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Several major economic and political changes occurred during the 1970s and 1980s, which

affected the developing countries and paved the way for the implementation of IMF-sponsoredStructural Adjustment Policies (New Economic Policy) in India in 1991. This was due to acombination of factors such as stagnant agriculture, low levels of industrial growth anddiversification, inadequate capital formation, adverse terms of trade in international markets,limits to domestic resource mobilization due to a fairly narrow tax-base, loss making publicsector enterprises, over regulated and controlled economy, poor industrial productivity, hugeamount of fiscal deficit, huge amount of public debt, poor rating of Indian economy byinternational agencies, foreign exchange crisis etc.

New Economic Policy of 1991 includes globalization, liberalization and privatization(Disinvestment)

1. Globalization means flow capital (finance in the form offoreign direct investment (FDI)and foreign portfolio investment (FPI), technology, human resource, goods and serviceamong countries. FDI is investment in real assets like automobile, consumer goodsproduction, service sectors like insurance, telecommunication, air transport etc.

2. Liberalisation means freeing the economic activities and business from unnecessarybureaucratic and other controls imposed by the governments.

3. Privatisation or Disinvestment: Selling the government owned public sector enterprises toprivate industrialists and opening the government operating sectors for privateinvestment.

The New Economic Policy includes reduction in government expenditure, opening of theeconomy to trade andforeign investment, adjustment of the exchange rate from fixed exchangerate system to flexible exchange rate system, deregulation in most markets and the removal ofrestrictions on entry, on exit, on capacity and on pricing.

Immediate consequences of economic liberalization that are to focus on are (a) an increase

in internal and external competition and (b) structural change induced by changes in

relative prices in the economy.

The Major areas of New Economic Policy 1991 are

1. Fiscal policy reforms2. Monetary policy reform3. Pricing policy reform4. External policy reform5. Industrial policy reform6. Foreign investment policy reform7. Trade policy reform8. Public sector policy reform

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The principal reforms initiated in the year 1991 included; reduction in import tariffs on mostgoods other than consumer goods, removal of quantitative restrictions and liberal terms of entryfor foreign investors. Indias simple average tariff rate was reduced from 128% in 1991 to about32.3% in 2001-02. Quotas and non-tariff barriers were also reduced.. To restore Macro economicstability, the reforms package of structural adjustment policies are aimed at freeing markets by

dismantling controls on production, prices and trade and reducing intervention in the economy.The need to control the fiscal deficit led to policies to curb public expenditure and these cutswere mainly on social sector expenditure and on production and consumption subsidies, whichdirectly affected the living standards of the economically vulnerable sections of the population.Privatisation, Liberalisation and export-promotion were the main features of the economicreforms recommended by the international institutions for the problems facing by the developingcountries .At the same time, the role of the state in advanced industrial economies was notshrinking as expected, but growing despite the ideological bias in favour of a rolled back state.

The share of national income spends by government, which averaged 30% in the rich industrialcountries in 1960 increased to 42.5% by 1980 and 45% by 1990.The experiences of countries,which have undergone these reforms, have in most cases not led to the expected outcome but

have infact worsened the state of their economies. In India, the New Economic Policy (NEP) is aset of policy (ies) and administrative procedures introduced in July 1991 to bring about changesin the economic direction of the country.

Industrial Policy Resolution 1991 (IPR-1991)

The regulatory policy framework which acted as a barrier to entry and growth by theentrepreneur was sought to be basically changed by the Industrial Policy announced in July1991.The measures introduced in this area along with other economic reforms were as under:Industrial licensing has been abolished for all projects except for a list of 15 industries related tosecurity, strategic or environmental concerns and certain items of luxury consumption that have ahigh proportion of imported inputs. The exemption from licensing also applies to the expansionof existing units.

Industrial licensing was abolished for all projects except for a list of 15 industries relatedto security, strategic or environmental concerns and certain items of luxury consumptionthat had a high proportion of imported inputs.

The Monopolies and Restrictive Trade Practices (MRTP) Act applied in a manner whicheliminated the need to seek prior government approval for expansion of presentundertakings and establishment of new undertakings by large companies.

The set of activities henceforth reserved for the public sector was much narrower thanbefore, and there would be no ban on the remaining reserved areas being opened up to theprivate sector.

Foreign Investment Policy

The Industrial Policy 1991 also provided increased opportunities for foreign investment with aview to take advantage of technology transfer, marketing expertise and introduction of modernmanagerial techniques. It was also intended to promote a much needed shift in the compositionof external private capital flows. The following measures were announced in this regard:

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Automatic approval would be given for direct foreign investment upto 51 per cent foreignequity ownership in a wide range of industries. Earlier, all foreign investment wasgenerally limited to 40 per cent.

To provide access to international markets, major foreign equity holdings upto 51 percent equity would be allowed for trading companies primarily engaged in export

activities. Automatic permission would be given for foreign technology agreements for royalty

payments upto 5 per cent of domestic sales or 8 per cent of export sales or for lumpsumpayments of Rs.10 million. Automatic approval for all other royalty payments will alsobe given if the projects can generate internally the foreign exchange required.

Abolished MRTP Act and FERA and instead of FERA, FEMA Act was passed in theParliament.

The threshold (Minimum) asset limit for companies under MRTP Act was raised fromRs.20 crores to Rs.100 Crores.

Public Sector Policy

The Government was of the view that public sector had not generated internal surpluses on alarge scale. On account of its inadequate exposure to competition; the public sector was subjectto a high cost structure. To provide a solution to the problems of the public sector, Governmentdecided to adopt a new approach, the key elements of which were:

The existing portfolio of public sector investment would be reviewed with a greater senseof realism to avoid areas where social considerations were not paramount or where theprivate sector would be more efficient.

Enterprises in areas where continued public sector involvement was judged appropriatewould be provided a much greater degree of managerial autonomy.

Budgetary support to public enterprises would be progressively reduced

To provide further market discipline for public enterprises, competition from the privatesector would be encouraged and part of the equity in selected enterprises would bedisinvested; and

Chronically sick public enterprises would not be allowed to incur heavy losses.As a follow up of this policy, several measures were taken:

The number of industries reserved for the public sector was reduced from 17 to 8. Evenin these areas, private sector participation was allowed selectively. Joint ventures withforeign companies would be encouraged.

Public enterprises that were chronically sick and unlikely to be turned around would bereferred to the Board for Industrial and Financial Reconstruction (BIFR) for rehabilitationor restructuring.

The existing system of monitoring public enterprises through Memorandum ofUnderstanding (MOU) was strengthened with primary emphasis on profitability and rateof return.

Initiated the disinvestment of public sector enterprises.

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The Bank and Structural Adjustment

The 80s will be remembered as the decade of global impoverishment linked to the Bank andthe IMF's infamous medicine: the Structural Adjustment Program (SAP). These programs arebeing implemented in over 70 Third World and Eastern European countries with devastatingresults. The Bank-IMF sponsored SAP has two phases. The first phase is short-term macro-economic stabilization. It is followed by implementation of a necessary structural reforms phase.In the early 80s, most SAPs focused on a narrow range of policies aimed at reducing accountdeficits.

As the debt crisis deepened and it became obvious that the stabilization programs were not

working, the US Treasury Secretary, Mr. James Baker came up with a strategy to solve the debtcrisis. This was called the 'Baker Plan'. Under this plan, the WB was asked to impose morecomprehensive conditions on the debtor countries. By 1990, majority of the countries that hadreceived conditional loans from the IMF also received structural adjustment loans with harshconditionalities from the Bank.

In 1992, the bank's lending for SAPs totaled 5847 million or 27% of its total commitments. Morethan 70 countries are subjected to 566 IMF and World Bank stabilization and SAPs in the last 14years. These countries were told that the structural reforms were essential for sustaining growthand economic stability. Faced with the threat of a cut off of external funds Aid needed to servicethe mounting debts incurred from western private banks in the 1970s, these countries had no

choice but to implement the painful measures demanded by the Bank.

Fourteen years after the World Bank issued its first structural adjustment loan, most countries arestill waiting for the market to "work its magic". Despite global adjustment, the third world's debtburden rose from $785 billion at the beginning of the debt crisis in 1978 to $1.3 trillion in 1992.The structural adjustment loans from the Bank have enabled the third world countries to makeinterest payments to western commercial banks. Having done this, the Bank went on applyingadjustment policies to assure a regular supply of repayments in the medium and long term. Thus,the structural adjustment has brought neither growth nor debt relief, it has certainly intensifiedpoverty.

The series of policy measures launched by the Indian government are part of structuraladjustment program in India. Government has taken up following measures to implement SAP :

Devaluation of rupee by 23%. New Industrial Policy allowing more foreign investments. Opening up more areas for private domestic and foreign investment. Part disinvestment of government equity in profitable public sector enterprises. Sick public sector units to be closed down.

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Reforms of the financial sector by allowing in private banks. Liberal import and export policy. Cuts in social sector spending to reduce fiscal deficit. Amendments to the existing laws and regulations to support reforms. Market-friendly approach and less government intervention.

Liberalization of the banking system. Tax reforms leading to greater share of indirect taxes.

All the above men-tioned ingredients of SAP are based on the Anderson Memorandum titled"Trade Reforms in India" dated Nov. 30, 1990 submitted to Government of India by the WorldBank. It is interesting to note that this memorandum was not disclosed to the then PrimeMinister, Mr. Chandra Shekhar, the then Finance Minister and the Cabinet Secretary by a groupof senior officials in the Finance Ministry. Incidentally, all these officials were ex-World Bankand ex-IMF employees.

India embarked upon a path of liberalization in the 1980s, whose pace quickened radically after

1985. Two points need to be noted, as a backdrop to India's new liberalization saga. It has beenargued that it came at a juncture in the international situation when the second oil-price hike of1979 had prompted the advanced industrial countries to raise interest rates (nominal) which had aserious, adverse impact on the borrowings by the developing countries, jacking up their debtservicing charges. Secondly, anti-inflationary measures pursued by the advanced capitalistcountries extended the impact of recession into the Third World countries. The recession in theirmarkets led to lowered demand for developing country exports further adversely affecting theirtrade balances.

On top of this was the direct impact that the hike in oil prices was to have on India in any case,since crude oil and its products are the single largest item on India's huge import bill.

India's deficit on the current account increased throughout the eighties. From the mid-eighties itwas pushed into greater reliance on high interest commercial loans from international banks tofinance the deficits. The net outcome was that her external debt tripled during this decade of highgrowth.

The above scenario set the stage in 90s for undergoing the medical therapy of the IMF and WB.

When these 'reforms' were initiated, the Government denied any pressure from the Bank or IMFbut had few takers. But very few believed in it. The Government's claim that they had beenindependently decided to carried little weight. Later on the Finance Minister told Parliament thatthe loans of the Bank and IMF carry conditionalities. In fact, the Finance Minister did notdisclose about his correspondence with the IMF and the Bank, due to great public pressure, hepresented to Parliament the terms of the IMF standby credit of $2.2 billion. But, the sameconsideration was not applied to reveal the policy conditions accepted under the StructuralAdjustment Loan of $900 million by the World Bank. When news of the Bank having access tothe 1992-93 budget and the Eighth Five Year Plan document prior to their presentation toParliament, the government was forced to make them public.

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Under SAP, WB is not supervising individual sectors of the Indian economy such as agriculture,social sector and energy sector. The Bank now monitors the entire macro-economy such asbalance of payments, fiscal deficit, foreign investment, money supply, etc. The publicexpenditure reviews are a part of the Bank's conditionalities. Under this review, the Bank notonly asks for cuts in expenditure but also gives detailed instructions for cuts in specific sectors.

The health budgets in recent years are an example of this. Health, far from being accepted as abasic right of the people, is now being shaped into a saleable commodity. Thereby, excludingthose with less or no purchasing power. The existing distortions of health services in India aregetting accentuated with the Government following the Bank's agenda on healthcare. The recentbudget of 1994-95, of which health care forms just 0.58% is an indication of the governmentwillingness to adopt Bank's policies. In India, the health care agenda is increasingly being set outby the Bank rather than by the people and the Indian state.

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Before and After Adjustment

The World Bank's own study titled, "Adjustment Lending: An Evaluation of Ten Years of

Experience" (1988) illustrates that the structural adjustment programs undertaken by 15

Sub-Saharan African countries failed in many areas :

The shape of Gross Domestic Product (GDP) devoted to investment fell rather thanrose as intended.

Annual economic growth declined. Budget deficits of export earnings that had to be devoted to debt payment increased.