Building a Market Economy in India

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Prepared for:
Prof. Dr. Masud Rahman

Prepared by:
Gazi Md. Ali Zafar

Mirpur Cantonment, Dhaka-1216


1. What were the features of pre reform India and what were the justifications of that?

Answer: The features of pre reform India were as following:

a) The economic system that developed in India after 1947 was mixed economy system characterized by a large number of state-owned enterprises, centralized planning, and subsidies.

b) This system constrained the growth of private sector and that time in India private companies could expand only with government permission. Under this system, dubbed the “License Raj,” private companies often had to wait months for government approval of routine business activities, such as expanding production or hiring a new director. It could take years to get permission to diversify into new product.

c) Much of heavy industry, such as auto, chemical, and steel production was reserved for state-owned enterprises.

d) Production quotas and high tariffs on imports also stunted the development of a private sector, and that time restrictive labor laws that made it difficult to fire employees.

e) In pre reform India, access to foreign exchange was limited, investment by foreign firms was severally restricted, land was strictly controlled, and the government routinely managed prices as opposed to letting them be set by market forces.

f) By the early 1990s, it was clear that before reform in India, this economic system was incapable of delivering the economic progress.

At the end of colonial rule, India inherited an economy that was one of the poorest in the developing world, with industrial development stalled, agriculture unable to feed a rapidly growing population, a largely illiterate and unskilled labor force, and extremely inadequate infrastructure. Indian people and government had a past idea that before independence East India Company dictates the people for two hundred years and exploit their people in many cases though initially that time trade and foreign investment policies were relatively liberal. So, taking experience from that situation leaders' exposure to democratic socialism as well as the economy progress achieved by some communist countries like Soviet Union. Domestic policy tended towards protectionism, with a strong emphasis on import substitution, industrialization, economic interventionism, a large public sector, business regulation, and central planning. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s

2. Identify the features of Indian economic reform. Critically evaluate the reform experiences of India?

Answer: In 1991, the lack of progress led the government to embark on ambitious economic reform programs which were given below:

a) Much of the industrial licensing system was dismantled, and several areas once closed to the private sector were opened, including electricity generation, parts of the oil industry, steelmaking, air transport, and some areas of the telecommunications industry.

b) One of the important economic reform aspects in India that investment by foreign companies, formerly allowed and was welcomed.

c) Approval was made automatic for foreign equity stakes of up to 51 percent in an Indian enterprise, and 100 percent foreign investment was allowed under certain circumstances.

d) After taking economic reform program in India, raw materials and many industrial goods could be freely imported and the maximum tariff that could be levied on imports was reduced from 400 percent to 65 percent and top income tax rate was also reduced...
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