Skyline Business School

Assignment of
Economic Reforms in India
Faculty Mr. Arunabh Banerjee
Subject code BB0029

Submitted by:
Rajat suri
520771334
BBA L3S2
Q1. How can India be regarded as a developing economy?
Indian Economy :
 2nd largest economy in world in terms of population
 16% of population and 12% of land
 4th largest eco. In term of GDP
 Highly diversified from Agri. to technology
 Gradual move from Public sector domination in industries to increasingly
liberalised (tariffs to quota-free )
 Restricted to liberalised
 Sellers’ market to Buyers’ market
 Large pool of human resources, natural resources
 3rd largest pool of engg. and quality educational insti.
Issues
 Inadequate employment oppportunities
 Inequalities in socio-economic status
 Poverty
 Poor Infrastructure
 Fiscal deficit
 Large Non Performing Assets (NPA)

Characteristics of Indian Economy

 Predominance of Agriculture
 Rapid population growth
 Low per capita income
 Unemployment
 Capital – scarce economy

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

Economic crisis of 1991 in India
India started having balance of payments problems since 1985, and by the end of 1990, it
was in a serious economic crisis. The government was close to default, its central bank had
refused new credit and foreign exchange reserves had reduced to the point that India could
barely finance three weeks’ worth of imports. India had to airlift gold to pledge it
with IMF for a loan.

Economic back ground

 1948 - 1956.
 Public sector dominance.
 Limited private participation.
 1956-1980.
 Industry classification.
 Industrial licensing policy
 1980 – 1991.
 Growth rate of 5.4 percent per annum.
 Limited liberalization measures were initiated.
 Steps were taken to modernize some of the most important industries, such as
cement, steel, aluminum and power generation equipment.

Cause of the Crisis-1990

Crisis was caused by current account deficits and currency overvaluation

 From 1950 to 1980, the Indian economy grew at a slow rate of 3.6 percent.
 This gave rise to foreign borrowing on a small scale.
 The result was increase in foreign debt and repayment liability.

 Foreign debt increased from US$23.5 billion in 1980 to $63.40 billion in 1991.
 Nearly 28% of total export revenue went to service the debt.
 Lead to Fiscal deficit (expenditure exceeds the revenue)
  Reasons of fiscal deficit
 Exorbitant expenditures were incurred by the central government's subsidies.
 The inefficient functioning of many of the central and state public sector enterprises.
 The multilateral agencies such as IMF and the World Bank insisted that the
policymakers undertake structural reforms.
 Internal debt liability increased to 53% of GDP.

Q3. What is the problem regarding current account deficit in the Balance of
Payment? How does the current account convertibility help this?

BoP is a double entry system of record of all economic transactions between the residents
of a country and the rest of the world carried out in a specific period of time.

In other words BoP means the exports & imports of all kinds including consumer goods,
consumer durables, FMCG, capital goods, technical equipment & services like banking,
insurance, tourism, transportation etc. and payment of salaries, benefits, interest, dividents
etc…

DEFICITS IN BoP
• There was a deficit in BoP from the 1st five yr plan (19951-56) onwards
• At that time deficit is
BoP CRISIS IN 1990
• The deficit problem is a long-standing one, it took on a serious turn in the early
1990’s and continues to be a difficult one at present, although there is some easing
of the situation.
FACTORS CONTRIBUTING BoP CRISIS

LARGE IMBALANCES
The continuing deficits become massive around the second half of 1990. Because,
Gulf crisis
• Rise in the value of imports of oil greatly expanded the size of deficit. From an avg
 of Rs499 cr ($ 287 m) pre month in June-Aug 1990, the value of importsrose
massively to Rs 1221 cr ($ 671 m) per month in the following six months.

• This in turn largely accounted for a doubling of the BoP deficit from an avg of Rs
619cr ($ 356 m) per month in June-Aug 1990 to Rs.1229 cr ($ 679 m) per month in
the six months followed.
• Indian workers employed in Kuwait had to be airlifted to India.
• UN trade embargo exports to Iraq & Kuwait.

LOSS OF CONFIDENCE
• Outside world had lost confidence in the country’s ability to manage the crisis.
There was an expectation that the country would default on its debts. And that the
Rupee would fall heavily in the world mkt.
• There was a drying up of short-term credits from a level of about $ 2 billion in 1989-
90 to over a half billion in 1990-91. The interest on these credits too went up
sharply.

BIG SIZE
• One reason why the problem is a serious one, is that the deficit in the trade balance
is a big figure. An indication of the same can be had by relating it to GDP. As a
proportion of GDP, it has remained as high as around 3% for most of the yrs. This is
larger than the projections in several plans. This is only a reflection of the low
performance of the exports, which is a proportion of GDP remained small in the
range of 5 to 8% of GDP on an avg basis. As against this imports exceeded exports by
a wide range of 8 to 12% of GDP.

MEASURES TO CONTROL BoP

• IMPORT CONTROL
• EXPORT PROMOTION
 • ATTRACTION OF NRI DEPOSITS
• LIBERALISED EXCHANGE RATE MGT SYSTEM
• UNIFIED EXCHANGE RATE
• CURRENT ACCOUNT CONVRTABILITY

Q4. What liberalization has taken place in the economy since 1991?

COMPONENTS OF LIBERALIZATION
 Industrial Sector Reforms
 Trade Sector Reforms
 Financial Sector Reforms
 Fiscal Sector Reforms

Reforms taken during liberalization

PHARMACEUTICALS INDUSTRY
 India is world's 4th largest pharmaceuticals producer with 8% share of global
production.
 3 New Molecules discovered by Indian companies - 12 more in the final stages.
 Over 100 Indian formulations have received United States FDA approval
BIOTECH
 More than 900 companies involved in traditional biotech products
 Biopharma products – 35 new MNC companies set up in past 5 years.
 R&D and commercialization of products on agricultural biotechnology is the
latest trend.
 Opportunities for fresh investment in Indian biotech sector in next 5-7 years -
US$ 1.5 – 2 billion
AGRI & FOOD PROCESSING
 India is looking for investment in infrastructure, packaging and marketing.
 India - One of the largest food producers of the world
  The Indian scientific and research talent had boomed up after liberalization
because of various MNC are investing big money in R&D.
AUTO & AUTO COMPONENTS
 2nd largest small car market in the world.
 Largest motorcycle manufacturer in the world.
 2nd largest scooter and tractor manufacturer in the world.
 Many international auto majors are manufacturing in India – Daimler Chrysler,
General Motors, Toyota, Ford, Honda, Hyundai, Volkswagen, Suzuki etc
 Most of them are also outsourcing their components from India as a hub.
RESEARCH & DEVELOPMENT
More than 100 global companies outsource R&D facilities from India
 GE John F Welch Technology Centre – Company’s largest research outfit
outside the US
 GE Medical Systems – India as sole sourcing base for its portable ultrasound
scanner
 Monsanto – First non-US research facility
 Eli Lilly – largest research facility in Asia and 3rd largest in the world
 Texas Instruments – Digital Signal Processor developed in India – controls 50%
of the world market
 AVL, Austria – India as base to do R&D for the company.
IT & IT ENABLED SERVICES
 Compounded annual growth rate (CAGR) exceeding 50 % over the last five years
 IT enabled services key driver of growth. Engine for outsourcing
 This segment poised to grow very rapidly, world-wide - India has potential to
tap 38 % of the world market.
 Revenues from ITeS (remote services) showed an annual growth rate of 68.2 %.

ENTERTAINMENT industry
 Industry growing at 15% - Total industry valued at US$ 4.267 billion in 2003
 Expected to reach US$ 9.4 billion by 2008
  Largest producer of films and enterntainment content in the world - More than
1000 films produced in 2003-04
 Co-production treaties being signed with UK, Canada, China and Italy,USA (Time
Warner,Universal,Goldmyn Mayor).
 Animation and gaming – one of the fastest growing sectors
 Animation and special effects for SPIDERMAN and GLADIATOR done
in India

HEALTHCARE industry
 Size of the Healthcare industry - over US$22 billion
 Sector employs over 60 lakh people
 One of the fastest growing sectors in India - expected to grow at 12-13% per
annum.
 Over 80% of healthcare spending is captured by private sector & MNC.
 Investment Potential : 750,000 extra beds over the next 10 years at a cost of
approximately US$30 billion.
OIL & GAS
 World’s 6th largest consumer of Energy
 World’s 8th largest consumer of Oil
 Demand for Petroleum Products expected to be 179 MT by 2006-07.
 Investments of US$ 150 Billion required to meet ongoing demand. More than
US$ 6 Billion already committed for exploration and development work over
next few years
 Liberalized Govt policies on exploration, production, refining, distribution,
marketing and pipelines for private sector participation.

POWER
 By 2012
 Peak Demand (Expected) – 1,57,000 MW
 Proposed Capacity Addition – 1,00,000 MW
  Estimated Investment for National Grid Development – US$ 20 Billion
 Up-to 100% FDI allowed in projects relating to electricity generation, transmission
and distribution (other than atomic reactor power plants).
AIRPORTS
 Projection 2010: International Passenger Traffic – 26 Million; Domestic
Passenger Traffic – 40 Million; Cargo Movement – 1.8 Million tones.
 FDI up-to 74% (up-to 100% with Special Permission) allowed in ventures for
airports.
 FDI up-to 49% and NRI Investment up-to 100% permitted in Domestic Airport
Services.

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 models described above have built on the key roles the public sector plays in social
service provision — roles which are undermined by privatization:

1. to ensure all recipients fair and equal access to services, the gatekeepers for all
services should be public entities. Federal law requires this for the Food Stamp and
Medicaid programs. States and localities should retain this role whether or not
required by federal law

2. public agency case managers should be responsible for their clients from beginning
to end. This is especially important where there is a patchwork of public and private
providers, and clients could get lost between the cracks. Private case managers lack
a view of the "big picture" and do not have overall responsibility for program
success in any case.
3. public agencies should always be responsible for ensuring due process for clients
when conflicts concerning service delivery arise. Private firms may lack knowledge
 of or interest in client rights and may see the appeals process as detracting from
profits.
4. public agencies must be responsible for ensuring oversight, measuring performance
and evaluating programs. To leave this to private companies is essentially to
abdicate the governmental function entirely. When services are privatized, the need
for careful oversight is greatly expanded.

5. At the time of independence, there existed serious gaps in the industrial structure of
the country, particularly in the fields of heavy industries such as steel heavy,
machine tools, exploration an refining of oil, heavy Electrical and equipment,
chemicals and fertilizers, defense equipment, etc. Public sector has helped to fill up
these gaps. The basic infrastructure required for rapid industrialisation has been
built up, through the production of strategic capital goods. The public sector has
considerably widened the industrial base of the country.

6. the public sector has protected the employment of millions. Public sector has also
contributed a lot towards the improvement of working and living conditions of
workers by serving as a model employer.

7. Public enterprises have developed these facilities thereby brining about complete
transformation in the socioeconomic life of the people in these regions. Steel plants
of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, Machine Tool plants in
Rajasthan, Precision Instruments plants in Kerla and Rajasthan, etc. are a few
examples of the development of backward regions by the public sector.

8. In recent years, the public sector has made increasing contributions to the public
sector in the form of dividend, corporate taxes, excise and customs duty, etc. The
total contribution from the public enterprises to the Exchequer increased from Rs.
11,074 crores in 1982-83 to Rs. 23, 972 crores in 1986-87.

Q6. Differentiate the role of private sector and public sector in the Indian economy.
INDIA
MIXED ECONOMY
COMMUNISM
PUBLIC SECTOR
CAPITALISM
PRIVATE SECTOR

ROLE OF PUBLIC SECTOR IN INDIAN ECONOMY

1. Capital formation
2. Development of infrastructure
3. Strong industrial base
4. Removal of regional disparities
5. Import substitution and export promotion
6. Check over concentration of economic power

PERFORMANCE OF PUBLIC SECTOR

1. Expansion of public sector as well as its share in national production
2. Employment and labor welfare
3. Contribution to Foreign exchange and its earnings

SHORTCOMINGS OF PUBLIC SECTOR

1. Mounting losses
2. Political influence
3. Problems of labor, personnel and management
4. Planning related to planning and construction of projects
5. Under utilization of capacity
6. Price policy

INDUSTRIAL POLICY 1991

1. Reduction in the number of industries reserved for the public sector from 17 to 8
 (reduced further to 6).
2. Disinvestment of shares of a select set of public sector enterprises in order to raise
resources and to encourage wider participation of general public and workers.
3. The policy towards sick public enterprises to be the same as that for the private
sectors.
4. An improvement of performance through memorandum of understanding system
by which managements are to be granted greater autonomy but held accountable
for specified results.

ROLE OF PRIVATE SECTOR IN INDIAN ECONOMY

1. The dominant sector
2. General economic development
3. Private sector in agriculture
4. Extensive modern industrial sector
5. Private sector in trading
6. Potentialities due to personal incentive in the small sector

SHORTCOMINGS OF PRIVATE SECTOR

1. Emphasis on non priority industries and wastage of resources
2. Monopoly and concentration
3. Contribution to trade deficits
4. industrial disputes
5. Industrial sickness
6. Problems relating to foreign competition
7. Problems relating to finance and credit

PERFORMANCE OF PUBLIC AND PRIVATE SECTOR IN INDIA (at current prices) (Rs crore)

S. No. Item 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

1. Gross Domestic Product 1786525 1925415 2100187 2265304 254941 2855933 3250932
1.1 Public 457006 481861 526326 578851 626219 686333 748528
1.2 Private 1329519 1443554 1573861 1686453 1923199 2169600 2502404
2. Gross Domestic Saving 484256 497218 535583 648982 820504 973028 1156809
2.1 Public -15494 -35061 -46578 -14057 31822 74682 71262
2.2 Private 499750 532279 582161 663039 788682 898346 1085547
3. Gross Domestic Capital 493999 491457 529376 600723 710014 886575 1104797
3.1 Public 144610 144639 156544 149324 174597 220487 264426
3.2 Private 349389 346818 372832 451399 535417 666088 840371
4. Final Consumption Expenditure 1510285 1611819 1748476 1836446 2024085 2216271 2476590
4.1 Public 252744 265401 282123 291320 310635 342542 404511
4.2 Private 1257541 1346418 1466353 1545126 1713450 1873729 2072079