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Students Corner - A Decade of Economic
Reforms in India - A Review

• Student Corner

• Project on Review of Economic Reforms

1. Real Economy - Growth, Saving and Investment - Introduction

2. Growth Performance - An assessment.

3. Saving Behaviour

4. Investment Behaviour

5. Performance of Agriculture Sector

6. Deceleration in Agricultural Growth in the 1990s

7. Performance of Agriculture - Assessment of Progress

8. Burgeoning Food Stock

9. Monetary Implications of Growing Foodgrain Stocks

10. Industry - Introduction

11. Industry - The Manufacturing Slowdown

12. Industry - Cyclical Factors in Industrial Slowdown

13. Industry - Adverse Effects of Higher Cost Structure of Power for Industrial Sector.

14. Industrial Performance and Credit Growth

15. Productivity Trends in the Manufacturing Sector

16. Sustainability of Services Growth

17. Services and Infrastructure - Assessment of Progress

18. Real Economy - Growth Performance in the first decade - Concluding Observations

The touchstone of any reform process is the impact it has on the real economy. Module 1 provides an assessment of how reforms have impacted the real sector of the Indian economy. The module provides a direct comparison of the 1980s and the 1990s in terms of real activity and efficiency parameters. Although the decadal growth rates do not appear to be different substantially, the average growth rates mask two important facets. First, from an impressive growth performance in the initial period of reform (1992-93 to 1996-97), real GDP growth decelerated considerably. Major shocks included the contagion from the East Asian crisis, global economic slowdown, the recent downward spiral in global asset markets specially the new economy segment, uncertainty in global oil markets and the severe drought in the year 2002. Second, growth in the relatively trouble free period of the 1980s was excessively leveraged through large fiscal deficits and build up of external debt. In this sense, the growth before the reform was unsustainable. In contrast, the high growth after the reforms was accomplished to an extent, with adjustment. The moduler attempts to explain these facets and also highlights the emerging weaknesses in the reform process which would have to be addressed so that real sector reforms gather further momentum. The potential of Indian economy to sustain the targeted high growth exists, but hinges critically on improvement of the domestic saving rate, increased public investment supported by marked improvement in public saving rate, higher inflow of foreign capital in gross as well as net terms and better credit delivery mechanisms.

During the first three decades after Independence, the Indian economy stagnated around a trend growth of 3.5 per cent. The scenario changed during the 1980s. The acceleration of growth during the 1980s to 5.6 per cent put the Indian economy on a higher growth path. However, the growth process of the 1980s turned increasingly unsustainable as manifested in the growing macroeconomic imbalances over the decade in the form of high fiscal deficit, high levels of current account deficit, and increasing levels of external debt, besides a repressive and weakening financial system. Continuing macroeconomic imbalance and delay in taking corrective action accentuated the impact of global economic shock of 1990.

A large and growing fiscal deficit with a sizeable component of monetised deficit, resulted in pressures on money supply and inflation. These imbalances, in turn, spilled over to the external sector in the form of a large and unsustainable current account deficit - giving rise to sizeable public debt, both domestic and external. All these culminated in an unprecedented external payments crisis in 1991. Economic growth fell to such a low level in 1991-92 that real per capita income declined for the first time since 1979-80. The improved growth performance of the 1980s was, thus, short-lived. To an extent, this underscored the importance of the inter-temporal budget constraint in ensuring macroeconomic stability.

In response to the macroeconomic crisis; a programme of stabilisation and structural adjustment was initiated in July 1991, with wide ranging reform measures encompassing the areas of trade, exchange rate management, industry, public finance and the financial sector. Fiscal correction, exchange rate adjustment, monetary targets and inflation controls constituted the immediate measures for macroeconomic stability. These measures were supported by structural reforms in the form of industrial deregulation, liberalisation of foreign direct investment, trade liberalisation, overhauling of public enterprises and financial sector reforms. Apart from aiming at restoring the economic stability on both domestic and external fronts, the economic reform programme strived towards achieving a higher growth trajectory through increased levels of investment, and improvements in productivity, efficiency and competitiveness.

The reform measures had sectoral dimensions as well. Beginning with the industrial policy of 1991, reforms in the industrial sector were undertaken with a view to remove distortions in the resource allocation and improve competitiveness of Indian industry. The reform measures included removal of industrial licensing, reduction in the number of industries reserved for the public sector, abolition of restrictions on investment and expansion under the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, automatic approval of foreign investment, elimination of quantitative import restrictions on intermediate and capital goods and steady reduction in protective custom tariffs. These measures created a favourable environment for industry to upgrade its technology and build-up capacity in order to cater to growing domestic and external demand. Despite widespread perception regarding the relative isolation of the agricultural sector from the direct impact of the reform process, a series of policy initiatives were undertaken in this sector as well. These included, inter alia, replacement of quantitative controls by tariff, partial decontrol of fertiliser prices, removal of bottlenecks in agricultural marketing, relaxation of restrictions of the Essential Commodities Act, 1955, replacement of the Revamped Public Distribution System (RPDS) with Targeted Public Distribution System (TPDS), and establishment of Rural Infrastructure Development Fund (RIDF). Moreover, price reforms improved terms of trade for agriculture. Also, exchange rate and international trade reforms improved the incentive structure facing agriculture.

The present module seek to address the following set of questions, against the backdrop of these reform measures:

1. How did the economic reform of the 1990s influence the growth process?

2. Was the impact of economic reform on growth short-lived?

3. How does the Indian economy fare vis-ŕ-vis other emerging market economies?

4. What was the prime mover for the post-reform growth experience?

5. Was it entirely services-driven, with sectors like ‘public administration and defence’ giving a short-lived fillip to growth?

6. Has the agricultural sector been somewhat isolated from economic reform?

7. What explains the unprecedented stockpile of foodgrains in the recent years and what are their macroeconomic implications?

8. Has the industrial sector entered a phase of prolonged slowdown?

9. Has there not been any productivity improvement under economic reform

Some of these issues have received attention in the available literature. Given the divergent assessment on each of these issues and recognising the importance of a comprehensive analysis of each sector to explain the overall growth dynamics, this module aims at documenting major developments during reforms, explaining the factors underlying them and identifying the policy challenges therein.