Economic Reforms & the WTOIndia Opens Up

Achievements

• ▹Rates of growth went up:
  • The growth of GDP increased from 5.6 per cent during 1980-91 to around [figure missing in source] per cent during 2007-2012.
  • India became fastest growing economy in world. However, recently it has lost this position.
  • During the reform period, the growth of agriculture has declined. While the industrial sectors reported fluctuation, the growth of service sector has gone up. This indicates that the growth is mainly driven by the growth in the service sector.
  • India has targeted economy of $5 trillion by 2024. However, some experts have termed it too difficult to achieve.
• ▹BOP crisis has been solved in the first few years and today the country has about $500 billion.
  • Currently, India is one of the largest foreign exchange reserve holders in the world. It had recently crossed threshold of $500 billion.
• ▹Services sector (tertiary sector) has grown in importance and today contributes almost 60% of GDP (2017) emerging as a global player — India being the global back office.
• ▹Resilience of the economy in the face of Great Recession.
• ▹Consumer choice has increased.
• ▹Tax-GDP ratio may have shrunk — but the tax collections and base increased.
• ▹Nature of external debt has changed and the short term component is less.
• ▹Indian companies are listed on Nasdaq and New York Stock Exchange and raised billions of dollars for investment. Indian rupees denominated bond like Masala bond has been listed in foreign countries.
• ▹FIIs and FDI picked up:
  • India received USD 51 billion in foreign investment in 2019 and was the world's 9th largest recipient of foreign direct investments (FDI) in 2019, according to a report by the UN's trade body.
• ▹India has become the highest recipient of remittances in the world according to world bank data.
• ▹India is seen as a successful exporter of auto parts, engineering goods, IT software and textiles in the reform period.
• ▹Rising prices have also been kept under control.
• ▹Indian corporates have acquired global majors like Jaguar and Anglo-Dutch steel maker Corus; Bharti bought Zain's African telecom operations.

Deficiencies

While the above facts paint a positive picture of reforms, there are deficiencies as well:

• ▹The reform process has been widely criticised for not being able to address some of the basic problems facing our economy especially in the areas of employment, agriculture, industry, infrastructure development and fiscal management.
• ▹Poverty is a challenge and reforms with a human face is the need of the hour.
• ▹Jobless growth is worrying the policy makers.
• ▹Regional economic imbalances are intensifying.
• ▹While foodgrains production is at 291 mt (2019-20), there is still pressure on food security.
• ▹Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.
• ▹Farmers are feeling directionless under the WTO regime.
• ▹Globalization threatens to destabilize agriculture with cheaper imports and questionable provisions related to intellectual property rights, impacting negatively availability of medicines etc.
• ▹Industrial growth has also recorded a slowdown.
  • This is because of decreasing demand of industrial products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc.
• ▹Infrastructure so far received inadequate attention except telecom, roads and ports.
• ▹PSU reforms have not made progress and disinvestment and privatization are still to see substantial movement.
• ▹Economic reforms have placed limits on the growth of public expenditure especially in social sectors.
  • The tax reductions in the reform period, aimed at yielding larger revenue and to curb tax evasion, have not resulted in increase in tax revenue for the government.
  • Also, the reform policies involving tariff reduction have curtailed the scope for raising revenue through customs duties.
  • In order to attract foreign investment, tax incentives were provided to foreign investors which further reduced the scope for raising tax revenues. This has a negative impact on developmental and welfare expenditures.

The second phase includes

• ▹Labour law flexibility;
• ▹Pension reforms based on employee contribution and the pension funds being deployed in the stock market;
• ▹GST;
• ▹Liberalized FDI including FDI in retail etc.
• ▹These reforms touch the lives of the ordinary people and need successes in other sectors — first generation reform — to make a convincing case. Otherwise, they may not be allowed by public opinion as we have seen in the case of FDI-Multibrand retail (Walmart etc) debate.

Why they are difficult

Second generation reforms are difficult as they are directly involved with the daily lives of people like:

• ▹User charges need to be rationalized to make these utilities viable but there are bound to be protests.
• ▹Man power rationalization in banks and PSUs through VRS faced resistance.
• ▹Labour law flexibility will make trade unions agitate.
• ▹Interest rate cut, for example, for small savings will mean less returns for the middle class etc.

  Example: A retired teacher living on interest from post-office savings feels every cut in the small-savings rate directly in her monthly income.

• ▹Agro reforms may mean small and marginal farmers' resistance.