Indian Economy, 5th edition (23 page)

First Generation Reforms (1991–2000)
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It was in the year 2000–01 that the Government, for the first time, announced the need for the
s
econd Generation of economic reforms and it was launched the same year. The ones which had been initiated by then (i.e from 1991 to 2000) were called by the Government as the reforms of the first Generation. The broad co-ordinates of the First Generation of reforms may be seen as under:

(i) Promotion to Private Sector:

This included various important and liberalising policy decisions i.e. ‘de-reservation’ and ‘de-licencing’ of the industries, abolition of the MRTP limit, abolition of the compulsion of the phased-production and conversion of loans into shares, simplifying environmental laws for the establishment of the industries, etc.

(ii) Public Sector Reforms:

The steps taken to make the public sector undertakings profitable, efficient, their disinvestment
(
token
), their corporatisation, etc. were the major parts of it.

(iii) External Sector Reforms:

They consisted of policies like—abolishing quantitative restrictions on import, switching to the floating currency regime of exchange rate, announcing full current account convertibility, reforms in the capital account, permission to foreign investment (direct as well as indirect), promulgation of a liberal foreign exchange management act (the FEMA replacing the FERA), etc.

(iv) Financial Sector Reforms

Several reform initiatives were taken up in the areas of the banking sector, capital market, insurance, mutual funds, etc.

(v) Tax Reforms

This consisted of all the policy initiatives directed towards simplifying, broadbasing, modernising, checking evasion, etc.

A major re-direction was ensued by this generation of reforms in the economy—the ‘command’ type of the economy moved strongly towards a market-driven economy, private sector (domestic as well as foreign) to have greater participation in the future.

Second Generation Reforms (2000–01 onwards)
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The Government launched this generation of the reforms in the year 2000-01. Basically, the reforms India launched in the early 1990s were not taking place as desired and a need for another set of reforms was felt by the Government which were initiated with the title of the Second Generation of economic reforms. The reforms of this generation were not only deeper and delicate but required a higher political will power from the governments. The major components of the reform are as given below:

(i) Factor Market Reforms:

Considered as the ‘backbone’ for the success of the reform process in India itself, it consists of dismantling of the Administered Price Mechanism (APM). There were many products in the economy whose prices were fixed/regulated by the Government viz. petroleum, sugar, fertilizers, drugs, etc. Though a major section of the products under the APM were produced by the private sector, they were not sold on the market principles which hindered the profitability of the manufacturers as well as the sellers and ultimately the expansion of the concerned industries leading to a demand-supply gap. Under market reforms these products were to be brought into the market fold.

In the petroleum segment now only kerosene oil and the LPG remained under the APM while petrol, diesel, lubricants have been phased out. Similarly, the income tax paying families don’t get sugar from the TPS on subsidies; only urea, among the fertilizers, remain under APM while many drugs have also been phased out of the mechanism. Opening the petroleum sector for private investment, cutting down the burden of levy on sugar, etc. are now giving dividends to the economy. But we cannot say that the Factor Market Reforms (FMRs) are complete in India. It is still going on. Cutting down subsidies on the essential goods is a socio-political question in India. Till market-based purchasing power is not delivered to all the consumers, it would not be possible to complete the FMRs.

(ii) Public Sector Reforms:

The second generation of reforms in the public sector especially emphasises on the areas like greater functional autonomy, freer leverage to the capital market, international tie-ups and greenfield ventures, disinvestment
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(
strategic
), etc.

(iii) Reforms in the Government and Public Institutions:

This involves all those moves which really go to convert the role of the Government from the ‘controller’ to the ‘facilitator’ or the administrative reform, as it may be called.

(iv) Legal Sector Reforms:

Though reforms in the legal sector were started in the first generation itself, now it was to be deepened and newer areas were to be included—abolishing outdated and contradictory laws, reforms in the Indian Penal Code (CrPC), Labour Laws, Company Laws and enacting suitable Legal provisions for new areas like Cyber Law, etc.

(v) Reforms in the Critical Areas:

The second generation reforms also commit to suitable reforms in the infrastructure sector (i.e. power, roads, especially as the telecom has been encouraging), agriculture, agricultural extension, education and the healthcare, etc. These areas have been called by the Government as the
‘critical areas’.
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These reforms have two segments. The first
segment is similar to the Factor Market Reforms, while the second
segment includes a broader dimension to the reforms viz. corporate farming, research and development in the agriculture sector (which was till now basically taken care of by the Government and needs active participation of the private sector), irrigation, inclusive education and the healthcare.

Other than the above-given focus of this generation of the reforms, some other important areas were also emphasised:

(a)
State’s Role in the Reform
For the first time, an important role to the state was designed, in the process of economic reforms. All new steps of the reforms were now to be started by the state with the centre playing a supportive role.

(b)
Fiscal Consolidation
The area of fiscal consolidation though it was a major co-ordinate of reform in India since 1991 itself, gets a constitutional commitment and responsibility. The FRBM Act is passed by the Centre and the Fiscal Responsibility Act (FRAs) is followed by the states as an era of new commitments to the fiscal prudence starts in the country.

(c)
Greater Tax Devolution to the States
Though there was such a political tendency
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by the mid-1990s itself, after the second generation reforms started, we see a visible change in the central policies favouring greater fiscal leverage to the states. Even the process of tax reforms takes the same dimension. Similarly, the Finance Commissions as well as the Planning Commission start taking greater fiscal care of the states. And for the first time the states had a net revenue surplus collections in the fiscal 2007–08.
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(d)
Focussing on the Social Sector
The social sector (especially the healthcare and education) gets increased attention by the Government with manifold increases in the allocations as well as show of a greater compliance to the performance of the development programmes.

We see mixed results of the second generation reforms though the reforms continue.

Third Generation Reforms

Announcement of the third generation of reforms were made on the margins of the launching of the Tenth Plan (2002–07). This generation of reforms commits to the cause of a fully functional Panchayati Raj Institution (PRIs), so that the benefits of the economic reforms, in general, can reach the grass-root level.

Though the constitutional arrangements for a decentralised developmental process was already effected in the early 1990s, it was in the early 2000s that the Government gets convinced of the need of the ‘inclusive growth and development’.
Till the masses are not involved in the process of development, the development will lack the ‘inclusion’ factor, it was concluded by the Government of the time. The Eleventh Plan goes on to ratify the same sentiments (though the political combination at the centre has changed) and view regarding the need for the third generation of reforms in India.

Fourth Generation Reforms

This is not an official ‘generation’ of reform in India. Basically, in early 2002, some experts coined this generation of reforms which entail a fully ‘information technology-enabled’ India. They hypothesised a ‘two-way’ connection between the economic reforms and the information technology (IT)—with each one reinforcing the other.

Note

The different generations of the economic reforms in India should not be seen as the completion/ending of the former and commencement of the later generations of the reform. Basically, all of the Generations are going on at present simultaneously, so that the goal of reforming the economy is objectified. The various generations of reforms in India also verify the fact that ‘reform’ is a continuous process which needs ‘fine-tuning’ in accordance with the changed situations. Reform is not the aim of the economy but reforming the economy is the aim. Reform is a means to an end.

We saw a general decline in the government’s eagerness towards furthering the cause of economic reforms once the UPA came to power in 2004 – largely due to the nature of the coalition which included the Left Front supporting it from outside (outside support is considered the weakest and the most delicate thing for a government by the world political thinkers and analysts). The returning of the UPA to power in 2009, with a bit different coalition partners could not ensue any new pace regarding furthering the reform process. Almost everyone, including the major industrial houses remarked the policy-paralysis of the government as the cause of hurting the pace of growth in the economy. The government document
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,
Economic Survey 2011-12
, says that though it is hard to quantify and for that reason is contestable, there has been seen a slackening in the pace of reforms – one consequence of increased awareness of high-profile corruption scandals in different parts of India and welcome civil-society activism has been a sense of caution among civil servants in taking crucial decisions. Since one way to avoid the charge of an ill-considered or, worse, bad-intentioned decision is to take no decision, it is arguable that some civil servants have resorted to precisely this strategy, concludes the Survey. This would cause a slowdown in decision making. In addition, coalition politics and federal considerations played their role in holding up economic reforms on several fronts, ranging from diesel and LPG pricing and taxation reform like the goods and services tax (GST) and direct taxes code (DTC), to FDI in retail and reform of the APMC Act, says the document.

Other than the above-discussed reasons the recent financial developments in the global economy, specially, the US and European economies which followed in the aftermath of the
US Sub-prime Crisis
also placed an ideological dilemma in front of India. This fact has been given no attention by the contemporary Indian media or the intelligentia, probably due to its academic nature (which can hardly be understood by the masses, the voters, who had already numerous reservations regarding the economic reform process followed by the GoI!)
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. The so-called affinity to the idea of the
Washington Consensus
among the Euro-American nations has now almost lost ground in the region where it was proposed, cemented and propagated around the world through the IMF/WB. What should be the course of action in future towards greater dependence on the private capital is still to be decided by the world financial body in clear terms. Meanwhile, a certain degree of liberal attitude towards promoting the process of economic reforms has been suggested by the IMF/WB to India
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to which the GoI has given its nod. The
Economic Survey 2012-13
has highlighted the need of continuing the process of economic reforms in the country – it has shown concern on the issue of the undue time which the India political system takes to reach at a consensus – specially while discussing the issue of the ‘demographic dividend’ – where it has cautioned that if India fails to remain in tune with the changing times of the global economy the aspirations of the ‘dividend’ may remain just a dream!