Indian Economic Reforms

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Economic reforms in india

New Industrial Policy

Under Industrial Policy, keeping in view the priorities of the country and its economic development, the roles of the public and private sectors are clearly decided.

Under the New Industrial Policy, the industries have been freed to a large extent from the licenses and other controls. In order to encourage modernisation, stress has been laid upon the use of latest technology.

A great reduction has been effected in the role of the public sector.  Efforts have been made to encourage foreign investment. Investment decision by companies has been facilitated by ending restrictions imposed by the MRTP Act. Similarly, Foreign Exchange Regulation Act (FERA) has been replaced with Foreign Exchange Management Act (FEMA).

Some important points of the New Industrial Policy are as follows:

Abolition of Licensing

Before the advent of the New Industrial Policy, the Indian industries were operating under strict licensing system. Now, most industries have been freed from licensing and other restrictions.

Freedom to Import Technology

The use of latest technology has been given prominence in the New Industrial Policy. Therefore, foreign technological collaboration has been allowed.

Contraction of Public Sector

A policy of not expanding unprofitable industrial units in the public sector has been adopted. Apart from this, the government is following the course of disinvestment in such public sector undertaking.

 

MRTP Restrictions Removed

Monopolies and Restrictive Trade Practices Act has been done away with. Now the companies do not need to seek government permission to issue shares, extend their area of operation and establish a new unit.

FERA Restrictions Removed

Foreign Exchange Regulation Act (FERA) has been replaced by Foreign Exchange Management Act (FEMA). It regulates the foreign transactions. These transactions have now become simpler.

New Trade Policy

Trade policy means the policy through which the foreign trade is controlled and regulated. As a result of liberalisation, trade policy has undergone tremendous changes. Especially the foreign trade has been freed from the unnecessary controls.  The age-old restrictions have been eliminated at one go. Some of the chief characteristics of the New Trade Policy are as follows:

  • Restrictions on the exports-imports have almost disappeared leaving only a few items.
  • Export-import tax on some items has been completely abolished and on some other items it has been reduced to the minimum level.
  • Import-export procedure has been simplified.
  • Foreign capital market has been established for sale and purchase of foreign exchange in the open market.

Fiscal reforms

The policy of the government connected with the income and expenditure is called fiscal policy. The greatest problem confronting the Indian government is excessive fiscal deficit. In 1990-91, the fiscal deficit was 8% of the GDP.

In order to handle the problem of fiscal deficit, basic changes were made in the tax system. The following are the major steps taken in this direction:

  • The rate of the individual and corporate tax has been reduced in order to bring more people in the tax net.
  • Tax procedure has been simplified.
  • Heavy reduction in the import duties has been implemented.

Monetary policy

Monetary policy is a sort of control policy through which the central bank controls the supply of money with a view to achieving the objectives of the general economic policy. Reforms in this policy are called monetary reforms. The major points with regard to the monetary reforms are given below:

Statutory Liquidity Ratio (SLR) has been lowered. (A commercial bank has to maintain a definite percentage of liquid funds in relation to its net demand and time liabilities. This is called SLR. In liquid funds, cash investment in permitted securities and balance in current account with nationalised banks are included.)

  • The banks have been allowed freedom to decide the rate of interest on the amount deposited.
  • New standards have been laid down for the income recognition for the banks. (By recognition of income, we mean what is to be considered as the income of the bank. For example, should the interest on the bad debt be considered as the income of the bank directions have been issued in this context.

Capital Market Reforms

The market in which securities are sold and bought is known as the capital market. The reforms connected with it are known as capital market reforms. This market is the pivot of the economy of a country. The government has taken the following steps for the development of this market:

  • Under the Portfolio Investment Scheme, the limit for investment by the NRIs and foreign companies in the shares and debentures of the Indian companies has been raised. (Portfolio Investment Scheme means investing in securities.)
  • In order to control the capital market, the Securities and Exchange Board of India (SEBI) has been established.
  • The restriction in respect of interest on debentures has been lifted. Now, it is decided on the basis of demand and supply.

Phasing out Subsidies 

Cash Compensatory Support (CCS) which was earlier given as export subsidy has been stopped. CCS can be understood with the help of an example.  If an exporter wants to import some raw material which is available abroad for 100, but the same material is available in India for 120 and the governments wants the raw material to be purchased by the exporter from India itself for the protection of indigenous industries, the government is ready to pay the difference of 20 to the exporter in the form of subsidy.  The payment of 20 will be considered as CCS. In addition to this, the CCS has been reduced in case of fertilizers and petro products.

Dismantling Price Control

The government has taken steps to remove price control in case of many products. (Price Control means that the companies will sell goods at the prices determined by the government.) The efforts to remove price control were mostly in respect of fertilizers, steel and iron and petro products. Restrictions on the import of these products have also been removed.

Impacts of Privatization

Privatization in generic terms refers to the process of transfer of ownership, can be of both permanent or long term lease in nature, of a once upon a time state-owned or public owned property to individuals or groups that intend to utilize it for private benefits and run the entity with the aim of profit maximization.
ADVANTAGES OF PRIVATIZATION
Privatization indeed is beneficial for the growth and sustainability of the state-owned enterprises.
• State owned enterprises usually are outdone by the private enterprises competitively. When compared the latter show better results in terms of revenues and efficiency and productivity. Hence, privatization can provide the necessary impetus to the underperforming PSUs .
• Privatization brings about radical structural changes providing momentum in the competitive sectors .
• Privatization leads to adoption of the global best practices along with management and motivation of the best human talent to foster sustainable competitive advantage and improvised management of resources.
• Privatization has a positive impact on the financial health of the sector which was previously state dominated by way of reducing the deficits and debts .
• The net transfer to the State owned Enterprises is lowered through privatization .
• Helps in escalating the performance benchmarks of the industry in general .
• Can initially have an undesirable impact on the employees but gradually in the long term, shall prove beneficial for the growth and prosperity of the employees .
• Privatized enterprises provide better and prompt services to the customers and help in improving the overall infrastructure of the country.

DISADVANTAGES OF PRIVATIZATION
Privatization in spite of the numerous benefits it provides to the state owned enterprises, there is the other side to it as well. Here are the prominent disadvantages of privatization:
• Private sector focuses more on profit maximization and less on social objectives unlike public sector that initiates socially viable adjustments in case of emergencies and criticalities .
• There is lack of transparency in private sector and stakeholders do not get the complete information about the functionality of the enterprise .
• Privatization has provided the unnecessary support to the corruption and illegitimate ways of accomplishments of licenses and business deals
ADVANTAGES AND DISADVANTAGES OF PRIVATISATION IN INDIA

  • Privatization loses the mission with which the enterprise was established and profit maximization agenda encourages malpractices like production of lower quality products, elevating the hidden indirect costs, price escalation etc..
    • Privatization results in high employee turnover and a lot of investment is required to train the lesser-qualified staff and even making the existing manpower of PSU abreast with the latest business practices .
    • There can be a conflict of interest amongst stakeholders and the management of the buyer private company and initial resistance to change can hamper the performance of the enterprise .
    • Privatization escalates price inflation in general as privatized enterprises do not enjoy government subsidies after the deal and the burden of this inflation effects common man

 

 

Impacts of Globalisation:-

Definition of Globalization :- Its a process(not an outcome) characterized by increasing global Interconnections by gradual removal of barriers to trade and investment between nation and higher economic efficiency through competitiveness.

Various economic, political, social and cultural effects of globalization are as follows:-

Economic:-

  • Breaking down of national economic barriers
  • International spread of Trade, Financial and productive activities
  • Growing power of transnational cooperation and International financial Institutions(WTO, IMF)Through the process of:-

1- Liberalization- relaxation of restrictions, reduction in role of state in economic activities,decline in role of govt in key industries, social and infrastructural sector.

2- Privatization- Public offering of shares and private sale of shares, entry of private sector in public sector and sale of govt enterprises.

3- FDI

4- International regulatory bodies(WTO,IMF)

5- MNC’s

6- Infrastructural development

7- Expansion of information and communication technology and birth of information age.

8- Outsourcing of services- ie BPO and Call Centres.

9- Trade related intellectual property rights(TRIPS)- product based patent rather than process based.

Social effects:-

  • Withdrawal of National govt from social sectors ie declining share of govt in public spending, reducing social benefits for worker(social dumping,pension cuts,subsidies reduction)
  • Labor  reforms and deteriorating Labor welfare:-
    • Labour Market deregulation:-
      • Minimum wage fixing
      • Employment security
      • Modifying tax regulation
      • Relaxed standards of security
    • Increased Mechanization demands skilled labour and thus loss of job for unskilled labour
    • Loss of jobs for traditional workers for example bihar silk workers due to imported Chinese- Korean silk
  • Feminism of Labour ie increased women participation specially in soft industries
  • Trickle down theory of poverty reduction has limited success and in agricultural nations poverty has infect increased.
  • Unsustainable development practices such as:- excessive use of fertilizers, irrigation, fish trawling by mnc’s(Protein flight ),Exploitation of natural resources by MNC’s.
  • Migration and urbanization have lead to problem of slums
  • Commercialization of indigenous knowledge:- patenting
  • Rising inequality in wealth concentration

 

Cultural:-

  • Increased pace of cultural penetration
  • Globalization of culture
  • Development of hybrid culture
  • Resurgence of cultural nationalism ie shivsena opposing valentine day

 

Political:-

  • Globalization of National Policies- Influenced by International agencies
  • Reducing economic role of govt
  • Political lobbying

 

Positive effects of Globalization

  • Increased competition
  • Employment generation
  • Investment and capital flow
  • Foreign trade
  • Spread of technical know how
  • Spread of education
  • Legal and ethical effects
  • Improved status of women in the society
  • Urbanization
  • Agriculture:- greater efficiency,productivity, use of HYV seeds, Future contracts and cooperative farming
  • Higher standard of living
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