Impact of liberlisation on indian economy


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Impact of liberlisation on indian economy

  1. 1. 1 Project Report ON “ IMPACT OF LIBERALISATION ON INDIAN ECONOMY ” Submitted To: Submitted By: Dr. ASHOK PANIGRAHI Nawaz Gazi Associate Professor Ashutosh kumar NMIMS College MBA Pharma Tech 2nd yr Roll No. A004 & A015 SVKM’S School of Pharmacy and Technology Management
  2. 2. 2 CERTIFICATE This is certify that Mr. Nawaz Gazi and Mr. Ashutosh Kumar worked during the period w.e.f. 10.03.2014 to 21.03.2014 on the development of the project “Impact of liberalization on INDIAN economy”, in the partial fulfillment of the requirement for the degree of MBA Pharma Tech under my guidance & supervision. To the best of my knowledge, the matter represented in this project is a bonafide & genuine piece of work. During his association with the project I found him to be sincere & motivated individual. He has shown keen interest in this project & him conduct was excellent. I wish him all success in his career. Place: Mumbai Date: 23-3-2014 Dr. ASHOK PANIGRAHI Associate professor SVKM’S NMIMS
  3. 3. 3 DECLARATION We, Nawaz Gazi & Ashutosh Kumar are bonafied students of M.B.A.Pharma Tech at NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES. Our enrollment number are A004&A015. . This report has not been submitted earlier either with NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES and any other educational organization as an essential requirement for the award of any Diploma/ Degree. Date- 23/03/2014 Signature: - Nawaz Gazi Ashutosh Kumar
  4. 4. 4 ACKNOWLEDGEMENT We have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them. we are highly indebted to Ashok Panigrahi for their guidance and constant supervision as well as for providing necessary information regarding the project & also for their support in completing the project. we would like to express my gratitude towards my parents & member of SPTM for their kind co- operation and encouragement which help us in completion of this project. Our thanks and appreciations also go to my colleague in developing the project and people who have willingly helped us out with their abilities.
  5. 5. 5 Abstract Trade liberalisation has changed both the direction and composition of the country. It has worsened the situation of net factor income from abroad. However, this policy is unable to worsen the agricultural base of net factor income from abroad in the case of India. There can be little doubt that, historically, trade has acted as an important engine of growth for countries at different stages of development, not only by contributing to a more efficient allocation of resources within countries, but also by transmitting growth from one part of the world to another. There are static and dynamic gains to be had from trade between countries but there is nothing in the theory of trade that says that the gains are equitably distributed. Also, there is nothing in the theory of Customs Unions that says that the gains from trade will be equitably distributed between members. Indeed, the Customs Union as a whole may be welfare-reducing if trade diversion exceeds trade creation.
  6. 6. 6 Recent research suggests that regional trade agreements, reduce growth and investment, but generalised trade liberalisation in the form of unilateral tariff reductions (or the reduction of non-tariff barriers to trade) improves growth performance. Export growth relax the balance of payments constraint on demand by providing the foreign exchange to pay for the import content of higher levels of consumption, investment and government expenditure. Most developing countries are constrained in their growth performance by a shortage of foreign exchange and could therefore grow faster with more exports
  7. 7. 7 Introduction The economic liberalisation in India refers to ongoing economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. Attempts were made to liberalise the economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. The second major attempt was in 1985 by prime minister Rajiv Gandhi. The process came to a halt in 1987, though 1967 style reversal did not take place.In 1991, after India faced a balance of payments crisis, it had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). In addition, the IMF required India to undertake a series of structural economic reforms. As a result of this requirement, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh (currently the Prime Minister of India) started breakthrough reforms, although they did not implement many of the reforms the IMF wanted. The new neo-liberal policies included opening for international trade and investment, deregulation, initiation of privatisation, tax reforms, and inflation- controlling measures. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies. Thus, unlike the reforms of 1966 and 1985 that were carried out by the majority Congress governments, the reforms of 1991 carried out by a minority government proved sustainable. There exists a lively debate in India as to what made the economic reforms sustainable.
  8. 8. 8 The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China. The growth rate has slowed significantly in the first half of 2012.An Organisation for Economic Co-operation and Development (OECD) report states that the average growth rate 7.5% will double the average income in a decade, and more reforms would speed up the pace. Indian government coalitions have been advised to continue liberalisation. India grows at slower pace than China, which has been liberalising its economy since 1978.[11] The McKinsey Quarterly states that removing main obstacles "would free India's economy to grow as fast as China's, at 10% a year". There has been significant debate, however, around liberalisation as an inclusive economic growth strategy. Since 1992, income inequality has deepened in India with consumption among the poorest staying stable while the wealthiest generate consumption growth. As India's gross domestic product (GDP) growth rate became lowest in 2012-13 over a decade, growing merely at 5%, more criticism of India's economic reforms surfaced, as it apparently failed to address employment growth, nutritional values in terms of food intake in calories, and also exports growth - and thereby leading to a worsening level of current account deficit compared to the prior to the reform period.
  9. 9. 9 For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings, which is an improvement from the preceding year. India’s trade policy is decided by the Director General of Foreign Trade (DGFT) that belongs to ministry of Commerce and Industry.It is empowered under section-5 of 1992 Act of foreign tradeto announce the trade policy. The trade policy which is being followed these days by India was announced in 2009 for 2009-2014. India followed various trade policies since 1991, the year of economic crisis. The present paper will make an effort to find an impact of this trade policy on the Indian economy since 1991.
  10. 10. 10 Pre-liberalisation period Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialisation under state monitoring, state intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, and central planning. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalised in the mid-1950s. Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990. In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries.[citation needed] The Vishwanath Pratap Singh (1989–1990) and Chandra Shekhar Singh government (1990–1991) did not add any significant reforms.
  11. 11. 11 Analysis India faced economic crisis in 1991. India had a trade deficit of $9.4 billion. The foreign exchange reserve in 1991 was able not to meet even more than four weeks of imports. Fiscal deficit was rising. Oil price was soaring high due to gulf war. Soviet block was broken out. India was suffering from political crisis. Credit rating of India was downgraded repeatedly. Non- resident Indian investment was fighting out. Investors were losing confidence in India. India announced a new trade policy in 1991 and took various steps. It liberalised its economy. Foreign investors were given due confidence to invest in India. Industrial licensing Raj was abolished. Information technology was promoted. Monopoly and Restrictive trade was abolished. Producers were given freedom to diversify their production. New technologies were imported. Investment limit in SSI (Small Scale industry) was increased to attract investment. Restriction in importing capital goods was abolished. Indian currency was made convertible in current account. Industrial, trade and financial sectors were reformed.Deregulation of industrial sector was done to improve efficiency and competition. Number of industries reserved. Under government sector was reduced from 18 to 03 (Rail, Atomic and Defence). India switched over to flexible exchange rate.Quantitative restriction on import of manufactured consumer good was abolished. Interest rates on both the saving and fixed deposits have been deregulated. Consequently FDI (Foreign Direct Investment) increased in India. Steps taken under 2009-2014 trade policy can be enumerated below. Under section-3 of trade policy Act, India provided incentives to exporters of various products. This trade policy started imposing zero duty on
  12. 12. 12 exporting capital goods to enhance technological capacity of India under Export Promotion Capital Good Scheme. India started Focus Market Scheme at international level to diversify markets itself. Special funds have been earmarked for SSI. Some towns have been identified to achieve export excellence. Under Town of Export Excellence Scheme Jaipur, Ludhiane, Muradabad and Kanpur have been selected.Under Focus Product System incentive of 3.00 per cent in the form of subsidy is given to producers. Paper less work has been started in trade sector to make it transparent. Ayat Niryat Form has been introduced to make simple process. Indian Trade Code (ITC) has been developed to code 153 products. Impacts of various trade policies followed by India since 1991 may be enumerated as well as below. Impact on Direction of India’s of Foreign Trade India’s export direction has been switching over from OECD countries to OPEC and developing countries. India’s export share to OECD countries decreased from 56.40 per cent in 1991 to 33.81 per cent in 2012. This share to developing countries increased from 17.00 per cent in 1991 to 44.00 per cent in 2012 as shown as in table-1. Similarly, India’s import switched from OECD countries to OPEC and developing countries. The share of import from OECD countries declined from 54.00 per cent in 1991 to 29.67 per cent in 2012. This figure form developing countries increased from 18.40 per cent in 1991 to 32.25 per cent in 2012.
  13. 13. 13 Countries to which india exports 1991 2012 OECD 56.40 33.81 OPEC 5.60 19.02 Eastern Europe 17.90 1.06 Devoloping countries 17.10 44.00 Others 3.00 2.1 Total 100 100 Import direction of india Countries to which india exports 1991 2012 OECD 54.00 29.67 OPEC 16.30 35.44 Eastern Europe 7.80 1.75 Devoloping countries 18.40 32.25 Others 3.50 0.89 Total 100 100
  14. 14. 14 (2) Impact on Composition of India’s Foreign Trade Export composition as shown as in table-3, infers that share of crude and a petroleum product has increased from 2.90 percent in 1991 to 18.25 per cent in 2012. Export share of both the agricultural and industrial products has declined in 2012 in the comparison of 1991. Import composition, as shown as in table-4, delves that share of petroleum products has increased while those of the commodities has decline in the 2012 in the comparison of 1991. Trade policy has affected the India’s trade composition in both the export and import. India is exporting crude petroleum products and importing petroleum products. In this field, import substitution has not taken shape. Export Composition Export commodity 1991 2012 Agricultural & Allied Products 19.50 12.29 Ores & Minerals 4.40 2.67 Manufactured Goods 73.0 61.32 Crude & Petroleum Products 2.9 18.25 Other & Unclassified Products 0.2 5.47 Total 100 100
  15. 15. 15 Import Composition Imported Commodity 1991 2012 Petroleum products 24.90 31.67 Capital goods 24.10 20.32 Pearls & Precious stones 8.70 6.24 Iron&Steel 5.00 2.46 Fertilizers 4.10 2.37 Edible oils 0.80 1.90 Others 32.40 20.97 Total 100 100 (3) Impact on Net Factor Income of India from abroad India’s trade libaralisation has worsened the situation of net factor income from abroad. Net factor income from abroad was - $ 168.49 billion in 1991 which further declined to - $ 518.28 billion in 2012. Net factor income of both the industrial and services sector in India is negative while that of agricultural sector is positive. It clearly shows that liberalisation is still unable to break the position of agriculture, which is the backbone of India.
  16. 16. 16 Net Factor Income from abroad Year Agriculture(A) Industry(B) Service(C) NFIA(A+B+C) 1990-1991 48.06 -66.18 -224.62 -168.49 1991-1992 63.59 -7.46 -188.1 -176.3 1992-1993 61.64 -49.84 -294.74 -178.12 1993-1994 102.59 14.03 -147.33 -162.05 1994-1995 72.85 -87.57 -244.25 -164.3 1995-1996 145.07 -65.12 -259.19 -176.72 1996-1997 175.48 -93.01 -166.07 -169.49 1997-1998 160.48 -163.9 35.72 -138.24 1998-1999 109.44 -283.4 -81.73 -146.87 1999-2000 92.46 -157.6 -425.14 -163.75 2000-2001 165.71 95.68 -342.45 -238 2001-2002 134.72 -30.27 -389.5 -213.71 2002-2003 170.45 5.34 -144.67 -189.6 2003-2004 152.93 -197.86 318.04 -206.93 2004-2005 387.9 -912.87 729.16 -223.75 2005-2006 277.17 -1230.1 1115.82 -248.96 2006-2007 376.49 -1741.3 1733.34 -295.15 2007-2008 539.73 -2568.2 2902.38 -171.79 2008-2009 550.94 -3625.1 2961.11 -253.84 2009-2010 383.29 -3598.2 3433.64 -276.64 2010-2011 673.01 -4383.3 4759.77 -527.76 2011-2012 1183.33 -6470.9 4769.25 -518.28
  17. 17. Post-liberalisation period (since 1991) GDP of India has risen rapidly since 1991. In the late 1970s, the government led by forincumbent companies, removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. However, the subsequent government policy of Fabian socialismhampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the Gulf War, which caused a spike in oil prices, resulted in a major balance payments crisis for India, which found itself facing the prospect of defaulting on its loans. asked for a $1.8 billion bailout loan from the return demanded de-regulation. liberalisation period (since 1991) government led by Morarji Desai eased restrictions on capacity expansion , removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. However, the subsequent government policy hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading , which caused a spike in oil prices, resulted in a major balance payments crisis for India, which found itself facing the prospect of defaulting on its loans. billion bailout loan from the International Monetary Fund regulation. 17 eased restrictions on capacity expansion , removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. However, the subsequent government policy hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading , which caused a spike in oil prices, resulted in a major balance-of- payments crisis for India, which found itself facing the prospect of defaulting on its loans. India (IMF), which in
  18. 18. 18 In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated theeconomic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies. By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than agricultural residents. While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by S&P and Moody's. India enjoyed high growth rates for a period from 2003 to 2007 with growth averaging 9% during this period. Growth then moderated due to the global financial crisis starting in 2008. In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower and is believed to play a major role in the global economy in the 21st century. Starting in 2012, India entered a period of more anemic growth, with growth slowing down to 4.4%. Other economic problems also became apparent: a plungingIndian rupee, a persistent high current account deficit and slow industrial growth. Hit by the U.S. Federal Reserve's decision to taper quantitative easing, foreign investors have been rapidly pulling out money from India.
  19. 19. 19 Impact • The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%.] At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%,South Korea by 10% and Taiwan by 12%. • Only four or five licences would be given for steel, electrical power and communications. Licence owners built up huge powerful empires. • A huge private sector emerged. State-owned enterprises made large losses. • Income Tax Department and Customs Department became efficient in checking tax evasion. • Infrastructure investment was poor because of the public sector monopoly. • Licence Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country" and corruption flourished under this system.
  20. 20. 20 Conclusion From above one can find that trade liberalization has both the positive and negative effect on the Indian economy. Both the trade direction and composition has changed in favour of developing economy. Net factor income has been worsened by liberalization and trade policy. Overall india’s experience of liberalisation in agriculture,manufacturing and finance shows that liberalisation has been gradual,voluntary and tailored according to the needs of the economy.the role of the state has been to use markets to not only maximize commercial objectives but also seek to galvanize attempts to attain social objectives. The cautious approach towards liberalisation has provided the state with enough policy space to pursue development led liberalisation