Economic Reforms in India

ECONOMIC REFORMS IN INDIA

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The economic reforms or liberalization in India mark a shift from socialist economy to a market economy. Initiated by the then Indian Prime Minister P.V. Narasimha Rao and his Finance Minister Manmohan Singh, their immediate cause was a foreign exchange crisis during Chandrashekhar government when India had to sell its gold reserves. Reforms ended the Licence Raj (investment, industrial and import licensing) and several public monopolies.

The UF government brought a budget that encouraged reforms but the 1997 Asian financial meltdown and political instability caused economic stagnation. The Vajpayee administration continued with privatization, reduced taxes, introduced a firm fiscal policy aimed at lessening deficits and debts and enhanced initiatives for public works.

India under Nehru and Congress followed the Soviet model of planned economy to rid India of the exploitive colonial British economic policy and its vestiges after independence. Five-Year Plans achieved much but also led to heavy centralization, inefficient State capitalism, State monopolies in mining, machine tools, water, telecommunications, insurance, and electrical plants. The so-called Hindu rate of growth became a joke as India stagnated at 3.5% from 1950s to 1980s, while per capita income averaged 1.3%, even as Pakistan grew by 8%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and in Taiwan by 12%.

Today, the private sector has become an active participant in the telecommunications sector. Insurance has been opened to private investors, both domestic and foreign. The economy has grown at more than 6 per cent, coupled with full macroeconomic stability. The rate of inflation is once again coming down after spiraling alarmingly.

Rising incomes have helped reduce poverty. According to official figures, the proportion of poor in total population has declined from 40 per cent in 1993-1994 to 26 per cent in 2000.

Most importantly, the attitude toward reforms has changed. Virtually every political party today recognizes the need for continued reforms.

Though slow pace of reforms is credited with India’s firm fundamentals and weathering the shock of global economic depression, yet all is not well with India’s reforms and the fiscal deficit remains in doldrums. The combined deficit at the Centre and States exceeds 10 per cent of GDP. This deficit is unsustainable; it is also crowding out private investment.

Infrastructure like roads, railways and ports all need expansion. Improvement in quality of service and delivery systems is a must. The government has recently started building roads, but the pace remains slow. India’s power sector is also in a horrible State.

Economic reforms have bypassed agriculture. Farmers are committing suicide and do not get full market price for their product. Procurement prices are below the market price. Further, export restrictions must be phased out.

If India grows at 6 per cent per annum on a sustained basis, it will take 14 years to reach the current level of per capita income of People’s Republic of China, 36 years to reach Thailand’s, and 104 years to reach that of the United States.

Thus, the need for accelerated growth can hardly be overemphasized.