The India economic reform experience
The reasons behind the reform:
- The India economic reform was characterized by being an outcome of
a crisis.
- India faced a critical economic crisis during 1990 that was about to
lead bankrupt of the whole country.
- The Main cause of that crisis goes back to wrong economic policies
adopted at that period as part of the wider economic liberalization
policies which led to sever macroeconomic imbalances. This imbalances
were representing in:
1-large fiscal deficits that was the result of huge government
expenditure levels specially during the second half of 1980s as the
government was adopting an expansionary economic policies.
2-These high levels lead the Indian government to get involved in
acquiring large borrowing from the (Reserve Bank of India) to be able to
finance its public spending which in turn led to huge budget deficit.
3-There was an expansionary effect of this policy on the money supply
that directly led to a big jump in inflation rates.
4- Also there was an impact of India’s huge import bill represented in
high level in trade deficit that was translated into huge current account
deficit in the balance of payment.
The Reform Programs:
An important feature of India’s reform program when compared with
reforms underway in many other countries is that it has emphasized
gradualism and evolutionary transition rather than rapid restructuring.
1-Fiscal stabilization:
The fiscal stabilization was given the highest priority in the initial phases
of crisis management because there was a high current account deficit
and high inflation rate.
- The first year of the reforms saw a substantial reduction in the central
government fiscal deficit
- From 8.4% of GDP in 1990-91
To 5.9% of GDP in 1991-92
And further to 5.7% of GDP in 1992-93
2-Tax reforms:
-The form of tax system has been an important element in the
government's reform program with major changes in both direct and
indirect taxes.
-The main idea is to move towards a simpler system of direct taxation
with moderate rates and fewer exemptions.
-This reform in the tax system go a long way towards the objective of
creating a system which avoids economic distortions and ensures
adequate revenue to support the task of fiscal consideration.
-The changes in tax structure will have to be accompanied by major
improvements in tax administration to realize the full potential of
reforms.
3-public sector policy:
- Reform of the public sector is a critical element in structural
adjustment programs all over the world and is also included in India’s
reform agenda.
- Instead of outright privatization the government has invited a limited
process of disinvestment of government equity in public sector
companies with government retaining 51% of the equity and also
management control.
4-Agriculture sector reform program :
- Accelerated irrigation benefits program (AIPB) was initiated by the
central government for the purpose of providing and facilitating funds
to complete the ongoing or current large and medium irrigation
projects.
- Improving conditions for farmers and facilitating more investments in
education and health care to support that goal.
- Agriculture subsidies to farmers specially the poor ones have been a
main part of the reform programs.
5-Industrial Sector Reform programs :
- Reduction in the number of industries dominated by the public sector.
- Industrial licensing by the central government has been almost
abolished except for a few environmentally sensitive industries.
6-Trade Reforms:
- Before the reform trade policy included high tariffs and import
restrictions.
- Removing quantitative restrictions on imported manufactured
consumer goods and agriculture products.
Benefits from Reform :
1 – India become on the top of the computer and technological related
products manufacturer in the world.
2 – The Indian economy was one of the very few economies that was
able to recover after the latest financial crisis.
3 – India’s GDP volume ranked 5
th
in terms of its volume in 2010 and
10
th
in terms of its growth rate.
4 – The Indian GDP per capita has been also increasing as a result of the
reforms adopted in the industrial sectors , Education and health sectors
and technological achievements.
5 – The share of the service sector in the GDP levels was increasing on
the expense of the agricultural sector share throughout the reform
programs times.
Lessons from India economic reform:
1 – Privatizing many of the state owned enterprises for enhancing their
performance with keeping the strategic enterprises owned by the
government.
2 – Undertaking comprehensive infrastructure developments with
giving more focus on education, health and main physical and social
infrastructure services.
3 – Adopting a comprehensive set of reforms in the taxing and public
finance system’s policies.
4 – Conducting many changes in the fiscal system in order to decrease
the public debt and government deficit to avoid crisis.
5 – Giving great importance to technological development programs
and the Information Technology sectors that made India one of the top
countries in technological exporting.