to Reform according to author is Frustratingly slow
pace of implementation
Even with gradualist pace, India should be able to achieve significant policy
changes over ten years.
Average growth rate was 6% from 1992-93 to 2002-03
Fastest growing developing country of the World in 1990s

Various reform Programs to be

undertaken

Savings, Investment and Fiscal Discipline

Reforms in Industry and Trade Policy
Foreign Direct Investment
Reforms in Agriculture
Infrastructure Development
Financial Sector reform
Privatization
Social Sector development in Health and Education
Conclusions

Savings, Investment and Fiscal

Discipline
Objectives of the reforms:
Reduction in Fiscal Deficit was an urgent priority at the start of the reforms.
Reduced it to 7 per cent in 1992-93 from 9.4 per cent in 1990-91.

Medium term goal was to increase public savings.

Reduced from +1.7 in 1996-97 to -1.7 in 2000-01

To achieve growth rate of 8% , growth rate of investments should

range from 36 to 38 percent of GDP.
Tax revenues also fell from 9.7% of GDP(1991-92) to 8.8 % of
GDP(2000-01), when it had to increase at least by 2 percentage
points.

Savings, Investment and Fiscal

Discipline
Central government subsidies can also be reduced, which are
highly distortionary and poorly targeted.
Overstaffing is estimated to be 30% and downsizing would
reduce expenditures.
Such failures have squeezed the capacity of both states and center
to undertake any public investment.
It will lead to difficulties in maintaining 6% for next 10 years, let
alone achieving a target of 8%.

Industry Policy
List of industries reserved for private sector was reduced to three:
o Defense
o Aircraft & Warships
o Atomic Energy & Railway Transportation

Industrial licensing has been abolished, except for a few industries.

New competition law that regulated anti competitive behavior was
established.
Action has been inadequate for the policy of reserving production of selected
items(800 items) for a small scale sector only.
Private investors rewuire many permissions due to a lot of bureaucracy.
Foreign investment varies greatly from state to state due to ease of doing
business.

Trade Policy
Import licensing was abolished for capital goods and intermediaries in 1993,
with a switch to flexible exchange rate regime.
Removing restrictions on finished goods was harder because a large no. of
local players were affected.
Average import duty declined from 72.5% in 1991-92 to 24.6% in 1996-97,
however, increased by 10% after that for next four years.
Tariff levels are significantly lower than in 1991, but remain highest in
developing nations.

FDI
The country allows 100% foreign ownership in a large number of industries
except banks, insurance companies, telecom and airlines.
For greater investment levels than permitted, applications are considered by
FIPM (Foreign Investment Promotion Board)
First permitted by government in 1993
Resulted in better technology utilization and improved competence and
quality

FDI The other side

Export performance has improved only modestly (5.7% - 9.4%). This is
because

o Slow progress in lowering import duties have made India a high cost producer, thereby less attractive for export
production
o Reservation of potentially exportable products in the small scale sector
o Poor quality of Indian infrastructure
o Inflexibility of labor market

IT Sector is the only exception here

Agriculture
Agriculture growth has decelerated in later half of 1990s.
Reduction of production and accompanying depreciation in exchange rate
has helped agricultural exports
Decline of public investment in irrigation, drainage, soil and water
management and roads have reduced productivity and revenues
This decline is due to deterioration in fiscal position of state government

Agriculture (Contd.)
Governments price support levels for grains are set on basis of
recommendation of commission but recently they are being set much higher,
encouraging over production
Essential Commodities Act
o empowers state governments to impose restrictions on movement of agricultural products across state and
district borders

This act denies farmers the benefit of an integrated national market

Several other outdated laws need to be reviewed as well

Infrastructure
Traditionally provided to public sector but later opened for private sector as
well
Was difficult to create an atmosphere for private sector to enter on terms that
suits both customers and investors alike
Expansion of generation capacity by electrical utilities in 1990s was only half
of the set target
Also, the quality of power was poor with large fluctuations and frequent
interruptions
More comprehensive reform is underway to target existing flaws
Tariff rationalization and penalties for non payment of dues are going to be
implemented

Infrastructure (Contd.)
Telecom sector is doing much better primarily due to success in IT
Civil aviation and ports also seem to be doing well, however proposals to
attract private investments are yet to be made
Indias roads are extensive but of low quality in most parts
Major routes have low capacity and poor maintenance
Railway sector suffers from financial constraints due to politically determined
fare structure
Expert group on Indian Railways (2002) submitted a comprehensive program
to convert railways in to a corporation, but no decision was announced

Financial Sector
Banking Sector reforms include:
Measures for liberalization
- Dismantling the complex system of interest rate controls
- Eliminating prior RBI approval in the case of large loans
- Reducing the number of statutory requirements to invest in government securities
Measures for increasing financial soundness
- Capital Adequacy
- Norms for strengthening banking supervision
Measures for increasing competition
- Liberal Licensing
-greater freedom of expansion for private banks

Financial Sector (Contd.)

Policy governing public sector banks dominates the banking system
hence to increase the efficiency of the banking sector the efficiency of public sector banks has
to be increased.
Public sector banks that perform badly have to be recapitalized rather than weeded out
however this will upset market forces as more efficient private banks will not be able to
expand
Some intermediary actions that could be taken to improve the performance of public sector
banks are as follows
-Shifting effective control from the government to the boards of the banks
-Removing civil servants and RBI representatives from the boards of PSBs
-Implementing a prompt corrective action framework
-Closure of banks that have been declared as insolvent

Legal system restricts creditors from enforcing their claims and lack of institutional expertise
limits the number of regulations placed on the stock market

Privatization
Policy of disinvestment Government sold minority stake in a public sector
enterprise while retaining the management share.
Disinvestment had limited success
1998-Government decides to award 74 per cent equity in Modern Foods to HUL
announced its willingness to reduce its stake to 26% and transferred
management control
To increase public interest of privatization- Proceeds of privatization maybe
used to finance additional expenditure on social development and settling
outstanding public debt

Social Sector Development in

Health and Education
Social Indicators in 1991 lagged behind levels of South East Asian countries 20 years
earlier
During the 10 years between 1991 to 2001 the central government expenditure on
social services and rural development increased from 7.6 to 10.2 of the total
expenditure
Problems:
o Poor delivery systems
o Lack of resources
o Non attendance of teachers in schools

Solution requires a greater participation by beneficiaries in supervising health and

education systems which in turn requires decentralization to local levels and proper
participation at these levels