Pre and Post Reform Period in India: An Analysis By: Anuradha Rao

Contents Scenario: Pre and Post Reforms Major Reforms Industrial Deregulation Fiscal Policy Financial Sector Trade & Investment Impact: Positives and Negatives Conclusion

Scenario: Pre-1991 Interventionist economic policies Low levels of growth Excessive State control: - Industrial production - Price setting - Foreign trade “License Raj” system

Winds of change 1980s- Inefficient management of Indian economy Revenue used to tackle social issues like poverty, unemployment, population explosion Foreign exchange used for internal consumption Crisis in 1991- loan from IMF and WB Announcement of New Economic Policy (NEP)

Scenario: Post-1991 Opening up of economy Rationalization of tax regime Reduction in control from the Centre Removal of barriers to industrialization

1. Industrial Deregulation Major Reforms REFORMS 1. Industrial Deregulation 2. Financial Sector 3. Fiscal Policy 4. Trade and Investment

Industrial Deregulation BEFORE 1991 AFTER 1991 Industrial licensing for all commodities Licensing restricted to alcohol, drugs etc. Private sector not allowed in many industries Only defense, energy, railway for public sector- large scale privatization, disinvestment Controls on price fixation and distribution Market allowed to determine prices

Financial Sector BEFORE 1991 AFTER 1991 RBI: a regulator- Operations of banks and other institutions under strict scrutiny RBI: a facilitator- Institutions allowed to make decisions without consultation at every step Closed economy Foreign Institutional Investors allowed to invest

Fiscal Policy BEFORE 1991 AFTER 1991 Direct tax rates high High income tax- evasion of payment High corporate tax Direct tax rates lessened Moderate income tax- saving encouraged Corporate tax lowered Disorganized indirect taxes Introduction of VAT, service tax etc. Complex tax procedures discouraging tax payment Procedures simplified- compliance on the part of taxpayers

Trade and Investment BEFORE 1991 AFTER 1991 Quantitative restrictions on imports and exports, import licensing, export duties Restrictions removed, lower tariff rates- free inflow and outflow of goods Lack of investment- Inefficient local industries without global technological inputs Investments allowed- increased international competitiveness

Impact: Positives The growth rate of average incomes increased from 1.25% prior to 1980s to 7% by 2006. For the 1st time since independence , in 1994-2004, the absolute no. of people living under the national poverty line declined. Annual growth trend of GDP post 2000 is 6.3%: 3 times that in the 1st three decades after independence

Impact: Positives Large improvements in service sector: communication, insurance, IT services Increase in FDI and FII: India now 6th largest foreign exchange holder in the world Inflation kept under control after reforms

Impact: Negatives GDP growth has not brought about increase in employment Agricultural sector adversely affected: lower government investment, international competition, export-oriented production Industrial sector facing competition from imports, insufficient investment issues Reduction in revenue generation through taxes and tariffs: lower developmental expenditure

Conclusion Economy has responded favorably to reforms: India is the second fastest growing economy in the world after China! However, potential to increase growth further by: -improving policy settings on infrastructure -easing manufacturing sector regulations -addressing identified negatives in a more comprehensive manner

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