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Economic reforms: Rear view... - Views on News from Equitymaster
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  • Nov 24, 2006

    Economic reforms: Rear view...

    The inevitability of economic reforms cannot be undermined by even the most powerful economies in the world. For a developing country like ours, it acts as a stimulant to counter stagnation and align with the global super powers. Be it a veto power at the WTO, bilateral trade or nuclear deal - it all boils down to a country's willingness to adopt economic reforms.

    In India, the words 'economic reform' had very little plausible meaning until 1991, when an economic insurgency (a threat of sovereign default) forced the Narsimha Rao government to pioneer the much-debated 'economic liberalisation' that instigated India's reform process. Since then, we have come a long way in the past one-and-a half decades, with India now being pegged as the second most powerful BRIC nation after China.

    Macroeconomic reforms
    Until the 1980s, the economy had become over controlled and rigid, consequently making entrepreneurship heavily constrained. The import substituting, inward-looking development strategy that could have been relevant in 20th century - was no longer suitable in the flattening and globalising world. Hence, overall reforms had to be undertaken to lay down a new framework. Wide-ranging macro reforms were undertaken along with corresponding microeconomic and sectoral reforms.

    Fiscal reforms
    The erstwhile tax system in India was both complex and detrimental to the taxpayers in India. The maximum marginal personal income tax rates were high, along with a number of rates for different income ranges. The corporate tax rates were no different. Because of high rates and complexity, avoidance and evasion of taxes were naturally high. The budget of 1991 and its successors have appreciably rectified many of these flaws. The latest and one of the most significant measure taken was the introduction of the Fiscal Responsibility and Budget Management Act (FRBM) in 2004, which enjoins the government to eliminate its revenue deficit and reduce its fiscal deficit to 3% of GDP by 2009. The other most noteworthy development at the federal level was the transformation of state level sales taxes to the Value Added Tax (VAT), which has introduced a large measure of rationality and uniformity in the state tax system.

    Financial sector reforms
    Financial sector reform is another area of India's success story. A major element of the financial sector reform was the introduction of competition enhancing measures. Introduction of operational autonomy and partial disinvestment of government ownership in public sector banks, entry of new private and foreign banks and permission for FDI in varied sectors were some of the major reform measures in this area. Besides, prudential regulations have been strengthened in line with Basel I standards and are now in process of being updated to Basel II standards. An effort has been put in for phased implementation of international best practices such as, CAR, provisioning and income recognition norms, and exposure limits and measures to strengthen risk management.

    Where we were...vs. where we are...
    The fact that the efforts of our economic policy makers have not gone in vain - is underscored by the understanding that while the poverty level has halved and income levels have quadrupled since independence, basic infrastructure, corporate prosperity and resilience to economic downturns have also added to the country's economic superiority versus global peers.

    The broad contours...
      Per capita
    income (Rs)
    (% of popln)
    capacity (MW)
    deficit (%)
    Corporate sales
    growth (% YoY)
    Credit / GDP
    Gross NPAs
    (% of advances)
    FY51 3,687 45.0 1,362 N.A. N.A. 6.2 N.A.
    FY71 5,002 52.0 14,709 N.A. N.A. 11.1 N.A.
    FY91 7,321 35.0 64,000 5.6 22.9 22.8 7.0
    FY06 14,987 19.3 125,000 4.1 20.5 47.0 1.9
    Source: RBI, CMIE, Equitymaster research
    N.A - Not available

    The clock must tick on...
    While the ingenuity of our economic reforms cannot be denied, what the policy makers need to now look into is the adequacy of the same along with their relevance with respect to the dynamics of the developing world. Callousness in vigilance and sloppy execution will only unwind the clock.



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