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Name: - Puja A. Govekar

Class: - Parashar

Roll No: - 9

Topic: - Critical Appraisal of EconomicReforms & Crisis

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Brief Introduction of the Origin of Economic Crisis

The problems of the economy in this country which assumed crisisproportions in 1991 did not develop suddenly. They had accumulated

over several years. In fact, the origin of the crisis is directly attributedto cavalier macro management of the economy which led to large &persistent macroeconomic imbalances. The strategy of development,notwithstanding its limitations, cant be blamed for this crisis. Thewidening gap between the revenue & expenditure of the governmentresulted in growing fiscal deficits which had to be met by borrowing athome. Further, the steadily growing difference between the income &expenditure of the economy as a whole resulted in large currentaccount deficits in the balance of payments which were financed byborrowing from abroad.

The Gulf crisis in the late 1990 sharply accentuated macroeconomicproblems. There was also political instability in the country at thisjuncture. All these together eroded International confidence in theIndian economy & as a result, this countrys credit rating in theInternational capital market declined steeply.

Since July 1991 the government has undertaken both stabilizationprogrammes & structural reforms as two components of theEconomic Reform Package.

Critical Appraisal of Economic Reforms

There is now considerable evidence to suggest that the avowedobjectives of the stabilization & structural reform programmes havebeen achieved only partly. Fiscal imbalances have not been corrected& the gross fiscal deficit of the Central government alone was as highas 5.9% of GDP in 2002-03. The only apparent sign of success is to beseen in the external sector where the stock of foreign exchangereserves (excluding Gold) was as high as $ 113.8 billion on October 8,2004.

In the real sectors, the structural reforms have showed mixed results. In1991-92 there was near stagnation. However, since 1992-93 during theeleven years upto 2003-03, GDP increased at the rate of 5.9% perannum. In the first two years of structural reforms, there was nearstagnation in the industrial sector. Recovery in this sector began in1993-94 & the industrial production rose at the rate of 11.0% per

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annum during the two year period beginning from 1993-94. Thereafterindustrial growth has been rather slow with industrial productionincreasing at the rate of 5.3% per annum. Since 1990-91 there was asteep fall in both savings & investment rates for three years. However,both savings & investments rates showed an upturn in 1994-95 but

were at modest levels in 2001-02. In 2002-03 while savings rate was24.2%, investment rate in this year was as low as 23.3%.

These modest gains from structural reforms notwithstanding, theeconomic reforms have been subjected to various criticisms.

The EPW Research Foundation has pointed out that the neweconomic policy is seriously flawed in conception in its contents,

strategy & approach and in many other respects. Theshortcomings can be broadly classified under five major categories:

1. absence of a broader development strategy;2. wrong sequencing of reforms;3. hasty pace of reforms;4. prerequisites of reforms ignored; &5. absence of human development goals as an integral part of thestrategy.

These limitations are interrelated & together expose the inherent flawsin the stabilization & structural reforms measures undertaken so far.

1. Absence of a broader development strategy :The focus of both macroeconomic stabilization & liberalization is tocreate a competitive environment in industry in whichentrepreneurial decision making will depend entirely on the marketforces. The governments new industrial policy, therefore, lacks awell defined strategy. The south-east Asian countries which recordedhigh rates of industrial growth during the decades of 1960s, 1970s& 1980s in contrast, did so on the basis of some structuredblueprints & by a process of significant State intervention. The caseof industrialization in South Korea is quite revealing. Thegovernment in this country steadfastly pursued a policy of heavyindustrialization despite the stiff opposition from IMF & WorldBank. Judged against the experiences of these countries, theinterventionist strategy of the government in this country can becriticized only for lack of dynamism. On the basis of our experiencein the past its patently wrong to conclude that a well articulated

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industrial strategy & heavy State intervention have no positive role toplay in accelerating industrial growth.

2. Wrong sequencing of reforms :As a result of wrong sequencing of reforms, serious distortions have

surfaced in economic management. There are at least three examplesof wrong sequencing of reforms. First, while for drastic reduction infiscal deficit, revenue deficit & even budget deficit the prerequisitesare decisive reduction of non0development expenditure & wideningthe tax base, the government has initiated fiscal correctionprogramme with surrendering of revenue through substantialreductions in tax rates & compression of capital expenditure. Second,a more obvious case of inappropriate sequencing relates tocompression of governments capital expenditure & contraction ofpublic investment before ensuring hat the private sector & the foreign

investors will fill the gap. The third case of flawed sequencing is ofliberalizing imports of capital goods before adopting a strategy fortechnology advancement of the domestic capital goods sector. Thelatter was necessary for adopting outward oriented strategy ofeconomic growth.

3. Hasty pace of reforms :The rapid pace of reforms has been determined by the controversialgoal to globalize the Indian economy quickly.This has led to rapid deterioration in the quality of industrial

structure. EPW Research Foundation points out, A sharpreduction in industrial growth, reduction in the growth of capitalgoods industries, a relative shift of exports away frommanufacturers, & arresting of the growth of industrial employment,have been some of the glaring effects of rapid reforms withoutproviding for some breathing time & appropriate checks & balancesfor the Indian industry.

4. Prerequisites of reforms ignored :The literature on stabilization & structural reform is full of evidencethat the shocks of these policies are better absorbed & theirconsequences for the well being of the masses are very much reducedif the society has already reached a certain minimal level of humandevelopment. South Korea, Malaysia & Thailand have been thesuccessful cases in the recent past but in all these countries not onlythe socio-economic structure was far more egalitarian due to landreforms & such other measures but the human development indiceslike life expectancy & literacy rates were at higher levels, while

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infant mortality was at a lower level before they embarked onsignificant structural reform programme. In contrast, the Indiansituation is not at all encouraging from the point of view of humandevelopment & socio-economic structures.

5. Absence of human development goals as an integral part of thestrategy :

The stabilization & structural reform programme in India is beingimplemented against a background of incomplete structuraltransformation, widespread poverty, low level of human development& distorted pattern of expenditure on health & education orientedtowards the relatively well off sections of the society. Given thesedismal conditions & a low rate of economic growth, structuralreforms must be undertaken with a human face. This requires thathuman development goals should be an integral part of the strategy

of structural adjustment. Unfortunately in India no such attempt hasbeen made.

Parthasarthi Shome & Hiranya Mukhopadhyaya have examined atlength whether Indias economic reforms of the 1990s aresustainable. Their analysis shows, Indias reforms of the 1990swhile having achieved a distinct beginning have not demonstratedsustainability. After the initial set of actions in rationalization of thetax structure, financial sector reform, & opening up of trade, thespeed of reform slowed down, & only short-term macroeconomic

policies-some good, some bad, but in any event, inadequate wereused. The spurt in economic growth was followed by a deeprecession.