Structural Changes in Indian Economy

STRUCTURAL CHANGES IN THE INDIAN ECONOMY AFTER LIBERALIZATION

CH. 11Class - XI

Introduction

Liberalization

PrivatizationGlobalization

Indian Economy at present

IE at the time of

independence

Since 1951 – IE is moving

forward

IE: An Underdeveloped Economy1. Low Per Capita Income2. Inequalities in Income

Distribution3. Predominance of Agriculture4. Heavy Population Pressure5. Large Unemployment6. Scarcity of Capital7. Technological Backwardness8. Poor Quality of Human Capital9. Large Unutilized Resources10. Underdeveloped Infrastructure11. Low level of Living12. Low Quality of Life13. Unfavorable Social Structure

1. Low Per Capita Income

Country $ in 2008India 1070

[Rs. 33,588 / Rs. 44,345

Switzerland 61 timesUSA 45 times

Japan 36 timesChina Higher than India

Srilanka

2. Inequalities in Income Distribution

Population Share of NI (%)

Top 10% 31Bottom 10% 3.6

3. Predominance of AgricultureCountr

yPopulation

Employed in 2008 (%)

NI Generated

(%)India 52 15USA 1.9 1.3U.K. 1.3

JAPAN 4.6 1.7

4. Population Explosion

102.7 crores in

2001 (16.7 % of world

population)

Every sixth

person of the world is Indian

PGR - 2% since 1961

Pressure on land

and availabili

ty of consumer goods

Problem of

unemployment

5. Large Unemployment

Lack of CapitalRural Area: • Underemployment or disguised

unemployment in agricultural sectorUrban Area:• Open Unemployment

13 million in 2004-05

6. Scarcity of Capital

Amount of capital require per head is low

The rate of capital

formation is low

Still it is far from satisfactory for two reasons:

Punjab, Haryana and Western UP,

modern agricultural

techniques are used for Wheat, Rice as a part of

Green Revolution

Modern Techniques of production in large-scale industries,

energy transport and

communication sectors

Unorganized sector like small scale industries still backwards

The low level of productivity in A & I is due to TB.

7. Technological Backwardness

8. Poor Quality of HCHC •Level of Education

•Training Facilities•Health Facilities

India •In 2005-06, Literacy Rate was 67.6% and one third of the world’s illiteracy belongs to it.

PE on E •India (2008-09) 3.23 % of National Income where in USA 10%

Doctors •In 2008-09, 60 doctors / 1,00,000 persons

9. Large Unutilized Resources

Resources• Renewable

• Water• Forest

• Non-Renewable• Iron ore• Coal• Manganese• Copper• Lead• Zing

Lack of Capital & Technological Knowledge• In 2006-07, Hydropower –

27% and Irrigation – 62%

10. Underdeveloped InfrastructureInadequat

e facilities in relation

to their demand

Substantial

shortage of

transport network

Acute scarcity of

power

Banks are not

sufficient

11. Low Level of

Living

FOOD INTAKE

• In 1999, avg. 2200 (3600)• NSSO, 66% Rural & 70% Urban population consumed less than national norms

(2700 calories/day) in 2005.• 20 % population is undernourished – a third children in India.

HOUSING

• Bleak Facilities. • Half population of urban lives in one room. • 21% Urban Population lives in Slums

SAFE DRINKING WATER & SANITATION

• 2001 – 27% rural people don’t have tap water facilities• 2004 – 74% didn’t have toilet facilities• According to WDR of2007-08, only 33% of the population access to improved

sanitation in 2004 in India.

12. Low Quality of Life

Avg. LE (2007)• 63.5 Yrs (78)

IM (2008)• 53/thousand (5/thousand)

13. Unfavorable Social Structure

Rigid, unfavorable & not conducive to economic developmentRigid class structure & cast System are indicators of social backwardness

IE – A Developing Economy

Go-ahead

Completed Six Decades of Economic Planning

Progressive

It has made modest to good progress in all the fields

Sustained

Economic

Development

Changes in Indian Economy are of permanent nature

IE – A Mixed Economy

PPT

IE – ME [Rationale for the PS]Socialist Pattern of

Society

Govt. was required to undertake heavy responsibilities as

the principal agencyPublic sector to

initiate economic development and also to play the dominant role in

shaping the entire pattern of economic

development.

Private sector have to play its part

within the framework of

comprehensive planning.

IE – ME [Rationale for the PS]

State or Govt. was to play the role of entrepreneur in a number of areas

IE – ME [Rationale for the PS]Private Sector had neither

the resources nor the desire to undertake

investment on such a large scale.

Govt. assumed the role of promoter of ED & came

forward to set up productive units under the PS. Hence, during the first four decades of ED around 40 % of total investment

was undertaken in the PS.

The share of the PS increased continuously

upto 1996-97.

IE – ME [Rationale for the PS]

Public Sector share in GDP

1960-61 7.5%

2005-06 25%

IE – Mixed Economy [NEP]Development Strategy change since 1991

Privatization• It has resulted in contraction of the Public Sector and

expansion of the Private Sector• Disinvestment Policy

Liberalization• Under this policy, regulations on the private sector through

licensing and other such policies have been reducedGlobalization

• The economy is being opened up to the other economies by encouraging imports of goods and inflow of capitaThus, IE is moving towards free-enterprise economy after 1991.

IE – Mixed Economy [NEP]

Private Sector dominates in• Agriculture• Consumer goods industries• No. of capital goods

industries• Trade• Transport• Many of the financial

services

Public Sector• Many of the

commanding heights like basic and heavy industries, railways, infrastructure, etc.

Conclusion

EP is still an integral part of the

IE.

However, PM or MM occupies a

dominant

position in

the IE.

Thus, presence of

a large public sector along with the

private

sector and EP

along with PM

make the IE a ME.

Policy of Liberalization

It is the policy of

deregulation of

different segments

of economy.

The policy of reducing government

controls over

industry and other activities

which existed before 1991.

Different sectors of

the economy

were to be made free

from controls, licenses

and permits.

It’s not a policy of laissez-

faire, i.e. completely unregulated economy,

but of reduced

regulations.

Features of Liberalization Policy

DE licensingControlling Monopolies

Liberalization of Industrial LocationRemoval of RestrictionsLiberalization of Capital Market

Foreign Exchange Market ReformsDevelopment of Infrastructure

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67

De-licensing

Before 1991, regulatory system of licensing and controls existed

It become a hurdle in the growth. Cause delays & was breeding corrupt practices.

Industrial licensing policy led to unnecessary government interference, delay in investment decisions and bureaucratic red-tapism etc.

It also created an inefficient, high cost and weak industrial sector.

Therefore, there was a need to review these measures.

Controlling MonopoliesMRTP Act: all the firms with assets above Rs. 100crore since 1985 were permitted to enter selected industries only, and they were required to take

approval of the government for any investment proposals.

Industrial Location Policy Liberalized:

Freedom has been given to industries to be located at all

locations other than cities with more than one million population.

No need to obtaining the approval of the government, except for industries subject

to compulsory licensing

Capital Marke

t

• Made free

• A new company can be floated now with the new issue of shares and debentures without seeking the permission of the govt.

• SEBI is controlling

Foreign Exchange Marke

t

• Flexible change rate is introduced [Exchange Rate is determined by market forces]

• In 1993-94 , the rupee was made fully convertible in terms of foreign currency.

• Exporter & Importers benefited

• RBI is controlling

Devel

opmen

t of Infrastructure

• Private Sector has been allowed to enter & develop…

• Power

• Roadways

• Communications

• Shipping

• Civil aviation

• Banking

• Liberalizing the control of RBI on commercial banks

• Price decontrols [sugar & Petroleum]

Othe

r Cha

nges

Significance of Policy of L

Overcome the

problems of ‘control Raj’ like uncalled delays,

corruption etc.

Provided freedom to the

entrepreneurs

Injected a spirit of

competition in the economic system

Encouraged

entrepreneurs to

undertake investment

Increased efficiency

of the economy

The Policy of Privatization

Role of public sector enterprises

is being reappraised

Public Sectors are losing their importance and with the emergence of new philosophy of economic liberalization, Private Sector and the Market Forces have acquired prominence once again

Meaning of Privatization

It basically implies the process which leads to transfer of ownership of public-sector enterprises from the government to the private sector.

In a wider sense, it also implies the process of granting autonomy to public-sector enterprises in decision-making and infusing the spirit of commercialization in them.

Privatization…

Started first in UK and USA during 1980s.

Mrs. Margaret Thatcher (UK) became the champion of privatization, • British

Airways• Railways,

Oil, Telecommunications, Mining & Bus services were sold off

President Ronald Reagan (USA) at the same

time

West Germany,

France, Japan,

Canada, Italy etc.

Arguments for

Privatization

Ideological GroundsImprovement in Managerial EfficiencyCreation of Competitive EnvironmentProfit-oriented DecisionsGreater Flexibility in Decision-makingReduction in Burden on Public ExchequerGreater Attention to Consumers’ SatisfactionGreater Investment & Employment OpportunitiesRevival of Sick Units

Increase in Accountability

Increase in Financial Discipline

Arguments against

Privatization

Not always DesirableSocial Welfare NeglectedPossibility of UnemploymentGrowth of Private MonopolyPossibility of Corrupt PracticesLopsided Industrial Development

Features of the Privatization Policy in India• Policy of De-reservation• Policy towards Sick PS

Undertakings• Policy for Navaratnas &

Miniratnas• Memorandum of

Understanding (MOU)• Voluntary Retirement

Scheme (VRS)• Disinvestment Policy

1. De-reservation

1956 – 17

industries were reserved for PS

1991 – Reduce

d to eight

Now,

Atomic EnergySpecifi

ed mineral

sRailwa

ys

2. Towards Sick PS Undertakings

Sick units have been brought

within the jurisdiction of the

Board for Industrial and Financial

Reconstruction (BIFR) for their

revival/rehabilitation.

262 cases up to December 2001 [38

cases were sanctioned]

Govt. established Board for

Reconstruction of PS

Enterprises in December 2004 for advice – 52

units on BRPSE’s

recommendation.

3. Navratnas & MiniratnasNavratnas: To identify high performing and

profit-making PS Enterprises. (1996) Initially with 9 PS

units, 10 more were added.

Miniratnas: these were consistently profit-making companies.

They were 39 in 2001 which increased to 62

in 2009.

These companies (Both) have been given additional power and

freedom to incur capital expenditure, raise debt, enter into joint ventures, to restructure their board of directors and work out

their own manpower and resources management policies.

4. MOU

Purpose was of improving the

performance of PS units.

5. VRS

To reduce the number of excess workers.

Workers seeking VRS in PS units are given financial compensation.

About 5,94,000 had opted for VRS till March, 2008.

6. Disinvestment Policy

Disinvestment means selling of investment. In the context of public enterprises, the

policy of disinvestment refers to selling of government ‘s equity in PS Units in the market.

Its being done in order to raise resources to reduce debt burden, to provide funds for giving assistance to PS units for their modernization and to encourage wider participation of general public and workers in the ownership of public enterprises.

Disinvestment Policy…

Department of Disinvestment was set up in 1999 to identify PS enterprises for equity disinvestment and to work out the modalities.

Initially, equity was offered to retail investors through domestic public issues.

Subsequently, funds were raised in the overseas market through Global Depository Receipts (GDRs).

Disinvestment Policy…

Of late, the govt. is pursuing the strategic sale method. Here govt. sells a major part of its stake to strategic buyers at market price and also gives over the management control.

From 1999 to 2009, govt. has raised Rs. 57,680 crores through the policy of disinvestment.

Disquieting Features of DI Policy1. Actual realization has been much below the

target. Targeted amount for the 14 years period (1991-92 to

2004-05) was Rs. 96,800 crores and the actual realization amounted to Rs. 47,800 crores only.

Amount realized has been too insignificant to affect the structure, management and working of public enterprises.

2. Equities have been sold at very low prices.3. Funds raised have not been used appropriately.4. Hasty and unplanned exercise of disinvestment.5. It lacked maturity and transparency.6. It has led to strengthening of private

monopolies.

Policy of Globalization

It is a process of integrating the economy of the country with other economies of the world through trade, capital flows and technology.

Main Channels of Globalization1. Free flow of goods and services

(Opening up of the world trade). Import liberalization programmes Removing the quantitative restrictions Reducing import duties

2. Removal of barriers to international investment

MNCs need to be encouraged3. Free flow of technology between

countries

Effects of Globalization Increased

1. Flow of goods between countries2. International flow of capital3. Interdependence between countries4. Access to the advanced technologies5. Worldwide market6. Information flow bet’n different countries7. Prosperity in the developing countries8. In the cross cultural contacts

Challenges 1. Fluctuations in the economies2. Inter-country inequalities3. Environmental degradation

Need for Globalization in India Major Foreign Exchange Crisis

War between the Gulf countries of Iraq and Kuwait. This pushed up oil prices…

India’s external debt had increased over time Political instability and uncertainty at home NRI

deposits was being withdrawn very rapidly Higher imports

Conditions Imposed by IMF & World Bank India was required to cut down fiscal deficit & rate of

growth of money supply Accept liberalization and to relax restrictions on

international flows Fall of USSR (Union of Soviet Socialist

Republics)

Features of Globalization Policy1. Exchange Rate Reforms2. Import Liberalization3. Foreign Investment4. Foreign Technology

1. Exchange Rate Reforms

Fixed exchange rate to market determined exchange rate

Policy of allowing the exchange rate to be determined in international market without official international is known as convertibility of the currency.

The full convertibility to Indian rupee on trade account was achieved in August, 1994.

2. Import Liberalization

Dismantled import licensing system. Quantitative restrictions on imports

have been abolished. Duties on M/X have been reduced.

Tariff rates (Import Duties) reduced from 72% (1991-92) to 25%(1996-97).

The peak import duty on nonagricultural goods is now only 10%.

3. Foreign Investment

It leads to higher efficiency and productivity by increasing competition and by bringing new technology into the country.

FDI encouraged for better technology, modernization and for providing goods and services of international standards.

1991 FDI approval was 51% foreign equity. It was raised to 74% & subsequently to 100%.

Road Development, Airports, Airlines, Housing, Banks, Power Generation, Oil Exploration etc.

4. Foreign Technology

Free flow of technology is allowed by government.

Effects of Globalization on Indian Industry

Positive1. Inflow of multinational corporations2. Emergence of IT and BPO sectors3. Availability of advanced technology4. Increased job availability for skilled manpower5. Setting up of SEZs6. Indian corporate sector emerging as Global Players

Negative1. Increased competition from the foreign companies2. Loss of jobs3. FDI used for takeovers & speculative investment

Changes in IE after L

National Income Industrial Sector Composition of NI S & I performance Foreign Trade Foreign Exchange Reserves FDI Overseas Investment Role of Public Sector

Conclusion Economic reforms having positive effects

on the IE. However, NEP has bot been able to solve

all the problems. Failed to reduce poverty, inequality of income

and unemployment Insignificant globalization (one of the lowest

in the world) India’s share in world trade is 0.7% as against

4% of China Over the past decade, FDI 0.5% of GDP as

against 5% of China and 5.5% of Brazil.