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Economic Reforms

What is Economic Reform?

• The primary aim of economic reforms was to enhance productivity growth and competitiveness in the Indian manufacturing sector. These reforms sought to make Indian manufacturing more efficient and technologically advanced, with the goal of achieving higher and sustainable growth. The government began deregulating the Indian economy through a liberalization program, focusing on investment patterns, trade policies, the financial sector, taxation, and public enterprises.
• In recent times, industrialization has emerged as a key focus for the mid-twentieth century and is seen as crucial for the development of underdeveloped or developing countries like India. Industrialization is viewed as a potential solution to issues such as poverty, insecurity, overpopulation, backwardness, and illiteracy. It is considered a remedy for the social and economic challenges faced by these countries. The core of economic development for a Less Developed Country (LDC) like India is largely centered around the growth of industrialization.
• Recognizing the significance of industrialization, Pt. Jawaharlal Nehru once said, “Real progress must ultimately depend on industrialization.” His vision was to position India among the world's developed nations, with industrialization as the key to restructuring the economy and achieving sustained growth. Given that the Indian economy is primarily agriculture-based, experience from advanced countries shows that relying solely on agriculture for growth is unsustainable.
• Conversely, focusing only on the tertiary sector while neglecting industrialization could lead to inflation, which might hamper economic growth. Hence, industrialization is essential for achieving sustained economic growth. Economic history shows that to overcome techno-economic backwardness, a country must develop and diversify its industrial sector across various areas and activities. While industrialization is a crucial part of economic development, it should not be considered synonymous with it, as economic development encompasses more than just industrialization.

Economic Reforms in Kerala

• Economic reforms in Kerala progressed slowly until the state's fiscal crisis in 2001. From mid-2001 to mid-2004, the state government introduced several measures to boost economic growth.
• When the UDF government took office in 2001, it significantly altered the state's development strategies and economic policies. Key features of these economic reforms included:
  • Market Focus: The reforms mirrored the central government's Structural Adjustment Reforms (SAR), emphasizing market revival through price variables as policy tools.
  • Private Investment: The reforms aimed to encourage private investment and create a favorable environment for investment, technological advancements, and institutional changes.
  • Retained Policies: Despite the structural adjustment characteristics, the reforms preserved aspects of Kerala's existing policies in public sector undertakings, public health, education, and social welfare for disadvantaged groups.
  • New Policies: Policies were introduced for various sectors, including industries, information technology, labor, urban development, and education to foster investment and favorable conditions.
  • Financial Improvement: Measures were implemented to enhance the state's financial health by increasing revenue and reducing expenditure.
  • Private Sector in Education: Private investment was permitted in professional education sectors such as medicine, engineering, technology, and management.
• These reforms enabled Kerala to achieve economic growth in industries, agriculture, education, IT, and tourism. However, some sectors did not meet expected growth rates due to various socio-economic factors.

Kerala village tourism development scheme

• The scheme aims to engage local communities in planning and executing tourism projects. This year, assistance will be provided to 140 villages under the initiative "My Village, A Tourism Friendly Village," which seeks to decentralize tourism development in the state.
• Kerala Tourism will offer financial support covering up to 50% of each project's cost, with a maximum limit of Rs. 10 lakh. The remaining funds must be sourced from local self-government institutions. However, the scheme does not support the cost of roads leading to tourist centers or the acquisition of land for tourism projects.

Tax Reforms

Kerala Goods and Service Tax

Demonetization and Cashless Economy

• Demonetization is a financial measure that invalidates the legal tender status of a currency unit.
• This action is typically taken when old currency notes are being replaced with new ones.
• For instance, on November 8, 2016, the Indian government declared that the 500 and 1000 rupee notes would no longer be considered legal tender.

Implications of Demonetization

• Demonetization has various consequences on the economy and the general public, influencing different sectors and aspects of financial transactions.
• It can impact liquidity in the market, leading to a temporary cash crunch that affects businesses and individuals.
• One significant outcome is the promotion of digital transactions and the shift towards a cashless economy as people seek alternative means of payment.
• Small businesses and informal sectors may face challenges in adapting to the sudden change, highlighting the importance of financial inclusion and support mechanisms during such transitions.

Effects of Demonetization in India

• Impact on Black Economy
  • A substantial portion of the parallel black economy faced collapse due to demonetization.
  • Estimations suggested that out of the total Rs 17 lakh crore in circulation, around Rs 3 lakh crore constituted black money.
• Counterfeit Currency
  • The circulation of counterfeit Indian currency, a significant issue, received a severe blow post-demonetization.
  • This measure targeted both domestic and international syndicates involved in producing fake currency.
• Impact on Employment
  • Given that a significant portion of the economy operated outside the formal banking system, the cash crunch adversely affected the informal sector heavily reliant on cash transactions.
• Political Impact
  • The move aimed to curb 'Vote-for-Note' practices, thereby enhancing the cleanliness and transparency of elections in the country.
• Economic Repercussions
  • Demonetization had several economic implications:
  • It led to increased borrowings for the government, improved the inflation scenario, and bolstered India's GDP.
  • The initiative rejuvenated investment opportunities, particularly in infrastructure and manufacturing, while also aiding in lowering interest rates and income tax rates.
• Real Estate Sector Impact
  • A sudden decline in land and property prices was witnessed, indicating a cleansing effect on the real estate market.
• Education Sector Transformation
  • The initiative made higher education more accessible by discouraging the use of black money for exorbitant 'high capitation fees'.
• Enhanced Security Measures
  • Demonetization played a crucial role in curbing illicit activities:
  • Terror financing through counterfeit currency and hawala transactions was disrupted.
  • Unrest in regions like Kashmir, North-East insurgency, and activities of groups like Maoists were impacted as their funding sources were targeted.