Economic Reforms

Economic Reforms

• The economic reforms were initiated in 1991.
• Economic reforms denote the process in which a government prescribes declining role for the state and expanding role for the private sector in an economy.
• It is safer to see economic reform as a policy shift in an economy from one to another or ‘alternative development strategies’.

Economic reforms In India

• On July 23, 1991, India launched a process of economic reforms in response to a fiscal and balance-of-payment (BoP) crisis.
• The reforms were historic and were going to change the very face and the nature of the economy in the coming times.
• The reforms and the related programmes are still going on with changing emphasis and dimensions.
• Back in the mid-1980s, the governments had taken its first steps to economic reforms.
• While the reforms of the 1980s witnessed rather limited deregulation and ‘partial liberalization of only a few aspects of the existing control regime, the reforms started in early 1990s in the fields of industries, trade, investment and later to include agriculture, were much ‘wider and deeper’.
• Though liberal policies were announced by the governments during the reforms of the 1980s itself, with the slogan of ‘economic reforms’, it was only launched with full conviction in the early 1990s.
• But the reforms of the 1980s, which were under the influence of the famous ‘Washington Consensus’ ideology had a crippling impact on the economy.
• The whole Seventh Plan (1985–90) promoted further relaxation of market regulations with heavy external borrowings to increase exports (as the thrust of the policy reform).
• By now as the benefits of the reforms have accrued to many, the criticism has somewhat calmed down, but still the reform process is considered as ‘anti-poor’ and ‘pro-rich’.
• The need of the hour is to go for ‘distributive growth’, though the reform has led the economy to a higher growth path.

Reform measures

The economic reform programme, that India launched, consisted of two categories of measures:

1. Macroeconomic Stabilization Measures

• It includes all those economic policies which intend to boost the aggregate demand in the economy—be it domestic or external.
• For the enhanced domestic demand, the focus has to be on increasing the purchasing power of the masses, which entails an emphasis on the creation of gainful and quality employment opportunities.

2. Structural Reform Measures

• It includes all the policy reforms which have been initiated by the government to boost the aggregate supply of goods and services in the economy.
• It naturally entails unshackling the economy so that it may search for its own potential of enhanced productivity.
• For the purchasing capacity of the people to be increased, the economy needs increased income, which comes from increased levels of activities.
• Income so increased is later distributed among the people whose purchasing power has to be increased
• This will take place by properly initiating a suitable set of macroeconomic policies.

The LPG

• The process of reforms in India has to be completed via three other processes namely, liberalization, privatization and globalization, known popularly by their short-form, the LPG.
• These three processes specify the characteristics of the reform process India initiated.
• Precisely seen, liberalization shows the direction of reform,
• Privatization shows the path of reform and globalization shows the ultimate goal of the reform.

Liberalization

• The ideology was the product of the breakdown of feudalism and the growth of a market or capitalist society in its place, which became popular in economics via the writings of Adam Smith and got identified as a principle of laissez-faire.
• Pro-market or pro-capitalistic inclination in the economic policies of an economy is the process of liberalization.
• The most suitable example of this process could be China of the mid-1980s when it announced its ‘open door policy’.
• The process of decreasing traits of a state economy and increasing traits of a market economy is liberalization.
• In the Indian case the term liberalisation is used to show the direction of the economic reforms—with decreasing influence of the state or the planned or the command economy and increasing influence of free market or the capitalistic economy.
• It is a move towards capitalism. India is attempting to strike its own balance of the ‘state-market mix’.
• It means, even if the economic reforms have the direction towards market economy it can never be branded a blind run to capitalism.

Privatization

• The policies through which the ‘roll back’ of the state was done included deregulation, privatization and introduction of market reforms in public services.
• Privatization was used as a process under which the state assets were transferred to the private sector.
• The root of the term privatization goes to this period which got more and more currency around the world once the East European nations and later the developing democratic nations went for it.
• But during the period several connotations and meanings of the term ‘privatization’ have developed. Some of them are described below:
  • Privatization in its purest sense and lexically means de-nationalization, i.e., transfer of the state ownership of the assets to the private sector to the tune of 100 per cent. This route of privatization has been avoided by almost all democratic systems.
  • The sense in which privatization has been used is the process of disinvestment all over the world. This process includes selling of the shares of the state owned enterprises to the private sector. Disinvestment is de-nationalization of less than 100 per cent ownership transfer from the state to the private sector. If an asset has been sold out by the government to the tune of only 49 per cent the ownership remains with the state though it is considered privatization. If the sale of shares of the state-owned assets has been to the tune of 51 per cent, the ownership is really transferred to the private sector even then it is termed as privatization.
  • The third and the last sense in which the term privatization has been used around the world, is very wide. Basically, all the economic policies which directly or indirectly seem to promote the expansion of the private sector or the market (economy) have been termed by experts and the governments as the process of privatization.

Globalization

• The process of Globalization has always been used in economic terms though it has always taken the political and cultural dimensions.
• Globalization is generally termed as ‘an increase in economic integration among nations’.
• The concept was popularised by the Organisation of Economic Cooperation and Development (OECD) in the mid-1980s.
• In its earlier deliberalization, the organisation had defined globalisation in a very narrow and business-like sense—‘any crossborder investment by an OECD company outside its country of origin for its benefit is globalisation’.
• The official meaning of globalisation for the WTO is movement of the economies of the world towards “unrestricted cross border movements of goods and services, capital and the labour force”.
• It simply means that the economies who are signatories to the process of globalization (i.e., signatories to the WTO) for them there will be nothing like foreign or indigenous goods and services, capital and labour. The world becoming a flat and level-playing field emerging in the due process of time
• For many political scientists, globalization is the emergence of a situation when our lives are increasingly shaped by the events that occur at a great distance from us about which the decisions are not taken by our conscious self.
• India became one of the founding members of the WTO and was obliged to promote the process of globalization, though its economic reforms started with no such obligations.
• It is a different thing that India started the process of globalization right after the reforms 1991.
• It should be noted here that the Indian idea of globalization is deeply and frequently inclined towards the concept of welfare state, which keeps coming in the day to day public policy as an emphatic reference.

Generations of Economic Reforms

Though there were no such announcements or proposals while India launched its reforms in 1991, in the coming times, many ‘generations’ of reforms were announced by the governments.A total of three generations of reforms have been announced till date, while experts have gone to suggest the fourth generation, too.

First Generation reforms (1991–2000)

The reforms initiated during 1991 to 2000 were termed as First Generation Reforms. The broad coordinates of the First Generation of reforms may be seen as under:

(i)  Promotion to Private Sector

• This included various important and liberalising policy decisions, i.e., ‘de-reservation’ and ‘delicencing’ of the industries, abolition of the MRTP limit, abolition of the compulsion of the phased-production and conversion of loans into shares, simplifying environmental laws for the establishment of industries, etc.

(ii)  Public Sector Reforms

• The steps taken to make the public sector undertakings profitable and efficient, their disinvestment (token), their corporatization, etc., were the major parts of it.

(iii) External Sector Reforms

• They consisted of policies like, abolishing quantitative restrictions on import, switching to the floating exchange rate, full current account convertibility, reforms in the capital account, permission to foreign investment (direct as well as indirect), promulgation of a liberal Foreign Exchange Management Act (the FEMA replacing the FERA), etc.

(iv) Financial Sector Reforms

• Several reform initiatives were taken up in areas such as banking, capital market, insurance, mutual funds, etc.

(v)  Tax Reforms

• This consisted of all the policy initiatives directed towards simplifying, broadbasing, modernising, checking evasion,etc.
• A major re-direction was ensued by this generation of reforms in the economy—the ‘command’ type of the economy moved strongly towards a market-driven economy, private sector (domestic as well as foreign) to have greater participation in the future.

Second Generation reforms (2000–01 onwards)

The government launched the second generation of reforms in 2000-01. Basically, the reforms India launched in the early 1990s were not taking place as desired and a need for another set of reforms was felt by the governments, which were initiated with the title of the Second Generation of economic reforms. These reforms were not only deeper and delicate, but required a higher political will power from the governments. The major components of the reform are as given below:

(i) Factor Market Reforms

• Considered as the ‘backbone’ for the success of the reform process in India, it consists of dismantling of the Administered Price Mechanism (APM).
• There were many products in the economy whose prices were fixed /regulated by the government, viz., petroleum, sugar, fertilizers, drugs, etc.
• Though a major section of the products under the APM were produced by the private sector, they were not sold on market principles which hindered the profitability of the manufacturers as well as the sellers and ultimately the expansion of the concerned industries leading to a demand supply gap.
• Under market reforms these products were to be brought into the market fold.
• But we cannot say that the Factor Market Reforms (FMRs) are complete in India. It is still going on.
• Cutting down subsidies on essential goods is a socio-political question in India.
• Till market-based purchasing power is not delivered to all the consumers, it would not be possible to complete the FMRs.

(ii)  Public Sector Reforms

• The second generation of reforms in the public sector especially emphasizes on areas like greater functional autonomy, freer leverage to the capital market, international tie-ups and Greenfield ventures, disinvestment.

(iii)  Reforms in Government and Public Institutions

• This involves all those moves which really go to convert the role of the government from the ‘controller’ to the ‘facilitator’ or the administrative reform, as it may be called.

(iv) Legal Sector Reforms

• Though reforms in the legal sector were started in the first generation itself, now it was to be deepened and newer areas were to be included, such as, abolishing outdated and contradictory laws, reforms in the Indian Penal Code (IPC) and Code of Criminal Procedure (CrPC), Labour Laws, Company Laws and enacting suitable legal provisions for new areas like Cyber Law, etc.

(v) Reforms in Critical Areas

• The second generation reforms also commit to suitable reforms in the infrastructure sector (i.e., power, roads, especially as the telecom sector has been encouraging), agriculture, agricultural extension, education and healthcare, etc. These areas have been called by the government as ‘critical areas’.

Third Generation reforms

• Announcement of the third generation of reforms were made on the margins of the launching of the Tenth Plan (2002–07).
• This generation of reforms commits to the cause of a fully functional Panchayati Raj Institution (PRIs), so that the benefits of economic reforms, in general, can reach to the grassroots.
• Though the constitutional arrangements for a decentralized developmental process were already effected in the early 1990s, it was in the early 2000s that the government gets convinced of the need of ‘inclusive growth and development’.
• Till the masses are not involved in the process of development, the development will lack the ‘inclusion’ factor; it was concluded by the government of the time.

Fourth Generation reforms

• This is not an official ‘generation’ of reform in India. Basically, in early 2002, some experts coined this generation of reforms which entail a fully ‘information technology-enabled’
• They hypothesized a ‘two-way’ connection between the economic reforms and the information technology (IT), with each one reinforcing the other.

India’s reform process which commenced in 1991 has been termed by experts as gradualist in nature with traits of occasional reversals, and without any big ideological U-turns. It reflects the compulsions of India’s highly pluralist and participative democratic policy-making process. Though such an approach helped the country to avoid sociopolitical upheavals/instability, it did not allow the desired economic outcome could have accrue from the reforms. The first generation of economic reforms could not bring the expected results due to lack of some other set of reforms for which India goes after almost over a decade—the second generation of economic reforms. Similarly, the economic benefits (whatever accrued) remained non-inclusive, in absence of an active public policy aimed at inclusion (commencing via the third generation of economic reforms). This created a kind of disillusionment about the prospects of reforms and failed the governments to muster enough public support in favour of reforms.

Washington Consensus

Context

Lately economists have cautioned that the Washington Consensus is losing its hold over institutions.

About

• Washington Consensus: The Washington Consensus is a set of 10 economic policy prescriptions by Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank and United States Department of the Treasury.
• It constitutes the "standard" reform package promoted for crisis-stricken developing countries.
• The prescriptions encompassed policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and expansion of market forces within the domestic economy.
• 10 Policy prescriptions:
• Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP.
• Redirection of public spending from subsidies (especially indiscriminate subsidies) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment.
• Tax reform, broadening the tax base and adopting moderate marginal tax rates.
• Interest rates that are market determined and positive (but moderate) in real terms.
• Competitive exchange rates.
• Trade liberalization: Liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs.
• Liberalization of inward foreign direct investment.
• Privatization of state enterprises.
• Deregulation: Abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions.
• Legal security for property rights.

Criticism

• Most criticism for Washington Consensus has been focused on trade liberalization and the elimination of subsidies, especially in the agriculture sector.
• In nations with substantial natural resources, the focus of criticism is on privatization of industries exploiting these resources.

Is the Washington consensus still relevant?

• Changing IMF stance: It has been argued that IMF might be moving away from the Washington Consensus world view of freely floating exchange rates and opposition to capital controls that dominated its thinking for decades.
• China factor: When Renminbi was just included in the basket of currencies that make up the Special Drawing Rights (SDR), economic concerns led to a massive capital flight that saw China’s foreign exchange reserves go down by a trillion.
• China imposed drastic capital controls to avoid currency crash so soon after its SDR inclusion. And it worked, unlike Washington consensus prescription.
• Rethinking on the ‘capital account fundamentalism’: The term denotes a belief that free flow of capital provides the greatest possible equity and prosperity, and that any interference with the market process decreases social well-being.
• However, empirical example suggests, it has not been the case.
• Free capital flow destabilized emerging economies after the crisis of 2009. Easy monetary policies in the developed world encouraged “carry trade"—cross-border investment in search of higher yields. Capital flooded into emerging economies with higher domestic interest rates. But when Federal Reserve Bank (Fed) tapering started, capital flows reversed, leaving emerging economies very unstable.
• A possible repetition of 2009: If the US economy stumbles into a recession, which presently seems like a possibility, Fed would be left with no choice but to further expand its quantitative easing. And this could once again have consequences on emerging economies.
• A similar distress can be caused by the actions of European Central Bank which is easy on printing currency and buying bonds that carry negative interest rates.

National Infrastructure Pipeline

Context

Finance Minister has released Report of the Task Force on National Infrastructure Pipeline for 2019-2025.

About

• It is estimated that India would need to spend $4.5 trillion on infrastructure by 2030 to sustain its growth rate.
• The endeavor of the National Infrastructure Pipeline (NIP) is to make this happen in an efficient manner.
• These projects are on top of Rs 51 lakh crore spent by the Centre and the states during the last six years and the new pipeline consists of 39 per cent projects each by the Centre and states and the balance by 22 per cent by private sector.

Benefits of National Infrastructure Pipeline

• Well-planned NIP will enable more infra projects, grow businesses, creates job, improve ease of living and provide equitable access to infrastructure for all, making growth more inclusive.
• Well- developed infrastructure enhances level of economic activity, creates additional fiscal space by improving revenue base of the government, and ensures quality of expenditure focused in productive areas.
• Provides better view of project supply, provides time to be better prepared for project bidding, reduces aggressive bids/failure in project delivery, ensures enhanced access to sources of finance as a result of increased investor confidence.

Features of National Infrastructure Pipeline

• To achieve this objective, a Task Force has been constituted to draw up the National Infrastructure Pipeline (NIP) for each of the years from FY 2019-20 to FY 2024-25 with the approval of the Finance Minister.
• The Task Force is chaired by Secretary, DEA with CEO (NITI Aayog), Secretary (Expenditure), Secretary of the Administrative Ministries, and Additional Secretary (Investments), DEA as members and Joint Secretary (IPF), DEA as Member Secretary.
• Total project capital expenditure in infrastructure sectors in India during the fiscals 2020 to 2025 is projected at over Rs 102 lakh crore.

Sector-wise:

• According to the Task Force, Government has planned to increase participation of private sector in freight traffic. It will add 30% of net cargo by 2025 and will increase private trains to 500.
• Irrigation and rural infrastructure projects would account for 7 lakh crore each. ?3.07 lakh crore would be spent on industrial infrastructure. Agriculture and social infrastructure would account for the rest.
• Road projects will account for 63 lakh crore while another 13.68 lakh crore would be for railway projects.
• Port projects would see spending of 1 lakh crore and airports another 43 lakh crore. 16.29 lakh crore would be spent on urban infrastructure and 3.2 lakh crore in telecom projects.
• According to the sector-wise break-up of projects made available by the Finance Ministry, 54 lakh crore investment will flow in the energy sector, and of that ?11.7 lakh crore would be in just the power sector.
• 42 lakh crore NIP projects which are in the implementation stage now include expressways, national gas grid and PMAY-G.

‘eBkray’ - online auction platform for assets attached by banks

Context

• eBkray is an e-auction platform to enable online auction of attached assets by banks.

About

• The eBkray platform provides navigational links to all PSB e-auction sites, property search feature and presents single-window access to information on properties up for e-auction, comparison of similar properties, and also contains videos and photographs of the uploaded properties.
• Buyers can use IBAPI portal to search and get properties details and participate in the auction process. Presently 21 banks are onboard on this portal
• Currently, there are 2,457 residential, 576 commercial, 333 industrial and 18 agricultural properties are available on eBkray platform among others.
• PSBs have attached assets worth over Rs 2.3 lakh crore in the last three fiscal years.

Objectives of eBkray

• To enhance user experience through seamless access to information by the search based on the type and location of the property put up for e-auction by the banks in India.
• To enable online auction of attached assets transparently and cleanly for the improved realization of value by banks.
• It will provide navigational links to all Public Sector Banks (PSBs) e-auction sites, property search feature and will present single-window access to information on properties up for e-auction, comparison of similar properties, as well as contains videos and photographs of uploaded properties.
• The platform also helps the buyer to easily navigate to the bank e-auction site after a notified property is selected. It also helps the user to search property using State-wise, District-wise and bank-wise details.

Need

• There has been information asymmetry when bank attached assets are auctioned which will come to an end with the launch eBkray.
• Simplify auction process

Conclusion

The e-auction platform is now linked on Indian Banks Auctions Mortgaged Properties Information (IBAPI) portal and guidelines have been made available which will help banks in the release of cash trapped in mortgaged assets. It will also bring transparency in the process.