1

DR.

RAM

MANOHAR

LOHIY

NATIONAL

LAW

UNIVERSITY,

LUCKNOW

ACADEMIC SESSION: 2015-16

FINAL DRAFT:
LIBERALIZATION,PRIVATIZATION AND GLOBALISATION POLICY
Submitted To:
Dr. Mitali Tiwari
Asst. Professor (Economics)
Dr. Ram Manohar Lohiya National
Law University, Lucknow
Section-A

Submitted By:
Aditya Joshi
B.A. L.L.B. (Hons.)
3rd Semester
Roll No-13

ACKNOWLEDGMENT:
I express my gratitude and deep regards to my teacher for the subject Ms. Mitali Tiwari for
giving me such a challenging topic and also for his exemplary guidance, monitoring and
constant encouragement throughout the course of this thesis.
I also take this opportunity to express a deep sense of gratitude to my seniors in the college
for their cordial support, valuable information and guidance, which helped me in completing
this task through various stages.
I am obliged to the staff members of the Madhu Limaye Library, for the timely and valuable
information provided by them in their respective fields. I am grateful for their cooperation
during the period of my assignment.
Lastly, I thank almighty, my family and friends for their constant encouragement without
which this assignment would not have been possible.

CHAPERISATION:
1) Introduction..4
2) Pre Liberalization Era .5
3) About L.P.G.6
4) Post Liberalization Era11
Industrial Policy 12
Trade Policy .13
F.D.I..14
Reform In Agriculture.15
Infrastructural Development..16
5) Conclusions. .19
6) Bibliography .21

INTRODUCTION:
Economic reforms in India started on 24 July 1991. After independence in 1947, Indian
adhered to socialist policies. Attempts were made to liberties the economy in 1966 and 1985.
The first attempt was reversed in 1967. Thereafter a stronger version of socialism was
adopted. The second major attempt was in 1985 by Prime Minister Rajiv Gandhi. The process
came to a halt in 1987, through 1966 style reversal did not take place. In 1991 after India
faced a balance of payments crisis, it had to pledge 20 tonnes of gold to Union Bank of
Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International
monetary fund. In addition the IMF required India to undertake a series of structural
economic reforms. As a result of this requirement the government of P.V. Narasimha Rao and
his finance minister Dr. Manmohan Singh started back through reforms, although they did not
implement many of the reforms the IMF wanted. The new neo-liberal policies included
opening for international trade and investment, deregulation initiation of Privatization, tax
reforms, the inflation controlling measures. The overall direction of liberalization has since
remained the same irrespective of the ruling party, although no party has yet tried to take on
powerful lobbies such as the trade union and farmers and reducing agricultural subsidies. The
fruits of liberalization reached their peak in 2007, when India recorded its highest GDP
growth rate of 9%, with this India became the second fastest growing major economy in the
world, next only to China. The growth rate has slowed significantly in the first half of2012.
OECD report states that the average growth rate 7.5% will double the average income in a
decade, and more reforms speed up the pace. There has been significant debate, however,
around liberalization as an inclusive economic growth strategy. Since 1992 income inequality
has depended in India with consumption among the poorest staying stable while the
wealthiest generate consumption growth. As Indias GDP growth rate became lowest in 201213 over a decade, growing merely at 5% more criticism of Indias economic reforms
surfaced, as it apparently failed to address employment growth, nutritional solutes in terms of
food intake in calories and also export growth and there by leading to worsening level of
current account deficit compared to the prior to the reform period. Privatization as a process
that aims at reducing involvement of the state or the public sector in the nations economic
activities by shifting the divide between public sector and private sector in favor of letter has
made considerable progress since the introduction of the new economic policy in 1991.The
first dimension of Privatization namely, the fiscal dimension stems from the governments
need to reduce the fiscal deficit. Privatization for efficiency is the second dimension. In a

sense the efficiency dimension forms the cruse of privatization policy. The third dimension of
our impact analysis is on intersecting oral linkages which have to be addressed by a policy on
privatization. The economic reforms ushered in a new era if liberalization as industrial
licensing was abolished, role of public sector diluted, doors to foreign investment
considerably opened , and numerous incentives and initiatives granted to the private sector to
expand its business activities. The 1991 policy welcomed the thought of lower taxes, less red
tape, less paperwork, more space to work and less government interference.
PRE-LIBERALIZATION ERA
Indian economic policy after independence was influenced by the colonial experience (which
was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian
socialism. Policy tended towards protectionism, with a strong emphasis on import
substitution, industrialisation under state monitoring, state intervention at the micro level in
all businesses especially in labour and financial markets, a large public sector, business
regulation, and central planning. Five-Year Plans of India resembled central planning in
the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and
electrical plants, among other industries, were effectively nationalised in the mid1950s. Elaborate licences, regulations and the accompanying red tape, commonly referred to
as Licence Raj, were required to set up business in India between 1947 and 1990.
Before the process of reform began in 1991, the government attempted to close the Indian
economy to the outside world. The Indian currency, the rupee, was inconvertible and high
tariffs and import licencing prevented foreign goods reaching the market. India also operated
a system of central planning for the economy, in which firms required licences to invest and
develop. The labyrinthine bureaucracy often led to absurd restrictionsup to 80 agencies
had to be satisfied before a firm could be granted a licence to produce and the state would
decide what was produced, how much, at what price and what sources of capital were used.
The government also prevented firms from laying off workers or closing factories. The
central pillar of the policy was import substitution, the belief that India needed to rely on
internal markets for development, not international tradea belief generated by a mixture of
socialism and the experience of colonial exploitation. Planning and the state, rather than
markets, would determine how much investment was needed in which sectors.
-- B.B.C

By 1991, India still had a fixed exchange rate system, where the rupee was pegged to the
value of a basket of currencies of major trading partners. 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. It had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to
Bank of England as part of a bailout deal with the International Monetary Fund (IMF). Most
of the economic reforms were forced upon India as a part of the IMF bailout.
A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an
IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic
reforms were forced upon India. That low point was the catalyst required to transform the
economy through badly needed reforms to unshackle the economy. Controls started to be
dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the
economy was opened to trade and investment, private sector enterprise and competition were
encouraged and globalisation was slowly embraced. The reforms process continues today
and is accepted by all political parties, but the speed is often held hostage by coalition
politics and vested interests.
India Report, Astaire Research

ABOUT LPG

L: Liberalization, P: Privatization and G: Globalisation

Definition of the term Liberalization and Economic Liberalization.
The term Liberalization stands for the act of making less strict.
Liberalization refers to relaxation of previous government restrictions usually in areas of
social and economic policies. Thus, when government liberalizes trade it means it has
removed the tariff, and other restrictions on the how of goods and services between countries.

Liberalization in economy stand for :

The process of making policies less constraining of economic activity and also reduction of
tariff or removal of non tariff barriers.
In developing countries economic
Liberalization refers more to liberalization of further Opening up of their respective
economies to foreign capital and investments. Three of the fastest growing developing
economies today; Brazil, China and India have achieved rapid economic growth in the past
several years or decades after they have Liberalised their economies to foreign capital.
Definition of term Privatization and Economic Privatization
The term Privatization refers to the transfer of ownership of property or business from a
government to a private owned entity.
Privatization refers to the transfer of assets service functions from public to private ownership
or control and the opening of the neither to closed areas to private sector entry. Privatization
can be achieved in many ways franchising, leasing, contracting and divesture.
The transition from a publicly traded and owned company to a company which is privately
owned and no longer trades publicly on a stock exchange. When a publicly traded company
becomes private investors can no longer purchase a stake in that company.

Globalisation
Globalisation means integration the domestic economy with the world economy. It is a
process which draws countries out of their insulation and makes them join rest of the world in
its march towards a new world economic order.
It involves increasing interaction among national economic system, more integrated financial
markets, economies of trade, higher factor mobility, free flow of technology and spread of
knowledge throughout the world.

According to Deepak Nayyar, Globalisation can be defined, simply as the expansion of

economic activities across political boundaries of nation states. More importantly perhaps it
refers economic interdependence between countries in the world economy.
Main objective of Industrial policy (LPG) of 1991
1. Self-reliance to build on the many sided gain already made.
2. Encouragement to Indian entrepreneurship, promotion of productivity and
employment generation.
3. Development of indigenous technology through greater investment in Research and
Development and bringing in new technology to help Indian manufacturing units
4.
5.
6.
7.
8.

attain world standards.

Removing regulator system and other weaknesses.
Increasing the competitiveness of industries for that to the common man.
Incentives for industrialisation of backward areas.
Enhanced support to small-scale sector.
Ensure running of public sector undertaking (PSUs) on business lines and cut their

losses.
9. Protest the interest of workers.
10. Abolish the monopoly of any sector in any field of manufacture except on strategic or
security grounds.
11. To Indian economy to the global market so that we acquire the ability to pay for
imports and to make us less dependent on aid.
Reasons for Globalization
According to Michael Porter, following factors lead to or influence the process of
globalisation.
1. Technological restructuring: The reshaping of competition globally as a result of
technological revolutions such as in micro electronics.
2. Growing similarity: Growing similarity of countries in terms of available
infrastructure, distribution channels, and marketing approaches.
3. End of the cold war in 1990s: It set the stage for most developing countries to
liberalise their economies and create a climate for attracting foreign investment to
supplement domestic resources.
4. Fluid global capital markets: National capital markets are growing into global
capital markets because of the large flow of funds between countries.
5. The integrating role of technology: Reduced cost and increased impact of products
have made them accessible to more global consumers.

6. New global competitors: A shift in competitors from traditional country competitors

to emerging global competitors.

Impact of Liberalization on Indian Economy

The low annual growth rate of the economy of India before 1980, which stagnated
around 3.5% from 1950s to 1980s which per capital income averaged 1.3%. At the
same time Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Koria by

10% and in Taiwan by 12%.

Only four to five licenses would be given for steel, Power and communications,

license owners built up huge powerful empires.

A huge public sector emerged. State owned enterprises made large losses.
Infrastructure investment was very poor because of the public sector monopoly.
License RAJ established the irresponsibly self perpetuating bureaucracy that still
exists throughout much of the county and corruption flourished under the system.

Impact of Privatization on Indian Economy

It frees the resources for a more productive utilisation.

Private concerns tend to be profit oriented and transparent in their functioning as
private owners are always oriented towards making profits and get rid of sacred cows

and hitches in conventional bureaucratic management.

Since the system becomes more transparent all underlying corruption are minimised
and owners have a free reign and incentive for profit maximisation so they tend to get

rid of all free loaders and vices that are inherent in government functions.
Gets rid of employment inconsistencies like free loaders or over employed

departments reducing the strain on resources.

Reduce the governments financial and administrative burden.
Effectively minimises corruption and optimises output and functions.
Private firms are less tolerant towards capitulation and appendages in government
departments and hence tend to right size the human resource potential befitting the
organisations needs and may cause resistance and disgruntled employees who are

accustomed to the benefits as government functionaries.

Permit the private sector to contribute to economic development.

10

Development of the general budget resources and diversifying sources of income.

Impact of Globalisation on Indian Economy

The following achievements have been claimed especially on the external front:

Indias share in the world trade which had fallen 0.53% in 1991 from 178% in 1950

has been reversed trends and has improved to 0.86% in 2003.

Our foreign currency reserves which had fallen to barely one billion dollars to June,

1991 rose substantially to about 141 billion dollars in March, 2005.

Exporters responding well to sweeping reforms in exchange rate and trade policies.
This would be clear from the fact that as against a fall in the dollar value of exports by
1.5 % in 1993-96. However, export growth slowed down during 1996-2002. The
annual average growth rate during this period was around 8%. Since 2002-2003
however, exports have picked up once again. The average growth of export has been

around 10% per annum during 1992-2004.

Exports now finance over 80% of imports, compared to only 60% in the latter half of

the eighties.
The current account deficit was over 3% of GDP in 1990-91. It has fallen to less the
1% in 2000-01. During 2001-03 we even had surplus in current account ranging

between 0.7-1.08percent of GDP.

At the time of crisis, our external debt was rising at rate of 8 billion a year, after that

its growth has been arrested. From 1996-2003, it grew only by less than 3 billion %.
Contrary to what many feared, the exchange rate for the rupee has remained almost

steady despite the introduction of full convertibility of rupee.

International confidence in India has been restored. This is indicated by swelling
foreign direct and portfolio investment. FDIs were just 155 million dollars in 1991.

They increased to around 3200 million dollars in 2004-05.

Certain benefits of globalisation have accrued to the Indian consumer in the form of
larger variety of consumer goods, improved quality of goods and in some cases and

reduced prices of consumer durable.

Markets have started responding to the movements abroad. A fluctuation in U.S.
market or U.K. market has started affecting Indian market. Unlike before, SENSEX

and other parts of the globe.

The rating agencies, which rate investments risks in countries for global investors,

have aggraded Indias rating.

Programmers of quality management and research and development are
systematically conducted by corporate sector.

11

POST LIBERALIZATION ERA

Opening up the economy to foreign competition has also faced considerable
restricting of the private corporate sector via. Consolidation, mergers and acquisition
as many business houses are concentrating on their core competencies and existing
from unrelated and diversified fields. As is clear from the table, the average rate of
growth of sales was 14.0 percent per annum during 1990s (1990-91 to 1999 -2000)
and 14.2 percent per annum during the period 2000-01 to 2006-07. Gross profits
increased at an overage rate of 12.5 percent per annum during 1990s and 20.04
percent per annum during 2000-01 to 2006-07. The performance of the corporate
sector in 2007-08 showed some deterioration vis--vis 2006-07. For instance growth
rate in sales and net profits during this year decelerated to 18.3 percent and 26.2 from
26.2 percent and 45.2 percent respectively in 2006-07. Growth in gross profit of the
corporate sector also decelerated from 41.9 percent in 2006-07 to 22.8 percent in
2007-08.
Savings, Investment and Fiscal Discipline
Fiscal profligacy was seen to have caused the balance of payments crisis in 1991 and
a reduction in the fiscal deficit was therefore an urgent priority at the start of the
reforms. The combined fiscal deficit of the central and state governments was
successfully reduced from 9.4 percent of GDP in 1990-91 to 7 percent in both 199192 and 1992-93 and the balance of payments crisis was over by 1993. However, the
reforms also had a medium term fiscal objective of improving public savings so that
essential public investment could be financed with a smaller fiscal deficit to avoid
crowding out private investment. This part of the reform strategy was unfortunately
never implemented.
Reforms in Industrial and Trade Policy
Reforms in industrial and trade policy were a central focus of much of Indias reform
effort in the early stages. Industrial policy prior to the reforms was characterized by
multiple controls over private investment which limited the areas in which private
investors were allowed to operate, and often also determined the scale of operations,
the location of new investment, and even the technology to be used. The industrial
structure that evolved under this regime was highly inefficient and needed to be

12

supported by a highly protective trade policy, often providing tailor-made protection

to each sector of industry. The costs imposed by these policies had been extensively
studied (for example, Bhagwati and Desai, 1965; Bhagwati and Srinivasan, 1971;
Ahluwalia, 1985) and by 1991 a broad consensus had emerged on the need for greater
liberalization and openness. A great deal has been achieved at the end of ten years of
gradualist reforms.
1. Industrial Policy
Industrial policy has seen the greatest change, with most central government industrial
controls being dismantled. The list of industries reserved solely for the public sector -which used to cover 18 industries, including iron and steel, heavy plant and
machinery, telecommunications and telecom equipment, minerals, oil, mining, air
transport services and electricity generation and distribution -- has been drastically
reduced to three: defense aircrafts and warships, atomic energy generation, and
railway transport. Industrial licensing by the central government has been almost
abolished except for a few hazardous and environmentally sensitive industries. The
requirement that investments by large industrial houses needed a separate clearance
under the Monopolies and Restrictive Trade Practices Act to discourage the
concentration of economic power was abolished and the act itself is to be replaced by
a new competition law which will attempt to regulate anticompetitive behavior in
other ways.
The main area where action has been inadequate relates to the long standing policy of
reserving production of certain items for the small-scale sector. About 800 items were
covered by this policy since the late 1970s, which meant that investment in plant and
machinery in any individual unit producing these items could not exceed $ 250,000.
Many of the reserved items such as garments, shoes, and toys had high export
potential and the failure to permit development of production units with more modern
equipment and a larger scale of production severely restricted Indias export
competitiveness. The Report of the Committee on Small Scale Enterprises (1997) and
the Report of the Prime Ministers Economic Advisory Council (2001) had both
pointed to the remarkable success of China in penetrating world markets in these
areas and stimulating rapid growth of employment in manufacturing. Both reports
recommended that the policy of reservation should be abolished and other measures

13

adopted to help small-scale industry. While such a radical change in policy was
unacceptable, some policy changes have been made very recently: fourteen items
were removed from the reserved list in 2001 and another 50 in 2002. The items
include garments, shoes, toys and auto components, all of which are potentially
important for exports. In addition, the investment ceiling for certain items was
increased to $1 million. However, these changes are very recent and it will take some
years before they are reflected in economic performance.
2. Trade Policy
Trade policy reform has also made progress, though the pace has been slower than in
industrial liberalization. Before the reforms, trade policy was characterized by high
tariffs and pervasive import restrictions. Imports of manufactured consumer goods
were completely banned. For capital goods, raw materials and intermediates, certain
lists of goods were freely importable, but for most items where domestic substitutes
were being produced, imports were only possible with import licenses. The criteria for
issue of licenses were nontransparent, delays were endemic and corruption
unavoidable. The economic reforms sought to phase out import licensing and also to
reduce import duties.
Import licensing was abolished relatively early for capital goods and intermediates
which became freely importable in 1993, simultaneously with the switch to a flexible
exchange rate regime. Import licensing had been traditionally defended on the
grounds that it was necessary to manage the balance of payments, but the shift to a
flexible exchange rate enabled the government to argue that any balance of payments
impact would be effectively dealt with through exchange rate flexibility. Removing
quantitative restrictions on imports of capital goods and intermediates was relatively
easy, because the number of domestic producers was small and Indian industry
welcomed the move as making it more competitive. It was much more difficult in the
case of final consumer goods because the number of domestic producers affected was
very large (partly because much of the consumer goods industry had been reserved for
small scale production). Quantitative restrictions on imports of manufactured
consumer goods and agricultural products were finally removed on April 1, 2001,
almost exactly ten years after the reforms began, and that in part because of a ruling

14

by a World Trade Organization dispute panel on a complaint brought by the United

States.
3. Foreign Direct Investment
Liberalizing foreign direct investment was another important part of Indias reforms,
driven by the belief that this would increase the total volume of investment in the
economy, improve production technology, and increase access to world markets. The
policy now allows 100 percent foreign ownership in a large number of industries and
majority ownership in all except banks, insurance companies, telecommunications
and airlines. Procedures for obtaining permission were greatly simplified by listing
industries that are eligible for automatic approval up to specified levels of foreign
equity (100 percent, 74 percent and 51 percent). Potential foreign investors investing
within these limits only need to register with the Reserve Bank of India. For
investments in other industries, or for a higher share of equity than is automatically
permitted in listed industries, applications are considered by a Foreign Investment
Promotion Board that has established a track record of speedy decisions. In 1993,
foreign institutional investors were allowed to purchase shares of listed Indian
companies in the stock market, opening a window for portfolio investment in existing
companies.
These reforms have created a very different competitive environment for Indias
industry than existed in 1991, which has led to significant changes. Indian companies
have upgraded their technology and expanded to more efficient scales of production.
They have also restructured through mergers and acquisitions and refocused their
activities to concentrate on areas of competence. New dynamic firms have displaced
older and less dynamic ones: of the top 100 companies ranked by market
capitalization in 1991, about half are no longer in this group. Foreign investment
inflows increased from virtually nothing in 1991 to about 0.5 percent of GDP.
Although this figure remains much below the levels of foreign direct investment in
many emerging market countries (not to mention 4 percent of GDP in China), the
change from the pre-reform situation is impressive. The presence of foreign-owned
firms and their products in the domestic market is evident and has added greatly to the
pressure to improve quality.These policy changes were expected to generate faster

15

industrial growth and greater penetration of world markets in industrial products, but
performance in this respect has been disappointing.
4. Reforms in Agriculture
A common criticism of Indias economic reforms is that they have been excessively
focused on industrial and trade policy, neglecting agriculture which provides the
livelihood of 60 percent of the population. Critics point to the deceleration in
agricultural growth in the second half of the 1990s as proof of this neglect. However,
the notion that trade policy changes have not helped agriculture is clearly a
misconception. The reduction of protection to industry, and the accompanying
depreciation in the exchange rate, has tilted relative prices in favor of agriculture and
helped agricultural exports. The index of agricultural prices relative to manufactured
products has increased by almost 30 percent in the past ten years (Ministry of
Finance, 2002, Chapter 5). The share of Indias agricultural exports in world exports
of the same commodities increased from 1.1 percent in 1990 to 1.9 percent in 1999,
whereas it had declined in the ten years before the reforms.
But while agriculture has benefited from trade policy changes, it has suffered in other
respects, most notably from the decline in public investment in areas critical for
agricultural growth, such as irrigation and drainage, soil conservation and water
management systems, and rural roads. As pointed out by Gulati and Bathla (2001),
this decline began much before the reforms, and was actually sharper in the 1980s
than in the 1990s. They also point out that while public investment declined, this was
more than offset by a rise in private investment in agriculture which accelerated after
the reforms. However, there is no doubt that investment in agriculture-related
infrastructure is critical for achieving higher productivity and this investment is only
likely to come from the public sector. Indeed, the rising trend in private investment
could easily be dampened if public investment in these critical areas is not increased.
The main reason why public investment in rural infrastructure has declined is the
deterioration in the fiscal position of the state governments and the tendency for
politically popular but inefficient and even iniquitous subsidies to crowd out more
productive investment. For example, the direct benefit of subsidizing fertilizer and
underpricing water and power goes mainly to fertilizer producers and high income
farmers while having negative effects on the environment and production, and even

16

on income of small farmers.i A phased increase in fertilizer prices and imposition of

economically rational user charges for irrigation and electricity could raise resources
to finance investment in rural infrastructure, benefiting both growth and equity.
Competitive populism makes it politically difficult to restructure subsidies in this way,
but there is also no alternative solution in sight.
5. Infrastructure Development
Rapid growth in a globalized environment requires a well-functioning infrastructure
including especially electric power, road and rail connectivity, telecommunications,
air transport, and efficient ports. India lags behind east and southeast Asia in these
areas. These services were traditionally provided by public sector monopolies but
since the investment needed to expand capacity and improve quality could not be
mobilized by the public sector, these sectors were opened to private investment,
including foreign investment. However, the difficulty in creating an environment
which would make it possible for private investors to enter on terms that would
appear reasonable to consumers, while providing an adequate risk- return profile to
investors, was greatly underestimated. Many false starts and disappointments have
resulted.
The greatest disappointment has been in the electric power sector, which was the first
area opened for private investment. Private investors were expected to produce
electricity for sale to the State Electricity Boards, which would control of
transmission and distribution. However, the State Electricity Boards were financially
very weak, partly because electricity tariffs for many categories of consumers were
too low and also because very large amounts of power were lost in transmission and
distribution. This loss, which should be between 10 to 15 percent on technical
grounds (depending on the extent of the rural network), varies from 35 to 50 percent.
The difference reflects theft of electricity, usually with the connivance of the
distribution staff. Private investors, fearing nonpayment by the State Electricity
Boards insisted on arrangements which guaranteed purchase of electricity by state
governments backed by additional guarantees from the central government. These
arrangements attracted criticism because of controversies about the reasonableness of
the tariffs demanded by private sector power producers. Although a large number of
proposals for private sector projects amounting to about 80 percent of existing

17

generation capacity were initiated, very few reached financial closure and some of
those which were implemented ran into trouble subsequently. Because of these
difficulties, the expansion of generation capacity by the utilities in the 1990s has been
only about half of what was targeted and the quality of power remained poor with
large voltage fluctuations and frequent interruptions.
6. Financial Sector Reform
Indias reform program included wide-ranging reforms in the banking system and the
capital markets relatively early in the process with reforms in insurance introduced at
a later stage.
Banking sector reforms included: (a) measures for liberalization, like dismantling the
complex system of interest rate controls, eliminating prior approval of the Reserve
Bank of India for large loans, and reducing the statutory requirements to invest in
government securities; (b) measures designed to increase financial soundness, like
introducing capital adequacy requirements and other prudential norms for banks and
strengthening banking supervision; (c) measures for increasing competition like more
liberal licensing of private banks and freer expansion by foreign banks. These steps
have produced some positive outcomes. There has been a sharp reduction in the share
of non-performing assets in the portfolio and more than 90 percent of the banks now
meet the new capital adequacy standards. However, these figures may overstate the
improvement because domestic standards for classifying assets as non-performing are
less stringent than international standards.
Indias banking reforms differ from those in other developing countries in one
important respect and that is the policy towards public sector banks which dominate
the banking system. The government has announced its intention to reduce its equity
share to 33-1/3 percent, but this is to be done while retaining government control.
Improvements in the efficiency of the banking system will therefore depend on the
ability to increase the efficiency of public sector banks.
7. Social Sector Development in Health and Education
Indias social indicators at the start of the reforms in 1991 lagged behind the levels
achieved in southeast Asia 20 years earlier, when those countries started to grow
rapidly (Dreze and Sen, 1995). For example, Indias adult literacy rate in 1991 was 52

18

percent, compared with 57 percent in Indonesia and 79 percent in Thailand in 1971.

The gap in social development needed to be closed, not only to improve the welfare of
the poor and increase their income earning capacity, but also to create the
preconditions for rapid economic growth. While the logic of economic reforms
required a withdrawal of the state from areas in which the private sector could do the
job just as well, if not better, it also required an expansion of public sector support for
social sector development.
Much of the debate in this area has focused on what has happened to expenditure on
social sector development in the post-reform period. Dev and Moolji (2002) find that
central government expenditure on towards social services and rural development
increased from 7.6 percent of total expenditure in 1990-91 to 10.2 percent in 2000-01,
as shown in Table 4. As a percentage of GDP, these expenditures show a dip in the
first two years of the reforms, when fiscal stabilization compulsions were dominant,
but there is a modest increase thereafter. However, expenditure trends in the states,
which account for 80 percent of total expenditures in this area, show a definite decline
as a percentage of GDP in the post-reforms period. Taking central and state
expenditures together, social sector expenditure has remained more or less constant as
a percentage of GDP.
Closing the social sector gaps between India and other countries in southeast Asia will
require additional expenditure, which in turn depends upon improvements in the fiscal
position of both the central and state governments. However, it is also important to
improve the efficiency of resource use in this area. Saxena (2001) has documented the
many problems with existing delivery systems of most social sector services,
especially in rural areas. Some of these problems are directly caused by lack of
resources, as when the bulk of the budget is absorbed in paying salaries , leaving little
available for medicines in clinics or essential teaching aids in schools. There are also
governance problems such as nonattendance by teachers in rural schools and poor
quality of teaching.
Part of the solution lies in greater participation by the beneficiaries in supervising
education and health systems, which in turn requires decentralization to local levels
and effective peoples participation at these levels. Nongovernment organizations can

19

play a critical role in this process. Different state governments are experimenting with
alternative modalities but a great deal more needs to be done in this area.
While the challenges in this area are enormous, it is worth noting that social sector
indicators have continued to improve during the reforms. The literacy rate increased
from 52 percent in 1991 to 65 percent in 2001, a faster increase in the 1990s than in
the previous decade, and the increase has been particularly high in the some of the
low literacy states such as Bihar, Madhya Pradesh, Uttar Pradesh and Rajasthan.
Conclusions
The impact of ten years of gradualist economic reforms in India on the policy
environment presents a mixed picture. The industrial and trade policy reforms have
gone far, though they need to be supplemented by labor market reforms which are a
critical missing link. The logic of liberalization also needs to be extended to
agriculture, where numerous restrictions remain in place. Reforms aimed at
encouraging private investment in infrastructure have worked in some areas but not in
others. The complexity of the problems in this area was underestimated, especially in
the power sector. This has now been recognized and policies are being reshaped
accordingly. Progress has been made in several areas of financial sector reforms,
though some of the critical issues relating to government ownership of the banks
remain to be addressed. However, the outcome in the fiscal area shows a worse
situation at the end of ten years than at the start.
Critics often blame the delays in implementation and failure to act in certain areas to
the choice of gradualism as a strategy. However, gradualism implies a clear definition
of the goal and a deliberate choice of extending the time taken to reach it, in order to
ease the pain of transition. This is not what happened in all areas. The goals were
often indicated only as a broad direction, with the precise end point and the pace of
transition left unstated to minimize oppositionand possibly also to allow room to
retreat if necessary. This reduced politically divisive controversy, and enabled a
consensus of sorts to evolve, but it also meant that the consensus at each point
represented a compromise, with many interested groups joining only because they
believed that reforms would not go too far. The result was a process of change that
was not so much gradualist as fitful and opportunistic. Progress was made as and
when politically feasible, but since the end point was not always clearly indicated,

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many participants were unclear about how much change would have to be accepted,
and this may have led to less adjustment than was otherwise feasible.
The alternative would have been to have a more thorough debate with the objective of
bringing about a clearer realization on the part of all concerned of the full extent of
change needed, thereby permitting more purposeful implementation. However, it is
difficult to say whether this approach would indeed have yielded better results, or
whether it would have created gridlock in Indias highly pluralist democracy. Instead,
India witnessed a halting process of change in which political parties which opposed
particular reforms when in opposition actually pushed them forward when in office.
The process can be aptly described as creating a strong consensus for weak reforms!
Have the reforms laid the basis for India to grow at 8 percent per year? The main
reason for being optimistic is that the cumulative change brought about is substantial.
The slow pace of implementation has meant that many of the reform initiatives have
been put in place recently and their beneficial effects are yet to be felt. The policy
environment today is therefore potentially much more supportive, especially if the
critical missing links are put in place. However, the failure on the fiscal front could
undo much of what has been achieved. Both the central and state governments are
under severe fiscal stress which seriously undermines their capacity to invest in
certain types of infrastructure and in social development where the public sector is the
only credible source of investment. If these trends are not reversed, it may be difficult
even to maintain 6 percent annual growth in the future, let alone accelerate to 8
percent. However, if credible corrective steps are taken on the fiscal front, then the
cumulative policy changes that have already taken place in many areas, combined
with continued progress on the unfinished agenda, should make it possible for India to
accelerate to well beyond 6 percent growth over the next few years.

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BIBLIOGRAPHY
1) Ahluwalia, Isher J., Productivity and Growth in Indian Manufacturing, Oxford
University Press, New Delhi 1991.
2) Ahluwalia, Isher J., Industrial Growth in India: Stagnation since the mid-sixties,
Oxford University Press, New Delhi, 1995.
3) Ahluwalia, Montek S., Indias Economic Reforms: An Appraisal, in Jeffrey Sachs and
Nirupam Bajpas (eds.), India in the Era of Economic Reform, Oxford University
Press, New Delhi, 2000.
4) Secondary

data

collected

from

the

Books,

Internet,

magazines,

Annual reports, News papers, different types of research papers etc.

Journals,

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5) Dr. Syed Azharuddin and Dr. W.K. Sarwade,2007, Business Environment Sagar
Publication, Aurangabad, p.129 and 219
6) http://www.google.com/business mapsofindia.com
7) Indian Journal of Managenent Review vol.I No.2 January-March 2011