Indian Economic Reforms

Business Environment PGRM Rishi Raman Singh

1. INTRODUCTION
Growth in Real GDP Averaged at 6% per Year during 1980-2005 India is in an enviable position among developing countries Fear of competition is receding confidence among Indian industries in their ability to compete in the world market. Success of IT is spilling over to manufacturing Indias standing as an economic power in the South Asian region and the world has risen None of this would have happened but for systemic reforms initiated in 1991 Origins of reforms

INTRODUCTION (continued)
Break from the Hindu rate of grown of 3.75% per year from 1950-80 Piece-meal and hesitant reforms of 1980s accompanied by fiscal profligacy and debt accumulation generated unsustainable growth Macroeconomic crisis of 1991 Approach to IMF and the World Bank

INTRODUCTION (continued):
Systemic reforms Initiated Reforms not reversed as they were after the 1966 crisis Collapse of the Soviet Union Chinas rapid growth after 1978

2. POST-REFORM PERFORMANCE 2.1 GDP Growth

Peak rate of 7.8% in 1996-97 Since then fluctuations in the range of 4% 8.5% Adjustment for monsoons and business cycle

2.2 Poverty Reduction

Table 3 Fluctuations of Poverty Ratio around 50% during 1950-1980 Reduction since 1980 Still a long way to go

2.3 Fiscal performance

Table 4 Slackening of fiscal consolidation efforts Failure to address subsidies Tax take low Progress in tax reforms High public debt

2.4 Domestic Savings and Investment

Table 5 Public sector dissaving Puzzling dominance of direct saving in physical assets Current account surplus for 3 years in a row Unhealthy accumulation of reserves

2.5 External Sector 2.5.1 Exports of Goods and Services

Table 6 China versus India Contribution of Software and BPO

2.5.2 Service Exports and BPO

AIMA task force report IT and ITES share in GDP and employment growth Backlash

2.5.3 Foreign Direct Investment

Table 7 Modest inflows Poor climate for FDI Ministry of finance assessment Bottlenecks

2.5.4 Special Economic Zones

Attempt to imitate China Failure of past attempts

2.5.5 Exchange Rate and Reserves

Fear of Floating Capital account convertibility

2.6 Financial Sector Reforms

Mixed picture in different segments Sea change compared to financial repression of pre-reform era Interest rates largely deregulated Greater competition from private banks and foreign banks Government pre-empts reduced significantly Establishment of autonomous Board of Financial Supervision Residential norms on capital adequacy Improved debt recovery and restructuring mechanism Government Securities Market with primary dealers as market matures Delivery Version Payment System Establishment of Clearing Corporation of India

2.6 Financial Sector Reforms Continued

Improvements in reach and depth of banking sector, its balance sheet, capital structure, net profits and NPAs. New financial products introduced Government Security Market has experienced increases in market size, lower yields and longer maturities Monetary Policy more independent and based on indirect instruments Turnover in foreign exchange markets increased Despite achievements problems remain Risk Assessment mechanisms not up to standard Not ready for Basel-II Public ownership a major problem Success in reforming of equity markets Creation of SEBI, National Stock Exchange Transactions costs fall and markets are integrated nationally

3. SOCIAL SECTORS AND NATIONAL COMMON MINIMUM PROGRAM

Consensus on poverty eradication as overarching objective of development Differences on strategies for achieving the objective Trickle down versus Pulling Up Employment guarantee Program

4. CONCLUSION:
Reform process stalled Plethora of committees and commissions to study issues studied several times earlier Actions cannot be delayed in several areas Further opening of the economy to external competition Have to move away from protectionism Attract larger inflows of FDI including in manufacturing Push for further liberalization of trade in goods and services in the Doha Round

CONCLUSION (Contd):
Financial sector reforms including further divestment Set up a date certain for capital account convertibility Fiscal consolidation Tax and Expenditure reforms Rethinking Fiscal Federalism Privitization National Investment Fund