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Role of Public Policies and Public
 Institutions in Market Economy
Dr. Tarun Das, Eco. Adviser, MOF




             Publi...
Role of Public Policies
and Public Institutions
  in Market Economy
          Contents
2. Economic Reforms in India
 3. Po...
I.   Economic Reforms in India

•




               Public Policy by Tarun Das   3
1.1 Economic Reforms in India
• Since July 1991 India has initiated wide-
  ranging reforms in trade, industry,
  financia...
1.2 Indian Economy in
         Pre-Reforms Period
 Mixed economy, but too closed
 Far behind world-wide globalization
 ...
1.3 Rationale for Reforms
Over control, regulation, licensing and
 high taxes and duties resulted in :
   Low efficiency ...
1.4 Challenges of Public Policy
 To break the nexus among vested interests
  so that reforms can be implemented,
 To cha...
1.6 Unique Features of Reforms
 Gradual, Step by Step, Evolutionary and
  Cumulative Approach, not a Big Bang,
  Shock Th...
2. Public Policies
and Public Institutions




       Public Policy by Tarun Das   9
2.1 Reorientation of Public Policies
 To create enabling environment for
  public-private partnership
 To link fiscal in...
2.2 Redefining the role of
         Bureaucracy
There is a distinct change of mind set
 of the government officials:
 Fro...
2.3 Redefining the role of govt
 Both well governed state and well
  functioning markets are essential for
  high growth ...
2.4 Markets and Institutions
 Efficient markets are central for rapid and
  successful economic development.
 But the re...
2.5 Role of Public Institutions
Successful development requires solid public
     institutions:
 To protect property righ...
2.6 Building Efficient Institutions
 Institution building is diverse involving all
  stakeholders viz. policymakers, corp...
2.7 Institutions for
         Good Governance
Good Governance requires the development
  and strengthening the following i...
2.8 Progress until now
 Significant progress has been made in
  these respects since 1991.
 Indian economy today is more...
2.9 Social Sector Development
 “Growth with social justice” has been
  basic objective of Indian planning
 Several anti-...
3. Impact of
 Reforms



    Public Policy by Tarun Das   19
Impact on Growth
UNDP Report on Globalization has
 mentioned that growth under
 globalization has been jobless, rootless,
...
3.1 India emerged as one of the fastest growing economies
                                                                ...
3.2 India moved on a higher growth path
    (Real GDP growth rate in per cent)

 9
                                       ...
3.3 Sectoral growth rates
           and shares in GDP (%)

Sectors       GR     GR Share in Share in
            1980-19 ...
3.4 Employment growth rates
          and shares in India (%)

Sectors       GR     GR    Share in Share in
            19...
3.5 Composition of sectoral GDI (%)

                                        1990-91   2002-03
A.   Agriculture & allied  ...
3.6 Impact on Financial Sectors
Item                Mar-96 Mar-98 Mar-04
1.No.of foreign banks 33                        4...
3.7 Improvement in Current Account
3
         on External Sector (as % of GDP)
                                           ...
3.8 Substantial increase in
                       Foreign Investment (US$ bln)
                  14
                     ...
3.9 Significant reduction in External
      Debt Service Ratio (at end March)
                   (% of gross current recei...
3.10 Significant reduction in External
      Debt/GDP ratios (at the end March)
45
            38.7 37.5
40
              ...
3.11 Reduction in Short Term Debt to
      Total External Debt Ratio (end March)
12
      10.2
10
             8.3
8      ...
3.12 Substantial Build-up of
                          Foreign Exchange Reserves
                                         ...
3.13 Steady Improvement in Import
                   Cover of FER (Number of months)
                                     ...
3.14 Expenditure on social sectors

  Year       Total          Expenditure Expenditure
            Expend.          on so...
3.15 Basic Indicators of Human
           Development-1
Year   Life expectancy                       Literacy rate
       ...
3.16 Basic Indicators of Human
          Development-2
Year   Birth rate         Death rate            Infant
       Per 1...
3.17 Reduction of Poverty
    Year          Poverty Ratios (%)    Number of Poor (Million)
               ________________...
4 Strengths, Challenges
     and Prospects




       Public Policy by Tarun Das   38
4.1 Strengths of Indian Economy
 Fourth largest economy in terms of PPP-
  adjusted GDP after USA, China and Japan
 Larg...
4.2 Illiberal Conclaves
 What is less clear is the drawing line between
  invisible hand of markets and the helping
  han...
4.3 Concluding Remarks
 As first generation reforms take root and second
  generation reforms unfold, India is emerging a...
Thank you
Have a Good Day




    Public Policy by Tarun Das   42
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  1. 1. Role of Public Policies and Public Institutions in Market Economy Dr. Tarun Das, Eco. Adviser, MOF Public Policy by Tarun Das 1
  2. 2. Role of Public Policies and Public Institutions in Market Economy Contents 2. Economic Reforms in India 3. Policies and institutions 4. Impact on the economy 5. Concluding observations Public Policy by Tarun Das 2
  3. 3. I. Economic Reforms in India • Public Policy by Tarun Das 3
  4. 4. 1.1 Economic Reforms in India • Since July 1991 India has initiated wide- ranging reforms in trade, industry, financial and public sectors. • To improve efficiency, productivity and international competitiveness of Indian industries and to impart dynamism to overall growth process. • Emphasis is on the role of market economy and the so-called LPG (liberalization and privatisation along with globalization). Public Policy by Tarun Das 4
  5. 5. 1.2 Indian Economy in Pre-Reforms Period  Mixed economy, but too closed  Far behind world-wide globalization  High level of control, licenses and regulation  Monopolistic practices in public utilities  Complex tax regime with high rates  High tariff walls & QRs on imports  Rigid factor markets-land, labour, capital  High fiscal deficits and public debt  Precarious balance of payments Public Policy by Tarun Das 5
  6. 6. 1.3 Rationale for Reforms Over control, regulation, licensing and high taxes and duties resulted in :  Low efficiency and productivity  High transactions cost  Corruption and rent seeking  Non-optimal allocation of resources  Sub-optimal choice of size, technology and location of industries  Low quality but high prices of products  Bureaucratic inefficiency and red tape Public Policy by Tarun Das 6
  7. 7. 1.4 Challenges of Public Policy  To break the nexus among vested interests so that reforms can be implemented,  To change the mind-set of all policymakers and bureaucrats to accept change,  To achieve sustained growth with equity and social justice so that fruits of reforms reach everybody,  To involve all stakeholders in the process of development, because we know that no reforms can succeed unless we are able to take the people along with us. Public Policy by Tarun Das 7
  8. 8. 1.6 Unique Features of Reforms  Gradual, Step by Step, Evolutionary and Cumulative Approach, not a Big Bang, Shock Therapy or Revolutionary Approach  General political consensus  Strong emphasis on “human face”  Sovereignty and nationality constraint  Agency constraint- ideology of party in power  Preference for national-level decentralization  Prioritisation and sequencing of reforms  No write-off / rescheduling of external debt  Practically no sacrifice made by people Public Policy by Tarun Das 8
  9. 9. 2. Public Policies and Public Institutions Public Policy by Tarun Das 9
  10. 10. 2.1 Reorientation of Public Policies  To create enabling environment for public-private partnership  To link fiscal incentives to productivity  To streamline public investment  To repair market failures  To strengthen structures and institutions  To emphasis on consultations, flexibility, decentralization, selectivity, outcome, implementation, evaluation, monitoring and co-ordination of policies Public Policy by Tarun Das 10
  11. 11. 2.2 Redefining the role of Bureaucracy There is a distinct change of mind set of the government officials:  From a controller to an enabler  From a supplier to a facilitator  From an operator to a policy maker  From a regulator to a trustee of social equity and environmental sustainability Public Policy by Tarun Das 11
  12. 12. 2.3 Redefining the role of govt  Both well governed state and well functioning markets are essential for high growth and sustainability.  Government and free markets should supplement and complement each other  Govt to withdraw from sectors where private participation is more productive  Scope of government to remain large in social sectors Public Policyinfrastructure. and by Tarun Das 12
  13. 13. 2.4 Markets and Institutions  Efficient markets are central for rapid and successful economic development.  But the real markets are neither competitive nor perfect. Government’s role is to correct market imperfections by strengthening institutions.  Institutions play an important role in developing fair, competitive, inclusive, efficient, and integrated markets.  Institutions are also essential for implementing and evaluating public policies.  Institutions include organisations, rules, laws, conventions and informal norms. Public Policy by Tarun Das 13
  14. 14. 2.5 Role of Public Institutions Successful development requires solid public institutions:  To protect property rights,  To regulate market agents,  To maintain macro-economic stability,  To ensure social equity and justice,  To provide social safety nets,  To resolve conflicts. All these help in reducing transactions costs and provide incentives for competition. Public Policy by Tarun Das 14
  15. 15. 2.6 Building Efficient Institutions  Institution building is diverse involving all stakeholders viz. policymakers, corporate bodies and civil society.  It is an evolutionary and cumulative process, and requires open mind by all stakeholders to accept new ideas and innovations and to reward merits.  Most of the institutions that support markets need to be developed by the government for regulating, stabilizing and legitimizing their scope and functions. Public Policy by Tarun Das 15
  16. 16. 2.7 Institutions for Good Governance Good Governance requires the development and strengthening the following institutions:  Economic and political institutions- Law and order, tax administration, social security systems, regulatory institutions, labour laws.  Independent audit- financial, performance and policy audit.  Independent judiciary,  Free Press,  Private voluntary organisations (NGOs). Public Policy by Tarun Das 16
  17. 17. 2.8 Progress until now  Significant progress has been made in these respects since 1991.  Indian economy today is more liberal and open, and there is greater participation of people in development.  Regulatory bodies have been set up for ports, telecom, electricity, insurance, pension, (POL under consideration).  Govt desires to set up Competition Commission  Although slow, outdated laws and Acts are being amended. Public Policy by Tarun Das 17
  18. 18. 2.9 Social Sector Development  “Growth with social justice” has been basic objective of Indian planning  Several anti-poverty programs are in operations for decades.  Two basic approaches for poverty reduction- Trickle down and direct attack on poverty.  Employment Guarantee Act  Education Cess and Sarva Siksha Yojana  Role of NGOs and SHGs in social sector Public Policy by Tarun Das 18
  19. 19. 3. Impact of Reforms Public Policy by Tarun Das 19
  20. 20. Impact on Growth UNDP Report on Globalization has mentioned that growth under globalization has been jobless, rootless, ruthless, But, no such adverse effects have happened in India. Public Policy by Tarun Das 20
  21. 21. 3.1 India emerged as one of the fastest growing economies in 1990-2001 12.0 10.0 Average growth rate in 1990s (%) 10.0 8.0 7.7 6.7 7.4 6.0 6.5 6.3 6.8 4.0 6.2 6.0 5.9 2.0 0.0 ia ile i na d p ia da r sia e ma Re Ind lan Ch er i qu an Ch l ay Li b m. Ire an Ug mb Ma Do My za Mo Country Public Policy by Tarun Das 21
  22. 22. 3.2 India moved on a higher growth path (Real GDP growth rate in per cent) 9 8.5 8 7.8 7 7.3 7.3 6.9 6.5 6.2 6 5.6 5.9 6.1 5.8 5 5.1 4.8 4 4.4 4.0 3 2 1.3 1 0 19 -96 19 -99 19 -98 20 -00 19 -92 20 -0 2 19 -97 20 -01 19 -91 19 -9 4 r- D 0 4 19 -93 19 -95 5 20 -03 20 c04 -0 Ap 0 3 - 96 00 90 91 01 95 99 98 93 97 92 94 02 04 e 19 Public Policy by Tarun Das 22
  23. 23. 3.3 Sectoral growth rates and shares in GDP (%) Sectors GR GR Share in Share in 1980-19 1992-2 GDP GDP 90 005 1990-91 2004-05 Agriculture 3.1 2.7 Industry 7.2 6.6 Services 6.5 8.4 GDP 5.5 6.4 Public Policy by Tarun Das 23
  24. 24. 3.4 Employment growth rates and shares in India (%) Sectors GR GR Share in Share in 1983-19 1993-2 Employ. Employ. 93 000 1983 1999-00 Agriculture 2.2 0.0 63.2 56.7 Industry 15.6 17.5 Services 21.2 25.8 Employ- 2.7 1.1 100 100 ment Public Policy by Tarun Das 24
  25. 25. 3.5 Composition of sectoral GDI (%) 1990-91 2002-03 A. Agriculture & allied 8.4 8.9 B. Industry 53.0 46.9 C. Services 38.5 44.2 D. Total GDI 100.0 100.0 Public Policy by Tarun Das 25
  26. 26. 3.6 Impact on Financial Sectors Item Mar-96 Mar-98 Mar-04 1.No.of foreign banks 33 42 33 2.New private banks 9 9 10 3.Gross NPA ratio 24.8 16.0 7.2 4.Net NPAs ratio 10.7 8.2 3.0 5.Op. profits ratio 1.6 1.8 2.7 6.Net profits ratio 0.2 0.8 1.1 7.CRAR (Capital adequacy ratio) No. of Banks -- Below 9% 31 6 2 -- 9 to 10% 10 16 1 -- Above 10% 43 71 87 8.Number of banks 84 93 90 Public Policy by Tarun Das 26 .
  27. 27. 3.7 Improvement in Current Account 3 on External Sector (as % of GDP) 1.8 2 1.2 1 0.7 0 -0.3 -0.4 -0.5 -1 19 91 19 -93 19 94 19 -96 19 97 19 -98 20 00 20 -01 r-D 4 19 -92 19 -95 19 -99 20 -02 20 03 04 Ap 03-0 -1.0 -1.0 -1.0 -0.9 - - - - - ec 92 93 95 96 97 99 00 90 91 94 98 01 02 -1.2 19 -1.4 -2 -1.7 -1.7 -3 -3.1 -4 Public Policy by Tarun Das 27
  28. 28. 3.8 Substantial increase in Foreign Investment (US$ bln) 14 12.5 12 11 10 8 in US $ billion 6.7 6 6.0 5.4 5.9 5.1 4.9 5.1 4.2 4.6 4 2 2.3 0.6 0 0.1 0.1 19 -91 19 -93 19 -94 19 -95 19 -96 19 -97 19 -98 19 -99 20 -00 20 -01 20 -02 20 -03 20 -04 -05 19 -92 90 92 93 94 95 96 97 98 99 00 01 02 03 04 91 19 Public Policy by Tarun Das 28
  29. 29. 3.9 Significant reduction in External Debt Service Ratio (at end March) (% of gross current receipts) 40 35.3 35 30.2 30 27.5 25.4 25.9 26.2 25 23.0 19.5 18.8 20 17.1 16.2 17.8 15.8 15 13.4 12.3 10 5 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Public Policy by Tarun Das 29
  30. 30. 3.10 Significant reduction in External Debt/GDP ratios (at the end March) 45 38.7 37.5 40 33.8 35 30.8 28.7 30 27.0 24.6 24.3 23.6 25 22.1 22.6 21.1 20.2 18.6 20 16.7 15 10 5 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Public Policy by Tarun Das 30
  31. 31. 3.11 Reduction in Short Term Debt to Total External Debt Ratio (end March) 12 10.2 10 8.3 8 7.0 7.2 6 5.4 5.4 5.1 4.3 4.4 4.4 3.9 4.0 4 3.6 2.8 2 0 91 92 93 94 96 97 98 99 00 01 02 03 04 95 19 19 19 19 19 19 19 19 19 20 20 20 20 20 Public Policy by Tarun Das 31
  32. 32. 3.12 Substantial Build-up of Foreign Exchange Reserves (end March) 160 142 140 120 113 100 76 80 in US $ billion 55 60 38.0 42.3 40 32.5 25.221.7 26.4 29.4 19.3 20 5.8 9.2 9.8 0 -20 94 96 00 02 91 92 93 95 97 98 99 01 03 1- 4 ay 0 Public Policy by Tarun Das 32 19 20 19 19 19 19 19 19 19 19 20 20 20 20 M
  33. 33. 3.13 Steady Improvement in Import Cover of FER (Number of months) (end March) 25 20 20 18 15 13.8 in US $ billion 11.3 10 8.6 8.4 8.2 8.2 8.6 6 6.5 6.9 5.3 4.9 5 2.5 0 19 -98 19 -92 19 -96 19 -99 20 -00 19 -97 20 -02 19 -91 20 -01 19 -9 4 19 -96 19 -93 20 -04 5 20 -03 -0 96 90 00 91 01 99 95 98 97 93 03 92 94 04 02 Public Policy by Tarun Das 33 19
  34. 34. 3.14 Expenditure on social sectors Year Total Expenditure Expenditure Expend. on social on social As % of sectors sectors GDP as % of as % of total GDP expend. 1992-93 17.4 7.8 1.4 2000-01 15.5 11.1 1.7 2005-06 17.0 11.5 2.0 Public Policy by Tarun Das 34
  35. 35. 3.15 Basic Indicators of Human Development-1 Year Life expectancy Literacy rate at birth (years) (percent) 1951 32.1 18.3 1961 41.3 28.3 1971 45.6 34.5 1981 50.4 43.6 1991 59.4 52.2 2001 63.5 65.4 Public Policy by Tarun Das 35
  36. 36. 3.16 Basic Indicators of Human Development-2 Year Birth rate Death rate Infant Per 1000 Per 1000 mortality rate Per 1000 1951 39.9 27.4 146 1961 41.7 22.8 146 1971 41.2 19.0 129 1981 33.9 12.5 110 1991 29.5 9.8 80 2001 25.8 8.5 68 Public Policy by Tarun Das 36
  37. 37. 3.17 Reduction of Poverty Year Poverty Ratios (%) Number of Poor (Million) ______________________ _________________________ Rural Urban Combined Rural Urban Combined __________________________________________________________ 1973-74 56.4 49.0 54.9 261 60 321 1977-78 53.1 45.2 51.3 264 65 329 1983-84 45.7 40.8 44.5 252 71 323 1987-88 39.1 38.2 38.9 232 75 307 1993-94 37.3 32.4 36.0 244 76 320 1999 27.1 23.6 26.1 193 67 260 _________________________________________________________________ Public Policy by Tarun Das 37
  38. 38. 4 Strengths, Challenges and Prospects Public Policy by Tarun Das 38
  39. 39. 4.1 Strengths of Indian Economy  Fourth largest economy in terms of PPP- adjusted GDP after USA, China and Japan  Largest pool of technical manpower  Largest share of working population  Largest English speaking population  Huge domestic market with second largest population, democracy, free press, independent judiciary  Rich natural resources, well established financial system, wide spread infrastructure, dynamic private sector Public Policy by Tarun Das 39
  40. 40. 4.2 Illiberal Conclaves  What is less clear is the drawing line between invisible hand of markets and the helping hand of the government.  There are still ‘illiberal conclaves’ such as inflexible land and labour markets, municipalities and corporations, outdated laws and legal procedures, rigid institutional rules and practice.  Govt is in the process of second generation reforms to remove these constraints on growth and development. Public Policy by Tarun Das 40
  41. 41. 4.3 Concluding Remarks  As first generation reforms take root and second generation reforms unfold, India is emerging as a favourite destination for investment and a land of immense opportunity for all.  India should maintain its open door policy in goods & services production, investment, trade.  Carried to their logical ends, economic reforms would make India as one of the most dynamic economies of Asia by 2010.  India is “an economic miracle” waiting to happen.  All the stakeholders have to play a distinct role in that exciting process of development. Public Policy by Tarun Das 41
  42. 42. Thank you Have a Good Day Public Policy by Tarun Das 42
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