ECONOMIC REFORMS IN INDIA: Impact on Business

1. ECONOMIC REFORMS IN INDIA: Impact on Business Dr. Sukumar Nandi Indian Institute of Management Lucknow

2. Period 1947- 1990 • The historical discontinuity after independence • The Plan strategy • A nation building exercise • The experiment with socialism Economic Reforms: Impact on Business_ S. Nandi

3. The Planning era • A Critical Assessment:: • A rate of growth of average 3.2 per cent • High population growth denies a significant dent on poverty • A huge public sector with minimum returns • A protective private sector Economic Reforms: Impact on Business_ S. Nandi

4. Philosophy of Reforms • To free the economy from the circumspection of socialist equity in the form of pervasive state control on production, low productivity, a distorted and dis-functional price system and a complacent over-protective private sector. • To establish the supremacy of individual and the role of economic freedom Economic Reforms: Impact on Business_ S. Nandi

5. Perspective: year 1990-91 • International reserve came down to $ 1.3 billion, less than 1 month import bill, and India was on the verge of default in foreign obligations [ short term debt] • Stagnant exports • India’s ratings down • High deficits in domestic budget • Public sector banks having large NPA • PSU incurring huge losses Economic Reforms: Impact on Business_ S. Nandi

6. International Scene • USSR’s disintegration… the currency rouble weakened • Overall confusion on the efficacy of command economy • Some east European countries came out of socialist economic structure • Loss of credibility of the ‘command economy’ as disturbing revelation came out on lower productivity and disinformation about planning Economic Reforms: Impact on Business_ S. Nandi

7. New Role of IMF • The Washington consensus about the ‘transition economies’ • Dismantle command economy structure • Reduce the size of government • Privatization of state undertakings • Reduce and remove budget deficit • Make currency stable and current account convertible Economic Reforms: Impact on Business_ S. Nandi

8. IMF and new WTO Regime • New WTO regulations make domestic liberalization and globalization an integrated one exercise Economic Reforms: Impact on Business_ S. Nandi

9. Mechanism • Dismantling of the license and permit raj so that the rent-seeking system is abolished • Minimize the role of the state in production except in some core and strategic areas • Reform of the legal system to end monopoly of any group/ sector • Financial sector reforms Economic Reforms: Impact on Business_ S. Nandi

10. continued • Reform of the system to allow free market mechanism by • Dismantling the administered price mechanism • Inducing firms to set own targets of production • Removing all artificial barriers to unleash forces of competition • Reforms of the tax system • Removal of trade barriers Economic Reforms: Impact on Business_ S. Nandi

11. Financial sector reforms • Fiscal reforms--- change in the budgetary process makes the government accountable--- discipline in revenue-expenditure process • Low inflation- low interest regime • Changes in the banking sector – making the system of bank credit more transparent_ efficient appraisal system and accountability for decision taking Economic Reforms: Impact on Business_ S. Nandi

12. Notes on Banking Crisis • Delegated screening and monitoring of borrowers on behalf of depositors (mitigate information asymmetries). • Transformation of short-term, liquid deposits held by households into illiquid liabilities issued by firms. Economic Reforms: Impact on Business_ S. Nandi

13. Results of F.S. reforms • Role of capital is appreciated and effort are on to make capital cheaper at par world standard [ GOI yet to fulfill the just demand of the corporate sector] • More transparent estimate of the need for investment in the infrastructure sector--- how to mobilize the resources • One estimate puts the requirement as $50 billion equivalent---- role of foreign direct investment as perceived by the government. Whether FDI is good for the country is no longer the issue Economic Reforms: Impact on Business_ S. Nandi

14. Current position of Reforms • The reforms process has been slowed down__ Reasons • Inability to carry out reforms in some crucial sectors like legal infrastructure and education • Resistance by interested groups • Lack of political will • Role of powerful bureaucracy as they feel threatened with diminutive public sector • A section of corporate sector beneficiary of old system Economic Reforms: Impact on Business_ S. Nandi

15. Reforms__ slowed down? • India’s endemic problems • Low literacy _ message of reforms not reaching • Archaic social structure__ at lower level of society and furthest from the centre of administration exploitation continues • Social and economic discrimination are intertwined in the society • Lack of genuine administrative reforms at the grass-root levels [panchayat system ]-- Economic Reforms: Impact on Business_ S. Nandi

16. Reforms slowed down?_ cont’d • Even when panchayats exist, they are totally dependent on state government for finance, that erodes their power • Emergence of regional groups based on caste • Lack of accountability [ corruption index being at level 83 among 133 countries surveyed recently] • A permissive society???? Economic Reforms: Impact on Business_ S. Nandi

17. Slow reforms • Some economic issues— • Wide gap between rural and urban areas regarding the availability of public goods like potable water, health services, primary education___ worse situation is that sometime availability is dictated on caste lines • [ a MIT study on rural situation in AP , conducted by Dr. A. Banerjee of MIT, USA ] • No cushion from the lower side regarding social security • Transparency in public policy lacking_ that creates credibility gap__ a breeding ground of violence Economic Reforms: Impact on Business_ S. Nandi

18. India • Let us see some developments in economic scene Economic Reforms: Impact on Business_ S. Nandi

19. India__ Growth rates in 1990s Economic Reforms: Impact on Business_ S. Nandi

20. India__ external sector Economic Reforms: Impact on Business_ S. Nandi

21. India__ international liquidity Economic Reforms: Impact on Business_ S. Nandi

22. GNP of 12 countries[ as on 2001 ] • Pop GNP Rank GNP/C Rank • million b $ Dollars • USA 284 9901 1 34870 7 • Japan 127 4574 2 35590 4 • Germany 82 1948 3 23700 20 • U.K. 60 1451 4 24230 16 • France 59 1377 5 22690 24 • China 1272 1130 6 890 138 • Italy 58 1123 7 19470 30 • Canada 31 662 8 21340 26 • Spain 40 587 9 14860 39 • Mexico 99 550 10 5540 68 • Brazil 173 529 11 3060 89 • India 1033 474 12 460 161 Economic Reforms: Impact on Business_ S. Nandi

23. Real GDP growth rates of selected countries during 1990--- 2000 [ per cent] • China 10.3 • Ireland 7.3 • India 6.0 USA 3.5 • Japan 1.3 • Russia -4.8 • Ukraine -9.3 Economic Reforms: Impact on Business_ S. Nandi

24. Need of the hour • Reforms of the infrastructure sector • Education_ universities • Legal system • Sense of accountability • A proper perspective of market mechanism • Redefine the role of Government Economic Reforms: Impact on Business_ S. Nandi

25. Need……. • Spread of innovation • Incentive system • An effective supervision system as reform process brings fragility also in the financial system. • WHY ECONOMIC FREEDOM IS NECESSARY AND FOR THAT A CONGENIAL ATMOSPHERE IS TO BE CREATED __ THAT SHOULD BE THE GOAL OF ECONOMIC REFORM Economic Reforms: Impact on Business_ S. Nandi

26. Issue__ Economic Freedom Economic Reforms: Impact on Business_ S. Nandi

27. Economic freedom__ parameters • Trade Policy • Taxation • Government Ownership • Monetary Policy • Restrictions on Foreign Investment • Restrictions on Banking • Wage and Price Controls • Property Rights • Regulations • Black Market Economic Reforms: Impact on Business_ S. Nandi

28. Freedom and income per capita Economic Reforms: Impact on Business_ S. Nandi

29. Freedom and income Economic Reforms: Impact on Business_ S. Nandi

30. Freedom__ bop of some countries[ 2001] Economic Reforms: Impact on Business_ S. Nandi

31. Currency __ INR [ a depreciating real exchange rate over time] Economic Reforms: Impact on Business_ S. Nandi

32. India’s exports to USA [ Issue is Capital flight] Economic Reforms: Impact on Business_ S. Nandi

33. India’s imports Economic Reforms: Impact on Business_ S. Nandi

34. Restrictions in bop • Import prohibitions applied since 1960 to a wide range of consumer goods • The European Commission has received complaints from business • The European Commission raised the issue in the framework of the World Trade Organization (WTO) • Negotiations led to a progressive elimination of restrictions between 2000 (for priority products) and 2003 • Expected additional turnover for EU industry: 2 Billion € Economic Reforms: Impact on Business_ S. Nandi

35. Restrictions Economic Reforms: Impact on Business_ S. Nandi

36. Global scene • Next few slides we will see the experience of economic transition in former command economies and its impact on several parameters___ a cross-section sample Economic Reforms: Impact on Business_ S. Nandi

37. Comparison • We can make comparison with the transition process that started in China ( 1985) and Russia ( 1989-90) • Russia__ lack of experience of running enterprise…. Corruption in privatization of state enterprises….. Financial mess….. Emergence of mafia • China___ lack of knowledge compensated by allowing foreign capital free run in limited areas ( eastern provinces) __ slow transition___ mess in financial system…. Large scale corruption Economic Reforms: Impact on Business_ S. Nandi

38. Growth & agriculture Economic Reforms: Impact on Business_ S. Nandi

39. Openness & share of agriculture Economic Reforms: Impact on Business_ S. Nandi

40. Cross –section example: growth & openness_ 1990 _97 Economic Reforms: Impact on Business_ S. Nandi

41. Just for knowledge__ corruption and economic growth Economic Reforms: Impact on Business_ S. Nandi

42. conclusion • We are in the middle of the process of reforms…. • Only expectations about the better future Economic Reforms: Impact on Business_ S. Nandi

43. End of discussion • Reference: • 1. Prem Sankar Jha, The Perilous Road to Reforms, Rupa & Co., Calcutta, 2002. • 2. World Bank__ World Economic Outlook_ 2002 • 3. Economic Reforms_ a position paper • sukumarnandi@hotmail.com THANK YOU Economic Reforms: Impact on Business_ S. Nandi