An assessment of the first generation reforms and recommendations on the 2nd generation reforms.
The economic reforms removed policy-induced entry barriers, relaxed constraints on private-sector initiatives, and led to the emergence of domestic as well as external competition. The reforms resulted in several favorable outcomes.
The economic reforms removed policy-induced entry barriers, relaxed constraints on private-sector initiatives, and led to the emergence of domestic as well as external competition. The reforms resulted in several favorable outcomes.
1)The composition as well as direction of imports and exports shifted away from barter trade with former Soviet Bloc.
2) Shares of exports in domestic production increased. Output and employment in the factory segment of the manufacturing sector expanded.
3) Finally, the GDP growth rate in the first 3 post-reform years exceeded 7 percent for the first time since Independence.
2) Shares of exports in domestic production increased. Output and employment in the factory segment of the manufacturing sector expanded.
3) Finally, the GDP growth rate in the first 3 post-reform years exceeded 7 percent for the first time since Independence.
The beneficial effects on the economy, though significant, have been modest, Still more reforms are needed to put India on a path of sustained rapid growth. For example, although the post-reform Indian export performance was superior to that of the pre-reform era, it was vastly outdone by that of small economies like Malaysia, South Korea, Taiwan, and Thailand, and large economies like China and Indonesia. Political and external factors played a role in the slowdown.
However, the failure to bring the overall fiscal deficit of the central and state governments as well as those of non financial public enterprises, significantly what it was as a proportion of GDP in 1990-91 just before the crises was a major contributing factor. The persistent deficit led to rise in real interests rates on borrowed capital and crowded out private investment.
The burden of the fiscal reforms that has occurred since the reform has fallen in a large part on public investment, particularly in infrastructure. The lack of adequate investment in additional capacity, and the poor maintenance and inefficient operation of infrastructure facilities and services, have acted as a drag on growth. Although there have been improvements in ht e performance indicators on power, telecommunications, railways, road transport, and ports, concrete progress has been too slow to meet progressively demanding requirements of the globalizing economy.
Two factors constrain investment for creating needed additional capacity. The public sector, as a whole, has become a net dissever. More public borrowings at market rates, not only for investment but also to sustain public consumption, would worsen the already serous issue of fiscal solvency besides crowding out private investment. The alternative- attracting significant private investment (domestic and foreign) into infrastructural sectors- is impossible as long as investors have to absorb, in effect, the cost of subsidized sales to privileged users. Besides adding capacity through investments, the efficient operation of already existing capacity is essential.
The regulation of the infrastructure sectors is also a key concern. Scale economies and network externalities are clearly significant in infrastructure sectors. Atomistic competition among price-taking enterprises is unlikely, because there are few firms of significant size relative to the market in such sectors. Regulation of their operation is common around the world, although the nature and scope of regulation have changed.
In these circumstances, a well-formulated and effectively enforced competition law could be better social policy than regulation. India’s experience with regulation is very recent. The Telecom Regulatory Authority of India (TRAI) had to be reconstituted twice within its short life.
In these circumstances, a well-formulated and effectively enforced competition law could be better social policy than regulation. India’s experience with regulation is very recent. The Telecom Regulatory Authority of India (TRAI) had to be reconstituted twice within its short life.
The states and the central government have set up regulatory agencies for electricity, but the legislation defining their functions and interrelation was approved by the Central Cabinet.
COMPLETING FIRST GENERATION OF REFORMS
Even after the substantial reduction in the import tariffs and of all quantitative restrictions (QRs) on imports, there is still a long way to go before India’s trade barriers are as low as those of its neighbors. All finance ministers in the post-reform era have declared their intention of bringing down average tariff rates to the levels prevailing in East India.
The more quickly these intentions are translated into concrete actions, the more quickly will Indian industry become internationally competitive and better placed to receive the benefits of expanding trade opportunities. Unfortunately, by replacing QRs that were removed with high tariffs and by imposing antidumping duties on some imports from China, the government seems to have taken a step away from acting on its intentions.
The first generation of reforms is also not complete with regard to the power sector. Draft legislation for the power sector allows for the unbundling of generations, transmission, and distribution and also permits private enterprises to undertake some of these functions. The unbundled functions of the State Electricity Boards (SEBs) should be corporatized as an interim measure, because privatization is unlikely anytime soon. This would formally distant them from government and may be expected to improve the efficiency of operations, rationalize the structure of tariffs, and bring revenues in line with the costs.
Even after the substantial reduction in the import tariffs and of all quantitative restrictions (QRs) on imports, there is still a long way to go before India’s trade barriers are as low as those of its neighbors. All finance ministers in the post-reform era have declared their intention of bringing down average tariff rates to the levels prevailing in East India.
The more quickly these intentions are translated into concrete actions, the more quickly will Indian industry become internationally competitive and better placed to receive the benefits of expanding trade opportunities. Unfortunately, by replacing QRs that were removed with high tariffs and by imposing antidumping duties on some imports from China, the government seems to have taken a step away from acting on its intentions.
The first generation of reforms is also not complete with regard to the power sector. Draft legislation for the power sector allows for the unbundling of generations, transmission, and distribution and also permits private enterprises to undertake some of these functions. The unbundled functions of the State Electricity Boards (SEBs) should be corporatized as an interim measure, because privatization is unlikely anytime soon. This would formally distant them from government and may be expected to improve the efficiency of operations, rationalize the structure of tariffs, and bring revenues in line with the costs.
SUMMING THE FIRST GENERATION REFORMS
• Industrial de-licensing and simplification and rationalization of tax structure to promote investment and expansion.
• Liberal FDI regime to supplement domestic resources.
• Current account convertibility to have a liberal trade regime.
• Public sector divestment to ensure government does what it does best.
• WTO compatibility to plug into the global economy.
LAUNCHING THE SECOND GENERATION REFORMS
Following should be included in the second generation reforms:-
• Reducing Fiscal deficit
• Amendments to crucial Economic Statutes
• Financial sector reforms
• Agriculture and Labor reforms
• Power Sector Reforms
• Corporate governance
"Talking of second generation reforms is a fuss when you are yet to complete the first generation reform process," said former Financial Minister and the current Prime Minister Manmohan Singh. The unfinished task of fiscal restructuring is standing in the way of more investments in education, healthcare, energy and physical infrastructure sector, he said.
The first generation reforms are still in various stages of completion after a decade attracted by political support. The second generation reforms are those yet to be undertaken in any significant measure but which are critical for restoring and sustaining rapid growth.
• Industrial de-licensing and simplification and rationalization of tax structure to promote investment and expansion.
• Liberal FDI regime to supplement domestic resources.
• Current account convertibility to have a liberal trade regime.
• Public sector divestment to ensure government does what it does best.
• WTO compatibility to plug into the global economy.
LAUNCHING THE SECOND GENERATION REFORMS
Following should be included in the second generation reforms:-
• Reducing Fiscal deficit
• Amendments to crucial Economic Statutes
• Financial sector reforms
• Agriculture and Labor reforms
• Power Sector Reforms
• Corporate governance
"Talking of second generation reforms is a fuss when you are yet to complete the first generation reform process," said former Financial Minister and the current Prime Minister Manmohan Singh. The unfinished task of fiscal restructuring is standing in the way of more investments in education, healthcare, energy and physical infrastructure sector, he said.
The first generation reforms are still in various stages of completion after a decade attracted by political support. The second generation reforms are those yet to be undertaken in any significant measure but which are critical for restoring and sustaining rapid growth.
There are four critical second-generation reforms of domestic policies and institutions:-
1) Reform of the labor laws
2) Privatization of enterprises that have no compelling social rationale to be in the public sector
3) Reform of laws of bankruptcy and liquidation
4) Restructuring of centre-state relations.
LABOR LAWS AND REFORMS
An overwhelming majority (60 percent) of the labor force is engaged in agriculture. The inefficient functioning of the market for land constrains the movement of labor out of agriculture into more productive activities. The labor market has dual structure: a few large enterprises have dominant share of output due to use of more capital per worker, thereby increasing their productivity per worker. Large enterprises substituted relatively cheap capital for labor as labor laws increased the cost of hiring and firing. Although reforming the labor laws has been on the agenda since 1991, not much has happened.
1) Reform of the labor laws
2) Privatization of enterprises that have no compelling social rationale to be in the public sector
3) Reform of laws of bankruptcy and liquidation
4) Restructuring of centre-state relations.
LABOR LAWS AND REFORMS
An overwhelming majority (60 percent) of the labor force is engaged in agriculture. The inefficient functioning of the market for land constrains the movement of labor out of agriculture into more productive activities. The labor market has dual structure: a few large enterprises have dominant share of output due to use of more capital per worker, thereby increasing their productivity per worker. Large enterprises substituted relatively cheap capital for labor as labor laws increased the cost of hiring and firing. Although reforming the labor laws has been on the agenda since 1991, not much has happened.
PROBLEMS
1) Despite recent growth, India’s manufacturing sector still accounts for less than 15 percent of GDP and employs less than 15 percent of the work force. This is in simple contrast to the fast-growing East Asian countries such as Korea, China and Thailand where rapid expansion in manufacturing has generated large scale employment that has lifted millions out of poverty.
The sector is clearly facing constraints that are hindering its expansion. China’s remarkable success – with exports of 20 billion finished garments or roughly 4 for every person in the world - has largely been explained by its state-of-the-art factories and efficient transport infrastructure. While huge infrastructure bottlenecks have undoubtedly kept India’s textile and clothing industry small and fragmented, what is perhaps less well-known is how India’s archaic labor regulations are hurting the sector’s growth.
2) For most Indians, especially the poor and marginalized, labor is the principal asset. If India is to sustain its current levels of growth and reduce poverty, it has to provide jobs with good wages for the vast majority of its people, as well as for the 80 million new entrants who are expected to join the work force over the next decade.
Of course, labor laws are needed. Workers need protection. But labor laws should protect workers, not jobs. In India, current regulations end up doing more harm than good. In international comparisons, India stands out as having one of the most rigid labor laws in the world. A recent study estimated that in 1997, India could have had more than 1 million more jobs in the textiles and clothing sector alone if its labor regulations had been less restrictive.
There are currently 47 central laws and 157 state regulations that directly affect labor markets. These are often inconsistent and at times overlapping. Active labor market programs and policies (ALMPs), as recommended by the International Labor Organization and other bodies internationally, are starting in India and may need to be strengthened. For now, the rural employment guarantee program is an important start. If implemented well, it promises to provide an important form of job security for the rural labor force. More is possible and could include effective information and employment exchanges, social insurance mechanisms for informal sector workers, and strengthened technical and vocational education programs. Amending the plethora of existing labor regulations is itself an integral part of the job-creating ALMP strategy for India.
PRIVATIZATION
Resistance to meaningful privatization is one, and not the only reason for the lack of significant progress in assuring an adequate, inexpensive and reliable supply of infrastructural goods and services such as power, transport and telecommunications. This is not to deny that there has been some progress. For example, the private sector is now allowed to construct and operate ports and toll roads. The establishment of state regulatory authorities for power could depoliticize the setting of power tariffs. Still there is a long way to go and without well-functioning infrastructure prospects for rapid growth and for attracting FDI are not good.
Reforms since 1991 have considerably eased the entry of domestic and foreign firms into the industrial sector. However, the legal hurdles continue to hamper the exit of unviable enterprises. The experience with the Bureau of Industrial and Financial Restructuring in ensuring orderly exit of sick enterprises is extremely discouraging
REFORMS OF BANKRUPTCY AND LIQUIDATION
In the reforms initiated in 1991, the emphasis was on reforms of product markets by abolishing industrial licensing and import barriers. These reforms, however, left the factor markets such as labour markets, land markets and capital markets, the natural resources market such as water, and institutions mostly untouched.
India's present laws of bankruptcy (exit policy) and corporate control require reforms so that the market for corporate control becomes competitive. The financial sector reforms would involve reforms of the banking sector, equity markets, debt markets and foreign exchange markets. In this, privatization of state-owned banks is perhaps the most essential, but preceded by strengthening of the regulation and supervision of financial institutions and of capital markets, which are really non-existent at present. The recent developments in the Indian stock market vividly show how the actions of one private bank, one cooperative bank, one major stock exchange management, and a giant mutual fund of 20 million subscribers can have a deleterious impact on national equity markets and particularly on small shareholders, because of a lack of strong supervision.
1) Despite recent growth, India’s manufacturing sector still accounts for less than 15 percent of GDP and employs less than 15 percent of the work force. This is in simple contrast to the fast-growing East Asian countries such as Korea, China and Thailand where rapid expansion in manufacturing has generated large scale employment that has lifted millions out of poverty.
The sector is clearly facing constraints that are hindering its expansion. China’s remarkable success – with exports of 20 billion finished garments or roughly 4 for every person in the world - has largely been explained by its state-of-the-art factories and efficient transport infrastructure. While huge infrastructure bottlenecks have undoubtedly kept India’s textile and clothing industry small and fragmented, what is perhaps less well-known is how India’s archaic labor regulations are hurting the sector’s growth.
2) For most Indians, especially the poor and marginalized, labor is the principal asset. If India is to sustain its current levels of growth and reduce poverty, it has to provide jobs with good wages for the vast majority of its people, as well as for the 80 million new entrants who are expected to join the work force over the next decade.
Of course, labor laws are needed. Workers need protection. But labor laws should protect workers, not jobs. In India, current regulations end up doing more harm than good. In international comparisons, India stands out as having one of the most rigid labor laws in the world. A recent study estimated that in 1997, India could have had more than 1 million more jobs in the textiles and clothing sector alone if its labor regulations had been less restrictive.
There are currently 47 central laws and 157 state regulations that directly affect labor markets. These are often inconsistent and at times overlapping. Active labor market programs and policies (ALMPs), as recommended by the International Labor Organization and other bodies internationally, are starting in India and may need to be strengthened. For now, the rural employment guarantee program is an important start. If implemented well, it promises to provide an important form of job security for the rural labor force. More is possible and could include effective information and employment exchanges, social insurance mechanisms for informal sector workers, and strengthened technical and vocational education programs. Amending the plethora of existing labor regulations is itself an integral part of the job-creating ALMP strategy for India.
PRIVATIZATION
Resistance to meaningful privatization is one, and not the only reason for the lack of significant progress in assuring an adequate, inexpensive and reliable supply of infrastructural goods and services such as power, transport and telecommunications. This is not to deny that there has been some progress. For example, the private sector is now allowed to construct and operate ports and toll roads. The establishment of state regulatory authorities for power could depoliticize the setting of power tariffs. Still there is a long way to go and without well-functioning infrastructure prospects for rapid growth and for attracting FDI are not good.
Reforms since 1991 have considerably eased the entry of domestic and foreign firms into the industrial sector. However, the legal hurdles continue to hamper the exit of unviable enterprises. The experience with the Bureau of Industrial and Financial Restructuring in ensuring orderly exit of sick enterprises is extremely discouraging
REFORMS OF BANKRUPTCY AND LIQUIDATION
In the reforms initiated in 1991, the emphasis was on reforms of product markets by abolishing industrial licensing and import barriers. These reforms, however, left the factor markets such as labour markets, land markets and capital markets, the natural resources market such as water, and institutions mostly untouched.
India's present laws of bankruptcy (exit policy) and corporate control require reforms so that the market for corporate control becomes competitive. The financial sector reforms would involve reforms of the banking sector, equity markets, debt markets and foreign exchange markets. In this, privatization of state-owned banks is perhaps the most essential, but preceded by strengthening of the regulation and supervision of financial institutions and of capital markets, which are really non-existent at present. The recent developments in the Indian stock market vividly show how the actions of one private bank, one cooperative bank, one major stock exchange management, and a giant mutual fund of 20 million subscribers can have a deleterious impact on national equity markets and particularly on small shareholders, because of a lack of strong supervision.
RESTRUCTURING OF CENTRE-STATE RELATIONS
The relevant recommendations of the Sarkaria commission on the restructuring of centre-state relations are not being accepted and implemented in true spirit by the NDA government, as a result of which there is a persistent trend of centralization of economic and political powers in the country.
In the administrative sphere, no safeguards against the abuse of Article 356 have been instituted. On the other hand, when the states have asked for the assistance of Central Reserve Forces, there has often been undue delay on the part of the central government.
In the legislative sphere, not only has the formal central intrusion into the state list been left unreversed, but further intrusions have also been made into the state list in terms of proliferation of so-called Centrally Sponsored Schemes in the state subjects. Moreover, after the centre’s adoption of neo-liberal policies, a new form of assault is now being made on the constitutionally assigned decision-making powers of the states, by the government of India discussing issues on state subjects with IMF, WTO, World Bank and similar external agencies, and then, on the guidance of these external bodies, imposing conditionalities on the state government without any concurrence of the states.
In the financial sphere, confronted with a long prevailing imbalance arising out of the fact that, while in the Constitution, the major responsibilities in the sphere of developmental and administrative expenditure have been given to the states, all the more important powers of revenue-raising have remained concentrated in the hands of the centre, the states have been correctly demanding over the years for increasing the share of central taxes to the states to at least 50 per cent. However, this share is only 30.5 per cent.
Discussions at the national and the state levels would be urgently necessary as the above disturbing trends, specially keeping in mind that the Thirteenth Finance Commission has recently been set up, and a new Commission on Centre-State relations has also started working. At the same time, discussions would also have to be taken down to the level of common people and this Party Congress gives a call for a wide mass movement across the states in support of a radical restructuring of the centre-state relations in the interest of working people of the entire country.
The relevant recommendations of the Sarkaria commission on the restructuring of centre-state relations are not being accepted and implemented in true spirit by the NDA government, as a result of which there is a persistent trend of centralization of economic and political powers in the country.
In the administrative sphere, no safeguards against the abuse of Article 356 have been instituted. On the other hand, when the states have asked for the assistance of Central Reserve Forces, there has often been undue delay on the part of the central government.
In the legislative sphere, not only has the formal central intrusion into the state list been left unreversed, but further intrusions have also been made into the state list in terms of proliferation of so-called Centrally Sponsored Schemes in the state subjects. Moreover, after the centre’s adoption of neo-liberal policies, a new form of assault is now being made on the constitutionally assigned decision-making powers of the states, by the government of India discussing issues on state subjects with IMF, WTO, World Bank and similar external agencies, and then, on the guidance of these external bodies, imposing conditionalities on the state government without any concurrence of the states.
In the financial sphere, confronted with a long prevailing imbalance arising out of the fact that, while in the Constitution, the major responsibilities in the sphere of developmental and administrative expenditure have been given to the states, all the more important powers of revenue-raising have remained concentrated in the hands of the centre, the states have been correctly demanding over the years for increasing the share of central taxes to the states to at least 50 per cent. However, this share is only 30.5 per cent.
Discussions at the national and the state levels would be urgently necessary as the above disturbing trends, specially keeping in mind that the Thirteenth Finance Commission has recently been set up, and a new Commission on Centre-State relations has also started working. At the same time, discussions would also have to be taken down to the level of common people and this Party Congress gives a call for a wide mass movement across the states in support of a radical restructuring of the centre-state relations in the interest of working people of the entire country.
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