SIKKIM MANIPAL UNIVERSITY DIRECTORATE OF DISTANCE EDUCATION

ASSIGNMENT FOR ECONOMIC REFORMS PROCESS IN INDIA (BB0029)

SUBMITTED BY AHAMMED MUFASIR MUSTHAFA 1|Page

BBA 6TH SEMESTER 511020734 Q1. How can India be regarded as a Developing economy? India can be regarded as a developing economy by taking into account the following features, Rise in Net National Product The rate of growth in national income has shown a significant increase. In the last two decades the NNP rose at the rate of 5.4 per cent per annum as against 3.4 per cent per annum during the first three decades of economic planning. It is a positive outlook that the national income has been rising at a rate which is higher than the rate of population growth. Rise in Per Capita Income Indias per capita income at 93-94 was Rs. 3,687. Since then in a period of five decades it has risen to Rs. 10,254. This is in spite the inadequate and erratic economic development of the nation. Structural Change There have been significant structural changes in Indian economy. Even though the rate of change is slow, we cannot ignore them. The structural changes include the following, 1. There is a slow change in the sectorial distribution of domestic products. 2. Stability in the occupational distribution of population. 3. Growth of basic capital goods 4. Expansion in social overhead capital 5. Significant and progressive changes in the financial sector Agricultural Transformation Agriculture has transformed from subsistence to market-oriented, from traditional to technology-oriented. India has emerged as the major producer of bananas, vegetables, fruits, sugarcane, tobacco, milk, wheat and oilseeds. There is also self-sufficiency in food grains. Change in Foreign Trade Indias foreign trade presently is highly diversified and has recorded changes of far-reaching importance. Foreign trade has come to mean exports and imports. India is now one of the brighter emerging markets. Expansion of Science and Technology India is considered to be a developing economy by its advanced and major leaps it has taken in the field of science and technology. India has developed one of the most advanced space programs and is part of many major scientific clubs with the developed economies. There has also been changes in the social aspects of the country. Caste system and Untouchability has been banished and is now punishable by law and various others changes have been brought into the social structure of India.

Q2. What was the economic crisis of 1991 in India? 2|Page

The economic crisis of 1991 was due to the growing fiscal and current account deficits. The government of India had a series of macroeconomic policies which were followed until 1991. These policies were implemented as fiscal policies aimed at mobilizing resources from the private sector to finance development programs and public investment in infrastructure. Monetary policy sought to regulate flows in accordance with the needs of the industrial sector and keep the rate of inflation under control. Foreign trade policy was formulated to protect domestic industry and keep the trade balance in manageable limits. However, economic imbalances grew to critical levels. As a rising balance of payment deficit cannot be financed beyond a point, it resulted in a blocking or destruction of the foreign exchange reserves which then makes it necessary to adjust for the monetization of the budget deficit. The fiscal adjustment requires a slowdown of the economy. Along with the political instability of the nation, the international community lost its faith in the Indian economy and its credit ratings were steeply cut. The fiscal situation had deteriorated throughout the 1980s due to growing burden of nondevelopment Expenditure. All the measures of fiscal imbalances showed major deficits and the chances of the government falling into a debt trap was real. The government could not continue with its policy of borrowing to meet steadily increasing fiscal deficits. With the gulf crisis of 1990 which triggered an inflation in the rise in whole sale prices and the excess liquidity of the in the economy the rates climbed to 12% of whole sale goods and inflation flew up to 18%. The Major reasons can be summed together as below, Excess of consumption and expenditure over revenue, resulting in heavy Government borrowing; Growing inefficiency in the use of resources; Over-protection Mismanagement of the firms and the economy Various distortions like poor technological development and a shortage of Foreign exchange.

Q3. What is the problem regarding current account deficit in the balance of payment? How does the current account convertibility help this? Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital and transfers. At present the balance of payment of India is not as dangerous as compared to the 1990-91. There has been a positive rise in the foreign exchange reserves which surely indicates the stability and sustainability of the Indian economy. Policies relevant to the balance of payment were adopted. The problems regarding the Balance 3|Page

of Payments arose in India due to the inadequate coverage of the import and export earnings. The inadequate coverage led to a massive trade deficit. Once it had reached an unsustainable position, there were needs of new policies and moves. The devaluation of rupees against major currencies resulted in widening the deficit and it also fueled the inflation rate in the Indian economy which compared to other industrial countries were high. Presently the Reserve bank of India tries to manage the excessive volatility in the exchange rates and maintain orderly market conditions to ensure that the exchange rate remains consistent. The balance of payment will heavily rely on the growth of export which has not promised enough growth. There has to be a growth of 14% in value to get a sustainable balance of payment position. India has to target the exchange rate on export competitiveness in order to reduce the deficit. There needs to be fiscal consolidation, trade reform, infrastructure development and incentive for private investment in export along with an appropriate exchange rate policy. It may be noted that the Indian policy-makers are concerned to limit current account deficits to safe levels, even though the countrys large infrastructure Requirements would seem to call for a significant recourse to foreign savings. Some of the measures taken in order to control the Balance of Payment are Import control, export promotion, Attraction of NRI Deposits, Liberalized exchange rates and current account convertibility.

Q4.What liberalization has taken place in the economy since 1991? Due to the failure of the Industrial licensing policy of the 1980, a number of liberalization policies were implemented. The policies were as follows, Liberalization from Licensing The limit of exemption from licensing was continuously raised upwards. The limit was first fixed at Rs. 3 crore, it was later raised to Rs. 5 crore and then to Rs. 15 crore for projects located in non-backward areas and Rs. 50 crore for projects located in backward areas. Concession from Monopolies Act In order to expand industrial production and promote exports, various concessions were provided to companies falling under the MRTP Act and FERA. The most important relaxation was raising the limit for MRTP companies from Rs. 20 crore to Rs. 100 crore in 1985. In 1983 the government also gave chances to the MRTP companies to set up, without the approval of the government, new capacities in industries of high national importance or industries with import potential or those using high end technology. Freedom for Expansion and Industry In order to encourage production, the government delicensed 28 broad catagories of industries and 82 bulk drugs and their formulation. For these industries only registration with the Secretariat for Industrial Approvals was required.

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Broad Banding of Industries Industries were classified under broad categories of two-wheelers, four-wheelers, tractors, as machinery and fertilizers, pharmaceuticals and paper and pulp etc., into generic categories. This was intended to enable the manufacturers to change their product-mix to match changes in demand patterns without incurring delays regarding paperwork and governmental affairs. Increase in Investment Limit of Small Industries Investment limit of both small and tiny or micro enterprises have been increased to 5 crores and 25 lakhs respectively. This was done to introduce modernization in the sector. Liberalization of Import Export Transactions The government had made it easy for import of raw materials technology and others. Other procedures regarding import and export were also simplified along with this. There were also liberalization on taxation policies and capital markets which were made to make the economy stronger and attract foreign investments.

Q5. How do you see the role of public sector in India in the current scenario with many of the as good as or even better than the private sector? The public sectors play a significant role in the economic development of the country. The role of public sector in India can be analyzed under the following heads, o Share in National Income o Share in Employment o Contribution to the Exchequer o Share in Capital Formation o Role in Import Substitution o Role in Infrastructure Development o Role in Export Promotion o Role in Resource Mobilization o Strong Industrial Base o Role in critical areas Share in National Income There has been steady growth in the contribution of the national income by the public sector. Even though the share is comparatively low when looking at private sectors, the key sectors like defense, civil aviation, and crude production are almost under state ownership. Share in Employment There has been considerable increase in the employment opportunities in the public sector where a staggering 68% of total workers in the organized sector work in the public part. Contribution to the Exchequer The public sector has been making significant contributions to the exchequer thru payment of corporate taxes, custom duty and other duties.

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 Share in Capital Formation In developing countries the savings rate is very low which in turn leads to low capital formation but this can be overcome through public enterprises. The public sector has made a tremendous contribution to this and still does. Share in Import Substitution For a balance of trade it is important that imported goods are produced within the country or find ingenious substitutes for the materials, the public sector is playing an important role in this field. Examples can be made of Bharat Electronics and Hindustan Antibiotics and Pharmaceuticals. Role in Infrastructure Development The growth of industrial development is dependent on the infrastructure of the nation and infrastructure development requires huge capital which cannot be mobilized by the private sector, these projects also do not guarantee high profits which makes the development only possible thru public sectors. Role in Export Promotion Public sectors have done a great job in promoting export of the nation. Railway engines, steel, machinerys have been a major export options and have done well. Role in Resource Mobilization The generation of internal resources by the public sector has assumed greater importance because, in addition to financing their own planned expansion and development, they are also expected to generate surplus for financing the needs of other priority sectors. Strong Industrial Base and Role in Critical Areas Rapid industrialization is a strong result of the public sectors efforts, the public sector has entered to wide areas of industries that are critical to the nations development and economic growth.

Q6. Differentiate the role of private sector and public sector in the Indian economy. The role of public sector and the private sector are very different in the economy, so is the performance of each sector and the shortcomings. The public sector was bought into the economy to cover the objectives of the following, Capital formation Development of infrastructure Strong industrial base Removal of regional disparities Import substitution and export promotion Check over concentration of economic power It was not until the economic reforms of 1956 that the public sector was given a strategic and important role in the economy. Thus we have assume that the private sector dominated the pre

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independence era up to the economic reform of 56. The major role of the private sector in our economy can be noted as below, General economic development Private sector in agriculture Extensive modern industrial sector Private sector in trading Dominant sector of the Indian economy Both the private sector and the public sector play an important role in shaping the economy of the nation. The public sector has not been able to pierce some of the sectors like agriculture and small scale industries which are a total privatized sector while regions like defense, civil aviation are majorly fall under the public sector. Both the sectors have their own shortcomings which can be noted as below, Private Sector Emphasis on non-priority industries and wastage of resources Monopoly and concentration Contribution to trade deficits Industrial disputes Industrial sickness Problems relating to foreign competition Problems relating to finance and credit Public Sector Mounting losses Over capitalization Price policy Underutilization of capacity Political factors Delays in completion Problems of labor, personnel and Management Trade Unionism

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