Economics
Jaspereric
EconomicReforms.pptxIndia’s Economic Reforms
Pre-reform India
Indira Ghandi had called her policies “socialist,” yet they were very much pro-business, if not pro-market.
The state sector owned thousands of “sick units” – enterprises that were failing and losing money – while private firms prospered. Profits were private, and losses were “socialized.”
Socialist rhetoric hindered investment, especially FDI.
Growth rates remained low (disparagingly called “Hindu growth rate.”) Job growth just barely above growth rate of population
Social indicators compared poorly with other LDCs.
Pressure for Reform
Breakup of USSR 1989-1991 led to foreign exchange crisis. Had only enough forex reserves for three weeks of imports.
IMF imposed conditions for loans: privatize SOEs, reduce trade barriers, increase FDI and portfolio investment, liberalize financial sector, lift price controls, etc.
Arguments in favor of reform
Increase in trade >> jobs, higher wages, less poverty
More FDI >> competition, more efficiency
Higher growth >> government revenues for health and education
Advocates also pointed out need to build forex reserves by increasing X and FDI
Arguments against reform
Government revenue could fall with loss of tariffs
Growth might not improve social outcomes without strong public commitment to improve health and well-being
FDI would be limited due to India’s poor infrastructure
More market-based policies could worsen inequality
New Economic Policy 1991 - Goals
Embrace globalization
Encourage markets and private sector
Liberalize trade
Encourage FDI
New Economic Policy - Reforms
Prices freed to global markets
Tariffs cut
Subsidies for power, food, fertilizers cut and gov’t encouraged export oriented farming (cash crops vs. food crops)
Most licensing rules eliminated
Privatized some banks
Closed most “sick units”
Sale of SOEs
Rupee devalued by 1/3
Allowed full foreign ownership of business
Inward portfolio investment allowed (some limitations)
Reform results 1990s – 2000s
GDP growth 6% avg. annual in 1990s, 7-8% in 2000s
X growth 12% avg. annual
FDI rose 30-fold in 1990s
Portfolio investment rose 1000-fold
Limits of Reform
Poverty rates didn’t begin to fall noticeably until 2000s
Poverty worsened for some farmers with loss of subsidies/price controls and move to cash crops. Rural Employment Guarantee Program promised 100 days of paid work/year/family
Labor-intensive industry lacking, so lack of formal sector job creation (estimated that 75% workers today are in the informal sector).
Loss of tariff revenue resulted in fiscal squeeze so primary education and public health not funded. Government spending on all social welfare only 6% of GDP.
By 2000s, literacy rates still low and student-teacher ratios avg. 58.
