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Short Essay on the Globalisation of Indian Economy

by Anjana Mazumdar

Globalisation of an economy implies that its commodity as well as factor market is functioning under the influence of
market forces generated in the world economy without any barrier imposed by its nation-state.

Under such a condition production units of globalised economy gain efficiency and become competitive in the world
market. Its export increases.

Foreign exchange problems get solved through increased export and adequate availability of private foreign capital.
So the country concerned achieves external equilibrium and can be hoped to move to higher growth path with

With this expectation, Indian economy is also being globalised to get rid of perennial Balance of Payments (BOP)
disequilibrium which resulted into severe BOPs crisis time and again. Such crises distort our planning process
creating tension over the economy and affect its smooth functioning.

If India is to become more competitive, we need first to create a competitive micro economy and a stable macroeconomy with no vested interests.

The liberalisation efforts by way of reducing controls, removing license raj, partial convertibility of the rupee etc. have
to be undertaken.

Globalisation is taking place on firm level through national and international interdependence encouraged by
technological developments. Globalisation of the Indian economy really meant that the industry had to face
competition from outside, subject to some degree of protection.

The argument in favour of integrating the Indian economy with the world economy has been put forth very strongly in
the official circles. The IMF and the World Bank have also been advocating such a policy for India.

The recent worldwide interest in globalisation has resulted from a large scale failure of the hitherto followed economic
policies. The poor performances of the world economy and sluggish growth have compelled various thinkers to frame
alternative models.

Consequently there is a general agreement that the future growth of the world economy is largely dependent upon
globalisation of production as well as consumption.

Globalisation is viewed as a two way action plan. First, it envisages free competition, high productivity and second,
selling in one single marketplace for the whole world.

Our policy-makers believe that by exposing Indian industries to free competition and integrating Indian economy with
the global mainstream, we can accelerate and boost the pace of economic development.

It is said that competition from abroad would lead to improvement in quality, productivity, efficiency and cost
effectiveness which would in turn, boost up exports and our foreign exchange earnings and steer our economy out of
the present crisis.

Independent India inherited an inward-oriented policy and in the early years of planning an import substitution regime
with anti-export bias was considered to be quite appropriate.

Indias trade regime remained basically inward-looking until export incentives were introduced in the mid-60s. In the
70s many more export incentives were introduced but this did not help export promotion much.

The 80s witnessed attempts towards export promotion and trade liberalisation under Sixth and Seventh Plans.
Despite the efforts towards liberalisation, Indias trade regime remained more or less inward-looking.

Owing to greater reliance on the working of the closed economy, Indian economy has generated a high cost
inefficient industry which has prohibited the optimum utilisation of factors of production.

Despite all potentialities Indian industries are not competing with the global industries with respect to cost and quality.
Protection has always given an avenue to develop a high cost industry. Under the shadow of FERA and MRTP Act,
monopoly houses have developed.

It is the closeness of the Indian economy that prohibits introduction of the advanced technology of the developed
nations. So the globalisation of the economy is essentially needed.

It will provide an opportunity for India to become an important production centre of the world. It will also provide an
opportunity to the Indian companies to become multinational concerns.

At the same time it can attract foreign investors so as to make India a centre of the world market. India can utilise
these avenues very well on account of its competitive edge over other countries due to its large skilled labour.

The strategy adopted since July 1991 for further integration of the Indian economy with the world economy includes
exchange rate adjustment to improve competitiveness of exports, reduction in tariffs and a more open policy towards
direct foreign investment and technology.

The new economic policy aims at making the Indian economy competitive and much better integrated with the world

We are now clearly in a new and different world. India cannot expect large inflow of external funds while there is an
irrational exchange rate policy.

India has no other alternative but to integrate its economy into the global mainstream to further boost its economic

As most of the countries in the world are steadily reorienting their economies to the market-friendly forces, it will be
suicidal on the part of India to remain in isolation. Competition from abroad would lead to improvement in quality,
productivity, efficiency and cost-effectiveness.

For integrating the Indian economy with the world economy not only faster export growth but also free access to
imports is necessary and accordingly import duties have been brought down substantially.

High tariffs have created a high cost industrial structure and Indian competitiveness had been affected by this. When
many other countries had substantially reduced the tariffs, Indias tariff structure also needed to be lowered.

Since globalisation requires the creation of suitable environment for free flow of direct foreign investment, the new
industrial policy of 1991 permits approval for foreign direct investment up to 51 per cent foreign equity in the case of
high priority industries and this obviously opens the door for multinationals in a big way.

The foreign investment will bring in new technology and marketing expertise from which the country will benefit. The
market-friendly approach of the new economic policy is expected to create suitable environment for the entry of
foreign capital on a large scale.

An open policy towards technology transfer is also an important requirement for globalisation of the Indian economy.
One obstacle too much needed inflow of technology has been the cumbersome approval process involving delays
and uncertainty.

To overcome this problem, in the new industrial policy automatic approval will be given by the government for
technology agreements related to high priority industries and similar facility will be provided to non-priority industries
also if expenditure in foreign exchange is not involved.

The new economic policy which advocates a market- friendly approach and removal of bureaucratic controls is
expected to attract foreign capital and technology and also facilitate easy movement of goods through substantial
reduction in tariffs and thus pave the way for further integrating the Indian economy with the global economy.

External environment is going to be more dynamic and complex. There will be less social protection for inefficiency.
There will be noticeable fights in the market place for innovation and competitiveness. Unless we increase our
productivity and efficiency, we will not be able to go beyond the Hindu rate of growth.
Indias globalisation efforts are hindered by lack of favourable international environment. At a time when advanced
countries, particularly the US, are adopting a protectionist policy with Super 301 threat, it is very difficult to
accomplish the objective of globalisation of the Indian economy.

Secondly, openness of the economy to the world competition is an invitation to the multinationals. The role of the
multinationals is not salubrious for the poor countries.

Thirdly, globalisation would imply certain consequences which may not be always beneficial to the developing
countries. One major implication of globalisation is the internationalisation of prices. Globalisation would also imply
the equalisation of domestic prices with international prices.

This would mean that the firms in the developing economies should enhance their competitive strength. If some of the
commodities have relatively lower prices due to subsidisation, the policy prescription would be that subsidies should
be withdrawn so that the prices would attain parity with prices prevailing in the international markets.

In recent times the fertiliser prices in India had been raised and the subsidies were withdrawn. The aftermath of the
withdrawal of subsidies would be a hefty increase in the prices of agricultural commodities.

This would mean that Indian prices must rise to US levels. So as a result of globalisation, inflationary tendencies
would persist as prices are expected to rise by 15 to 20 per cent.

Essay on Effects of Globalization on Indian

by Smriti Chand Globalization

Essay on Effects of Globalization on Indian Economy!

It means to open the Trade and Economy for the international players. In other
words, every manufacturer or producer of goods can compete for sale of their
products without restrictions or without any imposed control.
For example, think of a small village market or meal where all are free to come
and sell their products at their desired price, irrespective of places from where
they come. There are no restrictions on control on their products or the prices.
This is the globalised trade. Any country can participate to set up, acquire, merge
industries, invest in equity and shares, sell their products and services in India.
Therefore, globalisation should not be considered in isolation, but should be
considered in totality with liberalisation of the industrial policy towards lifting of
trade control and restrictions, influence of trade block and simultaneous
Global market treats the world as a single market. With the advent of information
technology and its strategic application, the world is focussed as a global village
and all traders are therefore globalised.
The Earlier (pre 1990s) concept:
Before 1990s India followed a patch of restricted trade. Such restrictions were
that certain products would not be allowed to be imported as they were
manufactured in India. For example, General Engineering goods, Food items,
toiletries, Agricultural products etc. were in the banned list of import.
Some other kinds of products which were produced in restricted quantity in the
country or are expensive and categorised as luxuries were subjected to heavy
import duty to make them costlier in order to dissuade flow of foreign exchange
and give protection to local producers. For example, VCR, Music sets, Airconditioners, Computers etc., these items were subject to 150% import duty.

Globalisation in India:
In the 1990s due to change in world economic order and due to heavy pressures
from rich countries like USA, Japan, European countries dominating the WTO
(World Trade Organisation having 135 members, established in 1995) and IMF
(International Monetary Fund) and World Bank engaged in development
financing activities, the developing and the poor countries all over the world were
forced to open their trade and market and allow foreigners to share their major
chunk of a business. Thus, India first started the process of globalisation and
liberalisation in 1991 under the Union Finance Minister, Shri Manmohan Singh.
The first 5 years in globalisation did not yield appreciable results. The coming of
Multinational cold drinks manufacturers like Coke, Pepsi, and others like Mc.
Donald, KFC, Boomer Chewing gums, Uncle Chips, Cornflakes only dominated
the show. Due to further liberalization of trade and the privatization, the late
1990s showed the effect to globalisation by the coming of giant car manufacturers
like Daewoo Motors, Ford, Honda, Hyundai which resulted in availability of
varieties of cars and reduction of domestic car prices.
Electronic giants like IBM and world leaders in the telecommunication sector like
Ericsson, Nokia, Aiwa etc., delivered wide range of quality products at affordable
prices and brought a major revolution in Indian electronic industries. In the
power sector Enron, AES-CESCO are dominating the show. The resultant effects
were tremendous boost to industrial sector economy. The price level came down
due to cut throat competition and Indian consumers are so far happy.
Recently in May 2001, the Indian Government also opened the defence sector
towards globalisation and privatisation.

Globalisation, but for whose benefit?

Due to globalisation and liberalisation, the Indian market is flooded with quality
foreign products, affecting the Indian industries adversely. This has also resulted
in the loss of jobs to many poor workers. Toys, bicycles and motor bikes from
China, soaps and toiletries from Indonesia and Malaysia, cheese and fruits from
Australia and many more await the Indian consumers with the lifting of trade

Globalisation has turned out to be a bonanza for consumers but a grave for
Indian producers, especially small-scale sectors, because of their age-old
technology and financial bottlenecks to update their machines and technology.
The import of edible oils, grains at lower prices have affected the Indian farmers
Now farming is no more profitable because of marginal remuneration. Indian
manufacturers are no longer able to compete with their global counterparts. The
closing of industries and manpower lay off have become very common.
Let us study the sector wise effects:
(1) Effect of Globalisation on Students and Education Sectors:
Due to globalisation, the availability of study books and information on the
internet or the World Wide Web (www) have increased tremendously. However,
the exorbitant cost factors have made higher and specialised education beyond
the reach of poor and middle class students.
Hundreds of foreign universities have started collaborating with Indian
universities and study institutions. This has affected the course fees. For
Engineering, Medical and Management studies, the course fees are hovering
around Rs.20 to Rs.50 lakhs. Intelligent students from middle and poor class
may have to settle for daily wages earning in future as they cannot afford for the
(2) Effect on Health Sectors:
It is unbelievable that in India, poor people have to spend a minimum of Rs.200
for a mere seasonal cold or minor stomach ailments, thanks to the multinationals
pharmaceutical companies engaged in sky rocketing cost of common medicines
under their brand names.
The private sector hospitals like Apollo, Medicare will be only too happy to
prepare a bill of Rs.5 lakh to Rs.10 lakh for heart or Kidney operation. The
monitoring of health electronically through the internet will worsen the situation
further in the years to come. Death will be the easiest option for poor following
the effect of globalisation in health sector.

(3) Effect on Agricultural sector:

The globalisation of trade in the agricultural sector is perhaps proving to be a big
blunder. The farmers will have to pay a very heavy price, for better variety of
imported seeds having resistance to diseases, because of the patent rights
imposed by WTO.
Over and above, the Indian farmer cannot export their products to rich countries
because of inferior technology and stringent quality parameters imposed by
foreign consumers. The large scale suicide by Indian farmers in Karnataka,
Punjab and Haryana under the burden of heavy loans is directly attributed to
The Indian agriculture is almost on its deathbed. The minimum cost of eatable
rice is Rs.12 per kg and apples from Australia at Rs. 100 to Rs.150 per kg cannot
be afforded by poor.
(4) Effect on Employment sector:
The employment scenario in India is probably the worst in recent years due to
globalisation. The restrictions of use of child labour and fair pay to workers have
a badly affected the traditional industries like cottage, handloom, artisans and
carving, carpet, jewellery, ceramic, and glassware etc., where the specialised skills
inherited for generations were passed on to the next generation from the early
age of 6 to 7 years. The globalisation and trade restrictions under the influence of
WTO have virtually killed business in these sectors.
Conclusion: (Positive aspects):
Though globalisation and liberalisation of trade have resulted in the availability
of large number of quality products at reasonable price, the overall economic
benefits are negated due to the slow death of small scale and traditional goods
producing sectors employing a large population.
The rising cost of basic sustenance products like garments, footwear, cereals,
edible oils, petrol and kerosene, medicines and health care items, decrease in
farm output, decrease in purchasing power of poor are some of the alarming
issues that have given rise to serious doubts about the benefits of globalisation.

The increasing wide gap between the poor and the rich is a major cause of
concern as will attribute to the increase in crime rates, lawlessness, antinational activities, terrorism, abduction, black mailing etc. The globalisation
process, that enables investment of foreign money, may turn out to be a serious
debt rap in future as was experienced in Indonesia, Brazil, Korea and some other
Moreover, for a common man, the globalisation is of no meaning. He wants a
secured source in terms of earning money, maintains his livelihood, has
reasonable savings and appreciates a trouble free life. Therefore, globalisation
may only add to the Indias woes.
Conclusion: (Positive aspects):
The biggest contribution of globalisation is in the field of quality and
development of products with various features to suit the Indians. There are
varieties of semi-processed food products to suit every taste in the market which
has helped us to save time. Globalisation has contributed tremendously to have
access to important information towards quality education Due to globalisation;
the communication sector has got a tremendous boost.
We have now cell phones; internet and the availability of latest drugs are helping
to save valuable lives along with good doctors sitting across the Web to advice.
Due to globalisation, the car manufacturer like Maruti is not able to take us as for
Now, wide choices are available to select electronic goods. Life is more
comfortable with cheaper air conditioners. Most importantly, the unscrupulous
Indian manufacturers are not able to take us for a ride. Thanks to globalisation,
we are able to dream to send a man to the moon due to a better economy and
technological competence.

Cultural Globalization



by Puja Mondal Globalization

Some of the important types of globalization are as follows: 1. Economic

Globalization 2. Cultural Globalization.
Economic and cultural are broadly the two types of globalization. These domains
are also interconnected. Development of communication technology like
telephony, television, computer and internet has been the only instrumental
factor to bring about economic and cultural globalization.
At the root of the globalization is technological revolution, which has squeezed
time and space in bringing people of the world in contact with one another as and
when one so desires. Its direct bearing is on the possibility of economic
interdependence among the world countries.

1. Economic Globalization:
From the second half of the eighties of the preceding century, a radical economic
relationship among different countries has come into being which is governed
and regulated by the market. The Indian market is now replete with both
domestic and foreign manufactured goods.
FDI is gradually increasing in the country and also the neighbouring countries.
Multinational companies are joining hands with Indian companies in a big way.
However, economic globalization in India is still scanty and partial and needs to
be evaluated with reference to the other countries of Asia, particularly China.
Globalization is an economic change, which is characterized by increasing
consumerism and a non-conventional and trendy lifestyle. The consumption
pattern, cultural production and other local cultural categories undergo change

away from the traditional living pattern. The markets are flooded with a variety of
goods manufactured all over the world.
India has joined the globalization movement and has indeed left an imprint on
the world economic system by contributing enormously, particularly in the
knowledge industry sector. The country is proud of the fact that the developed
countries are now forced to look towards India for the new challenges that have
emanated from the development.
Under the process of globalization, there is free movement of capital and
commodities from one country to other. The businessmen of one country are
freely investing money in manufacturing, service, knowledge and other sectors of
other countries. Multinational companies are mushrooming and dominating the
indigenous manufacturing sector of the less developed countries.

2. Cultural Globalization:
Globalization of cultural items is a natural outcome of economic interdependence
and reciprocal relationships. Efficiency of communication technology and
consequent economic linkages determine the extent and nature of cultural
symbiosis among the involved countries. Cultural expansion across national
boundaries is a natural result of intense economic globalization.
Mass media has an important role to play in bringing the cultures of the world to
people anywhere in the world, who adopt them if influenced. Since the education
and urbanization have weakened the old institutions and community
cohesiveness, and strengthened individual autonomy, the process of imitating
foreign culture has been accelerated.
Cultural globalization takes place at two levels. One, every culture of the world is
exposed to the people of every country through mass media and thus all the local
cultures are interacting with one another. In this process of cultural symbiosis, all
the cultures are taking global character in varying degrees depending upon their
attractiveness to people outside their cultural boundaries.
Cultural globalization is quite visible today in the form of uniformity of dress
style, consumption pattern, food habits etc. People, particularly the youth, are
frantically following the new lifestyle. The mass media has brought people closer

to the cultures of the world, which were earlier completely unknown to the people
at distant places.
The television channels on geography, tourism and wildlife have contributed a lot
to culturally unite people of the world ignoring specificities. Professor Yogendra
Singh says that globalization has also changed the traditional mode of cultural
expressions, usages of language and communication media at the local, regional
and national levels. These have also created many sub-cultures of entirely new
kind in urban areas. The rise of popular culture is a new phenomenon with
linkages both to rural and urban areas.
At the other level, globalization has accrued the material benefits to the local
cultures. The local cultures of India, which were confined to local spaces and
carried out either as part of leisure by local artisans or could be decoration pieces
and items of pleasure for the local elite, are now expanding much beyond their
traditional boundaries.
These culture products were not the commodity of the market. The artisans of
these arts and artifacts were doomed to live a modicum of life. As a result of
globalization, the local cultures are getting commoditized and monetized and
enjoying their existence at global level, making handsome amount of money for
their creators, the craftsmen, ameliorating their destitute and raising the
standard of living.
One thing, however, has to be borne in mind that, under the influence of
globalization, market economy, media, efficient and powerful information
technology and the local cultures are forced to undergo some changes and some
degree of homogenization of culture, which is not difficult to notice.
But this does not mean that the local cultures will vanish completely and there
would be one culture pattern the world over. A large amount of self-identity and
autonomy is enjoyed by local cultures. This is also truer about the Indian local
culture. In reality, the greater the depth of history of a culture is, greater would be
the resistance to the external pressure to it as is the case with Indian culture.
M.N. Srinivas writes:

Indian culture is characterized by enormous diversity. It would not be an

exaggeration to say that the cultural situation in India varies every few miles. And
even within a single village, each caste has culture which is somewhat different
from that of the other.
In fact, it would not be an exaggeration to state that each kinship unit has its own
distinctive cultural practices, representing a fusion of different incoming affine
strands modifying the culture of the main agnatic stem.
It is because of this strength that the local cultures of India have enough
resilience to counter hegemonic impact of globalization on them. India is a very
successful democracy. The state takes care of the interests of people of the
country and does not allow the negative consequences of globalization to prevail
but if the state fails at some point people enjoy so much autonomy and power
that they resist the negative influence of globalization by resorting to democratic
means like demonstrations, strikes, street plays and many other methods, which
are even violent sometimes.
Civil society is gaining power and confidence to counter the wrongs of
globalization. Today, no international deal undertaken by the government goes
unattended by the people of the country. For example, the recent Indo-US
nuclear deal, which was ratified not only after an intense debate but also led to a
confidence motion for the government and then only it, got the nod of the

Essay on Liberalization and Its Impact on the Indian


Essay on Liberalization and Its Impact on the Indian Economy

The Economic reforms currently underway in India represent both continuity and a break with India's postindependence development. Its main objective is to restore sustained high growth to alleviate poverty and raise the
standard of living.
Development of Thought:
Changes in the policy packages towards deregulation, liberalization and opening up of the economy were initiated in
the late 70s and early 80s but it was not until 1991 that major economic reforms were undertaken. The major changes
in India's economic reforms fall broadly under five heads-industrial, trade, financial, fiscal and monetary.
However these measures of stabilization are not by themselves enough. The main impetus for sustainable economic
growth has to originate with efficiency and productivity growth brought about through the expansion of investment
and exports.
Another important aspect to be considered is the large number of people in the country living on the poverty line. To
make any reform process socially acceptable a poverty alleviation programme must be in. In the context of resource
constraints, a serious thinking has to be done as to the extent and pace of economic reforms.
India has to go through a painful period of adjustment before the liberalization can have its fruitful impact upon the
economy. In liberalizing the economy the government must not forget to protect the poor and the needs of human
The present bout of economic reforms in India-those started in the nineties- marks both continuity and a break with
India's post-independence development strategy.
India's development strategy after independence was largely influenced by reservation regarding the ability of the
market forces to bring about, on their own, an optimum allocation of resources, thus balancing the country's two
main "Objectives "growth' and 'equity'.
A realization has since dawned on policy-makers, based on India's own experience and the experience of other
countries, that: The domestic economy has now reached a threshold where for better utilization of resources the
benefits of the market forces can be harnessed, by proper market-friendly macro and micro- economic policies
helping both in higher growth and more equity.
This has initiated a serious debate in the country on our development strategy for opening up the economy and
allowing more market orientation, by removing major Government interventions and regulations.
Since 1977, and specially after 1985-86, the Government has embarked upon a series of economic reforms leading
towards liberalization and deregulation Subsequently, there has been a significant improvement in the growth rate of
the country-from the long existing, low rate of income growth of 3.5 percent to an average growth rate of 5.5 per cent
and above.
As noted, the changes in the policy packages towards deregulation, liberalization and opening up of the economy had
been initiated in the late 70s and early 80s. These changes were not systematic and were never integrated into an
overall framework.
According to many economists, these changes were rather slow but not monotonic, until July 1991 when the new
Congress Government came to power. Since then the change in the policy packages have picked up momentum. There
have been major changes since July 1991.

The present Man Mohan Singh led Congress Government came into power in 2004. It has further extended the
liberalization policy started in 1991. In its 2004-2005 and 2005-2006 budgets, the government has brought along
with almost simultaneous changes in trade and finance announced outside the Budget.
These changes are primarily confined to Central Government activities and have not been given an} general policy
directive to integrate with the overall policy packages of the State Government.
The major changes in India's economic reforms fall broadly under five heads-industrial, trades, financial, fiscal and
monetary. The Government's key economic objective is to restore sustained high growth which is essential to alleviate
poverty and raise the standard of living.
In pursuit of these objectives the Government's reform strategy aims at achieving over the course of the next five
(1) a liberalized trade regime characterized by tariff rates comparable to other industrializing developing countries
and the absence of discretionary import licensing (with the exception of a small negative list);
(2) an exchange rate system which is free of the locative restrictions of trade;
(3) a financial system operating in a competitive market environment and regulated by sound prudential norms and
(4) an efficient and dynamic industrial sector subject only to regulations relating to environmental security, strategic
concerns- industrial safety and unfair trading and monopolistic practices; and
(5) an autonomous, competitive and streamlined public enterprise sector geared to the provision of essential
infrastructure goods and services, the development of key natural resources and areas of strategic concern.
It involves taking every step necessary to ensure that the burden of adjustment is fairly distributed and that the very
poor are protected. As a first step in this direction the Government has established a National Renewal Fund to
provide social safety net.
The thrust of the reform programme would initially be on casing the country's extremely tight external payments
situation and reducing inflation. In this context, the Government intends to pursue a. stab le exchange rate policy
geared to maintain the rupee constant in nominal terms- and to rely on fiscal adjustment accompanied by a tight
monetary policy to contain inflation.
But this is an initial phase. Stabilization by itself is not enough. As traditional demand impulses originating from
fiscal policy will remain constrained in the next two to three years, the main impetus for sustainable economic growth
has, to originate with efficiency and productivity growth brought about through the expansion of investment and
Under-pinning such a path of growth must be a consistent and comprehensive structural reforms strategy designed to
promote exports, to improve the relationship between the return on investment and the cost of capital, and to
increase the degree competition between firms in the domestic and external markets so that there are adequate
incentives for upgrading the technology, improving efficiency and reducing costs.
The main emphasis of the fiscal policy is to reduce the Central Government's fiscal deficit, within the broader context
of adjustment of the overall public sector budget.
Reducing the overall public sector budget will require increased financial discipline by the State Government as well,
and the Central Government will encourage the State Government to take steps to improve their fiscal performance
and to streamline the working of the enterprises.
In this context a comprehensive tax reform is proposed. It will improve:
(i) the elasticity of tax revenue through identification of new areas and increasing the share of direct tax a proportion
of total tax revenue,
(ii) a more equitable and broad based system particularly with regard to commodity taxation and personal taxation,
(iii) the removal of anomalies that distort economic incentives and simplification and rationalizations of customs,
tariffs, elimination of exemptions as well as a reduction the average level of tariffs and finally improve compliance of
direct taxes and strengthen enforcements.

In this context also, the need for rationalization and reduction of subsidies and for moving to a more objective system
of administered price has been emphasized.
Regarding exchange rate policy it emphasized the adjustment of exchange so as to provide a significant real
depreciation, to improve export incentives and international competitiveness. In this context the Government
intended to keep the nominal exchange rate stable by a suitable fiscal and monetary policy.
In the immediate future, to achieve stabilization. Government visualizes a tightening of credit and monetary policies,
free higher interest rates and higher cash reserve ratios. It also proposes, by declining the recourse to financial
savings the Government, a larger volume of supply of domestic credit to the private sector.
The Government recognizes that trade reform is an essential element securing supply response to facilitate the overall
restructuring of the economy and to restore external payment viability.
There are five key medium term objectives in the Government's trade policy agenda:
(1) The broadening and implication of export incentive measures and the removal of restrictions on exports:
(2) The elimination of quantitative restrictions on imports;
(3) Substantial retail in the tariff rates;
(4) The decanalisation of exports and imports with the exception of a few items and finally moving to a foreign
exchange system which is free of locative restrictions for trade.
The Government also recognizes that the temporary restriction on import which had to be imposed by the Reserve
Bank of India no to be relaxed.
The Government recognized that a major restructuring of Indian economy, implied by its agenda, will very much
depend on the success of its industrial policy reforms.
In this context a large number of sick firms which constitute drain on the Government budget, with their unpaid
outstanding loans, weaken the financial system, in many cases with the firms closing down leaving their creditors
unreimbursed, have to be taken care of.
For the restructuring of existing sick and loss-making companies, both in the public and private sector, Government
will review the existing provisions of various laws governing labour relations, the State and the local government's
role in restructuring regulation governing transfer of land, the procedure of liquidation under the Companies ACT
and other relevant aspects.
The Government is aware that the prerequisite of having a safety net or social insurance scheme is to provide support
for displace workers in the organised sector. The Government's industrial policy strategy marks a major step forward
towards changing the regulatory structure of industries.
It initiated major changes, including comprehensive deli censing, abolition entry controls related to the MRTP Act
and automatic approval of foreign technology agreements and foreign investments, among others.
The changes policies concerning foreign technology and foreign investment will enable Indian industries to forge
much more with foreign investors and suppliers of technology than has been possible in the past.
The Government's ownership of the financial and banking institutions enabled it to achieve the multiple objectives of
mobilization of resources integration of the rural population into the financial mainstream, enhancement availability
of long-term loans to all levels of industry and agriculture and increased access to credit to small industrialists,
farmers and weaker sections of sock.
However, there are weaknesses and imbalances. The statutory liquidity ratio and cash reserve ratio levels are high,
which implies low return for commercial banks on their funds. This reduces the reserves available to non-priority
borrowers and raises their costs in moving to market based operations of the financial institutions.
Measures have been taken to strengthen the capital markets, the rates for debentures have been freed, and mutual
funds have been opened to the private sector and the full statutory powers are to be given to independent agencies to
regulate security markets. The high level Narasimham Committee had been established to review the structure.

In line with the recommendations of the Narasimham Committee further reforms of the financial sector will be
formulated to increase the efficiency of the financial intermediation.
The measures required to meet these objectives would particularly involve a phased reduction of priority lending
schemes towards the targeted deserving groups and eventual elimination of the subsidies involved, formulation of
prudential norms and standards to guide efforts in recapitalization of the banking sector and full decontrol of deposit
India's severely constrained budgetary circumstances create both the need and the opportunity for placing greater
reliance on the private sector for resources mobilization and investment. Public enterprises provide many of the basic
and critical inputs in India.
It is a matter of serious concern that inadequate attention has been paid to improving their efficiency. In the context
of public enterprise structuring it will be important to assess the social cost involved, with the closure of sick units,
and to develop options and measures for compensation of retrenched labour.
Enterprises in areas judged appropriate for continued public sector involvement will be provided with greater degree
of managerial autonomy along with a progressive reduction in budgetary transfers and loans. Sale of selected firms or
partial divestment for specific sectors is being increasingly, pursued.
The Government recognizes that adjustment programmes entail significant transitional cost. This cost includes
potential loss of output, employment and consumption due to the deflationary impact of fiscal consolidation and
frictions in the restructuring process which must be equitably borne by all sections of the society.
However, a large proportion of India's population continues to be subject to malnutrition and ill health. For this
group, the Government is committed to minimise their share of the burden of adjustment.
Thus the Government should provide higher outlays on elementary-education, rural drinking water supply, assistance
to small and marginal farmers, programmes for women and children, programmes for welfare of scheduled caste and
scheduled tribes and the weaker sections of the society, and increased expenditure on infrastructure and employment
generation projects in rural areas.
Further steps have to be taken to re-allocate social expenditure, particularly in health and education for the poor.
Additional cost-effective compensatory programmes, particularly in the areas of nutrition and employment, should be
strengthened and broadened.
In this context the establishment of a National Renewal Fund has been proposed. Against this backdrop of proposed
policy changes, the first set of changes introduced by the Government comprises increasing of taxes and reduction in
Government expenditure, in order to reduce the deficit.
Simultaneously, there have been adjustments in the exchange rates to make exports more attractive and to control
imports to narrow the balance of payment gap. Along with this a tight monetary policy was followed. Subsequent
assessments however revealed that these measures were insufficient to reduce excess demand for imports.
Consequently, the Government imposed emergency credit restrictions on imports. Unfortunates although the
Government took timely measures in the field of trade, industrial policy and fiscal measures, it took a comparatively
longer time to introduce financial liberalization measures, public enterprise reform and measures affecting the
mobility of labour and capital which are normally known as entry/exit policy.
By introducing all these changes, the Government has been successful in its stabilization attempts to a certain extent.
For instance, the foreign exchange reserve has reached 128.9 billion $ on 4 February, 2005, increasing by $31 billion
from 2003-04, though it should be realized that this benefit is only a one time gain, resulting primarily from
multilateral aids.
Thus a major part of multilateral aid has been used for debt servicing. Even NRI outflow which increased $10.2 billion
in 2002-03 to $14.3 billion in 2003-04. Thus, the net inflow is still positive. There are differences of opinion as to the
potential adverse effect of attaining stabilization by this method.
For example, to reduce the gap the contribution of export growth has long term stable implications, but resorting to
too much import compression, will affect adversely the possibility of export growth, and may prove to be selfdefeating, especially if the import component of non-tradition exports is very high.

The 2005-06 budgets further has accelerated the reform process by reducing the deficit to 4.3 per cent of GDP but
again by a modest increase in revenue and a heavy reduction in expenditure, especially expenditure on capital
formation and on human development. For further reduction in fertilizer subsidy, nothing has been worked out.
With regard to the impact of economic reforms on social expenditure and poverty alleviation it is noted that the
reforms have affected public expenditure and many of the key social services areas like health, sanitation, water
supply etc. which contribute to the welfare of the poor.
It does not mean that there is no scope for economizing these expenditures but it implies that it should be done
carefully. Any across the board reduction may be politically and administratively easy but would be harmful to the
The essence of the present economic reforms, understandably, is to resort to the market and make price corrections
according to the relative scarcity values and rates of returns for all inputs in the productive system.
But experience shows that in the long run, when the economy is not growing at a fast pace (i.e., under a concretionary
stabilization phase) these price shifts results in the reduction in the reduction in the welfare of some sections of the
society while benefiting other sections, both in absolute and relative terms.
The fall in real consumption per has resulted in a significant increase in the level of poverty ratio and accordingly the
number of people below the poverty line. A conservative estimate using Planning Commission methodology and
database shows that nearly 6 to 7 Billion people went down the poverty line during this period.
This is a contrast with an annual improvement of nearly 10 to 15 million moving above the poverty line over the last
decade. Thus overall, it makes a difference in terms of a in the poverty alleviation pace by nearly 20 millions, with
reference to the trend values.
This scenario has high political and social sensitivity. In order make the reform process morally and socially
acceptable and politically feasible, conscious positive programme on poverty alleviation will be needed. The need for
such a programme will be more felt if the message is that the present structural adjustment phase will last for more
than 3 to 4 years.
The economic reform process also breeds a class of "new poor". These are the people who will be affected by the
restructuring process through 'closures', many of them are at the higher and middle income level, mostly in the
organised or and easy to identify.
They are the target groups which can be covered by the National Renewal Fund. In this context it should be noted that
already there has been a significant increase in the percent of unemployed.
To provide a cushion to the poor against high price increase, the Government uses the Public Distribution System
(PDS); however its effectiveness needs to be improved. For lance:
(I) The inter-State PDS's allocation is made on a per capita basis regardless of income;
(2) within a given area the poor-income groups are not functionally the most important beneficiaries of the PDS. In
West Bengal, for ample, the PDS financed 54 per cent of wheat consumption of the rural highest income groups;
(3) the PDS is grossly inadequate, especially in areas with high poverty intensity. The income of the poor is much too
low to take advantage even of the PDS; and finally, the whole approach towards impact on the vulnerable section of
the society should be reviewed in the light of reduced public expenditure on social programmes.
For example, cuts in the health programme could lead to increase in India's already high incidence of tropical
diseases. In addition, a poor location programme has its impact not only on the rural wage of the poor but also in the
drive for export growth and adoption of better technology, by making the labour force more illiterate.
The stabilization package is giving the anticipated results: it has also skillfully combined some of the structural
adjustment changes. However, the adequacy of the structural adjustment elements and the growth factors in the
stabilization programme of the Government has been questioned by many economists.
It is that many of the measures taken are on the soft side, as it does not remove many implicit subsidies. In this
context, measures to contain the Government wages bill have not been given proper priority. With regard to taxation,
it is felt that even now, the indirect tax rates in India, particularly on imports, are very high compared to other LDCs.

Of the measures on adjustment that have bet implemented, almost all are in the Central Government sector; whereas
substantial fiscal deficit exists in the States, almost close to that of the Centre of nearly 1.8 per cent of GDP. More
exhaustive measures need to be taken to curtail the States' expenditure pattern.
With regard to the cut in the capital expenditure, is rightly realized that there are many wasteful expenditure items in
the present composition of public investment.
One should, however, be cautious not to reduce them indiscriminately, since in this process, along with the
unproductive, productive sectors, also may suffer a cut.
The 'exit rules' constraining firms from liquidating their assets or retrench workers, remain major hindrances to
improving their efficiency and new investments in the organised sector. Any postponement of a policy in this arc does
not fit with the basic philosophy of structural reform and efficiency.
As to the role of foreign investment, they should be given more open-ended facilities since even now there remain a
large number of constraints in the form Government restrictions on remittances of profit, and Government's approval
required for some major productive sectors.
In the field of financial liberalization a quicker action is needed on the Narasimham Committee's Report. Without a
sound financial superstructure the passage to the market system may result problems, as was observed in the stock
market debacle very recently.
The financial reforms would strengthen the prudential financial recoveries and allow private banks, foreign and
domestic, to bring competition to the financial sector. In the field of agriculture, no specific action has been taken for
its betterment.
This is the area where coordination with the States Rector would be required. Public sector needs greater positive
reforms in addition to reduction in the capital expenditure as given in the last two Budgets.
The public sector should be allowed to adjust to the new policy frame by focusing on issues like: (i) privatization and
(ii) closure of enterprises that would not survive in a competitive environment.
Finally, although India has successfully diversified and expanded its export base, the major contribution in India's
export growth has come from the demand pull of the receiving countries (especially the developed countries). Only a
vet; small portion can be accounted for by changes in market composition and price competitiveness.
Indeed it is only the price factor and a prudent spread over different markets which can help in further increasing
India's exports, in future. This is true especially when the international trade buoyancy does not give rise to much
However, for increasing exports, apart from reducing domestic costs, the country will-need better links, with the
international market. For this efficient transport and communication links will be needed to back our trade an
investment policy.
It is the experience of most countries that in the process of reducing costs and improving quality of products the role
of literate labour force and skilled manpower should get high priority. Indeed, absorbing higher technology needs a
correspondingly well-trained, literate and healthy labour force.
In this context the heavy cut in human development expenditure under the recent budget and the low emphasis on
domestic R&D (needed to improve the ability to absorb and indigenize foreign technology) are disappointing.
India initiated the process of economic reforms with several handicaps. A high poverty ratio with nearly 32 to 40 per
cent of the population living below the poverty line. A very low foreign exchange reserve and level of confidence about
India's credit worthiness.
An unfavorable world scenario with its projected low income growth and increasing regionalism and a substantial loss
in RPA trade (Former USSR and Post European countries) for India.
India's hang-up with anti -market socialistic development strategies and people's shaken confidence arising from
unsatisfactory sporadic liberalization attempts since 1990s. The existence of a large but inefficient public sector with
its own vested interest.
All these, in the light of inter-country experiences, forewarn of a longer gestation period with heavy social costs and
raise doubts as to the tolerance level of Indian society for withstanding such less impending social cost.

However, there are plus points: The liberalization package is preceded by the minimum essential political setup:
India's democratic form of society. In the transformation of economy into a highly efficient one, moving towards a
market economy, India can benefit from her past experience of a mixed economy.
Indeed, this places India on a better footing vis-a-vis China, East Europe and other centrally planned economies.
India has a very good track record of fulfilling international commitments, with a comparatively low debt service ratio
compared to Latin American and some of the African countries.
India has a large supply of skilled manpower and cheap labour. India has a reasonably good basic infrastructure.
It is against this backdrop, that India's stabilization measures should be assessed. In the short run, it has fulfilled the
specific stabilization objectives i.e., reducing the balance of payments and the budgetary gaps and recouping all the
losses in the foreign exchange reserves.
However, a word of caution is needed, from the experience of other countries it has been observed that a short-term
success in the stabilization phase often tempts policy-makers to sit back and prolong the phase of stabilization
process. In a number of cases this has led to stagflation.
The continuance with too high a foreign reserve ratio (as in India) against a heavy import compression requires a
warning. Indeed, a large part of the present problem is due to India's lack of proper foreign exchange reserve
This warning is specially needed when stabilization is achieved through soft option (import and expenditure
compressions and heavy foreign exchange borrowings) regardless of the needs for growth and productivity (as
observed in number of other countries).
This may retard and render difficult the desired transition to growth. To avoid this, the adjustment process could be
slowed down if necessary, specially in certain areas of reform (for example, the rate of decline in the budget deficit as
percentage of GDP). The therapeutic approach of a shock treatment in the reform process may not work in India.
As observed in the case of other countries, a structural adjustment process is much more complex than the
stabilization process, and therefore should not be left only with the bureaucrats and politicians. There is no standard
recipe for the structural adjustment phase, although there is a far degree of commonality in the stabilization phase.
In choosing proper sequencing a very strong financial and banking infrastructure is a pre-requisite to establishing
appropriate market codes of conduct. Therefore financial liberalization should not be postponed for too long.
Moreover, in tune with the spirit of present economic reform, decisions on privatization and exit policy should follow
early in the game. Although a high rate of inflation is a problem the key issue is to revamp the real growth of the
economy by suitable investments and incentives.
In the context of improving productivity and international competitiveness, technology improvement should be the
buzz word. The attempts to reduce the costs exclusively through fiscal. Monetary, financial and trade policies have
their limits. Ultimately, it is the technological progress which matters.
Imports of technology via foreign direct investment should accordingly feature at the centre as a necessary condition
for increasing efficiency. However, the absorption and indigenization of foreign technology alone will satisfy the
requisite condition for success.
This will be made possible by the growth of research and development in the domestic economy. Reforms, therefore,
the research and development policy, must provide a clear strategy and sufficient resources.
To conclude, when Liberalization reforms were initiated the economy was suffering with the heavy foreign exchange
constraints and import compression and a relatively unfavorable international scenario but India will have to go
through a painful prolonged period of adjustment.
Thus, the country must prepare itself to meet this challenge by first protecting the poor and second by protecting the
infrastructure and human development needs.

What it is:
Deregulation occurs when there is a significant decrease or elimination of government regulation over an
industry, market, or economy.
How it works/Example:
The transportation industry is one of the most famous industries to feel the effects of deregulation. In 1887, Congress
established the Interstate Commerce Commission (ICC), which regulated the railroad industry. Over time, the ICC
came to regulate the trucking industry as well. The ICC licensed all truck operators, and it required new entrants to
prove they were "necessary for the public convenience" in order to obtain licenses. The ICC allowed established
shippers to argue whether the ICC should deny a license to a new entrant. The ICC also reviewed shipping rates,
dictated what products the carriers could haul, what routes they could travel, and the cities they could do business in.
The inefficiency imposed by regulation and its focus on helping companies more than consumers became very
apparent once the Motor Carrier Act of 1980 deregulated the trucking industry. The number of carriers nearly doubled
in the four years after the legislation, freight rates fell as much as 20% in one year, overall industry wages fell, and
A similar situation occurred in the airline industry, which was regulated by the Civil Aeronautics Board (CAB) until
1978. Like the ICC, the CAB issued licenses, set fares, and regulated where carriers did business. The Airline
Deregulation Act of 1978 eliminated these constraints, and the airline industry quickly expanded in employment, miles
flown, and number of passengers.
Why it Matters:
Like most economic policy, deregulation is controversial. Most economists agree that deregulation lowers an
industry's barriers to entry and generally increases efficiency, competition, entrepreneurship, and innovation.
Established producers have less control over competitors in a deregulated environment. Deregulation also benefits
the broader economy because it no longer requires taxpayersto support the regulatory agency's overhead.
Overall, deregulation tends to increase choices and lower prices for consumers. In some cases, however,
deregulation can be damaging to consumers, especially when natural monopolies are involved (such as electric
utilities or other situations with immense infrastructure or technical needs). Some also point out that the elimination of
weaker competitors in a deregulated environment means the loss of jobs.