India`s recent progress towards economic growth is only because of the reforms undertaken after the 1991 fiscal crisis, which lifted India from decades of slow growth rate under socialist rule and offered an opportunity to improve living conditions in the country. Though the recent growth is impressive but the progress is not enough. Some great steps have been taken in field of trade, industrial policies, financial systems in order to reduce poverty but still much is to be done. The government intrudes where it should not, everywhere from coal mines to discos and always fails to manage the basic services that it should like decent roads, stable power distribution, primary education etc.
NEED OF THE REFORMS The first PM of India J.L.Nehru established a blend of democratic politics and central planning. He named his reforms as “mixed economy” or “socialism”.
“A second-rate Indian good is superior to a first-rate foreign product.” With such statements Nehru established state ownership and import-substitution industrialization in hopes of developing the nation’s internal capacity.
Two major crisis at that time were :
License Raj: Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. Licensing prevented foreign goods reaching the market. India also operated a system of central planning for the economy, in which firms required licenses to invest and develop that means a huge number of departments had to be satisfied before a firm could be granted a license to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade-a belief generated by a mixture of socialism and the experience of colonial exploitation.
COSEQUENCES-: However, by the 1980s, the country was left with:
Low growth rates
Closure to trade and investment
A license-obsessed, restrictive state
Inability to sustain social expenditures
Macro instability, indeed crisis.
Increase in corruption
Balance of Payments: India started having balance of payments problems since 1985 i.e. right after the assassination of Indira Gandhi, and by the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports.
The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having balance of payments problems. Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up and investors took their money out.
When India was only one week away from defaulting on its external balance of payment obligation the PM Chandrashekhar and finance minister Yashwant Sinha decided to transfer 47 ton of gold to London and 20 tons to the union bank of Switzerland to raise 600 million dollars.
But the government collapsed a month later and this helped in tiding over the balance of payment crisis by the reforms introduced by Manmohan Singh.
REFORMS BY P.V.N. Rao in 1991 The economic reforms or liberalization in India mark a shift from socialist economy to a market economy. Initiated by the then Indian Prime Minister P.V. Narasimha Rao and his Finance Minister Manmohan Singh, their immediate cause was a foreign exchange crisis during Chandrashekhar government when India had to sell its gold reserves. Reforms were as follows-:
In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to licensing. Industrial regulation was rationalized.
Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue.
Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries.
Starting in 1994 of the National Stock Exchange as a computer-based trading system which served as an instrument to leverage reforms of India’s other stock exchanges. The NSE emerged as India’s largest exchange by 1996.
Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative controls i.e. the rupee was made convertible on trade account.
Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors.
Streamlining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation.
Marginal tax rates were reduced.
Privatization of large, inefficient and loss-inducing government corporations was initiated.
REFORMS BY A.B. VAJPAYEE Atal Bihari Vajpayee’s administration surprised many by continuing reforms, when it was at the helm of affairs of India for five years.
Vajpayee oversaw his National Highway Development Project and Pradhan Mantri Gram Sadak Yojana begin construction, in which he took a personal interest.
Vajpayee promoted pro-business, free market reforms to reinvigorate India’s economic transformation and expansion that were started by former PM Narasimha Rao but stalled after 1996 due to unstable governments and the 1997 Asian financial crisis
Increased competitiveness, extra funding and support for the information technology and high-tech industries, improvements in infrastructure, deregulation of trade, investments and corporate laws – all increased foreign capital investment and set in motion an economic expansion.
In March 2000 Bill Clinton, the President of the United States, paid a state visit to India. His was the first state visit to India by a US President in 22 years. President Clinton’s visit to India was hailed as a significant milestone in the relations between the two countries.
In 2001, the Vajpayee government launched the Sarva Shiksha Abhiyan, which aimed at improving the quality of education in primary and secondary schools.
THE WAY AHEAD After the onset of economic liberalization in 1991, the government made valiant efforts
toward privatizing public enterprises. However, political difficulties have forced it to
backtrack time and again. But if we get a chance to do the change, there are a lot of things to be altered. A few of them are as follows:-
Restructure tax collection and allocation system to increase revenues at local and
Downsize overstaffed public institutions, particularly at state and local levels
Allow pension funds to invest in stocks
Further reduce import duties and restrictions
Invest in infrastructure and education, as a recent survey of global CEOs cited
infrastructure and poor skill level as the two leading deterrents
Privatize the energy sector and base user-charges on economic cost
Eliminate subsidies that have largely benefited interest groups rather than poor
Farmers and Reallocate these freed-up resources toward urgent public interventions, such as building roads, irrigation channels, and refrigeration facilities.
The efficient market
1. Describe the efficient market hypothesis and give a piece of evidence consistent with this theory.
The Efficient Market Hypothesis is and investment theory that claims it is impossible to predict and beat the stock market through fundamental or technical analysis. The reasoning behind this is that share prices always reflect all available information and instantly change when new information is available. Buyers of securities are assuming that the value is more than that which they are paying, whereas sellers are assuming that the securities are worth less than what they are selling for. But if markets are efficient and current prices reflect all information, the only way to consistently outperform the stock market is through luck rather than skill.
The Efficient Market Hypothesis has three forms of varying degrees. The ‘Weak’ form is when past market prices and data have been fully reflected in securities prices (i.e. technical analysis is useless). The ‘Semi-strong’ form is when all publicly available information is accounted for is the prices (i.e. fundamental analysis is useless). The ‘Strong’ form is when all information is accounted for (i.e. insider information is useless.)
Auto-correlation is a method used to test the weak from of EMH. This method takes price movements over one period of time and compares it to that of previous prices. Tests have found that there is usually no significant level of auto-correlation except in some portfolios of small shares (which may be because they are traded less frequently.)
The Random Walk Hypothesis is similar to EMH and is used to explain that stock prices are completely random due to the efficiency of the market and was tested by flipping a coin. Returns from those that attempted to predict the market were, on average, the same as those who picked a stock at random.
2. The cleaning service firm CleanAll plc increased its worker’s wages by 4%, and it experienced an increase in its profits. How can this have happened?
The basic theory to explain this is efficiency wages. This theory states that by paying above the market wage, the best employees in the industry are attracted to the firm. This may mean the more efficient for example and so by then employing these workers, the output of the firm will increase leading to higher profits. The higher wages will act as an incentive for the workers not to slack off for fear of losing their jobs and having to move to another firm where a lower wage is paid. The risk of the better workers moving to other firms to work is also reduced.
In the case of CleanAll, the higher wage rate has increased productivity meaning that output is higher and so profits are increased.
3. Does an increase in savings lead to a higher standard of living? Why? Why might a politician prefer not try to introduce measures to increase the rate of saving?
Yes, an increase in savings would lead to a higher standard of living, but only for a while. This is because more capital can be accumulated when there is a higher savings rate. However, over time the benefits from the additional capital reduces over time and so growth slows due to diminishing returns. In the long run, the higher saving rate may lead to a higher level of productivity and standard of living but this point of long run may take a while to reach.
Politicians will not want such a high savings rate as it may affect aggregate demand too much and therefore effect the growth in a negative way. Consumption and investment may both fall as people do not want to spend money as the return from saving money is better.