Economic liberalization in India - Policy Regimes, Indian Economy Video Lecture | Indian Economy - B Com

hello student welcome to the lecture on
economic reforms in India and after this
lecture we were they able to learn the
following objectives explain the
features of economic reforms in India
discuss privatization and liberalisation
explain about globalization and
disinvestment understand the meaning and
functions of money discuss the role and
functions of Reserve Bank of India
explain the monetary policy in India
discuss the role and functions of
commercial bank managerial economics
introduction initially the government
adopted a limited approach of selling a
minority stake in public sector
enterprises while retaining management
control with the government a policy
described as disinvestment to
distinguish it from privatization the
liberalisation of the Indian economy
along with globalization helped the
country to step up its GDP growth rate
considerably economic reforms in India
since 1991 India's economic performance
in the post reform spirit has many
positive features the average growth
rate in the ten year period from 1990 to
93 to 2001 - was around 6.0 percent
which puts India among the fastest
growing developing countries in the
1990s in sharp contrast growth in the
1990s
was accompanied by remarkable external
stability despite the East Asian crisis
poverty also declined significantly in
the post reform period and at a faster
rate than in the 1980s according to some
studies India remained among the fastest
growing developing countries in the
second sub period because other
developing countries also slowed down
after the East Asian crisis but the
annual growth of 5.4% was much below the
target of 7.5% which the government had
set for the period world economic growth
was slower in the second half of the
1990s and that would have had some
dampening effect but India's dependence
on the world economy is not large enough
for this to account for the slowdown
this in turn is often attributed to
India's gradualist approach to reform
which has meant a frustratingly slow
pace of implementation economic reforms
in India since 1991 savings investment
and fiscal discipline fiscal profligacy
was seen to have caused the balance of
payments crisis in 1991 and a reduction
in the fiscal deficit was therefore an
urgent priority at the start of the
reforms the combined fiscal deficit of
the central and state governments was
successfully reduced from nine point
four percent of GDP in 1990-91
to seven percent in both 1991-92 and
1992-93 and the balance of payments
crisis was over by 1993 public savings
detorri ated steadily from plus 1.7
percent of GDP in 1996-97
- - 1.7% in 2000-2001 this was reflected
in a comparable detoriation in the
fiscal deficit taking it to 9.6 percent
of GDP in 2000 2001 total financial
savings of households amounted to only
11 percent of GDP the fiscal deficit
effectively preempts about 90 percent of
household financial savings for the
government the growth rate of 6% per
year in the Bose reform spirit was
achieved with an average investment rate
of around 23% of GDP
accelerating to 8% growth will require a
commensurate increase in investment
growth rates of this magnitude in East
Asia were associated with investment
rates ranging from 36 to 38 percent
economic reforms in India since 1991
reforms in industrial and trade policy
reforms in industrial and trade policy
were a central focus of much of India's
reform effort in the early stages
industrial policy prior to the reforms
was characterized by multiple controls
over private investment which limited
the areas in which private investors
were allowed to operate and often also
determined the scale of operations the
location of new investment and even the
technology to be used the industrial
structure that evolved under this regime
was highly inefficient and needed to be
supported by a highly protective trade
policy often providing tailor-made
protection to each sector of industry
industrial policy industrial policy has
seen the greatest change with most
central government industrial controls
being dismantled
the list of industries reserved solely
for the public sector which used to
cover 18 industries including iron and
steel heavy plant and machinery
telecommunications and telecom equipment
minerals oil mining air transport
services and electricity generation and
distribution has been drastically
reduced to three defence aircrafts and
warships atomic energy generation and
railway transport private investors
require much permission from state
governments to start operations like
connections to electricity and water
supply and environmental clearances
trade policy trade policy reform has
also made progress though the pace has
been slower than in industrial
liberalisation imports of manufactured
consumer goods were completely banned
for capital goods raw materials and
intermediates certain lists of goods
were freely importable but for most
items where domestic substitutes were
being produced imports were only
possible with import licenses import
licensing was abolished relatively early
for capital goods and intermediates
which became freely importable in 1993
simultaneously with the switch to a
flexible exchange rate regime import
licensing had been traditionally
defended on the grounds that it was
necessary to manage the balance of
payments but the shift to a flexible
exchange rate enables the government to
argue that any balance of payments
impact would be effectively dealt with
through exchange rate flexibility
quantitative restrictions on imports of
manufactured consumer goods and
agricultural products but finally
removed on April 1 2001 almost exactly
10
years after the reforms began and that
in part because of a ruling by a World
Trade Organisation dispute panel on a
complaint brought by the United States
economic reforms in India since 1991
foreign direct investment liberalizing
foreign direct investment was another
important part of India's reforms driven
by the belief that this would increase
the total volume of investment in the
economy improve production technology
and increase access to world markets
procedures for obtaining permission were
greatly simplified by listing industries
that are eligible for automatic approval
up to specified levels of foreign equity
hundred percent seventy four percent and
51 percent
potential foreign investors investing
within these limits only need to
register with the Reserve Bank of India
Indian companies have upgraded their
technology and expanded to more
efficient scales of production foreign
investment in flows increased from
virtually nothing in 1991 to about 0.5
percent of GDP high levels of protection
compared with other countries also
explains why foreign direct investment
in India has been much more oriented to
the protected domestic market rather
than using India as a base for export in
flexibility of the labor market is a
major factor reducing India's
competitiveness in exports and also
producing industrial productivity
generally the increased competition in
the goods market has made labour more
willing to take reasonable positions
because lack of flexibility only leads
to forms losing market share the
government has recently announced its
intention to amend the law and Rea
the level of employment above which
firms have to seek permission for
retrenchment from hundred workers at
present to 1000 while simultaneously
increasing the scale of retrenchment
compensation economic reforms in India
since 1991 reforms in agriculture a
common criticism of India's economic
reforms 'as have been excessively
focused on industrial and trade policy
neglecting agriculture which provides
the livelihood of 60% of the population
the reduction of protection to industry
and the accompanying depreciation in the
exchange rate has tilted relative prices
in favour of agriculture and helped
agricultural exports government price
support levels for food grains such as
wheat are supposed to be set on the
basis of the recommendations of the
Commission on agricultural costs and
prices a technical body which is
expected to calibrate price support to
reasonable levels agricultural
diversification also calls for radical
changes in some outdated laws The
Essential Commodities Act which empowers
state governments to impose restrictions
on movement of agricultural products
across state and sometimes even district
boundaries and to limit the maximum
stocks wholesalers and retailers can
carry for certain commodities was
designed to prevent exploitive traders
from diverting local supplies to other
areas of scarcity or from hoarding
supplies to raise prices economic
reforms in India since 1991
infrastructure development rapid growth
in a globalized environment requires a
well-functioning
infrastructure including specially
electric power road and rail connected
telecommunications air transport and
efficient ports private investors were
expected to produce electricity for sale
to the state electricity boards which
would control of transmission and
distribution private investors fearing
non-payment by the state electricity
boards insisted on arrangements which
guaranteed purchase of electricity by
state governments backed by additional
guarantees from the central government
the results in telecommunications have
been much better and this is an
important factor underlying India's
success in information technology to
private sector domestic airlines which
began operations after the reforms now
have more than half the market for
domestic air travel
India's road network is extensive but
most of it is low quality and this is a
major constraint for interior locations
a few toll roads and bridges in areas of
high traffic density have been awarded
to the private sector for development
the railways are a potentially important
means of freight transportation but this
area is untouched by reforms as yet
economic reforms in India since 1991
financial sector reform reforms in the
stock market were accelerated by a stock
market scan in 1992 that reveals serious
weaknesses in the regulatory mechanism
reforms implemented include
establishment of a statutory regulator
promulgation of rules and regulations
governing various types of participants
in the capital market and also
activities like inside trading and
takeover beds introduction of electronic
trading to improve transparency in
establishing prices and
dematerialization of
is to eliminate the need for physical
movement and storage of paper securities
an important recent reform is the
withdrawal of the special privileges
enjoyed by the unit Trust of India a
public sector mutual fund which was the
dominant mutual fund investment vehicle
when the reforms began the insurance
sector including pension schemes was a
public sector monopoly at the start of
the reforms the need to open the sector
to private insurance companies was
recommended by an expert committee in
1994 but there were strong political
resistance an independent insurance
development and regulatory authority
have now been established and 10 new
life insurance companies and six general
insurance companies many with well-known
international insurance companies as
partners have started operations
economic reforms in India since 1991
social sector development in health and
education India social indicators at the
start of the reforms in 1991 lagged
behind the levels achieved in Southeast
Asia 20 years earlier when those
countries started to grow rapidly in a
research it was found that central
government expenditure on towards Social
Services and rural development increased
from 7.6 percent of total expenditure in
1990-91 to 10.2 percent in 2000 2001 as
a percentage of GDP these expenditures
show a dip in the first two years of the
reforms when fiscal stabilization
compulsions were dominant but there is a
modest increase there after closing the
social sector gaps between India and
other countries in Southeast Asia will
require additional expenditure which in
turn depends upon improvements
the fiscal position of both the central
and state governments the literacy rate
increased from 52% in 1991 to 65% in
2001 a faster increase in the 1990s than
in the previous decade and the increase
has been particularly high in some of
the low literacy states such as Bihar
Madhya Pradesh Uttar Pradesh and
Rajasthan privatization initially the
government adopted a limited approach of
selling a minority stake in public
sector enterprises while retaining
management control with the government a
policy described as disinvestment to
distinguish it from privatization the
principal motivation was to mobilize
revenue for the budget though there was
some expectation that private
shareholders would increase the
commercial orientation of public sector
enterprises an important recent
innovation which may increase public
acceptance of privatization is the
decision to earmark the proceeds of
privatization to finance additional
expenditure on social sector development
and for retirement of public debt
privatization is clearly not a permanent
source of revenue but it can help fill
critical gaps in the next five to ten
years while longer-term solutions to the
fiscal problem are attempted
liberalisation prior to 1991 India
followed mixed economy approach to
economic development industry is
critically important for the economy
were retained by the government it was
felt that this would preside necessary
resources to undertake development
activities in different segments of the
economy private sector was allowed to
establish industries and business
but was subject to controls and
regulations so that resources and wealth
would not get concentrated in a few
hands in case of public sector the
government invested a considerable share
of its revenues and started many public
sector enterprises the purpose behind
this strategy to eliminate poverty
reduce inequalities in the distribution
of income and wealth and achieve
economic growth with social justice
globalization and its impact India's
economy opened up during the early 90s
the policy measures on the domestic
front demanded that there was a
requirement of multinational
organizations to set up their offices
here the direct impact of globalization
was directly seen on the GDP of the
country which increased significantly
the liberalisation of the Indian economy
along with globalization helped the
country to step up its GDP growth rate
considerably the GDP growth rate picked
up instantly from 5.6 percent in 1990 91
to 77.8%
in 1996-97 globalization has also played
a major role in generating employment
opportunities in India disinvestment the
new policy of liberalization
privatization and globalization
de-emphasize the role of the public
sector in the nation's economy
this investment involves the sale of
equity and bond capital invested by the
government in PS use it also implies the
sale of government's loan capital NPS
use through securitisation this
investment is generally expected to
achieve a greater inflow of private
capital and the use of private
management practices in PS use as well
as enable more effective monitor
of management disciplined by the private
shareholders the government has not used
the disinvestment proceeds to finance
expenditure on capital accounts that is
the disinvestment policy has resulted in
capital consumption rather than
generation total disinvestment of PS use
would naturally concentrate economic and
political part in the hands of the
private corporate sector the US
economist Kenneth Galbraith had
visualized a roll of countervailing
power for the PS use money money is a
token or item which acts as a medium of
exchange that has both legal and social
acceptance with regards to making
payment for buying commodities or
receiving services as well as repayment
of loans in addition money also
functions as a standard of value and a
store of value because with the help of
money the value of various goods and
services can be measured according to a
small number of economists money is a
standard of deferred payment money
refers both to currency specifically a
large number of currencies that
circulate under the legal tender status
and different types of financial deposit
accounts for example savings account
demand deposits as well as certificates
of deposit according to the theory of
modern economy currency is the most
miniscule constituent of money supply
money has no similarities with real
value as real value is the fundamental
component of the study of economics the
study of economics has a key focus on
money and money is mostly associated
with finance money characteristics of
money money is a medium of exchange or
it functions as an intermediary of trade
money functions as a unit of account or
a standard mathematical unit of
measurement which is used to measure the
market value of various commodities and
services and other dealings money
functions as a store of value because
the forms of money can be stored and
recovered and used for any future
purpose money has the highest degree of
liquidity for the simple reason that
money has the universal acceptance and
recognition as the basic form of
currency money functions of money money
as a unit of value the first function of
money is to be a unit of value or a unit
of account the monetary unit is the unit
in terms of which the value of all goods
and services is measured and expressed
accounting is simplified as all items
will be recorded in terms of monetary
units that can be added and subtracted
money is a useful measuring rod of value
only if the value of money itself
remains constant the value of money is
linked to its purchasing power
purchasing power is the inverse of the
average or general level of prices as
measured by the Consumer Price Index etc
as the general price level increases a
unit of money can purchase a lesser
amount of goods and services so the
value or purchasing power of money
declines money will be a useful unit of
value only as long as its own value or
purchasing power remains constant money
as a medium of exchange money also acts
as a medium of exchange or as a medium
of payments this function of money is
served by anything that is generally
accepted by people in exchange for goods
and services any
has been quite a variety of things
across places and times money will then
reduce the time and energy spent in
barter or trade may be considered barter
one good or service is traded for
another good or services either directly
or indirectly with money acting as the
intermediary by acting as an
intermediary money increases the ease of
trade money is also called a bearer of
options or generalized purchasing power
this indicates the freedom of choice
that the use of money offers money as a
standard of deferred payments money
performs the previous two functions then
it may also perform the function of
being the unit in terms of which
differed of future payments are stated
as long as money maintains a constant
value through time it will overcome the
problems associated with making future
payments with specific commodities money
as a store of value money becomes a unit
of value and a means of payment then it
may also perform the function of serving
as a store of value the holders of money
are holders of generalized purchasing
power that can be spent through time it
may be noted that any asset other than
money may also perform the function of
store of value for examples bonds
land houses etc these assets have the
advantage that unlike money they ield
income and may appreciate in value over
time they may involve storage costs they
may not be liquid in the sense that they
could not be quickly converted into
money without loss of value and they may
depreciate in value a person may choose
to store value in any form depending on
the durations of income safety and
liquidity banking Reserve Bank of India
RBI banking is defined as the accepting
for the purpose of lending or investment
of deposits money from the public
repayable on demand and withdraw able by
checks drafts and orders or otherwise
the central bank of the country is the
Reserve Bank of India RBI it was
established in April 1935 with a share
capital of INR 5 crores on the basis of
the recommendations of the Hilton Young
Commission Reserve Bank of India was
nationalized in the year 1949 general
superintendence and direction of the
bank is entrusted to central board of
directors of 20 members the governor and
four deputy governors one government
official from the Ministry of Finance
ten nominated directors by the
government to give representation to
important elements in the economic life
of the country and four nominated
directors by the central government to
represent the four local boards with the
headquarters at Mumbai Kolkata Chennai
and New Delhi the Reserve Bank of India
act 1935 was commenced on April 1 1935
the act 1934 ii of 1934 provides the
statutory basis of the functioning of
the bank the bank was constituted for
the need of the following to regulate
the issue of banknotes to maintain
reserves with a view to securing
monetary stability and to operate the
credit and currency system of the
country to its advantage
banking role and functions of Reserve
Bank of India of any group of colleges
welcomes you in this special lecture my
topic for today's discussion is
the RBI as a Monetary Authority I would
discuss this whole chapter in three
parts one is meaning and another is
objectives and third one is tools so for
a remaining is concerned I would like to
make it very clear that the basic policy
of the monetary authority is Reserve
Bank of India does is making available
adequate money for growth and
development Reserve Bank also decides
cost of money and credit and based on
this it announces its monetary policy
for announcing monetary policy Reserve
Bank of India undertakes a review of the
economy quarterly and in each quarter
bit quarterly review and this way
Reserve Bank of India undertakes it
banking functions of commercial banks
accepting deposits the most significant
and traditional function of commercial
bank is accepting deposit from the
public savings deposits are paid a small
rate of interest and the bank imposes
certain restrictions on the withdrawal
of money fixed deposits are made by the
persons who have idle money with them
they can withdraw their money only after
the expiry of the fixed period of time
providing loans banks provide loans
against approved securities to the
public and companies loans can be
granted in the form of cash credit
short-term loan overdraft discounting of
bills and demand loans credit creation a
bank can be called the factory or the
manufacturer of the credit in the
process of accepting and depositing
money banks multiplied credit in the
economy it depends on cash reserve ratio
transfer of funds commercial banks can
transfer funds of a customer to other
customers
counts in the same or the different bank
through checks drafts mail transfers
telegraphic transfers etc agency
functions collection of bills drafts etc
collection of interest dividends etc on
behalf of the customers payment of
interests installment of loans insurance
premium etc purchase and sale of
securities banks also execute the will
of their customers after their debts
other functions payment of credit
letters and traveler checks gift checks
bank draft etc banks also provide local
services for the valuable security of
their customer and charges a very
nominal fee banks also deal in foreign
exchange such banks are usually called
foreign exchange banks summary reforms
in industrial and trade policy were a
central focus of much of India's reform
effort in the early stages the central
government's effort must be directed
primarily towards improving revenues
because performance in this area has
deteriorated significantly in the post
reform period industrial policy has seen
the greatest change with most central
government industrial controls being
dismantled rapid growth in a globalized
environment requires a well-functioning
infrastructure including specially
electric power road and rail
connectivity telecommunications air
transport and efficient boards india's
road network is extensive but most of it
is low-quality
and this is a major constraint for
interior locations india's reform
programme included wide-ranging reforms
in the banking system and the capital
markets relatively early
in the process with reforms insurance
introduced at a later stage a bank can
be called the factory or the
manufacturer of the credit in the
process of accepting and depositing
money banks multiplied credit in the
economy it depends on cash reserve ratio