ECONOMIC HIGHLIGHTS

New Delhi, 2 January 2008

Economic Reforms’ Report Card

TOUCH FARM &  FINANCE SECTORS

By Dr Vinod Mehta

(Former Director, Research, ICSSR)

Thanks to economic reforms, India has been able to make a complete break with the Hindu rate of growth in just one-and-a-half decade. For almost four decades since Independence the country registered an annual growth rate of between three to five per cent; and in the past decade and a half it has been steadily rising and is currently hovering between nine and ten per cent. 

This does not mean that we have solved all our economic problems; we still have to go along way.  It only shows that if we persist with this growth rate we can now confidently tackle the problems of poverty and unemployment.

It is common knowledge that the need for economic reform was felt in the early eighties, but there was no political will to initiate the process of economic reforms in any meaningful manner.  It was initiated only after the nation was thrown into the worst-ever economic crises when it had to mortgage its gold to save itself from the humiliation of being labelled as a defaulter in relation to the repayment of its foreign debts.

The disintegration of the USSR, at that point of time, which underlined the deep economic malaise of a planned economy, also provided a kind of an ideological weapon to justify the reform process.

The rate of growth of the real Gross National Product (Gross National Product measured in terms of constant prices, which are currently 1980-81 prices in the case of India) had fallen from 5.3 per cent in 1990-91 to 0.6 per cent in 1991-92 and the real Net National Product (Gross National Product minus depreciation) fell from 5.2 per cent in 1990-91 to zero in 1991-92.

Therefore, it must be underlined that the process of economic reforms was initiated in India not as a well-thought out strategy but as a fire-fighting exercise to save the economy from the deepening economic crises.  But whatever the push factor the reforms had a salutary effect on the economy.

Compared to the year 1991-92, the economy today stands at a more sound footing and is receptive to more doses of economic reforms, provided we have the political will to further the process of economic reforms, 

The process of economic reforms, till date, has touched mainly the industrial sector of the economy and to some extent the service sector, but the agricultural sector and the financial sector have remained almost untouched by it. Some sub-sectors of the agricultural sector have benefitted indirectly via the reforms in the industrial sector, for instance, the food processing industry.

On the positive side, the following could be considered as the achievements of the past decade and a half of economic reforms: Firstly, the process of economic reforms has brought about a kind of change in the mindsets of a large number of people who have come to realize that a large number of Government controls in the economic sphere actually hampers growth, breeds corruption and that the Government is not always the best manager of resources. 

A very large amount of scarce resources locked up in inefficient and sometimes irrelevant public sector units are actually a drain on the economy.  This cannot go on for ever.  The acceptability of the need for economic reforms among the people today is much more than what it was a few years ago.

Secondly, the numerous industrial licensing controls have been done away with.  A few remaining industries which are still subject to licensing control account for only 15 per cent of the value added in the manufacturing. 

The number of industries reserved for the public sector has been reduced to six --- defence products, atomic energy, coal and lignite, mineral oils, railways and minerals specified in the schedule to Atomic Energy Order of 1953. However, in the case of defence products it has been thrown open to public-private partnership.

Thirdly, automatic approval of foreign investment up to 51 per cent for 35 priority industries which account for about 50 per cent value have been added in the manufacturing sector.  The Government has also allowed Indian companies not only to raise funds abroad but also buy out foreign firms. Something which was unthinkable five years ago.

Fourthly, the rupee has been made convertible on the current account and the exchange rates are now market determined. The apprehension that making the rupee convertible on current account would lead to an exodus of foreign exchange has been totally belied.  The rupee has in fact, become stronger which is giving sleepless nights to the exporters. 

While the market determined rate of exchange now reflects the real value of the rupee, it has at the same time, dealt a severe blow to the illegal foreign exchange business, if not totally eliminated it. The country is now slowly moving towards the full convertibility of the rupee.

Fifthly, the import duties have not only been streamlined but also reduced and brought in tune with the structure of import duties prevailing in other countries. The excise duty on almost all the items has been greatly reduced and streamlined.

Again, the direct and indirect tax rates have been greatly simplified and rationalized compared to the earlier years. With these reductions in tax rates, the tax collections have gone up substantiating the view that lower tax rates lead to more tax compliance.  Moreover, the fiscal deficit of the Government is now more manageable than what it was between 1990-91.

The process of economic reforms has, however, faltered on the following: Firstly, the process of economic reforms did not touch the agricultural sector to any significant extent. The subsidies under the various guises have continued to grow for the agricultural sector. 

Though the production of grain and other agricultural products have significantly increased (but gone down in the past two years), there has been very little impact of the final prices of agricultural products. No attempt has been made in the past 15 years to bring agricultural incomes in the tax net and thereby widen the tax base.

Secondly, the financial sector had been crying for reforms, but not much has been achieved.  Interest rates for the maturity period of two years and more have been deregulated, but the health of the some of the nationalized banks remains precarious.   

All the attempts to create mega banks to take on the foreign banks have come to a nought so far.  Again the SEBI has not been highly successful in taming the capital market --- price rigging and other malpractices in the bourses still persist.

Thirdly, the public sector disinvestment has been handled in a very bureaucratic and amateurish fashion. The privatization of the public sector units, where even a 5 per cent privatization could have brought in crores of rupees has brought only peanuts. 

The Government also failed to restructure its management and change its management style.  For months and years, the posts of chairmen and chief executive officers of various public sector units have been kept vacant.

Fourthly, the Government failed to come out with an exit policy for the industry. As a result, a lot of capital is locked up in the sick units. Again, in the absence of any meaningful exit policy a large number of foreign investors are fighting shy of committing their funds to India, as no foreign investor would like to be tied down to a sick unit.

Finally, though the fiscal deficit of the Government as a proportion of the GDP has come down, in absolute terms it is still very high. The Government has been unable to either curb its expenditure to any significant extent or streamline the structure of subsidies. 

Moreover, the success in controlling inflation is going to be short-lived as it is a result of the tight monetary policy and not a product of the demand and supply management. We need to produce more of everything to increase the supply of products, for instance, cement. 

To sum up, going by the above, the economic reforms can be said to have a salutary effect on the economy as a whole. Compared to the pre-reform period, almost all the economic indicators show improvement.  It has also set at rest some of the apprehensions, which were raised when these reforms were introduced. The question now is how we can deepen the process of economic reforms to cover the sectors which have remained untouched so far. ---- INFA

(Copyright India News & Feature Alliance)