Indian Economic Reforms
Business Environment
PGRM
Rishi Raman Singh
1. INTRODUCTION
• Growth in Real GDP Averaged at 6% per Year during
1980-2005
• India is in an enviable position among developing
countries
• Fear of competition is receding – confidence among
Indian industries in their ability to compete in the
world market.
• Success of IT is spilling over to manufacturing
• India’s standing as an economic power in the South
Asian region and the world has risen
• None of this would have happened but for systemic
reforms initiated in 1991
• Origins of reforms
INTRODUCTION (continued)
• Break from the “Hindu” rate of grown of
3.75% per year from 1950-80
• Piece-meal and hesitant reforms of 1980’s
accompanied by fiscal profligacy and debt
accumulation generated unsustainable growth
• Macroeconomic crisis of 1991
• Approach to IMF and the World Bank
INTRODUCTION (continued):
• Systemic reforms Initiated
• Reforms not reversed as they were after the
1966 crisis
• Collapse of the Soviet Union
• China’s rapid growth after 1978
2. POST-REFORM PERFORMANCE
2.1 GDP Growth
• Peak rate of 7.8% in 1996-97
• Since then fluctuations in the range of 4% 8.5%
• Adjustment for monsoons and business
cycle
2.2 Poverty Reduction
• Table 3
• Fluctuations of Poverty Ratio around 50%
during 1950-1980
• Reduction since 1980
• Still a long way to go
2.3 Fiscal performance
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Table 4
Slackening of fiscal consolidation efforts
Failure to address subsidies
Tax take low
Progress in tax reforms
High public debt
2.4 Domestic Savings and
Investment
• Table 5
• Public sector dissaving
• Puzzling dominance of direct saving in physical
assets
• Current account surplus for 3 years in a row
• Unhealthy accumulation of reserves
2.5 External Sector
2.5.1 Exports of Goods and
Services
• Table 6
• China versus India
• Contribution of Software and BPO
2.5.2 Service Exports and BPO
• AIMA task force report
• IT and ITES share in GDP and employment
growth
• Backlash
2.5.3 Foreign Direct Investment
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Table 7
Modest inflows
Poor climate for FDI
Ministry of finance assessment
Bottlenecks
2.5.4 Special Economic Zones
• Attempt to imitate China
• Failure of past attempts
2.5.5 Exchange Rate and Reserves
• Fear of Floating
• Capital account convertibility
2.6 Financial Sector Reforms
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Mixed picture in different segments
Sea change compared to financial repression
of pre-reform era
Interest rates largely deregulated
Greater competition from private banks and foreign banks
Government pre-empts reduced significantly
Establishment of autonomous Board of Financial Supervision
Residential norms on capital adequacy
Improved debt recovery and restructuring mechanism
Government Securities Market with primary dealers as market matures
Delivery Version Payment System
Establishment of Clearing Corporation of India
2.6 Financial Sector Reforms
Continued…
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Improvements in reach and depth of banking sector, its balance sheet, capital structure, net
profits and NPAs.
New financial products introduced
Government Security Market has experienced increases in market size, lower yields and
longer maturities
Monetary Policy more independent and based on indirect instruments
Turnover in foreign exchange markets increased
Despite achievements problems remain
Risk Assessment mechanisms not up to standard
Not ready for Basel-II
Public ownership a major problem
Success in reforming of equity markets
Creation of SEBI, National Stock Exchange
Transactions costs fall and markets are integrated nationally
3. SOCIAL SECTORS AND NATIONAL COMMON
MINIMUM PROGRAM
• Consensus on poverty eradication as
overarching objective of development
• Differences on strategies for achieving the
objective
• Trickle down versus Pulling Up
• Employment guarantee Program
4. CONCLUSION:
• Reform process stalled
• Plethora of committees and commissions to study issues studied several
times earlier
• Actions cannot be delayed in several areas
• Further opening of the economy to external competition
• Have to move away from protectionism
• Attract larger inflows of FDI including in manufacturing
• Push for further liberalization of trade in goods and services in the Doha
Round
CONCLUSION (Cont’d):
• Financial sector reforms including further
divestment
• Set up a date certain for capital account
convertibility
• Fiscal consolidation – Tax and Expenditure
reforms
• Rethinking Fiscal Federalism
• Privitization – National Investment Fund