Economic Reforms

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Recently the 20th anniversary of India's economic independence passed unnoticed. The economic reforms ushered in 1991 were indeed the economic independence for India. The year 1947 brought political independence in India whose basic virtues were democracy, freedom and liberty, the year 1991 brought economic independence and its basic tenets were LPG i.e. Liberalization, Privatization and Globalization. 

In the pre-reform period, Indian economy was a closed economy having low efficiency, low growth, low income, low saving, low investment behind the high tariff walls. Globalization shattered these walls and linked India with the more vibrant global economy. Globalization is not just free flow of goods across the country's boundaries but the smooth flow of services, capital, technology and labour as well. 
Further, the Indian industry in the pre-reform era was dominated by the complacent public sector undertakings (PSUs) operating below par in the absence of any competition as many such industries were reserved for the public sector and the private enterprises were not allowed to venture into such industries The privatization led to the selling of inefficient PSUs (often termed as Disinvestment) and the sectors reserved exclusively for the public sector were extensively reduced. Currently only three sectors viz: Atomic energy, Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 1953 and Railway transport are reserved for the public sector. 
Liberalization was the most important element of economic reforms. The pre-reform economy was characterized by the regulations, controls, orders, reservations, licenses and the system was sarcastically called as License Raj. The Liberalization removed the shackles of License Raj to push for the unfettered growth of economy in general and of industry in particular. Before venturing into the constituents of economic reforms and their impacts, let’s have a look on he major characteristics of the pre-reform economy
Pre-Reform economy
In the pre-reform period, Industries (Development and Regulation) Act 1951 was the most important Act governing the industrial activity of the country. The Industrial Policy Resolution of 1956 reserved 17 industries exclusively for the public sector. Such industries included vital sectors like Railways Shipping, Aircraft, Air Transport, Mineral Oil, Electricity, Heavy and Core industries etc. Apart from it, IDRA empowered the Government to issue licenses for setting up of new industries, expansion of existing ones and diversification of products etc. The Government appointed Hazari Committee in 1966 to review the working of IRDA  and the committee pointed out that influence of big entrepreneurs prevented the new entrants in business and thus hindering the development. Then Government appointed an Industrial Licensing Policy Inquiry Committee (also known as Dutta Committee) in 1969. The committee in its report revealed that Industrial Licensing had resulted in increase concentration of business power in fewer hands. The revelations of the committee didn't led to the scrapping of the license raja but he enactment of another act namely, Monopolies and Restrictive Trade Practices Act ( MRTP), 1969. The companies having assets above certain limit (made Rs 100 crore in 1985) were classified as MRTP firms and were allowed to  enter in selected industries only and that too on case by cae basis only. The objective of the act was to prevent the creation of the monopolies and curb the restrictive trade practices.
Apart from this, during the Janta Party government in 1977 many industries were reserved for the production by small scale industries and large scale industries were allowed to produce such products only if they exports more than 50% of such produce.
The situation of financial sector was also not better than the real sector of the economy. The tax rates were too high to push the new investment, neither they were able to garner enough savings due to the low income. Banks were not free to operate on commercial principles but were dictated by the ruling government on the basis of populist principles. Where loan melas were organized to distribute loan at the behest of politicians and recovery of loans was not good. Debt waivers were not uncommon and the Non Performing Assets (NPAs) rose in unproportionate proposition. The fiscal situation was equally fragile where tax-GDP ratio was too low to support the rising public expenditure. High tax rates (up to 95% at one point of time), low collection, inefficient and cumbersome tax structure were the major factors responsible for abysmal tax revenue. In principle, the proportion of direct tax must be higher than indirect tax is total tax revenue, as direct taxes are supposed to be favoring income equalities but the opposite happened in Indian scenario. Low tax revenue couple with high public expenditure resulted in widening of government deficit which was replenished by borrowings both domestic as well as external.
Though ‘Garibi Hatao’ was the prominent slogan of pre-reform era but in reality, the over all policy paralysis resulted is the “Amiri Hatao”. The police paralysis of 1970s and 1980s culminated into the crisis of 1989-91.
The Crisis of 1989-91
The widening deficit of the government during 1980s coupled with the stagnant productive capacity of the country resulted in the crisis of 1989-91 which brought India at the brink of collapse. The budget deficit reached 9% of the GDP, BOP deficit rose in unproportionate terms, inflation soaring continuously in double digits. Unstable government at centre during this phase further shook the confidence of investors in the ability of the government. There were external causes too which further aggravated the crisis, like the collapse of Soviet Union which was the most important trading partner of country then. The Gulf war of 1991 resulted in the scarcity of crude oil, resulting in another oil shock. All these factors led to the flight of capital from the country and the foreign exchange reserves shrinked and were able to feed merely the fifteen days of import. The only recourse available with the government was to seek concessional loans from the World Bank and IMF and they laid strenuous condition in the form of structural reform before granting assistance. These reforms were launched in the form of new economic policy and were called as economic reform. 
Reforms Undertaken
The reforms of 1991 are also called as Rao-Manmohan model of development deriving the name from then prime minister and finance minister-P.V. Narsimha Rao and Dr. Manmohan Singh respectively
The reform package outlined by Dr. Manmohan Singh had three components 
1-Fiscal stabilization to control growing fiscal deficit and contain it at much lower level.
2-Internal liberalization to infuse competition, enlarging the space for operation of market forces, leaving enterprises free to make their production and investment decision.
3-Integration of Indian economy with world economy though removal of quota restrictions, lowering of tariff walls, removing controls on foreign exchange and external trade.
Under the Fiscal stabilization, the budget deficit had to be reduced to such a level that it may not become unsustainable and pose another crisis. For that matter, expenditure had to be reduced and tax revenue had to be increased. To order to increase tax revenue, direct and indirect tax reforms were undertaken as recommended by Chelliah Committee. As recommended by the committee, tax rates were reduced, tax base was broadened and the tax administration was simplified. Further measures were also undertaken to reduce the share of indirect taxes in total tax collection while increasing the overall tax-GDP ratio.
Under the internal liberalization, the industries reserved exclusively for public sector were gradually reduced to three. The license requirement for establishing new industries was dismantled except the following five industries:
1.Distillation and brewing of alcohol.
2.Tobacco products.
3.Electronic aerospace and defense equipments.
4.Industrial explosive.
5.Specified hazardous chemicals.  
The locational requirement for establishment of new industries was done away (except for million plus cities). MRTP limit of Rs. 100 crore was scraped. Thus much freedom for business was provided in contrast to the pre reform era. Inefficient PSUs were to be sold off, reforms were undertaken in strategic PSUs to make them profitable. 
Indian economy was linked to the global economy by abolition of quota restriction and reduction of import tariff. The country moved from fixed exchange rate system to the flexible exchange rate system, FERA (foreign exchange regulation act, 1973) under which forex irregularities was a criminal offence, was replace by FEMA (foreign exchange management act, 1997) under which forex irregularities were civil offense. This move was necessary to improve the export performance. 
Thus the economic reforms provided much needed freedom and space to the Indian firms to engage in the production and diversification in a competitive environment. Further liberal FDI rules allow the inflow of foreign capital, technology and innovation.
Resistance to Reforms
The economic reforms were vehemently opposed by the various section for various reasons and by varying force. The industrialist’s and enthusiasm was quite visible because of liberalization policies but they equally apposed globalization. According to them Indian industry was not in a position to face the MNCs in a competitive environment. The strongest opposition came from the workers in the organized sector especially from the public sector. The various forces opposing the reform were apprehensive for following reasons:
1.The trade liberalization and liberal imports will adversely effects the domestic small scale industries which are most vital in the manufacturing and posses high employment elasticity.
2.In the name of fiscal consolidation, squeezing of expenditure will adversely affect the pro-poor programs like social security schemes, poverty alleviation programs.
3.In the course of providing incentives to the enterprises and professionals, government may be providing an incentive for increased inequalities
4.Agreeing to the jurisdiction of international bodies like WTO may effects the sovereignty of the country.
5.  Greater liberalization which may promote the hire and fire policy was not acceptable to the trade unions.
Appraisal of Reforms
If we compare 20 years of pre-reform period with the 20 years of post-reform period then comparison in economic parameters like GDP, per capita income investment etc. will certainly give the proponents of reforms an edge over the rest. In the absence of reforms, India’s entry into the top four economies of the world would have been a distant dream. So let’s forget the monitory comparison and compare position of a common man of 1991 and 2011. In 1991, getting a telephone connection was an uphill task consuming lots of time from months to years and many times common man didn’t think of having a telephone connection. It was a sort of luxury for common middle class. In 2011 one can get the wireless mobile connection with in an hour and right from a rickshaw-puller to an air-craft pilot can afford it. Now one can compare the situation where only one PSU provides telecommunication service (1991) and the telecom market where private sector and public sector are operating in competitive environment (2011). In 2011 owning a car is not a big deal for middle class but in 1991, owning a car was exclusive right of elite class. Similarly we can view that air 
travel is also no more a luxury travel. Apart from this when India is one of the top producers of eggs, milk, fruits and vegetables, increased price of such commodities indicate that there is rise in demand of such products which manifests the diversification of consumer’s food basket.
In education sector also we may see the proliferation numerous professional colleges imparting the courses in management, engineering, law, computer, etc. manifesting the needs of Indian industry. The post reform period saw the dynamism of Indian education sector visible in the diversification of professional courses. 
But everything is not rosy in the analysis of economic reforms. The most critical opponents of the reforms criticize them on account of neglect of agriculture and perpetuation of inequalities where rich are becoming richer and the poor are becoming poorer. Now first lets take the case of agriculture. New Economic Policy of 1991 basically hovered around the secondary sector of the economy where liberalization, privatization, globalization, tax reforms, trade reforms etc everything was reformed keeping industry in the mind and agriculture was neglected. So now there is indeed a need for reforms in agriculture sector. Since per hectare yield in India is still too low compared to the other nations like US, China despite having one of the most fertile tracks of the world, agriculture reforms are top priority of the present time. After 20 years of comparatively faster growth of industry and services than agriculture, the share of agriculture in GDP had reduced to the vicinity of 15 per cent while it still employs more than 50 percent of the work force. Thus while industry and services were able to accelerate the income growth, they were unable to accelerate employment generation at commensurate pace. One reason for the jobless growth is the requirement of skilled work force for industry and services while most of the current workforce is still unskilled. Thus providing adequate skills to the work force is an important prerequisite to transform the jobless growth into the job friendly growth.
Another fallout Indian growth trajectory is that it has increased the inequalities in the country. It is because of the galloping rise in the income of the upper strata while the creeping rise in the income of the lower strata and thus the income gap keeps on rising. The faster growth of the industry and services and the laggard performance of the agriculture had further aggravated the inequalities. The panacea for curing such inequalities is promotion for inclusive growth. The inclusive growth can’t be fuelled by providing the doles to the lower quartile of the population but by empowering them through investment in skilled education and health infrastructure. We cant afford to wait to see the fruits of faster growth percolate to the lower strata of population in long run but they should be made active participants of growth story in India.
Further it is also claimed by few that the growth witnessed in India not sustainable as it had led to the faster depletion of resources and therefore the growth witnessed by the current generation is at the cost of future generation which will be left with no resources to exploit. Therefore in order to made growth sustainable, the conservation of resources is as important as the exploitation of resources. Today most of the rivers are polluted, forest cover is reduced, air quality in cities is deteriorated so in is the case with soil fertility due to the over use of chemical fertilizers. The objective of economics policy is not just to ensure growth but to ensure a growth with humane face, growth with happiness, growth with welfare.

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