6. economic reforms

8/2/2019 6. Economic Reforms

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Economic Reforms

Bedi Suresh,

Business Environment

Chapter 15The Process of Economic Reforms


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Government Policy(From Independence to Till 1991)

Since independence several serious attemptswere made for rapid growth though the processof Economic Planning

But no substantial gains were achieved evenafter the difficult and painful attempt in fourdecades in that direction

Huge investments were made in the publicsector/ state owned enterprises but theseenterprises yielded very poor results


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Continued---

Cost overruns and disguised unemploymentalso contributed to this phenomenon

Lack of optimum utilization of resources,inadequacy of infrastructural facilities, absenceof sufficient motivation, poor investment haveall contributed to the slow development of

economy


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Continued---

The highly traditional and conservative outlookof the political leaders led to economy asclosed door economy


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The crisis of June 1991

The present process of economic reforms wasborn out of the crisis in the economy, whichclimaxed in 1991.

In early 1990s the Gulf war led to a sharpincrease in oil prices.

Foreign Exchange Reserves declining from Rs.

5480 crore (August 31, 1990) to Rs. 1,666crore (January 10, 1991)(Reduced by 70%)

Not enough to meet the requirements of a fewdays


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Continued---

Internal debt rose to about 50%of GDP withinterest payments draining 39% of totalrevenue collection of the central government

GNP growth rate fell to 1.4% from the peaklevel of 10.5% in 1988-89 (At 1980-81 prices)

Inflation rate based on wholesale price indexand consumer price index (Industrial worker)soared high at 13-14 per cent

Rupee depreciated by 26.7 per cent vis--vis $


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Continued---

Indias credit rating started deteriorating to a

low level as the short term credits began to dryup

It was accompanied by a net outflow of NRIdeposits

The country was on the verge of defaulting oninternational financial obligations and thesituation warranted immediate policy action tosave the situation


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Continued---

In May 1991, the government had to lease 20tons of gold out of its stock to the State Bank ofIndia to enable it to sell the gold with REPO

after six months

In addition RBI was allowed to pledge 47 tonsof gold to the Bank of England to raise a loan of

$600 Million


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Economic Reforms

Economic reforms requires reduction ofcountrys spending to the level parallel to its

income and thereby reducing its fiscal deficit

considerably


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Objectives of Economic Reforms

1.Increase in Fiscal Deficit

Fiscal Deficit =Total Borrowings of the Government

Prior to 1991, fiscal deficit of the Government,had been mounting year after year on accountof continuous increase in non developmentexpenditure

1981-82 - 5.4% of GDP

1990-91 - 8.4% of GDP


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Continued---

Interest payment on public debt

1981-82 - 10% of Total GovernmentExpenditure

1990-91 - 36.4% of Total GovernmentExpenditure


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2. Increase in Adverse Balance ofPayment

BOP is the difference b.w total exports and totalimports of a country ( Visible and Invisible)

Foreign exchange is needed to pay imports andis earned through

Exporting goods and services

Remittances by NRIsBOP wasve since 1980-81

In 1980-81 BOP was adverse by 2,214 crore

In 1990-91 it rose to 17,367 crore (90%)


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Continued---

To meet this deficit large amount of foreignloans had to be obtained

Foreign loans were 12% of GDP in1980-81rose to 23% of GDP in 1990-91

The burden of foreign debt services which was15% of our exports in 1980-81 rose to 30% in1990-91


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3. Gulf Crisis

On account of Iraq war in 1990-91, prices ofpetrol shot up.

70% of total need is fulfilled from imports

Gulf crisis thus further heighten alreadyadverse India's BOP


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4. Fall in Foreign Exchange Reserve

In 1990-91 Indias foreign exchange reservesfell to such a low level that same were notenough to pay for an import bill for even 10

days


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5. Rise in price

Average annual rate of inflation increased from6.7% to 16.7% prior to 1991


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6. Poor Performance of Public SectorUndertakings (PSUs)

In 1951 there were just 5 enterprises in publicsector in India but in 2004 their number rose to230.

Several thousand crore of public funds wereinvested there in


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Main Features of Economic Reforms

L-P-G: The Three Pillars of Economic Reforms

1. Liberalization

2. Privatization3. Globalization


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Liberalisation

It is the process of liberating the economy fromthe various regulatory and control mechanismsof the state and of giving greater freedom to

private enterprise

Few Examples of control :Prior to 1991

Industrial licensing system

Import license

Foreign exchange control

Restriction on investment by big houses


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Measures taken for Liberalization

1. Abolition of Industrial Licensing and Registration

In July 1991 a new industrial policy was announcedand with the exception of 6, industrial licensing has

been abolished for all other industries


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2. Concession from Monopolies Act

According to the provisions of Monopolies andRestrictive Trade Practices Act (MRTP Act) allthose companies having assets worth more

than 100 crore used to be declared MRTP firms

These firms were subjected to severalrestrictions

Now the concept of MRTP has been doneaway with


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3. Freedom from Expansion andProduction to Industries

Under the policy of liberalisation, industries arefree to expand and produce


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4. Increase in the Investment Limit ofthe small Industries

Investment limit of the small industries hasbeen raised to Rs. 1crore and of tiny industrieshas also been increased to Rs. 25 lakh


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5. Freedom to Import Capital Goodsand Technology

Free to buy machines, technology and rawmaterial from abroad


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6. Free Determination of InterestRates

Banks all over the country are now free todetermine the rate of interest as they like


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Privatisation

Privatization means allowing the private sectorto set up more and more of industries that werepreviously reserved for public sector

Private sector is invited to invest in publicsector

It is a general process of involving the privatesector in the ownership or operation of a stateowned enterprise


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Causes of Privatisation

1. Disintegration of Socialist Economies

Most crucial sector of Russia and other socialisteconomies was public sector

Taking these economies as model, almost allunder developed countries gave excessiveimportance to public sector

Decision proved wrong


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2. Inefficient Public Sector

Do not have the independence to take decision

Most of the decisions are taken by ministers intheir own political interest

Long delays, under utilization of capacityrender public sector inefficient


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3. Uneconomic Price Policy

Prices of public utility services are notdetermined by economic forces

These are determined by political, social andother non economical considerations


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4. Burden on the Government

Losses incurred by public sector enterprisesare not borne by their organizers

Losses are made good by the governmentrevenue

Organizers are therefore indifferent to profitsearned or losses incurred


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Objectives of Privatization

To increase the efficiency and competitiveness

To reduce deficit financing

To strengthen industrial managementTo earn more and more foreign currency


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Measures adopted for Privatisation

1.Contraction of Public Sector

Except of 4 industries (Defense, AtomicEnergy, Mining of Atomic Minerals and RailwayTransport) other industries were made open forprivate sector

Di i i E i i P bli


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Disinvestment in Existing PublicSector Industries

It implies that government has been selling out theseindustries to private sector

Examples

Modern Foods (PSU ran by the central government)HLL

Balco (Aluminium Company) and Hindustan Zinc Ltd

(HZL) - Acquired by Sterlite IndustriesParadeep Phosphates Limited (Fertilizer company) -Zuari Maroc Phosphates, a 51:49 joint venture of K KBirla group and Maroc Phosphore of Morocco


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Continued---

Hotel Kanishka (ITDC) Acquired by NehruPlace Hotels Ltd of J R Sood


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Sale of shares of Public Enterprises

To financial institutions, workers and public forgreater participation of private individuals

Maruti Suzuki India Ltd.

(Suzuki holds 54.2% stake in Maruti )


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Increase in private sector investment

As a result of economic reforms, share ofprivate sector investment in total investmenthas increased from 45% to 55%

C i f l i t h i t


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Conversion of loans into share is notnecessary

National Industrial Finance Institutions havebeen making substantial contribution to theindustrial investment of private sector

Clause relating to convertibility is removed


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Memorandum of Understanding

With a view to improve the working of publicsector enterprises a system of MOU has beenintroduced

Management of Public Sector Enterprises willbe given more freedom and they will beaccountable for the results

500 companies have signed MOU till date


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Globalization

Globalization means integrating the economy ofa country with the economies of other countriesunder conditions of free flow of trade and

capital and movement of persons acrossborders

Charles W.L.Hill

The shift towards a more integrated andinterdependent world economy. Globalisationhas two main components the globalisation ofmarkets and the globalisation of production


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Features of Globalisation

The business expands throughout the world

Goods and services are bought and soldfrom/to any country in the world

The difference b/w domestic and foreignmarkets comes to an end

Products are planned and developed keepingin mind the markets of entire world

Manufacturing of goods can be made in anypart of the world


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Process of Globalisation

Golbalisation takes place gradually and doesnot take place at once

Ohame has explained the five stages ofglobalisation

Stage 1

Domestic company exports to foreign countriesthrough the dealers of home country

Stage 2

On its own


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Continued---

Stage 3

Becomes an international company byestablishing production and marketingoperations in various foreign countries

Stage 4

Replicates a foreign company in the foreigncountry by having all the facilities includingR&D, full fledged human resources


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Continued---

Stage 5

The company becomes a true foreign companyby serving the needs of foreign customers justlike the host countrys serves


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Essential conditions

1. Quotas and tariffs should be removed

2. Complete autonomy to public and privatesector

3. Competitiveness based on quality, price,delivery, customer service etc

4. Administrative and governmental support

5. Government should provide adequatesupport

6. Stock market should be developed


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Types of Globalisation

Globalisation of Markets

Example: Biryani of Hyderabad, Mc Donald,Coca-Cola, Pepsi

Globalisation of Production

Globalisation of Technology

Through Joint Ventures and Mergers, Royaltyor Outright purchase of Technology

Globalisation of Investment

Allowed 49% almost in all sectors


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Measures taken for Globalisation

1. Reduction of Import Duties

There has been a considerable reduction inimport duties

The maximum rate was reduced from 150% to50%(On majority of goods)

On Feburary8,2007 the commerce ministryremoved restriction on 162 items for imports

Out of 162, total 69 items were moved from SILto free imports


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Continued---

Example:

Escalators, Moving walkways, Cable cars,Burglar and fire alarms, Cameras of all kindsetc.

2 Encouragement of Foreign


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2. Encouragement of ForeignInvestment

Approval would be given for direct investmentupto 51% foreign equity in high priorityindustries (Industrial Policy 1991)

EX. Hotels and tourism-related industry ,Printing Machinery, Drugs andPharmaceuticals, Agricultural Machinery


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Continued---

Cabinet gave its assent to a new list ofindustries whereby joint ventures with upto 74%foreign equity would be cleared automatically

(1996)Ex. Pharma Companies, Industries like MiningServices, Construction and Maintenance of

Roads, Bridges, Ropeways

3 Encouragement of Foreign


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3. Encouragement of ForeignTechnology Agreement

Automatic permission will be given for foreigntechnology agreements in high priorityindustries upto a lumpsum payment of Rs.

1croreNo permission will be necessary for hiring offoreign technicians


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4. Partial Convertibility

To achieve the objective of globalisation, partialconvertibility of Indian Rupee was allowed

For following transactions

Import and Export of goods and services

Payment of interest or dividend on investment

Remittances to meet family expenses

6. economic reforms

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