Financial Crisis:
The Reason:
- Insufficient Revenue generated by Tax and PSU's was not able cover up government expense .
- Heavy Spending on Development Projects, Defense sectors etc.. with not immediate Revenues.
- Foreign Exchange borrowed was spent on meeting consumption needs.
- No attempts were made to reduce these profligate expenses
- We did not focus on boosting Exports to meets the Trade Deficit due to growing imports.
- Needed foreign Exchange to import petroleum and other products.
The Crisis:
- Expense was more than Income so, Govt. borrowed from bank and Fin. Institutions to finance the Deficit.
- Meeting the expenditure by borrowing became unsustainable.
- Prices of Essential Goods rose sharply.
- Foreign exchange levels declined so much that, imports could not be financed for more than two weeks.
- No foreign exchange to pay the interest to international lenders, also no country/funder was willing to lend to India
- India approached IBRD (International Bank on Reconstruction and development) popularly known as World Bank, and we also approached IMF.
The Loan:
- Received 7 Billion US Dollars.
- India was expected to open up the economy
- Remove trade restrictions
- Remove restrictions on pvt. Sectors and reduce govt. role
- India Agreed and announced the New Economic Policy(NEP).
NEP:
Liberalization:
- Deregulation Industrial Sector:
- Licensing has been abolished for almost all but product categories - alcohol, cigarette, aerospace etc.(Check these)
- Only few Industries reserved for public sector are-- Defense, Atomic Energy, Railway transport(Check these)
- Many goods for small scale Industries have been de-reserved
- Financial Sector Reforms:
- Reduce the role of RBI from a Regulator to Facilitator.
- Establishment of private and Foreign Banks .
- Banks which fulfill certain criteria can setup branches without RBI approval
- FII's now allowed to invest in Indian Markets
- Tax Reforms:
- Moderate Tax rate for Income and corporate taxes, to Encourage Savings and avoid Tax Evasion.
- Reforms in Indirect taxes
- Simplification in overall tax structure for better compliance
- Foreign Exchange Reforms:
- Rupee Devaluation led to an increase in inflow of Foreign Exchange.
- Rupee value determination was also set out of control of government, to be determined by Market forces.
- Trade and Investment Policy Reforms:
- Dismantling of quantitative restriction on Import and Export.
- Complete removal of quantitative restriction on Manufactured Consumer goods and Agri. Goods(from April 2001)
- Reduction of Tariff rates and removal of Export Duties
- Abolition of Import licensing with exceptions on Hazardous substances.
- Privatization:
- Through Withdrawal of govt. from the ownership of some PSU's
- Through Outright sale.
- Through Disinvestment
- This was done to facilitate Modernization, and encourage FDI.
- Globalization:
- Outcome of a set of policies that are aimed at transforming the World towards greater Interdependence and Integration.
- Involves creation of a network of activities transcending social, Economic, and geographical barrier.
- Outsourcing:
- A Company hires Regular source from external sources, which was previously provided internally
- Intensified in recent times due to growth of IT
- Developed countries are outsourcing services to Developing countries like India. (Due to Cheap rates & reasonable accuracy).
- WTO:
- It is a Successor of GATT(General agreement on Trade Tariff)[23 countries].
- Administers Multilateral/Bilateral Trade Agreements, by providing equal opportunities to all parties in international market
- Expected to establish a Rule Based Trading Regime, So no country can place Arbitrary trade Restrictions.
- Facilitate international trade through removal of Tariff/non-tariff barriers.
- India has been in the forefront for advocating interest of Developing countries through
- Questions on India being a member of WTO, coz international trade occurs b/w developed nation and developing countries cheated to open their markets in return no access to developed country markets.
Indian Economy During Reforms
- Steady increase in GDP numbers(5.6----8.2…...)
-
Sector Outlook Agriculture Decline Industry Fluctuations Service Gone UP - India is the is the Largest foreign Exchange holder in the World(2015 current year).
- Criticism that the Reforms not been able to address basic issues of our Economy(Employment….nd all!!)
- Reforms in Agriculture:
- Reforms have not benefitted as growth rate is declining
- Public Investment(esp. in agri. Infra.) has fallen during reform period.
- Removal of Fertilizer Subsidy , Min. Support Prices affected the marginal farmer
- Reduction in Import restrictions & tariffs.
- Export oriented Policy==>Focus on Export market==>Grow more Cash Crops==>Inflation on Food Grain prices.
- Reforms in Industry:
- Industry Growth has recorded a Slow Down.
- Reason being less demand for domestic products(open Economy==>Cheaper Imports).
- Globalization creates condition for free movement of Goods and Services that adversely affect the local Industry, and Employment opportunity in developing countries.
- Also we do not have access to developed countries markets(USA has not removed Quota restrictions on their import of Textile from India and China).
- Disinvestment:
- Every Year Govt. sets target for selling PSE's
- Debate that the PSE assets are Undervalued and sold to pvt. Sector.(incurring substantial loss)
- Proceeds of selling are used to offset the govt. revenues rather using for Development.
- Reforms in Fiscal Policy:
- Reforms have placed a limit on growth of Expenditure in social sector.
- Reduction in tax-rates not successful in increasing revenue/curbing Evasion.
- Tax Incentives to FII has a negative Impact.