A Glimpse into the Economic Reforms and the Journey Ahead:-

Host: – Vishal Dahiya

Participants: –

1. A.K. Bhattacharya, Editorial Director, Business Standard
2. Abhinav Prakash, Assistant Professor of Economics, University of Delhi

Context:

It has been 30 years since India embarked on the path of liberalization. A multi-faceted reforms strategy was introduced in 1991, which revolutionized the role of the State as a facilitator and neutral regulator. Over the years, India has emerged as one of the fastest-growing economies in the 21st century, with the reform agenda continuing to steer economic growth.

Background:

Liberalization refers to the process of reducing state control over economic activities, thereby empowering business enterprises in decision-making and minimizing government intervention.

Why was liberalization needed?

• Inadequate performance of the public sector
• Balance of payment crisis
• Increasing government debt
• Decrease in import cover
• Slow growth rate of the 1980s (Hindu rate of growth)
• Long-standing structural weaknesses such as license raj, MRTP Act, 1969, inward-looking trade policies, import substitution, etc.

India received financial aid of $7 billion from the World Bank and the IMF in exchange for announcing its New Economic Policy.

Immediate impact of the reforms:

• Inflation dropped from a peak of 17% in August 1991 to about 8.5% within 2.5 years
• Forex reserves rose from $1.2 billion in June 1991 to over $15 billion in 1994
• GDP growth increased from 1.1% in 1991-92 to 4% in 1992-93
• The fiscal deficit reduced from 8.4% in 1990-91 to 5.7% in 1992-93
• Exports more than doubled from 1990-91 to 1993-94

Significant changes since 1991:

1. Fiscal stabilization: Abolition of export subsidies, FRBM Act , budget support to loss-making public-sector units, banning the use of ad-hoc treasury bills.
2. Easing of foreign investment norms to attract FDI
3. Tax rate reforms like VAT, GST, reduction of corporate taxes, rationalization of tax slabs, etc.
4. Financial sector reforms – Autonomy to PSBs, giving teeth to SEBI, allowing the use of global depository receipts, etc.
5. Reforms in the exchange rate policies – full current account convertibility was introduced in India.
6. Despite the increased growth rate, the benefits of development have not been equitably distributed due to a sharp rise in inequality.

Economic situation during the pandemic

• Unemployment: India’s unemployment rate sharply rose to 7.11% in 2020.
• India’s debt to GDP ratio increased from 74% to 90% during the COVID-19 pandemic.
• India’s Gross Domestic Product (GDP) contracted 7.3% in 2020-21, as per provisional National Income estimates released by the National Statistical Office.

Measures taken for Economic Revival:

1. Atmanirbhar Bharat Abhiyaan
2. PM Garib Kalyan Yojana
3. PLI schemes for multiple manufacturing sectors
4. Credit guarantee schemes for MSME, NBFCs
5. A Rs.20 lakh crore revival package.

Way Forward:

• New challenges require innovative solutions.
• Reforms should be implemented in areas that directly impact the public, such as local government finances, agricultural bills, etc.
• The government needs to address data security challenges and the digital economy by introducing a personal data act and amending the Information Technology Act .
• There is still a need for administrative reforms like prison reforms, personnel reforms (the USA has 5 times more administrators than India).
• Reforms should be Pro Market rather than Pro Business.
• India needs to enhance its health infrastructure and consequently human capital to leverage the potential of the demographic dividend for sustained economic growth.

Conclusion:

After a setback of more than a year due to the pandemic, India needs to take comprehensive and rational steps to overcome the crisis and resume its journey towards becoming a $5 trillion economy.

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