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UPSC GS 3 Notes: Economic Reforms Of 1991

The year 1991 saw India face an unprecedented financial crisis. The crisis was triggered by a major Balance of Payments situation. The crisis was converted into a golden opportunity to reform the country’s economic situation and make-up and introduce fundamental changes in economic policy.

The government brought in structural reforms and stabilization policies. While the former was aimed at removing the rigidities in the various sectors of the Indian economy, the latter was aimed at correcting the weaknesses that had emerged on the fiscal and BoP fronts.

India’s Prime Minister, when the New Economic Policy (NEP) was introduced was P V Narasimha Rao and the Finance Minister was Dr. Manmohan Singh.

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Objectives of New Economic Policy 1991

• Enter into the field of ‘globalization’ and make the economy more market-oriented.
• Reduce the inflation rate and rectify imbalances in payment.
• Increase the growth rate of the economy and create enough foreign exchange reserves.
• Stabilize the economy and convert the economy into a market economy by the removal of unwanted restrictions.
• Allow the international flow of goods, capital, services, technology, human resources, etc. without too many restrictions.
• Enhance the participation of private players in all sectors of the economy. For this, the reserved sectors for the government were reduced to just 3.

Steps under economic reforms of 1991

The branches of the new economic policy are threefold:

• Liberalization
• Privatization
• Globalization

The government sought to open up the Indian economy through these measures and gear India from a Soviet-model economy to a market economy. This is an ongoing process and the initiation was done in 1991.

Steps taken under Liberalisation

• Commercial banks were given the freedom to determine interest rates. Previously, the Reserve Bank of India used to decide this.
• The investment limit for small scale industries was raised to Rs. 1 crore.
• Indian industries were given the freedom to import capital goods like machinery and raw materials from foreign countries.
• Previously, the government used to fix the maximum production capacity of industries. Now, the industries could diversify their production capacities and reduce production costs. Industries are now free to decide this based on market requirements.
• Abolition of restrictive trade practices: Previously, companies with assets worth more than Rs.100 crore were classified as MRTP firms (as per Monopolies and Restrictive Trade Practices (MRTP) Act 1969), and were subject to severe restrictions. These were lifted.
• Industrial explosives
• Defence equipment
• Hazardous chemicals

Steps taken under Privatisation

Privatization refers to opening up the private sector to industries that were previously reserved for the government sector. This chiefly involved selling the PSUs (private sector undertakings) to private players. This was meant to remove the political interference in PSUs which was making them models of inefficiencies.

The following steps were taken under the privatization reforms:

• Selling shares of PSUs to the public and financial institutions. For example, shares of Maruti Udyog Ltd. were sold to private parties.
• Disinvestment in PSUs. This means selling PSUs to the private sector.
• Transport and railway
• Atomic energy
• Mining of atomic minerals

Steps taken under Globalisation

Globalization refers to opening up the economy more towards foreign investment and global trade.

• Reduction in tariffs: a gradual reduction in the customs duties and tariffs on exports and imports to make India attractive to global investment.
• Liberal policy
• Encouragement of open competition
• Controls on foreign trade were removed
• Before 1991, imports to India were regulated by a positive list of freely importable items. From 1992 onwards, the list was replaced by a limited negative list. Almost all intermediate and capital goods were freed from the list for import restrictions.
• The Indian currency was made partially convertible.
• The equity limit of foreign capital investment was raised from 40% to 100%. The Foreign Exchange Management Act (FEMA) was enacted replacing the draconian Foreign Exchange Regulation Act (FERA).

The economic reforms of 1991 led to widespread economic development in the country. Many sectors such as civil aviation and telecom saw great leaps from deregulation and surged ahead. India is also home to many start-ups and mushrooming businesses because of the end of the dreaded License Raj. The process is, however, far from complete and many areas need improvement.

The economic reforms of 1991 are a milestone in Indian economic history and hence, are of utmost importance as far as the IAS exam is concerned. The economy itself is an important subject, especially for General Studies III in the UPSC syllabus . Candidates should read a lot about the economic reforms initiated in 1991 and make notes on the timeline and events. This will help in understanding the concept better and also help recall better in the UPSC exam.

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Q 1. what were the three branches of economic reforms in 1991, q 2. who was the indian prime minister when the new economic policy 1991 was introduced.

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India’s Economic Reforms and Development

Author(s): Dr. Isher Judge Ahluwalia

India’s Economic Reforms and Development Essays for Manmohan Singh by Isher Judge Ahluwalia & IMD Little Second Edition updated as part of Oxford India Perennial Series

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Essay: Indian Economy and Economic Reforms

Economic reforms were introduced by the Government of India in July 1991. The reform process has completed 17 years. It would, therefore, be both interesting and instructive to make an overall assessment of the reform process so as to ascertain whether the country is moving in the right direction, or, to terminate the reform process altogether.

The objectives of the reform process were:

(a) To promote a faster rate of growth,

(b) To enlarge employment potential leading to full employment,

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(c) To reduce the incidence of poverty,

(d) To promote equity, leading to a better deal for the poor and less well-off sections of society,

(e) Reduction of regional disparities, i.e., the gap between the rich and the poor states, and

(f) Improving the BOP position.

We may now examine economic reforms in terms of the above goals:

1. GDP Growth :

The annual growth rate in the post-reform decade (1990-91 to 2000-01) was the same as that of the pre-reform decade (1980-81 to 1990-91), viz., 5.6% per annum. After the teething troubles of the first two years, viz., 1991-92 and 1992-93, the growth rate during 1993-94 and 1997-98 has averaged to more than 7% per annum.

After 1991-92, the growth momentum has been sustained. Reforms have, no doubt, improved the growth potential of the economy. This is clear from the fact that the growth rate of GDP during the 5-year period (2000-01 to 2005-06) was 7% p.a. It increased to about 8.9% in the next year. (2006-2007)

2. Poverty Alleviation :

The overall poverty ratio declined from 36% in 1993-94 to 27.5% in 2004-05—a decline of 8.5% during the 11-year period. Annual average reduction of poverty during this period was 0.74%. However, the rate of poverty reduction during 1973-74 and 1987-88 was from 54.9% to 38.9%—a reduction of 14 percentage points during the 14-year period.

So, poverty reduction was at the rate of 1 % p.a., which was higher than that during the post-reform period, even though GDP growth rate during the post-reform period was much higher than that in the pre-reform period.

The number of persons below the poverty line was 300 million in 2004-05 compared to 320 million in 1993-94. This means that the absolute number of poor declined very slowly during the post-reform period. So, the trickledown effect of the growth process did not benefit the poor.

3. Employment Generation:

One of the causes of poverty is growing unemployment or underemployment. Total employment increased from 302 lakhs in 1983-84 to 3,568 lakhs in 1990-91 and then to 3,829 lakhs in 1997- 98. The rate of growth of employment was of the order of 2.39% p.a. during 1983-84 and 1990- 91, which was just equal to the rate of growth of labour force during this period.

But over the period 1990-91 and 1997-98 the overall growth rate of employment was only 1%. Since the reform process is limited to the organised sector, more so to the large corporate sector, the growth rate of employment in the organised sector decelerated to 0.60% during 1990-91 to 1997-98 as against 1.73% p.a. witnessed in the 7-year pre-reform period of 1983-84—1990- 91.

There was also a substantial slowdown in the employment growth rate of the unorganised sector to merely 1.1% during 1990-91 and 1997-98 as against employment growth rate of 2.41% witnessed during the 7-year pre-reform period.

4. Economic Reforms and its Impact on Labour :

(a) Person Days Lost:

The number of person days lost due to strikes and lockouts declined during the period 1991- 2000 compared to that in the period.

1981-1990. This can be treated as an index improvement of industrial relations in the post- reform period.

(b) Downsizing :

Although the government has not formally accepted an exit policy, by the scheme of voluntary retirement, the load of workers is being reduced, both in the public and private sectors. So workers are being pushed from the organised to the unorganised sector and from secure to insecure employment.

5. Increase in Productivity and Movements, Real Wage :

Although labour productivity had increased by 3.32% during 1987-88 and 1993-94, the real earning of workers increased at the annual average rate of 1%. In other words, the gains of increased labour productivity were not shared by the workers.

The basic problem with economic reforms is not to treat labour as an asset but as a mere instrument which can be disposed with when it is no longer useful. Thus economic reforms so far had an adverse effect on labour welfare, more so in view of the fact that there is no comprehensive social security system in India.

6. Neglect of Agriculture—The Main Drawback of Economic Reforms :

A major criticism of the process of economic reforms is the neglect of agriculture—the mainstay of livelihood of two-thirds of the population. Due to inadequate attention given to agriculture food grains production did not increase much. Even during 2004-05 and 2006-07, food grains production stagnated at around 2008-09 million tones. As a result foods prices rose sharply. This created inflation and, thus, was one of the causes of poverty.

The reform process has emphasised the growth of manufacturing and service sectors and thus neglected agriculture. As a result, agricultural growth has stagnated around 2% during the last decade. It was 2.1% during the Ninth Plan (1997-2002) and was estimated to be 2.3% during the Tenth Plan (2002-2007).

The structural weakness of the agricultural sector reflected in low level of investment, exhaustion of the yield potential of new high yield varieties of wheat and rice, an inadequate incentive system and post-harvest value addition all conjointly accounted for slow agriculture growth, or virtual stagnation since 2000-2001. Moreover, public sector investment in irrigation, flood control, water harvesting, rural infrastructure, reclamation of degraded lands, etc., also had a spread effect.

The neglect of agriculture casts a shadow on sustainability of agricultural growth unless there is a reorientation of priorities with much greater emphasis on agriculture and rural industrialisation. It is time the state, instead of withdrawing from investment in agriculture, irrigation and rural infrastructure, strengthened public sector investment in these areas.

7. Economic Reforms and Industrial Growth :

Economic reforms were mainly intended to remove the bottlenecks which acted as obstacles to industrial growth. The reform process dismantled the system of industrial licensing which was considered to be a main roadblock to the progress of India’s industrial economy, measured in terms of industrial growth and diversification.

In spite of this, India’s industrial sector took a back seat. Whereas, in the pre-reform period (1981-82 to 1990-91), the general index of industrial production recorded an annual average growth rate of 7.8%, the growth rate of industrial production slowed down to 6.7% during 1993-94 and 2004-05, which is generally identified as a period of wide-ranging reforms in the industrial sector.

The growth was much below the target. It failed even to equal the performance observed in the 1980s, not to speak of improving the performance, as a consequence of the reform process. The failure of the basic goods and capital goods sectors really put a question mark on the success of the reform process.

8. Performance of the Public Sector Enterprises :

The Central Public Sector Enterprises have shown an improved performance during the 10-year period of reform (1993-94 to 2003-04). In spite of this, the Government has undertaken disinvestments of these enterprises instead of improving their performance still farther through the reform process.

9. Economic Reforms and the Movements of WPI and CPI :

In the post-reform period (1993-94 to 2005-06) the movement of the CPI (IW) was slightly higher than the movement of WPI (IW). This indicates that retail inflation in the post-reform period was slightly higher than wholesale inflation. The weighted price index (base 1993-94 = 100) showed an annual average increase of 6.3% during 1993-94 and 2005-06.

10. Trends of Growth in Infrastructure :

In case of saleable steel and cement, the growth rates were higher in the post-reform period than in the pre-reform period for acceleration in the production of cement was largely the result of introduction of dual pricing in case of cement introduced in 1982 with progressive reduction in the percentage of controlled cement, to eventually freeing cement prices from state control. This led to massive increase in the production capacity and output of sugar.

Similarly, the gradual easing of steel price control introduced since 1983 led to rise in output. All these measures, taken in the pre-reform period, helped to create an environment to these industries to raise their production capacity and output without any bottlenecks.

However, other infrastructure industries—electricity, coal and petroleum—did not fare well during the reform period. Excessive dependence on the private sector did not yield the desired result.

11. India’s Foreign Trade and BOP :

During 1981-82 and 1987-88 India followed a restrictive import policy. During 1988-89 and 1990-91 the Government adopted a policy of export promotion. So, there was a shift of emphasis in trade policy in the second half of the 1980s. A very distressing aspect of this period is the steady decline in exports of net invisibles and the consequent fall in export earnings from invisibles.

Economic reforms went in for a rapid globalisation of the Indian economy by reducing and/ or abolishing quantitative restrictions and also reducing tariff barriers which hindered trade. The reform measures were mainly directed toward boosting exports as well as to facilitate developments imports (mainly capital and intermediate goods) as also imports of some basic raw materials which were so vital for increasing industrial production.

The post-reform period can be divided into three parts:

i. Period 1: 1991-92 to 1995-96:

During this period the annual average growth rate of exports was 11.8%, while imports increased at the rate of 9.3% p.a. As a result the current account deficit was restricted to $3,025 million.

ii. Period 2: 1996-97 to 2000-01 :

During this period exports increased at an average rate of 6.8% per annum, while imports increased at the rate of 6.3%. This implies that export promotion could not become effective. Consequently, trade deficit as on average reached a record level of $15,156 million.

But a very encouraging effect of this period is the sharp increase in surplus from net invisibles to an average level of $10,667 million which neutralized the trade deficit to a large extent. Consequently, the current account deficit was restricted to $4,489 million.

iii. Period 3: 2001-02 to 2005-06 :

During this period a big boost was given to export promotion and exports grew at an average annual rate of 18.4% p.a. As against this, the rate of growth of imports was of the order of 21.4% p.a. The most notable achievement of this period was the big surge in net invisibles which more than offset the trade deficit. The current account turned positive in 2001-02. The surplus, which was $3,400 million in 2001-02, increased to $14,083 million in 2003-04.

An Overall Evaluation of India’s External Account :

On balance it seems that India’s foreign trade position was quite satisfactory during the reform period. Exports have grown faster than imports in percentage terms. No doubt trade deficit has increased, but the massive increase in net invisibles has helped to reduce current account deficit. The emergence of a favourable current account balance during 2001-02 and 2003-04 is, no doubt, a major achievement of the post-reform period.

The situation has taken a turn in 2005-06, since imports increased faster than exports. Consequently, the trade deficit touched a record level of $51,554 million. No doubt net invisibles were positive to the extent of $40,492 million.

Yet they were not adequate as to wipe out the trade deficit. The net result was the emergence of a negative balance on current account to the tune of $10,612 million. The situation did not change much in 2006-07 and the trade deficit was likely to be $60,600 million.

Lessons to Learn :

No doubt, the Government took credit for a rise of exports, but was oblivious of the sharper rise in imports.

Three lessons can be learnt from the BOP situation:

i. Re-Thinking on Full Convertibility of the Rupee :

Policy-makers are giving a second thought to the full convertibility of the rupee after the East Asian crisis.

ii. Improving the Balance on Current Account :

There was a surplus in the current account during 2001-02 and 2003-04. This is, no doubt, an encouraging trend. However, there is need to strengthen this healthy development. The emergence of a negative current account balance in 2004-05 and 2005-06 has again resulted in an adverse situation and India needs caution in this regard.

iii. Reviewing Import Policy :

Finally, with an increase in oil prices and also with the revival of industry, imports are likely to increase. So India has to be vigilant in pursuing a very liberal import policy.

12. Reduction of Regional Disparities:

One of the declared objectives of India’s planning as also of industrial policy is to reduce regional disparities. However, the reform process initiated in 1991 has been emphasizing the use of the market forces, which naturally attract investment to regions which are more developed in terms of infrastructure—both economic and financial. However, it did not pay any attention to the question of regional imbalance.

The reform process helped the forward states much more than their backward counterparts and was responsible for widening regional disparities. More than two-thirds of investment proposals were concentrated in the forward states. A similar situation prevailed in terms of financial assistance disbursed by all-India financial institutions as well as SFCs.

In short, the reform process has favoured the forward states in terms of approval of investment proposals as well as financial assistance. Consequently, the already better-off states are in a position to accelerate their growth process further. In sharp contrast to this, backward states, being unfavourably treated, face a retardation of growth. This explains the growing disparities in terms of NSDP—both total and per capita.

The ongoing reforms with stress on stabilisation and deregulation policies as their prime instrument and a very significant role for the private sector seem to have aggravated the inter­state disparities.

Globalisation and Indian Agriculture :

Globalisation refers to the trend for people, firms & governments around the world to become increasingly dependent on and integrated with one another. This can be a source of tremendous opportunity, as new markets, workers, business partners, goods & services and jobs become available; but also of competitive threat, which may undermine economic activities that were available before globalisation.

The term globalisation was coined during the 1980s to characterize huge changes that were taking place in the international economy, notably the growth in international trade and inflows of capital around the world. Usually, the term is synonymous with international integration, the spread of free markets and policies of liberalisation and free trade.

Firms enjoying some natural protection and farmers (receiving subsidies) have been some of the main opponents of globalisation, along with advocates of free trade. Moreover all gov­ernments have not embraced globalisation warmly. It is against this backdrop that we study the effect of globalisation in Indian agriculture.

Effect of Globalisation: A Summary View :

In short, globalisation and economic reforms have had negative effects on Indian agriculture. The post-reform period of 1990s has witnessed a distinctive trend on the farm front. This gets reflected in the deceleration in agricultural growth as well as in rural employment growth with slow reduction in poverty in India. This can be explained in terms of unfavorable initial conditions, viz., failure to implement land reforms effectively, low rate of saving and infrastructure deficiency (both physical & social).

As Hanumantha Rao has commented, “The opening up of the economy & the significant reduction in protection to domestic industry did result in an improvement in the terms of trade for agriculture which led to a significant rise in private investment. But because of continued decline in real public investment in irrigation research and extension and other rural infrastructure owing to reform induced erosion of tax revenues and compression in public expenditures, agriculture could not derive full benefit from macroeconomic reforms and globalisation especially because, there was hardly and slack in the pre-reforms period”.

Policy Implications :

The major areas of concern in the post-reform period are the expansion of irrigated area through enhanced ‘public investment’, efficient management of available water resources and rural electricity through the involvement of actual users and regeneration of degraded land areas through direct participation of the actual tillers of the soil.

In the opinion of Hanumantha Rao, “Decline in public involvement, inefficiency in the management of available infrastructure and degradation of natural resources are attributable, in a significant measure, to the steep rise in subsidies on water supplied from public irrigation systems, electricity for pumping water and chemical fertilisers”.

It is high time steps were taken to reduce these subsidies progressively by targeting them to only small & marginal farmers who really deserve them. This will go a long way in stepping up productive investment in agriculture & preserving agricultural land.

Conclusion :

It is a fact that the reform process will not be able to achieve its socio-economic objectives because of excessive private participation in the economy and the private sector is solely guided by the objective of profit maximisation. No doubt the liberalisation process has reduced the role of public sector investment.

But it has failed to fill the vacuum created by the withdrawal of public sector investment in infrastructure, more so in the backward states. Obviously, this calls for a review of the reform process and taking corrective measures.

The three way fast lane of liberalisation, privatisation and globailisaion (LPG) failed to make a dent on the problem of unemployment. The whole reform process makes at least one thing clear—the market forces do not help the poor.

Four main drawbacks of the reform process are:

1. It increased disparities among states.

2. It displaced people having little, if any marketable skills.

3. It increased the incidence of poverty and inequality.

4. It failed to ensure human development whose key indicators are life expectancy, literacy rate, infant mortality rate, death rate and birth rate.

The true challenge before us is to combine the economies of growth with the economies of equity and social justice. The age-old problem of planning has been the conflict between growth and distributive justice.

Related Articles:

• New Economic Reforms in Indian Economy
• Economic Reforms and Indian Agriculture
• Achievements of Economic Reforms in India
• Essay on Indian Economy

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Insights into Editorial: India’s new economic reforms and challenges ahead

India is in a crisis, with the pandemic battering an already weak economy.

The national government has struggled, both in terms of managing the pandemic and in trying to rescue the economy .

The crisis and the urgency it has created has, however, led to the beginning of a new set of economic reforms.

These reforms aim to address obstacles to growth that have persisted through the three decades since India shifted its basic stance towards economic policymaking .

Recent reforms in various fields:

• On the reforms in agricultural markets and marketing , which have the potential to improve efficiency in agricultural markets, and perhaps even help farmers earn more as a result.
• As farmers’ responses suggest, these benefits are not guaranteed, and the government should consider additional reforms that focus on production, risk mitigation, and ensuring competition by buyers and intermediaries.
• Improvements in credit access for farmers would also help. An additional possibility is reform of the PDS, along with better incentives for farmers to shift into higher-value crops.
• This would reduce the damage to the environment that the current narrowly-designed PDS creates in states like Punjab, as a recent detailed analysis suggest.
• The central government also passed a series of labour law reforms that are designed to streamline the regulation of labour .
• Like the agricultural reform bills, the urgency of action has led to a lack of prior debate and new laws don’t seem to be entirely well thought out.

Manufacturing Boost: Production-linked incentive (PLI) scheme for Sustained growth:

• The poor performance of India’s manufacturing sector is caused by multiple deficiencies in the preconditions for productive investment and growth .
• The PLI schemes are useful to signal government support and to jumpstart the economy in sectors that are viewed as having potential for growth or that have strategic importance, but they will ultimately be a drop in the bucket compared to what is needed.
• On top of everything else, broad-based manufacturing growth will still require cleaning up and reforming the financial sector.
• Perhaps the most central example of the new set of economic reforms is the production-linked incentive (PLI) scheme for 10 sectors , ranging across a variety of products and technologies.
• The essential idea is to reward growth in sales, and this is certainly better than policies that encourage firms to stay small, as did the notorious Small-Scale Reservation schemes of the past.
• Encouraging rapid growth with simple and direct monetary incentives seems especially attractive as the economy seeks to recover from the pandemic.
• But here, too, the government may need to fill out its policy package in a more careful manner.
• Sustained growth in manufacturing will come from good physical infrastructure, efficient regulation, building a reputation, developing customer and supplier linkages, and so on.
• A more rational and trade-friendly tariff structure will also help. The best investment will be attracted by an environment that includes all of the above.
• As noted earlier, access to labour with the appropriate skills , or the existence of local organisations that can impart these skills, is also an important component of sustained manufacturing growth.

Structural Reforms are a Key Priority of the Government:

• The Government has taken many initiatives for the welfare of the Farmers.
• Soil Health Card, Neem Coating of Urea, Pradhan Mantri Fasal Bima Yojana, Pradhan Mantri Krishi Sinchai Yojana, PM Kisan Samman Nidhi Yojana to name a few.Rs.15 Lakh Crore worth agricultural loans are being provided at 4% interest; 77,000 Crore relief has been given to farmers in last 5 years.
• Under the initiative of E-Mandi , 1,000 mandis have been connected to the internet and transactions worth one lakh crore happened so far.
• Through the new reforms, under contract farming , it will be ensured that the ownership will remain with the farmer, the contract will only be regarding the crops.
• Contract farming will bring in new technology, new seeds and investment .
• Through the years low productivity is the biggest problem faced by our farmers.
• As investment will grow, the use of technology and new seeds will enhance the productivity.
• The objective of agricultural reforms is to empower our farmers and increase agricultural productivity by bringing in new techniques, new seeds and new investment; and thus, to increase the contribution of agriculture to our national GDP.

Areas which need immediate attention:

• Many details are left out of the laws and left up to future executive actions. The reforms aim to continue to provide needed protections for labour while increasing flexibility for employers.
• Still, there are some valid concerns about adequate safety and health protections for labour under the new legal framework, and the dilution of collective bargaining power for labour.
• Another issue is the lack of employment protection , and here one has to be agnostic since the difficulty of firing industrial labour in India has been a major barrier to hiring.
• Of course, flexibility in hiring and firing is not going to be sufficient to improve anaemic employment growth.
• In addition to other kinds of incentives for industrial growth, one hopes that the government will make a serious attempt to collaborate with industry and figure out how to improve the skills of India’s workforce , in both depth and breadth.
• One of the challenges is that so much employment is in smaller firms , which do not have the resources to provide training for workers.
• By contrast, India’s software firms had sufficient scale (and high enough profit margins) to train their workers who, even as graduates of engineering colleges, did not have the specific skills or quality of training needed.

Conclusion:

In any domestic ecosystem of manufacturing, access to credit and capital will have to be smooth and efficient.

India’s financial system has been prone to financial capital being allocated inefficiently, or even just stolen.

Companies such as Apple or Reliance may be able to rely solely on their own funds, but a successful economy will require a much better functioning financial sector than the one India has .

Innovations based on digital technology provide some hope for improving the financing of India’s firms, but regulation will have to catch up quickly and make sure that this can happen without introducing new kinds of risk .

In the final analysis, the new set of economic reforms being introduced with urgency by India’s national government is barely scratching the surface of what needs to be done for the economy to sustain growth at rates that will once again start lifting millions out of poverty.

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Home — Essay Samples — Economics — Economic Problem — The journey of economic reforms during

The Journey of Economic Reforms During

• Categories: Economic Problem

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Words: 1777 |

Published: Sep 18, 2018

Words: 1777 | Pages: 4 | 9 min read

• 1. Defence: In the previous budget for 2017-2018 funds allocated to defence sector was INR 267000 crores and the defence sector shared 12% from the total value of the 2017-2018 budget. In the current 2018-2019 budget defence sector shares the 12% from the total value of budget but the funds allocated to defence sector is INR 283000 crores, which ultimately proves that there is a rise in current budget made by the government. Defence sector is one of the most important sectors because government needs to constantly spend money on purchasing weapons, purchasing new technology, upgrading the current systems in Navy and Air forces for the safety of the nation. Looking at current war tensions with Pakistan and China, 12% or INR 283000 crores seems to be good amount dedicated towards the defence sector. Graphical representation of defence sector:
• 2.Agriculture: In the previous budget for 2017-2018 funds allocated to agriculture sector was INR 56600crores and the agriculture sector shared 2.6% from the total value of the 2017-2018 budget. In the current 2018-2019 budget agriculture sector shares the 2.6% from the total value of budget but the funds allocated to agriculture sector is INR 63800 crores. Agriculture sector is one the most important sector in India as most of the population of India resides in the rural areas and 70% of the population residing in the rural areas undertake agriculture as their occupations. Looking at the total number of population residing in the rural areas 2.6% or INR 63800 crores seems to be little less. Graphical representation of agriculture sector:
• 3. Education: In the previous budget for 2017-2018 funds allocated to education sector was INR 81900 crores and the education sector shared 3.7% from the total value of the 2017-2018 budget. In the current 2018-2019 budget education sector shares the 3.5% from the total value of budget but the funds allocated to education sector is INR 85000 crores. Education is the most important sector not only for India but also for the world because the country makes progress depending on how educated its population is. Government decreased the share by 0.2% but increase of INR 3100 crores. Looking at the current global competition government should have allotted more amount to education sector then what it is currently allotted. Graphical representation of education sector:
• 4. Health: In the previous budget for 2017-2018 funds allocated to health sector was INR 53200 crores and the health sector shared 2.4% from the total value of the 2017-2018 budget. In the current 2018-2019 budget health sector shares the 2.2% from the total value of budget but the funds allocated to health sector is INR 54700 crores. Health sector is also the important sector for any economy but it has more importance in developing countries like India. Government will start new hospitals and will also start new medical colleges. In comparison from previous budget its share is reduced by 0.2% but increase off INR 1500 crores. Looking at the importance of Health sector 2.2% or INR 54700 crores looks less for health sector. Graphical representation of health sector:
• 5. Transport: In the previous budget for 2017-2018 funds allocated to transport sector was INR 107000 crores and the transport sector shared 4.8% from the total value of the 2017-2018 budget. In the current 2018-2019 budget transport sector shares the 5.5% from the total value of budget but the funds allocated to transport sector is INR 135000 crores. Transport is the backbone for business in any economy Easy transportation increases ease of doing business and it also increases domestic and international trade. In comparison to previous budget it has increased by 0.7% or INR 28000 crores. Looking at the importance of transport sector in an economy INR 135000 crores is very good for an economy. Graphical representation of transport sector:
• 6. Rural development:In the previous budget for 2017-2018 funds allocated to rural development sector was INR 136000 crores and the rural development sector shared 6.1% from the total value of the 2017-2018 budgets.

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Nigeria’s Economic Reforms: Progress and Challenges

Subscribe to africa in focus, ngozi okonjo-iweala and ngozi okonjo-iweala nonresident distinguished fellow - global economy and development , africa growth initiative @noiweala philip osafo-kwaako philip osafo-kwaako visiting fellow - africa center for economic transformation.

March 23, 2007

Following years of economic stagnation, Nigeria embarked on a comprehensive reform program during the second term of the Obasanjo administration. The program was based on the National Economic Empowerment and Development Strategy (NEEDS) and focused on four main areas: improving the macroeconomic environment, pursuing structural reforms, strengthening public expenditure management, and implementing institutional and governance reforms.

This paper reviews Nigeria’s recent experience with economic reforms and outlines major policy measures that have been implemented. Although there have been notable achievements under the program, significant challenges exist, particularly in translating the benefits of reforms into welfare improvements for citizens, in improving the domestic business environment, and in extending reform policies to states and local governments. Consequently, we argue that the recent reform program must be viewed as the initial steps of a much longer journey of economic recovery and sustained growth. This paper concludes by outlining a number of outstanding issues that future Nigerian administrations must address.

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What is New Economic Reforms?

New economic reforms in India refers to the neo-liberal polices introduced by the government in 1991 and in the later years. The central point of the reforms was liberalization of the economy, simplifying regulations, giving more role to the private sector and opening up of the economy to competition. New industrial policy of 1991 is the heart of the new economic reforms. The philosophy of the new economic policy was enhancing competition based upon more market orientation. During the last twenty-five years, the economic reform has produced significant impact on the economy- mostly positive.  Following are the main features of New Economic Reforms.

1. Dereservation of the industrial sector – the industrial sector of the economy has been opened up to the private sector after the New Industrial Policy of 1991. Previously, the public sector has given reservation especially in the capital goods and key industries. Other operators- private sector and foreign investors were not allowed in these critical industries. Deregulation of the industrial sector allowed private sector operation in most of these sectors except in eight selected areas including atomic energy, mining and railways.

2. Industrial delicensing policy: the most important part of the new industrial policy of 1991 was the end of the industrial licensing or the license raj or red tapism. Under the previous industrial licensing policies, private sector firms have to secure licenses to start an industry. This has created long delays in the startup of industries. The industrial policy of 1991 has almost abandoned the industrial licensing system. It has reduced industrial licensing to fifteen sectors.

3. Opening up of the economy to foreign competition : another major feature of the economic reform measure was that it has given welcome to foreign investment and foreign technology. Opening up of the economy to foreign competition started a new era in India’s economic policy with permission to FDI upto 51 per cent in selected sectors.

4. Liberalization of trade and investment: the economic reforms introduced extensive liberalization of foreign trade and foreign investment. The import substitution and import restriction policies were abandoned and instead import liberalization and export promotion policies were introduced. On the investment front, the economic reforms mark the era of capital mobility in the country. Foreign capital in the form of FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment) were entered into our country.

5. Financial Sector Reforms : on the financial sector the government is introducing numerous measures for the deregulation as well as liberalisation of the sector. Different banking sector reforms including removal of control on interest rate and branch licensing policy liberalization were launched. Capital market reforms and money market reforms were extensive after 1994.

6. Reforms related to the Public sector enterprises: reforms in the public sector were aimed at enhancing efficiency and competitiveness of the sector. The public sector will be concentrating in key and strategic sectors. Government has adopted disinvestment policy for the restructuring of the public sector in the country along with several other policies.

7. Abolition of MRTP Act: The New Industrial Policy of 1991 has abolished the Monopoly and Restricted Trade Practice Act. In 2010, the Competition Commission has emerged as the watchdog in monitoring competitive practices in the economy.

The economic reforms were started in 1991, and they are still continuing. A major feature of economic reforms was that it was implemented in a gradual manner. The reforms were comprehensive and extensive as it covered all sectors- trade, investment, industrial sector, financial sector, public sector, fiscal sector etc. The new industrial policy introduced in 1991 is the central point of the economic reforms. In the following years, the government has introduced further policy changes for trade liberalization, financial sector liberalization and foreign investment policy changes to sustain the momentum initiated in 1991. Over the last twenty-five years, as a result of the launch of the new economic policy and its continuation, the Indian economy has undergone significant improvement and now is one of the fastest growing economies in the world. The famous BRIC report predicts that India will grow as the second largest economy by 2050. At present, India is categorized as an Emerging Market Economy (EME) along with China, Brazil, Russia etc. Even in the current crisis phase of the global economy, India’s macroeconomic performance is comparatively better. 

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China’s Economic Reforms: Facilitating Modern Technology Essay

Introduction, works cited.

Chinese economic reforms are plans that were introduced to bring changes in China’s republic in early 1978 by realists’ members of China’s Communist Party. The major aim of introducing these reforms was to enhance efficient funds to facilitate modern technology. The difficulty that was encountered during these reforms was to mobilize the farmers and employees to devote much of their time so as to produce excess commodities, and funds to maintain favorable balance of payment.

These reforms were implemented through various levels to help solve the problems that were emerging and the political wave that struck the government. This reform was triggered by communism set up as it was required; they introduced new strategies to avoid duplication of ideas that were already being used by other developing countries.

The initial reforms that started in the early 1978 were directed to external markets where China identified foreign markets to sell its products. Farmers were encouraged to sell their excess produce to these markets.

Then in the mid 90s the reforms focused on pricing system and privatization of public corporation with an aim of eliminating the state in matters relating to resource allocation (Wang 56). The reforms that were started in the early 2000 were mainly to eliminate those businesses that were not performing, and also to ensure resources were equally distributed in all sectors of the economy.

The strategies that it initially applied have really helped to boost the economy of China that (since then) has been tremendously growing. There are well established infrastructures that ease the movement of goods from production site to the market, for example the magnetic train in Shanghai that eases movement of people.

China normally tests its idea in its capacity and implement it before the public is informed and later becomes operational once found legible. Farmers were given incentives by giving them a priority of enjoying the excess fund from their farms. Later small businesses in villages were established then the state opened the door for foreign investors. This contributed to improvement of peoples’ welfare and living standards (Liou 78).

China’s next level of reforms focused on price improvement in the economy rather than being an economy driven by administration. The price reforms involved setting of price control policies using price-track system. Commodities were divided into two where some were set at market price and the other under state price. The prices set exempted the local traders from being exploited by business people who were offering poor prices.

The products which were set under the market price policies eventually increased up to the early 90s. After this period the banks were given the priority so as to avoid the issue of inflation. Regulations were put in place by the banks such as minimizing the issuing of loans. Banks offered loans to businesses in terms of their profit margin but not under political demand. Businesses that enjoyed relatively higher profit received larger amount of loans and the vice versa (Wei & Chao 98).

Before 1978, the state used to control all sectors of major production. It is after this period that the government of China decided to reform its economic set up. It started by encouraging the start up of small business enterprises in rural areas and also mobilizing people to venture in private businesses.

The major reason why the government of China decided to do this was to make the unutilized skills be fully exploited and identified. It also slackened its market, special training for employee was offered, and it abolished some regulations to allow free flow of products both internally and externally (Liou 34). This really helped Chinese economy to grow tremendously.

By the end of 1978, China recorded a 6 per cent economic growth. The growth domestic product (GDP) increased by 9 percent. The economic growth continued growing consecutively each year recording new percentage increments. The analysts predict that in the next 20 years China will record a larger growth compared to United States. For the last 30 years, the per capital income of China has really increased.

A group of researchers from IMF launched a survey to identify why Chinese economy is doing so well and identified the cause. They observed that the country’s capital asset growth rate increased production due to evolution of new industries (Wei & Chao).

Efficiency of factors of production such as labor has also helped its economy to grow enormously. Between1979 to 1994, the production increased by more than 42 per cent which was taken per national capital where in most countries it is the major source of growth. This was as a result of reforms launched in the early 1978.

Chinese economic strategies make even the economist studying its policies remain in darkness without getting solid answers. The government tendency of applying strict measures to control industries and centralized planning makes prices to be stable and misallocation of resources (Wang 102).

The style of Chinese national accounting policies is so different from those applied by other western countries, this make it difficult to compare Chinese economy with data collected from international market. Different analyst gathers differing figures of China’s economic growth.

Different economists have different ways of measuring and explaining the economic growth but the one applied most is called neoclassical approach. This approach outlines how the factors of production are combined to increase the level of output, which simplify evaluation and analyzing of collected data. This is the only approach that can be used in Chinese economy but it also holds some limitations because mostly it is used in the market economy (Liou 211).

The data researched by IMF was secondary data gathered from information released by government agencies and Chinese statistical Bureau.

Unfortunately this data used to measure its gross national product (GNP) was collected after 1978; Chinese used to measure its production using gross social output (GSO), this approach does not include all sectors of economy compared to GNP which include almost all. After all major changes in the national income statistics, which constitute taxes evaluation and adjustments, the data gathered after this can be used to measure China’s growth and the major contributing factors to this growth (Wang 22).

Most of research undertaken has revealed that capital investment play a major role on growth of any country. Capital investment has contributed much in China’s growth. Improvement in production technology and well developed infrastructure also contributed to the increase in Chinese GDP.

The ratio between capital employed and per unit output remained the same though expenditure was high between 1979 & 1994. This reflects that capital is not always the major contributor for growth (Liou 231). Labor intensive also contributed to tremendous growth of Chinese economy, it contributed up to 17 per cent, capital contributed 41 percent and the rest was contributed by other factors.

Comparing the previous productivity in China there was an increase during 1979-94 compared to 1953-78 where in the latter China recorded 1.12 increment and 4.0 in the previous period. 1n 1990 China started recording an increase in productivity of more than 50 per cent due to output and 33.3 per cent of employed capital.

Compared to U S which recorded an increase of 0.45 percent during this period, it shows that China can retain this growth for a long period if productive measures are keenly followed. This is because the reforms that were started by China after 1978 were important in productivity. The reforms led to improved efficiency in production of rural dwellers businesses, private companies, and foreign traders due to availability of tax incentives that encouraged trade.

Privatization of business also contributed to a boost where government owned enterprises decreased the total output by 17 percent and that of private enterprises raised by 11 percent. This is due to incentives that were introduced by the government to encourage trade. Business owners devoted much of their time in business and applied labor intensive measures so as to realize more profit (Wei & Chao 360).

The recent trend in China’s economic growth is commendable. Comparing China to other Asian countries, it has made major steps to overtake its rivals on economic matters. China’s currency has also gained value in the world market, it is feared that due to the current devaluation of U S dollar, China’s currency is likely to replace the dollar in future due to its stability (Wang 342).

Before 1978, majority of Chinese were working in the agriculture sector but by 1990 after reforms this changed leading to a decrease of workers in agricultural sectors. People directed their attention to other sectors of the economy and started forming small businesses which are not agriculture based. Prices of agriculture produce swelled which in return made farmers to apply labor intensive measures and modern methods of production to increase efficiency.

Majority of workers pulled out of this sector (Liou 111). This led to an increased growth of small business and many people became entrepreneurs. This transition from agriculture to entrepreneurship eventually led to evolution of industries; that is small enterprises developed to industries. The people became manufacturers and many factories were established.

Due to establishment of businesses in rural areas, infrastructures were put in place and this led to local products to flow easily to the market places. This encouraged both farmers and local traders making them to realize surplus produce and finances (Wei & Chao 75). This excess fund was used to expand other sectors of economy which improved their growth.

The reforms helped the entrepreneurs to set their long-term goals in production; they became monopolies by the fact that they reserved the right to set prices of their produce. This saw them becoming managers who were free even to allocate the surplus capital for future expansion, sucked those employees who were not productive, and identified the suitable markets to sell their products.

These reforms contributed to privatization of business where individuals became the real owners of businesses. In return, employment opportunities were created which left a big number of unemployed youth to get absorbed by these enterprises. Quality of produce also increased where consumers enjoyed varieties of goods of high quality (Liou 68).

Foreign investors have been attracted by China’s economic policies and this has led to big revolution to the China’s economy. The annual cash inflow, which previously was increasing at a rate of 1.0 percent of total fixed investment, increased to 20 percent during 1979-94 periods.

The foreign currency has made China to construct more factories, creation of more employment opportunities, and evolution of modern technology. Many foreign investors have enjoyed tax incentives and that can be proved by visiting the costal region of China where you would find a large number of foreign investors.

Further, the country liberalized economy has contributed to more exports which create a favorable balance of payment. Export value has been rising consecutively since 1978-2002 at 19 percent rate. When export increases, a favorable balance of payment is enjoyed. This has helped China to boost its local industries by the foreign currency accumulated from exports; this triggers growth (Wang 13).

China has also encouraged local producers to be self-sufficient by reforming the prices of consumer goods and those of agricultural produce. A case of inflation which was a major problem that barred the government from liberalizing the prices of commodities in China is now a past tense (Wei & Chao). Though increased growth may lead to inflation, China has been able to control this.

The major reasons that make China to be unique in economic set up has been mostly seen as the political crises that locked China before 1978 that could have made China to focus mostly on economic matters to her strengthen. The political wave was so strong in China such that if the economics status was to be compared with the current one it is much more of a nightmare.

The growth and productivity rose tremendously from 1.1 to 1.7 percent during 1970-90 periods. Before 1978 Chinese mostly concentrated its investments in rural urban areas and never moved to cities (Wang 51). However, due to reforms after 1978 people shifted from these sectors and invested in other areas of economy.

Another unique state that researcher view is the maintenance of stability in China’s productivity gains from 1979 to date. These post reforms, if keenly observed, keep changing leading to continued gain in productivity. The gain keeps changing (Liou 12). This shows that Chinese transferred these gains from one sectors to other different areas. This means that they ploughed back the capital to various sectors of the economy.

China capital-stock data if observed well in the statistics of the national income does not include the data of residential housing. This should be reflected for the new outlays of housing which actually keeps rising since 1978. These investment figures are supposed to be changed subsequently (Wang 102). When these changes are made, it shows that there was no adjustment in productivity growth before 1978 and this contradict with the modern rates of growth.

The initial Capital stock could have been overvalued or undervalued which automatically led to errors. This could be the reasons why various economists get different figures. Capital stock estimates were applied to analyze the data but no solid evidence could dispute the findings. But before 1978 the data reflected negative gain in productivity and after this period up to date it remains unaffected.

The challenge of bridging this gap is of great concern (Wei & Chao 122). The pre-feasibility study and the data collected were being compared with the data collected by other economists that were contradicting. However, the data of productivity was not having so much errors, this indicates that improvement of productivity was as a result of the reforms and the capital-stock calculation. The estimates in 1979-2000 varies with about 4 percent.

Due to other source data, the study that was done might have overestimated the growth after1978 over the previous period before reforms. This can be revealed where some countries tend to undervalue its currency and also over quoting the output.

This mostly is caused by the entrepreneurs for giving false quotations of output and also understating the prices of commodities so as to show that they have hit the target as required by the government (Wei & Chao 99). This now shows that the values after 1978 may contain more errors compared to the previous one due to over quotation.

The nominal out put if underestimated could cause occurrence of major statistical errors. The price reforms and liberalized market makes it difficult to identify the major causes of deflation after 1978 reforms. Also, this can be seen by the central government of China where before reforms inflation was relatively quite high due to presence of black market and lack of some commodities which are mostly needed in day to day activities.

However, the errors that could have been encountered do not necessarily mean it was from data collected after the reforms. In statistics, errors of omission and commission always occur (Liou 104). Different economists were getting differing values and this was due to the statistical errors.

By the fact that China has a unique slot in the economic status in the globe, the trend of its growth and the area coverage of its territory reflect its superiority around the world. The other developing countries should learn from China and apply the correct strategies to get where China stands at economically.

Though most developing countries view capital investment as a major tool that triggers growth, it is also important to implement market based reforms which will favor rural entrepreneurs to realize much profit. If these measures are put in place under well laid policies, a long term growth will be observed in the third word countries. Those countries which have a large number of people absorbed in agricultural sector can lay down the same policies as China and see whether it is practicable.

Due to China realizing the importance of rural enterprises and paying much intention on them through incentives, it led to emergency of new industries which absorbed a large number of unemployed youth. The country mobilized people to work in factories and drop farm labor (Wei &Chao). This has seen tremendous growth. This has also helped China to amalgamate its market with the foreign market.

We cannot forget that the major contributor of China’s improved growth is the reforms that were launched after 1978. This has really helped economy of China to constantly improve in the subsequent years. Though many challenges have made it difficult to measure China’s economic variables, the data act as a key measure of country’s growth (Wang 63). This has given the other developing countries an idea to apply the same strategies to trigger growth.

The developing countries should focus mostly on the areas where they perform best and use labor intensive methods to improve productivity. Capital investment should not be the only resource for growth, countries should use their strategic policies rather than relying on other countries policies.

It is evidence that China, due to political pressure, introduced unique policies that saw its gross domestic product (GDP) rising every year and this led to Chinese economy growing at a very high percentage that is incomparable with other Asian countries.

Liou Tom Kuotsai. Managing Economic Reforms . Indiana: Greenwood Publishing Group, 1998. Print

Wang, Yanlai. China Development and Democratization . Hong Kong: Ash Yale publishing ltd, 2003. Print

Wei, Lin., & Chao, Arnold. China Economic Reforms. Beijing: University of Pennsylvania Press, 1982. Print

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