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THE ECONOMIC POLICY AGENDA OF INDIA FOR 1990
INTRODUCTION: The development issues of the Eighth Five Year Plan (1992-97) mainly related to the creation of more employment, generation of larger savings, allocation of sufficient outlay to infrastructure and social sectors. The role of the public sector has been redefined and in man,) areas both the private and public sector will now complement or compete with each other to provide better services to the consumer.
DEVELOPMENT OF THOUGHT: The recent structural reforms in the spheres of trade, industry, financial and public sectors have set in motion conditions for higher Industrial and overall growth. But the future agenda for economic policies remains formidable. The future economic policy agenda must concentrate on the reduction of government expenditure, rationalization and simplification of taxation rules, strict fiscal prudence and monetary discipline. Regional imbalances in agriculture are also to be reduced while exports need to do better to bridge the trade gap. An important requirement of the economic reforms is that the various sections of society must be fully committed towards it. The objective should be “adjustment with a human face”.
CONCLUSION: It is expected that there will be a turnaround in agriculture, industry and overall growth in the coming years.
The Eighth Five Year Plan was launched on April I, 1992. The Plan (1992 1997) aims at achieving an average growth rate of 5.6 per cent per annum in GDP at constant prices over the planning horizon. Given the Incremental investment ratio (ICOR) a 4.1 per cent, the requirement of gross domestic investment is 23 per cent of GDP, which would be financed by gross .domestic saving to the extent of 21.4 per cent of GDP and a net inflow of foreign capital to the extent of 1.6 per cent of GDP. The rate of growth of agriculture is targeted at 3 per cent per annum, that of the manufacturing sector at 7.3 per cent, energy sector at 8.2 per cent, transport at 7.2 per cent, communications at 6.3 per cent and other services at 6.1 per cent.
Future development issues mainly relate to the creation of more employment, generation of larger savings, allocation of sufficient outlay to the infrastructure and social sectors, reduction of the share of public sector in total plan outlay, and to the enhancement of exports to finance increasing needs of capital goods, components, fertilizer and petroleum products. Regional imbalances of agriculture are to be reduced, and the cropping pattern and productivity in agriculture are to be improved. Industrial, trade and public sectors have been made much more competitive and liberalized. It would be ensured that procedural matters are further simplified, and basic infrastructural facilities are supplied to operationalise these policies. Very high tariff walls and complicated taxation laws have also come under severe criticism and need to be rationalized. Because of the balance of payments crisis and India’s dependence on substantial imports of oil to meet the ever increasing energy demand, conservation of energy and development of non-conventional sources of energy need to be given top priority. Fiscal deficits, which spill over to the balance of payments deficits and accentuate inflationary pressure, should be reduced gradually to the targeted level of 4 to 4.5 per cent of GDP. For fiscal prudence, we need to achieve complete phasing out of food and fertilizer subsidies, curtailment of defence and other non-developmental expenditures and to raise more resources by widening the tax base and improving the performance of the public sector industries.
The share of the public sector in total investment is proposed to be reduced to 45 per cent in the Eighth plan compared with -75.7 per cent in the Seventh plan thus allowing for a much larger space for the private sector that has hitherto been given. The labour force is expected to grow at a rate of 2.2 per cent per annum during the Eighth plan and employment is expected to grow at 2.6 per cent per annum given the planned pattern of investment, production and labour intensities. In absolute terms, about 8 million jobs per annum would be generated during the first half, and about 9 million jobs per annum during the second half of the plan, approaching a rate of 10 million jobs a year towards the end of the decade.
It has been indicated earlier that the role of the public sector has been redefined and there would be greater private participation and free market play for overall economic development. The private sector has been allowed to enter areas where it has a comparative advantage in terms of efficiency and resource allocation. The public sector will have a role to play in sectors where private entrepreneurs are unwilling to enter due to greater risks, low profitability and enormous size, and a long gestation period of investment, or where there is a greater degree of market imperfection, externalities or discontinuities. In many areas, they may complement or compete with each other for better services. Excessive nationalisation may lead to distortion in price structure, a state monopoly, inefficient allocation of resources and undesirable rents for influential pressure groups. On the other hand, excessive privatisation may lead to a greater concentration of income and wealth and undeserved oligopoly profits. Thus, the reappraisal of the respective roles of both public ‘and private enterprises for the Eighth plan has been based on economic rationality, need for efficiency and fairness and not on emotions and ideological bias.
While India’s fiscal and balance of payments performance in recent years is not encouraging and indicates the need for strengthening its macro-economic management the favourable impact of the liberalisation policies implemented during the 1980s on the industrial and infrastructural sectors and overall economic growth should not be overlooked. India moved to a higher growth path of 5.8 per cent per annum during the 1980s compared with an average and trend growth rate of only 3.5 per cent achieved until the end of 1970s. While the pace of policy changes has been slow and uneven yet, viewed as a process, important progress has been made in strengthening the institutional setup, rationalising and simplifying the tax system, relaxing the scope and intensity of domestic control and regulation on trade and industry, developing a modern capital market, and reducing the anti-export bias of the trade regime. Much of India’s industrial growth and export performance in recent years is attributable to these changes in economic policies. Trade deregulations and a flexible exchange rate policy had been instrumental for rapid growth in exports. The easing of licensing policies and quantitative restricted actions on import of capital goods and raw materials led to rapid growth in the manufacturing sector. Some of the differences between the growth rates of manufacturing subsectors can also explain the ned by the pattern of reform of domestic regulation and changes in import controls. Sub-sectors such as cement, electronics, passenger cars, fertilizers etc. where barriers to entry and expansion were lowered grew relatively’ rapidly Subsectors where barriers were maintained (e.g. via public sector and small scale reservations or restrictive licensing requirements) appear to have grown less rapidly than the other subsectors during the 1980s.
The recent structural reform in the spheres of trade, industry, financial and public sectors and the associated macro-economic stabilization policies are expected to impart dynamism and efficiency to the growth process and to provide a solid foundation of higher industrial and overall growth. The process is time-consuming and complex but will have to be completed in full to get the real benefits of the structural reforms. While impressive steps have been taken by the Government in the last few months to set in motion the fundamental structural and policy reforms, the future agenda for economic policies remains formidable. The future economic policy agenda must include the following: (a) reduction of government expenditure, particularly of non-developmental and revenue expenditure; (b) rationalization and simplification of tax rules and regulations and tax rates; (c) reduction of custom duties and thereby industrial protection; (d) further liberalization and consolidation of industrial and trade policies and their effective implementation; (e) liberalization of the financial sector; (0 restructuring of public enterprises with the view of increasing their efficiency, and their internal resources generation and (g) strict fiscal prudence and monetary discipline.
The key macro-economic targets of the Government during the adjustment period are: (i) a rapid recovery of GDP growth from about 3 per cent in 1991-92 to about 6 per cent by the mid 1990s; (ii) an inflation rate of about 9 to 10 per cent (as measured by changes in the GDP deflator) in 1991-92, falling to 7.5 per cent in 1992-93 and further to 6 per cent in 1995-96; (iii) a reduction of overall public sector deficit to GDP ratio from about 12.5 per cent in 1990-91 to 8.5 per cent in l992-93;and that of central government deficit/GDP ratio from 9 percent in 1990-91, to 5 percent in 1992-93 with commitments of further reduction during the Eighth plan, (iv) an easing of the present critical payments situation and rebuilding of foreign exchange reserves from the low level of US $ 2.1 billion as on November I, 1991 to about 3 months’ worth of imports over the next few years and (v) a decline in external current account deficit from about 3.5 per cent of GDP in 1990-91, to about 1.5 per cent of GDP by 1995-96, as export growth strengthens under the influence of improved competitiveness and a recovery of world demand.
The series of structural reforms already undertaken and contemplated is in pursuance of the policy of economic liberalization or deregulation. They are intended to unleash the productive forces of the economy which were hitherto held in check through a number of unnecessary Government controls. These measures are expected to enhance efficiency and productivity and thereby improve India’s international competitiveness, impart dynamism to the growth process and provide a solid foundation for higher exports and overall growth. However, it may be noted that the impact of these supply-side policies will take some time to be felt and in the transitional period of Government would provide a safety net to the people who might be affected by these structural reforms.
It may be pointed out that stabilization policies and structural reforms failed in many Latin American countries and also in Asian countries such as Sri Lanka and the Philippines, and they have run into some problems in Pakistan. The Indian situation is somewhat different and it is felt that these reforms, over the medium term, will enable the country to achieve the path of sustainable non-inflationary growth with the viable balance of’ payments. In this connection, the major strong points of the Indian situation are explained below.
India has gone in for the stabilization-cum-adjustment programme at a stage stronger than in the case of many other countries. India’s external debt and debt service liabilities are not high compared to other developing countries. Our reliance on short-term debt is also low by international standards. The economy is diversified with a fairly strong industrial structure. The country’s exports are also diversified by products and by markets with over three-quarters accounted for by manufactured products. India is also following the reform process in a sequence which is more efficient than those followed by others. This is important as it has been noted that the failure of the adjustment package in some of the Latin American countries was because of the wrong sequencing of the reforms.
An important requirement of the economic reforms is that the various sections of the society should be fully committed towards it. The Government has been able to bring about a consensus among various groups in society for the need for stabilisation and structural adjustment. The Government is committed not only to the reform process but also to the promise that the burden of these measures should not fall unduly on those sections of the society which are least able to bear it. “Adjustment with a human face”, is the objective. The success of the reform process also depends greatly on this aspect.
Although it is too early to assess the impact of these reforms on our economy, the early results of these policies have been very favourable and highly encouraging. International confidence in our economy has been restored. International credit rating agencies have started either removing India from the credit watch or are upgrading the rating of Indian scripts. The foreign currency assets, which had declined to $1.1 billion at their lowest point in June 1991, had risen to about $5.6 billion at the end of March 1992 and an additional $ 1.6 billion was received on India Development Bonds, which is held by the State Bank of India. In addition to the build-up of foreign exchange reserves, the Government was able to bring back the gold pledged with the Bank of England and the Bank of Japan in July 1991. The value of this gold was about $ 600 million.
Although the current rate of inflation is still a matter of concern, the rate of inflation which rose to a peak level of 16.7 per cent in August 1991 has declined continuously and presently stands at around 8%. It may also be noted that the t despite industrial recession, very expensive bank credits, severe import compression, frig continuous deprecate nation of rupee, increase in excise duty on most of the industrial products and a hike in petroleum product prices and railway inflation rates for primary articles and fuel-power-lubricants was lower than those during 1990-91. However, the Government attaches the highest priority to controlling the rate of inflation, as it hurts everybody, particularly the poor.
There has been a slight slackening of industrial production which was due to severe imports squeeze in 1990-91 and 1991-92, and the high cost of finances because of strict fiscal and monetary discipline, but the economy does not face any critical supply bottleneck. Important infrastructure industries like power, steel, cement, coal etc. have continued to register impressive growth rates. In fact infrastructure industries, basic goods and consumer non-durables have registered higher growth rates during 1991-92 compared with 1990-91. Despite a fall in industrial production, our export in dollars to the general currency areas has increased by 6.3 per cent. Investment climate and capital market also remained buoyant. It is expected that given a favourable monsoon there would be a turn-around in agricultural, industrial and overall growth in the coming years.