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Indian Economic Reforms

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

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Indian Economic Reforms

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  1. Indian Economic Reforms Business Environment PGRM Rishi Raman Singh

  2. 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 • India’s 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

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

  4. INTRODUCTION (continued): • Systemic reforms Initiated • Reforms not reversed as they were after the 1966 crisis • Collapse of the Soviet Union • China’s rapid growth after 1978

  5. POST-REFORM PERFORMANCE2.1 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

  6. 2.2 Poverty Reduction • Table 3 • Fluctuations of Poverty Ratio around 50% during 1950-1980 • Reduction since 1980 • Still a long way to go

  7. 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

  8. 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

  9. 2.5 External Sector 2.5.1 Exports of Goods and Services • Table 6 • China versus India • Contribution of Software and BPO

  10. 2.5.2 Service Exports and BPO • AIMA task force report • IT and ITES share in GDP and employment growth • Backlash

  11. 2.5.3 Foreign Direct Investment • Table 7 • Modest inflows • Poor climate for FDI • Ministry of finance assessment • Bottlenecks

  12. 2.5.4 Special Economic Zones • Attempt to imitate China • Failure of past attempts

  13. 2.5.5 Exchange Rate and Reserves • Fear of Floating • Capital account convertibility

  14. 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

  15. 2.6 Financial Sector ReformsContinued… • 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

  16. 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

  17. 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

  18. CONCLUSION (Cont’d): • 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

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