Economic Reforms since 1991

Topics: Poverty, Foreign direct investment, Investment Pages: 19 (5023 words) Published: October 13, 2014

Economic Reforms in India since 1991: Has Gradualist Approach Worked? By Vadapalli.Tilak Kumar,
India was a latecomer to economic reforms, embarking on the process in earnest only in 1991, in the wake of an exceptionally severe balance of payments crisis. The need for a policy shift had become evident much earlier, as many countries in east Asia achieved high growth and poverty reduction through policies which emphasized greater export orientation and encouragement of the private sector. India took some steps in this direction in the 1980s, but it was not until 1991 that the government signaled a systemic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of government. India’s economic performance in the post-reforms period has many positive features. The average growth rate in the ten year period from 1992-93 to 2001-02 was around 6.0 percent, as shown in Table 1, which puts India among the fastest growing developing countries in the 1990s. In sharp contrast, growth in the 1990s was accompanied by remarkable external stability despite the east Asian crisis. In addition, the annual average growth rate for the periods 2002-03 to 2011-12 is 7.97 percent. Poverty also declined significantly in the post-reform period, and at a faster rate than in the 1980s according to studies. India still remained among the fastest growing developing countries in the second sub-period because other developing countries also slowed down after the east Asian crisis, but the annual growth of 5.4 percent was much below the target of 7.5 percent which the government had set for the period. Inevitably, this has led to some questioning about the effectiveness of the reforms. Opinions on the causes of the growth deceleration vary. World economic growth was slower in the second half of the 1990s and that would have had some effect, but India’s dependence on the world economy is not large enough for this to account for the slowdown. However, the opposite view is that the slowdown is due not to the effects of reforms, but rather to the failure to implement the reforms effectively. However, even a gradualist pace should be able to achieve significant policy changes over twenty years. This paper examines India’s experience with gradualist reforms from this perspective. We review policy changes in Six major areas covered by the reform program: fiscal deficit reduction, industrial and trade policy, agricultural policy, infrastructure development and social sector development. Based on this review, we consider the cumulative outcome of twenty years of gradualism to assess whether the reforms have created an environment which can support increase in percentage of GDP growth, which is now the government largest target. Fiscal Discipline

Fiscal profligacy was seem to have cause for balance of payments crisis in 1991and reduction in fiscal deficit was therefore an urgent priority at the start of the reforms. By 1990, the current account and fiscal deficits had risen to 3.5% and 9.4% of GDP respectively, leading to the BOP crisis of 1991. Containing this deficit was one of the key structural adjustments undertaken by the Indian government at the time. Economic reforms helped reduce the fiscal deficit, and the combined fiscal deficit fell to 6.3% of GDP in 1996–1997. The combined fiscal deficit came down to 4.2% of GDP in 2007–2008 (well below the prescribed 6.0%) and the primary deficit (fiscal deficit net of interest payments) turned into a surplus of 1.3% of GDP in 2007–2008. But un relatively, the combined fiscal deficit increased to 10.2% of GDP in 2009-10. *Fortunately, the combined fiscal deficit has came down again to 4.2% in the year 2013-14 (*Source ; RBI various issues) The tax rate for individual reduced to 30 %. The tax rate for domestic companies reduced from 40 % to 30 %. The tax rate on foreign companies reduced from 55...

References: Ahluwalia, Isher J., “Industrial Growth in India: Stagnation since the mid-sixties,” Oxford University Press, New Delhi, 1995.
Ahluwalia, Montek S., “India’s Economic Reforms: An Appraisal,” in Jeffrey Sachs and Nirupam Bajpa’s (eds.), “India in the Era of Economic Reform,” Oxford University Press, New Delhi, 2000.
Bhagwati, J., and Srinivasan, T.N., “Outward-Orientation on Development: Are the Revisionists Right,” in Trade, Development and Political Economy, by Deepak Lal and Richard Snape eds. Palgrave, 2001.
Chaudhuri, Sudip, “Economic Reforms and Industrial Structure in India,” Economic and Political Weekly, January 12, 2002.
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