economic reforms -07-02-2011

8/7/2019 Economic Reforms -07-02-2011

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` In this chapter we propose a broad profileof the Indian economy as it will help us inunderstanding the scope forbusinessactivity in the country.


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` India is the second largest country inthe world, both in terms of

population and area.` India has 16% of the worlds

population and roughly 12% of the

worlds land.


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` India is also the sixth largesteconomy in terms of Gross

Domestic Product (GDP).` India is, without doubt, a keyplayer in the world economy.


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`Agricultural activityin Indiacontributes only 23% to the GDP, but

employs approximately 65% of thework force. This places a burden onthe Indian economy.


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`ON the other hand, India has thecomparative advantage in terms-------

----- of the considerable command ofthe English language and thetechnological abilities in certain

sections of the population.


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` SOMEof the problems faced by theeconomy like--------- inadequateinadequate

employment opportunities,employment opportunities,inequalities in the socio economicinequalities in the socio economic

status and povertystatus and povertycan prove

disastrous to any globalizingeconomy.


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`SOMEof the other concerns

regarding the Indian economy

are---------- poor infrastructure,poor infrastructure,fiscal deficit and a large amount offiscal deficit and a large amount of

Non Performing Assets (NPA).Non Performing Assets (NPA).


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` India has changed from publicsector domination in industries

to an --------increasinglyliberalized system, with bothdomestic and foreign players.


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` It has also changed from a sellers marketwith limited competition --------to a buyersmarketwith increased competition,

` from a country with QuantitativeRestrictions(QR) and tariffs to Quota-free andopen economy and from a restrictedrestrictedfinancial marketfinancial marketto ato a liberalized financialliberalized financialmarketmarketwith prudential norms.


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`THESE changes are atestimony to the dynamic

nature of the Indian economy.


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` SOMEkey strengths that India canleverage upon in creating its ownindigenous industries can be its --------------

-----vast pool of human resources,vast pool of human resources,natural resources and entrepreneurialnatural resources and entrepreneurial

talent.talent.


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` It should be noted that the countryhas a rich pool of skilled workers

with the worlds third largestreservoir of engineers and ahandful of quality educational

institutions.


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` The Indian economy achieved a growth rate of

above 7% in the recent past.

` This robust performance of the economy was

due to high growth rates in service sectorand aworld economic environment that providedconducive to the Indian economy.


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`A strong Balance of Payment(BOP) position in recent years

has resulted in a steadyaccumulation of foreign exchangereserves.


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`The term Balance of Paymentsrefers -----------------------to the

yearly financial statement of acountry for the transactions in theexternal sectorwith the rest of

the world.


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` THE BOP table has got two sides(i.e.) credit and debit, hence it can be

conceptualized asbalance sheet ofthe country with the rest of the world.


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` The economic survey of the year 2004-05had hinted that the BOP appears to beresilient and strong even after the

increase in the imports.

` The sustained momentum of themanufacturingsectorhas helped

greatly in the growth of exports.


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` The exports of services like---------------------------

------------------- software, business and othercommercial services has also been playing a

significant role in adding to theB

alance ofPayments.

` The reserves position is also very comfortabledue to the increasing capital inflows into the

country.


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` THE current account of BOP has been insurplus since 2001-02.

` While the trade deficit increased, thedeficit was neutralized by a higher surplusin the invisibles contributed mainly by -------------software service exports and

private transfers.


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`Growth momentum in exports hasbeen maintained;

` India has registered a growth of20% in exports in the last fewyears.


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` DESPITE a higher value of total importsin the last few years mainly due to thepetroleum and oil imports,

` India did not suffer a negative tradebalance as it was highly compensated bythe service exports.


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` THE main contributors to capitalaccount surplus were ---------------------

------------------------------------------------the banking capital inflows, foreigninstitutional investments and othercapital inflows.


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` Indian Economy is considered as a developingeconomy based on its characteristic features.

` But it is also called an underdeveloped

economy mainly because of the country's lowper capita income, low literacy rate and rapidpopulation growth.


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`THE salient features of Indianeconomy can be specified as -

---------------


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` 1.Predominance of agriculture.

` 2.Rapid population growth.

` 3.Low per capita income (GDP per capita).

` 4.Unemployment.` 5.Capital scarce economy.

` 6.Technological Backwardness.

` 7.Lack of Entrepreneurs.


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`Pressures generated by the largeand persistent fiscal deficits and

foreign exchange crisis.


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`Adverse global developments in1990-91 .

`

i.e., the slowdown in world tradefollowing recession in the industrialworld, the Gulf crisis ofAugust 1990

aggravated the crisis.


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`The current account deficitsoared to a level of 3.2% of GDP

in 1990-91.`There was a massive shortage

of the foreign exchange

reserves.


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` It was in this backdrop that India launched the New Economic Policyannounced in Dr.Manmohan Singhs June 1991 budget.

` Broadly, the measures taken can be classified into two:

` 1.A short-term stabilization programme to bring the economy backon rails.

` 2.Amedium to long-term structural rigidities and bottlenecks in theeconomy.


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` The aim of this programme was to control inflationand remove the balance of payment deficit.

` It consisted of four distinct areas of action-

Fiscal policy, Monetary policy,

Exchange rate policy, and

Social sector reforms


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` Fiscal deficit:` The objective was to reduce the Govts expenditure on the one hand

and increasing the tax base, on the other.

` An ambitious target of lowering the fiscal deficit from 8.4 per cent in

1990-91 to 5% of GDP in 1992-93 was fixed.` A review of food and fertilizer subsidies was undertaken.

` The Chelliah Committee was appointed to look into the taxationstructure and suggest measures to augment(generate) revenue.

` As a result of these measures, fiscal deficit fell to 5.6% in 1992-93.


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` Monetary Policy and Exchange Rate:` In monetary policy credit was tightened by increasing interest rates.

` Narasimham Committee was appointed to recommended measures forfinancial sector reforms.

` RBI was given more autonomy and the automatic monetisation ofgovernments deficit was given up.

` In order to control the exchange rate, Rupee was devalued by 23%.

` In February 1992, government announced the Liberalised Exchange RateManagement System (LERMS) to promote trade, and in the next stagerupee was made convertible on current account in the 1994-95 budget.


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` Social sector:` In social sector the experience of countries in Latin America andAfrica,

which had undertaken stabilisation programmes in the 1980s had shownthat due to ----------

` the regid public expenditure control, and demand compression whichaccompanied stabilisation, the poor suffered disproportionately.

` Drastic cuts in subsidies and increase in taxation impoverished the weakerand Vulnerable sections in those countries.

` International financial institutions like the World Bank and IMF, whichrecommended stabilisation measures, became unpopular on this account.


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` It was UNICEF, which undertook a systematic study ofthe social sector of stabilisation and structuraladjustment in late 1980s and recommended adoption ofa humane face for adjustment.

` Indian reformers had built the reform package measuresto protect the vulnerable sections from the fall out ofmacroeconomic adjustment.

` Indian reforms had built into the reform package

measures to protect the venerable sections from thefall out of macroeconomic adjustment.

` A social safety net programme was launched consistingof EAS,PMRY and NSAP and PDS was revamped fortargeting the deserving beneficiaries.

economic reforms -07-02-2011

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