Ramesh Singh : Summary of Economic Reforms UPSC Notes | EduRev

Indian Economy for UPSC CSE

UPSC : Ramesh Singh : Summary of Economic Reforms UPSC Notes | EduRev

The document Ramesh Singh : Summary of Economic Reforms UPSC Notes | EduRev is a part of the UPSC Course Indian Economy for UPSC CSE.
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ECONOMIC REFORMS

Planning Model

  • Till the rise of the Soviet Union, the prevalent development strategy in the Euro- American countries was the capitalist system of economy, which promoted the principles of laissez-faire and dominant role for private capital in the economy. 
  • Once the Soviet Union went for the planning model most of the developing countries after their independence were influenced by socialism and the governments there took a central role in planned development.
  • As these economies were dominated by foreign colonisers, they worried that opening the economy to foreign investment would lead to a new form of domination, the domination by large multinationals.

Washington Consensus

  • By the early 1980s, a new development strategy emerged. Though it was not new, it was like the old idea getting vindicated after failure of a comparatively newer idea.
  • After the world recognised the limits of a state-dominated economy, arguments in favour of the market, i.e., the private sector, was promoted emphatically. 
  • Many countries shifted their economic policy just to the other extreme arguing for a minimal role of the government in the economy. Governments of the socialist or the planned economies were urged/suggested to privatise and liberalise, to sell off state-owned companies and eliminate government interventions in the economy.
  • These governments were also suggested to take measures which could boost the aggregate demand in the economy (i.e., macroeconomic stability measures). 
  • The broad outlines of such a development strategy were regarded as being inspired by the Washington Consensus.

Mixed Economy

  • By the mid-1990s, it had become increasingly clear that neither of the extremes—the Washington Consensus or the state-led planned economy—were the ultimate strategies of development.
  • The success achieved by the East Asian economies even if we take into account their setback due to the financial crisis of 1997-98, stands out in marked contrast to the experiences of other economies of the time who were following the Washington Consensus.
  • The East Asian economies have not only been able to propel higher growth rates, but they have been greatly successful in reducing poverty, promoting education and healthcare, etc.

ECONOMIC REFORMS IN INDIA

  • On July 23,1991, India launched a process of economic reforms in response to a fiscal and balance- of-payment (BoP) crisis.
  • The reforms were historic and were going to change the very face and the nature of the economy in the coming times.
  • The reforms and the related programmes are still going on with changing emphasis and dimensions, but they are criticised as being slow ever since the UPA Government came to power in May 2004. 
  • Back in the mid-1980s, the governments had taken its first steps to economic reforms.
  • While the reforms of the 1980s witnessed rather limited deregulation and 'partial liberalisation of only a few aspects of the existing control regime, the reforms started in early 1990s in the fields of industries, trade, investment and later to include agriculture, were much 'wider and deeper'.

Obligatory Reform

  • Similar reform process started by some other economies since the 1980s were voluntary decisions of the concerned countries. But in the case of India it was an involuntary decision taken by the government of the time in the wake of the BoP crisis.
  • Under the Extended Fund Facility (EFF) programme of the IMF, countries get external currency support from the fund to mitigate their BoP crisis, but such supports have some obligatory conditionalities put on the economy to be fulfilled.
  • There are no set rules of such conditions already available with the IMF, though they are devised and prescribed to the BoP-crisis-ridden economy at the time of need.
  • The masses were convinced that the government has bowed down to the diktats of the IMF, the imperialist forces, the multinationals, etc.
  • The politics of economic reforms damaged India more than the reform has benefitted the country. It would not be an exaggeration if we conclude that economic reforms had no political consensus.
  • There was enough scope for the critics to criticise India's economic reforms as prescribed and dictated by the IMF. The process of economic reforms in India had to face severe criticism from almost every quarter of the economy concerned, although the reforms were aimed to boost growth and deliver competitiveness to the economy.

Reform Measures

1. Macroeconomic Stabilisation Measures : It includes all those economic policies which intend to boost the aggregate demand in the economy — be it domestic or external. For the enhanced domestic demand, the focus has to be on increasing the purchasing power of the masses, which entails an emphasis on the creation o f gainful and quality employment opportunities.
2. Structural Reform Measures : It includes all the policy reforms which have been initiated by the government to boost the aggregate supply of goods and services in the economy. It naturally entails unshackling the economy so that it may search for its own potential of enhanced productivity.

The LPG

  • The process of reforms in India has to be completed via three other processes namely, liberalisation, privatisation and globalisation , known popularly by their short-form, the LPG.
  • These three processes specify the characteristics of the reform process India initiated.

LIBERALISATION

  • The term liberalisation has its origin in the political ideology 'liberalism', which took its form by early nineteenth century. 
  • The term is sometimes portrayed as a meta-ideology capable of embracing abroad range of rival values and beliefs.
  • The ideology was the product of the break down of feudalism and the growth of a market or capitalist society in its place, which became popular in economics via the writings of Adam Smith (its founding father in the USA) and got identified as a principle of laissez-faire.
  • He process of decreasing traits of a state economy and increasing traits of a market economy is liberalisation.
  • In the Indian case the term liberalisation is used to show the direction of the economic reforms— with decreasing influence of the state or the planned or the command economy and increasing influence of free market or the capitalistic economy.

PRIVATISATION

  • Th e policies through which the 'roll back' of the state was done included deregulation, privatisation and introduction of market reforms in public services.
  • Privatisation at that time was used as a process under which the state assets were transferred to the private sector.
  • The root of the term privatisation goes to this period which got more and more currency around the world once the East Europe an nations and later the developing democratic nations went for it.
  • But during the period several connotations and meanings of the term 'privatisation' have developed.

GLOBALISATION

  • The process of Globalisation has always been used in economic terms though it has always taken the political and cultural dimensions.
  • Once economic changes occur it has several socio-political manifestations. Globalisation is generally termed as 'an increase in economic integration among nations'.
  • Even before several nation-states were not even born, the countries around the world had gone for globalisation, i.e., 'a closer integration of their economies'. This globalisation lasted from 1800 to almost 1930, interrupted by the Great Depression and the two Wars which led to retrenchment and several trade barriers were erected since early 1930s.
  • The concept was popularised by the Organisation of Economic Cooperation and Development (OECD) in the mid-1980s again after the Wars, 
  • The organisation had defined globalisation in a very narrow and business-like sense—'any cross-border investment by an OECD company outside its country of origin for its benefit is globalisation'.

GENERATIONS OF ECONOMIC REFORMS

First Generation Reforms (1991-2000)

  • The broad coordinates of the First Generation of reforms may be seen as under:
    (i) Promotion to Private Sector - This included various important and liberalising policy decisions.
    (ii) Public Sector Reforms - The steps taken to make the public sector undertakings profitable and efficient, their disinvestment, their corporatisation, etc., were the major parts of it.
    (iii) External Sector Reforms - They consisted of policies like, abolishing quantitative restrictions on import, switching to the floating exchange rate, full current account convertibility, reforms in the capital account, permission to foreign investment (direct as well as indirect), promulgation of a liberal Foreign Exchange Management Act (the FEMA replacing the FERA), etc.
    (iv) Financial Sector Reforms - Several reform initiatives were taken up in areas such as banking, capital market, insurance, mutual funds, etc.
    (iv) Tax Reforms - This consisted of all the policy initiatives directed towards simplifying, broadbasing, modernising, checking evasion, etc.
  • A major re-direction was ensued by this generation of reforms in the economy—the 'command' type of the economy moved strongly towards a market-driven economy, private sector to have greater participation in the future.

Second Generation Reforms (2000-01 onwards)

  • Factor Market Reforms : Considered as the 'backbone' for the success of the reform process in India, it consists of dismantling of the Administered Price Mechanism (APM). There were many products in the economy whose prices were fixed/regulated by the government, viz., petroleum, sugar, fertilizers, drugs, etc.
  • Public Sector Reforms : The second generation of reforms in the public sector especially emphasises on areas like greater functional autonomy, freer leverage to the capital market, international tie- ups and greenfield ventures, disinvestment (strategic), etc.
  • Reforms in Government and Public Institutions : This involves all those moves which really go to convert the role of the government from the 'controller' to the 'facilitator' or the administrative reform, as it may be called.

Third Generation Reforms

  • Announcement of the third generation of reforms were made on the margins of the launching of the Tenth Plan (2002-07).
  • This generation of reforms commits to the cause of a fully functional Panchayati Raj Institution (PRIs), so that the benefits of economic reforms, in general, can reach to the grassroots.

Fourth Generation Reforms

  • This is not an official 'generation' of reform in India. Basically, in early 2002, some experts coined this generation of reforms which entail a fully 'information technology-enabled' India.
  • They hypothesised a 'two-way' connection between the economic reforms and the information technology (IT), with each one reinforcing the other.

THE REFORM APPROACH

  • The process of economic reforms commenced in the world by mid-1980s (in Western Europe and Northern America).
  • Once the idea of the Washington Consensus gained ground, we find similar reforms being followed by different countries cutting across continents.
  • Over the time, experts together with the IMF/WB, started classifying such countries into two categories, viz., one which went for the 'Gradualist Approach' and the other which went for the 'Stop-and-Go Approach'.
  • India's reform process which commenced in 1991 has been termed by experts as gradualist (also called incremental) in nature with traits of occasional reversals, and without any big ideological U-turns—coalitions of various political parties at the Centre and different political parties ruling the states lacked a general sense of consensus on reforms.
  • It reflects the compulsions of India's highly pluralist and participative democratic policy-making process. Though such an approach helped the country to avoid socio-political upheavals/instability, it did not allow the desired economic outcome could have accrue from the reforms.
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