Generation of Economic Reforms

Generation of Economic Reforms

Generation of Economic Reforms

• The reform process in India was initiated with the aim of accelerating the pace of economic growth and eradication of poverty. The process of economic liberalization in India can be traced back to the late 1970s. However, the reform process began in earnest only in July 1991.

• With the onset of the reforms 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. The reforms of the last two and a half decades have gone a long way in freeing the domestic economy from the control regime.

• An important feature of India’s reform programme is that it has emphasized gradualism and evolutionary transition rather than rapid restructuring or “shock therapy”.

First Generation Reforms (1991 onwards)

• It had its origin in 1985 when the New Economic Policy declared emphasised on improvement in productivity, absorption of modern technology and fuller utilisation of capacity and finally on the greater role for the private sector.

• The economic reforms initiated in 1991 introduced far-reaching measures, which changed the working and machinery of the economy. The reforms have unlocked India’s enormous growth potential and unleashed powerful entrepreneurial forces.

• Since 1991, successive governments have successfully carried forward the country’s economic reform agenda in response to the changes in the nature of markets and institutions, industrial organisation and structures and social relations of production.

• These changes were pertinent to the following:

– Dominance of the public sector in the industrial activity
– Discretionary controls on industrial investment and capacity expansion
– Trade and exchange controls
– Limited access to foreign investment
– Public ownership and regulation of the financial sector
• The focus of reforms was mostly on stabilization with a little stress on structural reforms.

• New policy introduced various changes regarding industrial licensing, technology up-gradation, elimination of controls and restrictions, foreign capital, fiscal policy, rationalizing and simplifying the system of fiscal and administrative regulation and export-import policy in order to provide greater scope to private sector.

• The policy changes were expected to provide a big boost in private sector investment particularly in the corporate segment of manufacturing industry which would, in turn usher in rapid growth of the economy as well as pave the way for modernization of the economy.

• Broader Reforms among First Generation were as follows:

– Chelliah Committee suggestions in Taxation, focus was on broadening the Tax Base.
– Narasimham Committee suggestions for Financial Sector, focus was on increasing stability.
– LPG reforms through New Industrial Policy, focus was on freeing the economy from clutches of ageing public sector.
– Partial convertibility of Rupee in Current Account.

Second Generation Reforms

• In a way the Second Generation Reforms began in right earnest in 1999. India embarked on an exercise of cutting personal taxes, investing in infrastructure and creating world class companies.

• Second generation of economic reforms in the country gave special stress on fiscal reforms, financial reforms, structural reforms, labour law reforms etc. Major fiscal reforms have been undertaken for broadening the income tax base and streamlining the excise and customs duty structures.

• Major financial sector reforms undertaken by the government include allowing private companies to enter into insurance sector, allowing foreign bank to open their branches in India.

• The focus of reforms was on structural reforms through institutional strengthening. Overall, the objective was to push economy on a higher growth trajectory & the second generation reforms did pushed India to 8% growth path as against 6% growth path that was guided by first generation reforms.

• Broader Reforms among Second Generation were as follows –

– Foreign Exchange – Abolition of (FERA) Foreign Exchange Regulation Act and creation of (FEMA) Foreign Exchange Management Act; Partial convertibility of Rupee in Capital Account on basis of Second Tarapore Committee

– Labour – Voluntary Retirement Scheme (VRS); Board for Industrial and Financial Reconstruction (BIFR); National Renewal Fund

– Financial Sector – Narasimham Committee II suggestions regarding prudential norms and the Capital Adequacy Ratio (CAR)

– Taxation – Value Added Tax (VAT); Kelkar Panel Suggestions on Direct tax; Provision of Minimum Alternate Tax (MAT), Fringe Benefit Tax (FBT) and other tax avoidance aspects; Introduction of service tax

Third Generation Reforms

• Currently India is under 3rd generation of reforms.

• The First & Second generation of reforms had a few downsides. The GDP had been growing but the GDP per capita still left a lot to be desired. India ranks much lower than Asian and Latin American peers when compared on parameters like GDP per capita and Tax/GDP. This is one of the first challenges before the Indian government.

• The second challenge was the creation of world class infrastructure. We are not only referring to infrastructure in terms of roads, railways and ports; but also in terms of manufacturing and manpower infrastructure.

• The third area of focus is on creating, encouraging and nurturing the spirit of entrepreneurship.

• Broader Reforms among Third Generation were as follows:

– GST (Goods and Service Tax)
– Exit Policy/ Bankruptcy Code
– Capital easing norms for start-ups or entrepreneurs through Mudra Bank