The current economic reforms programme being implemented by the government may be described as basically a shift from central planning to market driven economy.
It is a move from the centralised allocation of resources by the markets farces. The reform aims at removing distortions in the market which had driven market forces in the underground to emerge as black-markets.
The formulation of the new economic policies were preceded by appointment of high level committees the Narashimham Committee on the financial sector, the Chelliah Committee on Taxation, the Goswami Committee on exit policies, the Rangarajan Committee on disinvestment of government equity holdings in public enterprises, the Malhotra Committee on the insurance industry. The recommendations of these committees have been accepted and incorporated in the policy programmes.
The policy of economic reforms enabled the economy to emerge from crisis during 1992-93. It helped restore economic growth to 4 per cent during the year, brought down the rate of inflation to 7 per cent, restored level of foreign currency reserves to US dollar 6.4 billion and stimulated a strong recovery in exports towards the end of the financial year.
Contrary to the fears expressed by some economists, the rupee has been stable after it was made fully .convertible on current account.
The new economic policies basically consisted of correcting a semi-controlled economy, which was also a badly controlled economy, into a relatively market-oriented, liberalised set-up.
Essentially, they were aimed at correcting the macro-economic imbalances that had emerged due to excessive controls and interventions and by releasing the brakes, sought to convert a demand-managed economy into a supply-oriented one.
The new policies can be looked at from three view points: (i) correction of budgetary imbalances; (ii) excessively large deficits in relation to the Gross Domestic Product; and (iii) phenomenal money creation leading to inflation.
The new policies, particularly the budgetary policies, were aimed at collecting larger revenue with reduced tax rates in the hope of accomplishing greater tax compliance and cutting down government expenditure, including subsidies.
They also aimed at revamping the public sector by liberalising and giving the public enterprises a freedom of operation and letting many of them raise their own capital in the market place, so that the Government did not have to bear too much of their deficits.
The first part dealing with budget-deficit cuts was substantially achieved and the fiscal deficit was reduced almost miraculously from 8 per cent of the GDP in 1991 to 6.5 per cent, 5 per cent and 4.5 per cent in the next three years.
This cut in budget deficit had a remarkable impact and reduced the inflation rate from 16.5 per cent in mid 1991 to less than 8 per cent towards the end of 1994.
The reduction in subsidies, starting with export subsidies and fertiliser subsidies fizzled out, and political considerations in recent years have constrained the Finance Minister in bringing about further cuts.
In the whole range of industries, barring a few, licensing is no longer required so that entrepreneurs are free to expand capacity with the result that a limited number of market- dominant companies are converted into a larger number of competing companies, small and large.
This process was designed to augment competition and to ensure that the firms that could stand up were those that produced effectively at low cost and also export handsomely.
This process has started and has recently become sharper. It had gone far enough because while expansion was permitted, the borrowing rates of interest were extremely high and stood at 20 to 21 per cent.
This deterred potential industrialists. However, the recent cuts in interest rates—which now hover a little above 15 per cent—are leading to new investments and the industrial growth rate, now at 8.5 per cent can increase further in the coming years.
Deregulation, unfortunately has not taken place in public enterprises and applies only to the private sector.
An important aspect of the past budgets has been a reduction in the income-tax rates, corporate taxes, import duties and excise duties.
The basic idea of tax reduction is to achieve greater compliance and a larger base. This process must continue.
The most important instrument of the new economic policies is the industrial policy. Next we shall discuss the new industrial policy and its three important dimensions viz. privatisation, liberalisation and globalisation.
Jawaharlal Nehru laid the foundations of modern India. The aims and objectives set out for the nation by Nehru on the eve of Independence was rapid agricultural and industrial development of the country, rapid expansion of opportunities for gainful employment, progressive reduction of social and economic disparities, removal of poverty and attainment of self-reliance remain as valid as at the time Nehru set them before the nation.
Any industrial policy must contribute to the realisation of these aims and objectives. Though the present statement of industrial policy is inspired by these concerns, actually it bids farewell to Nehruvian socialism and brings the public sector at par with the private sector in several areas.
Hence in core areas like steel, power and several other industries, the public sector will have to climb down from the commanding heights to street level commercialism where it has to fight it out with the private enterprise.
In 1948, the government adopted the Industrial Policy Resolution which emphasised the importance to the economy of securing a continuous increase in production and ensuring its equitable distribution.
After the adoption of the Constitution and the socio-economic goals, the Industrial Policy was revised and adopted in 1956. To meet new challenges from time to time, it was modified through statements in 1973, 1977 and 1980.
The 1956 policy resolution had as its objective the achievement of a socialist pattern of society. In 1956, capital was scarce and the base of entrepreneurship not strong enough. Hence the 1956 industrial policy resolution gave primacy to the role of the State to assume a predominant and direct responsibility for industrial development.
The industrial policy statement of 1973 identified high priority industries where investment from large industrial houses and foreign companies would be permitted. The industrial policy statement of 1977 laid emphasis on decentralisation and on the role of small-scale, tiny and cottage industries.
The industrial policy statement of 1980 focused attention on the need for promoting competition in the domestic market, technological up gradation and modernisation.
The policy laid the foundation for an increasingly competitive export base and for ensuring foreign investment in high technology areas. These policies created a climate for rapid industrial growth in the country. Basic industries had been established.
New growth centers of industrial activity had emerged as had a new generation of entrepreneurs. A number of policy and procedural changes were introduced in 1985 and 1986 under the leadership of Rajiv Gandhi aimed at increasing productivity, reducing costs and improving quality.
The public sector was freed from a number of constraints and given a larger measure of autonomy.
In the 1950s and 1960s the principal instrument for controlling the commanding heights of the economy was investment in the capital of key industries. Today the state has other instruments of intervention, particularly fiscal and monetary instruments.
The state also commands the bulk of the nation’s savings. Banks and Financial Institutions are under the state control. Where state intervention is necessary, these instruments will prove more effective.
The Government will fully protect the interests of labour, enhance their welfare and equip them to deal with the inevitability of technological change.
Labour will be made an equal partner in progress and prosperity. Workers’ participation in management will be promoted.
The Government will continue to cover new vistas. The major objectives of the new industrial policy will be to build on the gains already made, correct the distortions that may have crept in, maintain a sustained growth in productivity and gainful employment and attain international competitiveness. The government’s policy will be continuity with change.