India’s journey towards market economy in the 1990s
@sunandoroy April 2001
The changing contours of State and Markets in India in recent years demonstrate certain characteristics which attaches an uniqueness to the Indian experience with economic reforms and shifting roles of State and Markets. The first distinguishing feature of the Indian experience is the gradualism with which the institutional shifts are taking place. the process of altering the State market composition has been slower in India than in other countries. The adjustment of the State to the new realities is certainly not sudden but follows a gradual course. State continues to play a significant role in the economy, in the fulfillment of constitutional directives as also in the judicious management of economic fundamentals.
The initial years of Indian Independence was characterised by the psychology of heightened expectations, it was the ‘Nehruvian Utopia’ which engulfed the nation. However, even since the initial euphoria with a planning in a closed economy with a pro-active State died down since the late sixties as a reaction to food crises, slowdown in industrial activity and as a consequence to the Oil Crisis in the early 1970s, there was a general feeling of being left behind and not being able to exploit the opportunities available. It was only since the 1980s, there was an effort, at the policy level, to redefine the role of the State vis-à-vis the market. The admission among the policy makers that there should be a fundamental review of the Indian development paradigm is evident from the reports of various committees on important policies such as the Abid Hussain Committee on Trade Policies, Narasimhan Committee on Physical Control, Chakravarty Committee on Monetary Policy, Arjun Sen Gupta Committee on Public Enterprises and Statement on Long Term Fiscal Policy. Even though there was a question mark on the role of the State vis-à-vis the market, the process of change was gradual even when the inevitability became apparent. Finally, it was the Gulf crisis and the consequent crisis in the external front in 1991 which forced the policy makers into taking actions that were contemplated and debated for a long time. In the nineties, the history of reform programmes have not been a one-shot affair like some of the countries that experienced similar reforms.
A second and related feature of the Indian experience of transforming its economy has been the continuity of development thinking that prompted this restructuring of State and markets. Unlike many developing countries, the Indian experience has been free from external pressures. The Indian State enjoyed considerable flexibility in the implementation of its programmes. Primarily due to the spirit of ‘self-reliance’ in the closed economic set up, the ability of the foreign powers to influence the Indian economy was limited.
Thirdly, the relative composition of State and Markets in India have been guided by consensus in certain fundamental aspects of the economy. First, while the economic reforms in many advanced countries are aiming at “cutting welfare”, the welfare role of the State never came into question in India. Cutting across political parties, intellectuals, bureaucracy and the people, there was little doubt that State has to bear the prime responsibility in providing the basic needs like health, nutrition, housing, water supply and education to the masses and in alleviating poverty. The shifting landscape of economic management of the country lies on the same ground of ‘growth with social justice’. Our goal remains the same, while there is a change in the process of attaining the goal.
Fourthly, the long experience with planned developments ensured that State had a predominant share in various sectors of the economy. In 1990-91, at the onset of economic reforms, State enjoyed complete monopoly in Mining, Railways, Communication and Defence, while it had very large shares of Electricity, Gas and Water supply (95 per cent) and Banking & Insurance (86 per cent). This has acted as a constraint on the preparedness of the markets to avail of the opportunities provided by economic reforms to stake a greater share of Indian economy.
Another dimension of India’s economic evolution has been the close integration between economic policy and socio-political realities. Redesigning the State in Indian context was never detached from the socio-economic realities. Social and political factors like caste system, mass poverty and illiteracy, structure of political power all have played an important part in redefining the place of state and market in the economy.
Phases in the Evolution of State in India :
The role of the State has undergone considerable transformation since independence. Broadly, the evolution of the state in independent India may be divided into, first, a period of ascendancy of the state (1951 to 1966), a period of mixed signals and uncertainty (1967-1977), a period of retrospection (1978-1984), a period of new economic policy (1985-1990) and finally a phase of stabilisation and structural reforms since 1991 in the wake of the crisis in the balance of payments owing to the Gulf crisis.
The Phase of Ascendancy of State (1951-1966)
During this phase, the Indian state expanded its influence on various sectors of the economy. This expansionary strategy of the state was approved by the national and international consensus during that time. The national policymakers sought to introduce a “mixed” economic system with a sizable presence of state in the ‘core’ sectors of the economy, in major and heavy industries, and also in physical and social infrastructure . The State was expected to promote ‘growth with social justice’. This view was endorsed, at the national level, by various committees set up in the pre-independence period including the National Planning Committee set up by the Indian National Congress in 1936, the Bombay Plan, 1944, the Statement of Industrial Policy of 1945. This pro-active role of the state was also recognised by the Industrial Policy Resolution of 1948 and the first and the second five year plan. This consensus was also in evidence at the international level. Noted economists like Rosenstein-Rodan, Arnold Harberger, Richard Eckaus, Alan Manne, James Mirrles, Oskar Lange, Ragner Frisch & Jan Tinbergen approved of this state-led development strategy in less developed world. This state-led development strategy was in evidence in many sectors of the economy. The entry of state in various sectors were necessitated by both the post-world war II reconstruction effort as also from the planned development perspective.
In agriculture, the Congress Agrarian Reform Committee (CARC) attempted institutional reforms in Indian agriculture. It recommended fixing a ceiling on landholding. They also stressed the need for co-operative efforts, particularly in credit and marketing. The abolition of Zamindari (1954) was an important step towards removal of intermediaries in agriculture. In 1955, the Government set up a panel on land reforms. To strengthen agricultural research and extension for the modernisation of agriculture, an Indo-US technical programme was launched. Efforts were also made to reorient agricultural organisation and to promote skill formation in agriculture. In 1959, at the instance of the Government, the Ford Foundation Agriculture Production Team submitted a report aimed at improving agricultural production in India. The report recommended (i) stabilisation of farm prices by introducing minimum support prices, (ii) security to land tenure and consolidation of landholdings, (iii) public works programmes for agricultural employment and infrastructure development and (iv) selection of crops and areas for intensive efforts.
In 1959, following the recommendations of the Ford Committee, the Intensive Agricultural Districts Programme was launched. The Government orchestrated the whole programme and imported a huge amount of High Yielding Variety Seeds in 1964-65 from abroad. The Government also played a very active role in promoting agricultural credit.
At the time of independence, state used to finance a very small portion of credit needs of agriculture, only 7.3 per cent. In view of this, the Government appointed a Rural Banking Enquiry Committee to consider measures that could be immediately adopted for the extension of banking facilities in rural areas. An All India Rural Credit Survey was conducted to assess the credit availability to farmers during the first plan (1951-52). The Government also spent a sizable portion of investment on agricultural infrastructure including irrigation. State also played a pro-active role in fostering industrial development in the country. The Nehru-Mahalanobis Model of industrialisation envisaged significant state-intervention in the early stages of development. Organised thinking on role of state in industrialisation started before the onset of planning in India National Planning Committee Report on Industry (1938), Bombay Plan (1944) and Statement of Industrial Policy (1945). Industrial Policy Resolution 1948 envisaged a leading role of state in industrialisation. Industries (Development & Regulation) Act, 1951 chalked out the regulatory role of the Government in the industrialisation process. Industrial Policy Resolution, 1956 spelt out the design of state-led industrialisation in India. Emphasis was given to heavy and capital-goods industries i.e. the Mahalanobis Model of Industrialisation. A number of sectors were reserved for the public sector. A number of sectors reserved to promote small scale industries.
The state also embarked upon developing a huge network for the delivery of welfare services in urban and rural areas. In the case of health care, Health Survey & Development Committee (Bhore Committee), 1946 spelt out the underlying spirit behind health policy in India. It was suggested that Government should provide everyone, who wished to use it, full range of health care. No one should be compelled to use it. But those who would use public health services should get good and hygienic treatment. Bhore Committee spelt out short-term and long-term targets for bed-population, doctor-population and primary health-centre -population ratios. In 1961, the Health Survey and Planning Committee (Mudaliar Committee) reviewed the progress made in the provision of health services. In the 1960s, the population problem came into focus. Consequently, the health workers at the village level were transformed to multipurpose workers. This apart, in order to ensure fair prices of foodgrains the Government introduced the public distribution system (PDS) in the country, since the outbreak of the second world war. Since the onset of planning, this was extended to urban and highly deficit areas of the country. The food distribution system was gradually expanded and in 1965, the Food Corporation of India (FCI) was set up to control and co-ordinate the distribution of foodgrains throughout the country.
In the field of education, the state was instrumental in setting up of a large number of educational institutions which in turn provided the much needed skilled manpower to the society.
The Age of Uncertainty & Mixed Signals (1967-1977)
During the period from the mid-sixties to the mid-seventies, there was a confusion on the role of the state in the economy. The model which the Indian policymakers adopted in the 1960s began to flounder in the mid-sixties. Agricultural production was severely affected by unfavourable weather while industrial production also began to stagnate, reflecting the close linkage between agriculture and industry. . Looking at the close linkage of agriculture and industry, the Indian state embarked upon a “new agricultural strategy” involving the massive use of fertilisers, pesticides, better seed and water. Simultaneously, a decision to establish a buffer stock of foodgrains to combat food shortage was adopted. The Economic Survey 1968-69 stated “Looking back, the interregnum since 1964-65 has not been without its gains. The spread and efficiency with which a large public distribution system was set up and worked … was a major achievement (p.1). Along with the expansion of the state as a promoter of agricultural production as an active agent to ensure equitable distribution of foodgrains, there was also an expansion of the regulatory role of the state during this period. First, in order to introduce social control for purposive channelisation of credit, the Government set up a National Credit Council in 1968, amended the Banking Laws to legalise social control through Banking Laws Amendment Act, 1968 finally leading to the Nationalisation of Commercial Banks in 1969. This was significant event in the field of money and banking was the nationalisation of 19 commercial banks with deposits of over Rs.50 crores and above on July 19, 1969 which expanded the regulatory role of the state on the economy. The Government also attempted to check the concentration and ownership of industry through the Monopolies and Restrictive Trade Practices Act in 1969.
Along with shift towards an expansion in the role of the state, the state began to withdraw from some of its earlier roles. First and foremost, the process of economic planning, the central strategy of state intervention in the economy was abandoned for three years, a period which was termed as plan holiday (1966-1969). The Industrial Licensing Policy, 1970 reflected a realisation on part of the policymakers that the efforts of public enterprises needs to be supplemented by the private sector as also with the help of public-private cooperation in the joint sector. This apart, there was a realisation that the Government should liberalise the trade policy further and boost exports. Thus, to a significant extent, the Government removed many precious controls on exports and imports, with the view to promote export growth. The oil shock of 1973 also led to such export promotion drives which included automatic licenses for import of raw materials and components, replenishment licenses, more and more commodities under OGL and so on. Thus, there existed a dualism in policy, a retreat of the state from some spheres and an expansion of the role of the state in some spheres. But the economy was given no clear direction
The Phase of Retrospection (1978-1984)
This was a period of retrospection, with the planners taking a relook at the role of the state in various sectors of the economy.
In 1978, theAlexander Committee on Import Policy attempted to examine the export potential of the small scale sector. With a view to streamlining and simplifying procedures and policies relating to industrial licensing as well as export and import licensing, a Study Group on Industrial Regulation and Procedures was set up. Another Cabinet Committee under the Chairmanship of Finance Minister looked into the infrastructure deficiencies in India.
In the eighties, this process of rethinking is in evidence in the form of a large number of committees constituted to look at the role of the Government in economic development and some very crucial policy documents published during the period.
List of Committees
| 1983 | National Health Policy |
| 1983 | Technology Policy |
| 1985 | Long Term Fiscal Policy |
| 1985 | Committee to Review the Working of the Monetary System (Chakravarty Committee) |
| August 1986 | “Administered Price Policy – A Discussion Paper” |
| November 1986 | “Agricultural Price Policy – A Long Term Perspective” |
| 1986 | Report of the Abid Hussain Committee on Trade Policy |
| 1986 | Report of the Narasimham Committee |
| 1986 | National Policy on Education |
| 1988 | National Housing Policy |
| 1988 | National Policy on Urbanisation |
1985-1991 – Phase of Gradualism in Reform Process
This period is marked by the launching of economic reforms in India. Two major milestones in the mid-eighties are the Long-Term Fiscal Policy (LTFP) of the Government and the Chakravarty Committee Report on the need for monetary reforms in the economy. In other sectors also, this phase is characterised by the decisive move towards efficiency, higher productivity, removal of unnecessary impediments to the growth process and the restructuring of existing institutions in consonance with the above objectives. In the 1980s, there was a clear recognition that there should be a fundamental review of Indian development paradigm which depended excessively on the State. The winds of change were not without reasons. The economy was showing various weaknesses/efficiency bottlenecks. The question mark on the pro-active State had two dimensions – both internal and external.
On the first count, there was a general dissatisfaction with the functioning of the State apparatus in various fields of the economy. First, pervasive State intervention in various sectors of the economy led to bureaucratisation which tended to stifle the private initiative. The over-regulated State apparatus was responsible not just for accentuating delay, it also increased uncertainly with investments and at the same time induced corrupt practices. Second, several efficiency lapses in State activities became increasingly clear. In the area of productivity growth, the Indian economy is very poor in its performance. The planning strategy depended heavily on the quantitative targets without concern for cost and efficiency. This is evident from the incremental capital-output ratio, the reciprocal of which gives the additional output produced by one unit of investment was around 5-6 which was higher compared to other East Asian Countries. There was little emphasis on efficient management of public sector, instilling competitive structure in private sector or exploiting the economies of scale. Moreover, the incentive-reward system in ensuring a competitive framework for efficiency gain was conspicuous by its absence. This apart, excessive subsidisation by the State of certain segments of the population were found to be a drag on the fiscal front whereas they failed to improve the productive efficiency of the economy.
Apart from internal factors, certain external realities also pushed us towards a rethinking in development strategy. The rethinking on the role of the State was also necessary due to some new realities in the international economic and trading environment since the 1980s.
Firstly, the world economy has taken decisive steps towards globalisation and integration of financial markets. This has enabled cross-border flow of savings towards the financing of productive investment. Official flows, i.e. multilateral and bilateral flows which usually supported government has been far outpaced by rapid growth of financial flows in the private sector. Further, with the demise of a large socialist block, the scope and need for investment flows or trade flows on public sector accounts such as through Indo-USSR agreements gets reduced.
Secondly, the country obligations under the World Trade Organistion (WTO) also implied liberalisation of domestic markets by removing the quantitative restrictions, reducing tariffs to acceptable levels and by restricting excessive subsidisation of certain segments of the economy. All these implies a repositioning of the role of State and market in developing countries. As the WTO agreements expand to the coverage of services, recognising the fast growing service component, private sector has a predominant stake in many of the service sector. With the gradual removal of trade barriers, the private sector has the potential of expanding its wings to external markets. Such realities compel the policymaker to think about the respective roles of the private and public sectors have played in economic development and what needs to be done in this context. At the same time, with the increasing integration of global markets, the risk of non-performance on the policy front is higher as compared to a situation of a closed economic system. This also asks for an re-evaluation of the role of the State in the economic management of the economy.
Phase of Economic Reforms ( 1991 to the present )
While the introspection regarding the role of State and markets in economic progress in India started being discussed in the 1980s, it was the Gulf crisis and the consequent crisis in the external front in 1991 which forced the policy makers into action. The initial thrust of the reform process was in exchange rate management, trade policy and balance of payments in general. However, the reform in the external front demanded the structural adjustment programmes to correct the macro-economic imbalances which included fiscal restraint, monetary discipline and efforts at raising the productive efficiency of the economy.
Major thrust areas of the economic reform programmes in India were :
First, to ensure a gradual and sustainable integration between international and domestic markets consistent with our national interests.
Second, to prepare the Indian economy to face the challenges of global competition by enhancing the productive efficiency of the economy by :
(a) evolving a more dynamics mix of the State and market by reorienting the resources of government towards provision of efficient physical and social infrastructure, withdrawing the government from inefficient production of tradables when needed and to raise the productive efficiency of public investment where possible.
- to reorient the regulatory role of the government from pervasive regulation towards effective regulation – which helps to contain the systemic risks while enabling the private sectors to compete in the domestic and international markets by removing the restrictive regulatory framework.
Thirdly, there was an attempt towards enhancing the transperancy in the application of policies and procedures to enable economic agents to operate efficiently, and
Finally, to remove excessive subsidisation of various sectors of the economy and gradual shift away from ‘universal’ to ‘target-oriented’ subsidisation. All these objectives of economic reforms were guided by the belief that injection of competitive elements tend to create a climate conducive for efficiency enhancement.
In this context, a look at the various sectors where the role of State and markets can transform significantly may be useful.
The agricultural sector, by and large, has failed to respond to the emerging opportunities created by liberalisation of global agricultural trade. Owing to the closed economic model pursued up to the 1990s, trade in agriculture takes place at a residual level rather than being driven by global trading environment. Clearly, liberalisation of agriculture will provide opportunities to private entrepreneurs to reap benefits from world markets just as it will raise demand side issues of domestic food security and stability of food prices. In a comfortable situation of foreign exchange reserves, such fears may be allayed by the deregulation of imports and effective targeting of Public Distribution System towards the poor and improving the social infrastructure like health services, education in the economy. A substantial growth in agricultural exports will necessitate a look into the supply side issues such as, the unfavourable pattern of landholding, insufficiency of agricultural inputs and appropriate technology to farmers, inadequate institutional credit to the rural sector and lack of insurance against natural calamities and crop failures. The Government can play a significant role as facilitator in this respect. Government intervention in agriculture also takes place in terms of support prices to farmers to ensure that farmers get prices which cover the cost of production and to ensure flow of agricultural inputs at subsidised prices. Government involvement in these areas have not resulted in commensurate increase in productivity as the subsidies have been sued for vested political interests. There is a need to rethinking the role of government in agricultural price regulation. The government should also play a significant role in promoting the agro-industries. The institution of food processing industries, can raise the export earning, increase employment and income of the producers. There is also need for facilitating adequate storage facilities for agricultural products in the countryside. The private sector on the other hand, should be encouraged to produce agricultural inputs. Greater competition in this area will be beneficial to agriculture.
In the industrial front, emerging challenges in industrial production and technology requires a dynamic State that facilitates industrial production rather than regulating it. The emerging integrated world economy demands a continuous increase in industrial productivity. Survival in this competitive environment requires that the Indian industry has to raise its productive efficiency rapidly through judicious resource use and technological innovation. As the Indian experience suggests, the public sector enterprises have limited capacity and flexibility to respond to such challenges. In this context, there is a need to review the ‘public-private’ mix in the industrial sector. At the onset of the reform process, Indian industry had a sizeable presence of public sector as ‘producer’. In general, the public sector efficiency levels were much lower than the private sector levels and PSUs had to depend on significant budgetary support for their survival. There is certainly case for a retreat of the State in productive activity on grounds of efficiency.
Evolving an optimal mix of public and private role in industrial production varies with types of industry. Here, a distinction may be made between industries producing tradable commodities and those producing non-tradables. The former includes manufactured and mining industry while the latter includes the infrastructure industries.
Since the Statement of Industrial Policy, 1991, a number of industries, which hitherto were exclusively reserved for State has been dereserved. In the dereserved sector, there were a large number of public sector companies which were running in an inefficient manner. Future industrial sector reforms may necessitate further dereservation of activities of public sector, withdrawal of discriminatory treatment between the private and public sector, creating institutions and procedures which focus commercial and enterprise elements. The steps taken will involve reorienting the regulatory framework and minimising budgetary supports.
Growing competitiveness, whether defined in terms of price or export competitiveness, is the litmus test for survival in the new industrial environment. In this context, restructuring of sick firms is an urgent necessity and in this respect, some roll back of the State as a producer may result. The restructuring of public enterprises in India may focus on –
- improved capacity utilisation
- instilling professional culture in management
- sharper focus in objectives and targets
- improved labour relationship
- acquisition of modern technology and
- autonomy from political pressures.
In the Infrastructure sector, the State has played a significant role. Most infrastructure service have elements of public good in them. Huge initial costs and difficulties in pricing kept the private sector away from infrastructure. Despite these constraints, three factors have played a crucial role in the rethinking of the role of State and market in this sector.
Firstly, the quantity, quality and cost-effectiveness of infrastructure services have not kept pace with the needs of general public or business class.
Secondly, resource constraint in the public sector prevented the much-needed acceleration in infrastructure investment, a fact clearly demonstrated by the recent estimates of India Infrastructure Report.
Thirdly, a wave of privatisation and regulation has been sweeping the infrastructure sectors throughout the world. In many developed and developing countries, the private sector has participated successfully and profitably in the provision of infrastructure services.
In view of the huge investment requirements, there is surely a case for private sector to play a supplementary role in Indian infrastructure sector. Since infrastructure projects are beset with a large number of risks – including completion risk, political risk, operational risk, market risk, inflation risk, foreign exchange risks etc. Government has a crucial role to play in regulation of the sector and facilitating in the easing of the risk profile of private sector venture apart from being a crucial provides infrastructure in this country.
In the Social Sector, sustainable economic growth crucially depends on the productive efficiency of the labour force which ,in turn,is positively influenced by nutritional adequacy, health care, educational attainment, skill formation and other basic needs of the people. High investment in physical and human capital has been the centerpiece of many of the success stories of the world, including the East Asian ‘miracle’. The Indian achievements in the social sector, when seen against the achievements of many other developing nations, seems less than satisfactory . According to the Human Development Report,1997, India ranks 138th among 175 counties in the Human Development Index .In Gender related indices like the Gender Development Index and the Gender Empowerment Index, India ranks far lower that many of the well-performing developing countries(118th and 86th respectively among 175 nations).
Such limitations can be explained by two major factors. Firstly, India spends less on social sectors as a share of its GNP and secondly, the social expenditure has not been translated into improvements in human development indicators due to poor targeting of resources and poor utilisation of the public welfare services. Since the institution of structural reforms in the country, there has been encouraging attempts to move towards targeted schemes of social security. The introduction of Revamped Public Distribution System (RPDS) in 1992 and Targeted Public Distribution System in 1996 are instances of this welcome change in policy stance towards the social sector.
As in other spheres of Indian economy, in the social sector also, the private sector can play an important role in the financing of the social sector. The Non-Governmental Organisations are acting as important channels of overseas Funds for the social sector in different parts of the country. An active co-operation between the Government and Non-Governmental agencies in the social sector remains an important agenda for the future.
Changing Dimensions of State – Market Mix in India
Any effort at demarcating the roles of State and market requires an appreciation of the broad dimensions of role the State. The first is the role of State as a producer of goods and services essentially for sale, this is reflected in the share of public sector in GDP. Secondly, the State has an extremely crucial role to play as a regulator of economic as well as non-economic aspects. Economic regulation may include fiscal policies, monetary policies and laws relating to the functioning of various segments of the economy. Thirdly, State has also a role as a ‘facilitator’, in providing support to private initiatives in diverse forms, by providing the requisite infrastructure or by putting in place arrangements which assist the private sectors in reducing the risks involved in their respective economic ventures. Fourthly, State has a crucial and overriding role as a welfare State, in removing poverty and in the provision of basic needs such as health, foods, education etc. to the weaker segments of society.
The state, as an apparatus to pursue the collective interests of a society, has a certain composition of the various roles its perform. In phases of economic transition, the role of the state changes in its various dimensions in diverse ways. Altering the boundaries between the state and markets thus results from two types of transformations in the role of the state – inter-dimensional transformation and intra-dimensional transformation.
The inter-dimensional transition is evidenced when the state reduces its role as producer and expands its role as regulator or facilitator. The state may even expand the role of regulator and restructure the role as welfare provided. The inter-dimensional restructuring of the states role thus implies reconfiguring the various dimensions of state activity, strengthening some while reducing other roles. The permutations and combinations in this may be extremely diverse. Let us recount our Indian experience so far.
A look at the public enterprises reforms in the Indian context reveals that a significant decline in the role of the producer state was matched by an expansion in the role of the regulator and the facilitator state. In 1991, the industrial policy statement announced by the government envisaged disinvestment of a part of government holdings of equity capital in selected public sector enterprises. Along with this reduction in government’s role as producer a host of regulatory reforms were put in place –
First, a disinvestment commission was set up to look into the modalities of PSE restructuring .
Second, in order to establish a system of rehabilitation without the government having to face excessive financial burden, the Sick Industrial Companies Act (SICA) was amended in December 1992.
Third, the reduction of producer state was also accompanied by granting of enhanced autonomy to selected PSEs, the ‘Nava-ratnas’.
Fourth, to award functional autonomy, a host of guidelines on issues of micro-management of PSEs have been withdrawn.
The PSE restructiring experience have also been associated with the rise of facilitator role of the state for the employees of PSEs. In 1992, to protect the interest of workers in PSEs, a national renewal fund was established to assist in retraining and redeployment of workers.
In certain cases, a withdrawal of the ‘Regulator State’ has given rise to an enhanced role of the ‘facilitator’ state.. On the industrial front, the gradual delicensing of industries and entry of private sector into hitherto state dominated sectors since 1991 were accompanied with a rise in the facilitator state in the form of setting up of investment promotion bodies like the Investment Promotion and Project Monitoring Cell in 1993, Constitution of Foreign Investment Promotion Council and Tariff Commission, and a High Powered Export Promotion Board during 1996-1998 . A classic example of such a reconfiguration of the role of the state boundaries is the infrastructure sector.
In the power sector, while the government has agreed to a programme of privatising the power sector and encouragement of captive power plans, it has facilitated the growth of private sector by extending counter-guarantees to eight fast track Independent Power Projects (IPP) with total generating capacity of 5000 MW.
In the road sector, the state has allowed the entry of private sector by relaxing MRTP provision to allow large private firms in highway sector, and by amending National Highway Act to allow entry of market forces. This was accompanied by the states ‘facilitator’ role which has involved issuing guarantees to the road sector, and by declaring road sector as an industry to facilitate borrowing on easy terms and to enable floating of bonds.The government has also established Infrastructure Development Finance Company as a private company with public funding to facilitate the flow of long-term finance for infrastructure.
In the agriculture sector too, the role of state as regulator is gradually being reduced. Export and import of agricultural commodities have been relaxed in order to promote exports and several efforts have been made to deregulate the industries producing inputs for agriculture. The High Powered Fertiliser Pricing Policy Review Committee has suggested that the fertiliser industry be deregulated. Such deregulation has been matched by Agricultural Policy Resolutions in 1993 which sought to accelerate the development of rural infrastructure, promote agro-based industries strengthen co-operatives and dovetail research and development for agriculture.
This inter-dimensional restructuring of the role of the state and markets in Indian economy has been accompanied by redesigning of the role of the state within the respective dimensions of state function. This may be termed as intra-dimensional transformation of state activity in India. For instance, within the producer role of the state, while the sick and non-performing units are being restructured, there is a noticeable trend towards the expansion of well-performing public sector enterprises. To enhance the competitiveness and efficiency of well-performing PSUs, several measures of unshackling them have taken place.
In the context of the state as regulator, there has also been a transformation in the quality of state intervention. Some instances are given below. In the telecommunication sector, while the basic telecom and value added services have been opened up for private participation, and foreign equity participation of 49 per cent has been allowed in joint ventures in basic telecom services, the government has decided to set up the Telecom Regulatory Authority of India (TRAI) to separate regulatory function from policy formulation and operational functions.
In the Port Sector also, since 1991, the process of privatisation have started within the ambit of existing provisions in the Indian Ports Act, 1908 and Major Port Trusts Act, 1963 and guiding for foreign participation has been relaxed. Simultaneously, a Tariff Authority for Major Ports (TAMP) has been set up to fix port charges to be collected by private provider of port facilities. Also, to devise an integrated approach to the development of major and minor ports, the Maritime State Development Council has been set up in 1997.
First, unable to meet the growing demands of infrastructure as a direct source of funds for infrastructure and the sole provider of infrastructural activities, the state has now shifted its focus to facilitate the entry of private sector in infrastructure by mitigating the risks involved through the provision of guarantees, by setting up specialised financial institutions and creating an enabling legal framework to facilitate privatisation. The state as a welfare provider has also shifted its focus in view of the macro-realities of high fiscal deficits and consequent drive to cut costs in the social sector. Such redesigning can be seen in the health sector where the focus has shifted from ‘health for all’ to ‘health for under-privileged’. This shift from universal welfare services to targeted state intervention is also seen in the restructuring of Public Distribution System (PDS) since independence. With a view to target the food subsidy to the needy, the government launched the Revamped Public Distribution System in 1992 and the Targeted Public Distribution System in 1996. Such inter-dimensional and intra-dimensional repositioning of the state vis-à-vis markets have also resulted in changing role of state in provisioning and funding of resources. In the case of public enterprises, the budgetary support has been gradually reduced. In an enabling environment, PSEs are asked to generate funds internally through commercialisation and efficiency enhancements.
The role of state as facilitator has also undergone subtle but crucial challenges.
In many of the public utilities, the user charges have been revised to reduce the burden on state exchequer. At the same time, efforts have been made to allow the private sector a greater role in both provisioning and funding of products.
References
Ahluwalia, Isher J. (1985) : Industrial Growth in India : Stagnation Since the Mid-Sixties, Delhi Oxford University Press
Bardhan P. : The Political Economy of Development in India, Delhi Oxford University Press
Bhagwati, J. & P. Desai (1970) : India : Planning for Industrialisation, London Oxford University Press
__________ & T.N. Srinivasan (1993) : India’s Economic Reforms, Government of India
Bhanoji Rao, V.V. (1993) : India’s Economic Future – Government, People and Attitudes, Tata Mcgrew Hill, New Delhi
Chakravarty, Sukhomoy (1987) : Development Planning – The Indian Experience, OUP, New Delhi.
Dandekar V.M. (1994) : The Indian Economy 1947-1992, Vol.1 Agriculture
Frankel, F. (1978) : India’s Political Economy 1947-1977 : The Gradual Revolution, Delhi Oxford University Press
Government of India (1965) : Report of the Monopolies Inquiry Commission, New Delhi
___________________ (1978) : Report of the Committee on Import-Export Policies and Procedures, (P.C. Alexander, Chairman), New Delhi
___________________ (1979) : Report of the Committee on Controls and Subsidies, (V. Dagli, Chairman), New Delhi
___________________ (1984) : Report of the Committee on Trade Policies, (Abid Hussain, Chairman), Ministry of Commerce, Government of India
___________________ (1985) : Report of the Committee to Examine Principles of Possible Shift from Physical to Financial Controls, (M.Narsimham, Chairman), New Delhi
___________________ (1985) : Report of the Committee to Review the Working of the Monetary System, (Chakravarty Committee), RBI, Mumbai
___________________, Economic Survey, various years
___________________, Planning Commission, Five Year Plan Reports.
Jalan, Bimal (1991) : India’s Economic Crisis : The Way Ahead, Delhi Oxford University Press
___________ (1991) (ed) : The Indian Economy : Problems & Prospects, Penguin, New Delhi
Jha, Prem Shankar (1980) : India : A Political Economy of Stagnation, Delhi Oxford University Press
Kolhi, A. (1990) : Democracy and discontent : India’s Growing Crisis of Governability, Cambridge University Press, Cambridge
Rangarajan C. (1988) : Indian Economy – Essays on Money and Finance, UBSPD, New Delhi
Sankar T.L. & Reddy Y.V. (1989) : Privatisation : Diversification of Ownership of Public Enterprises
Scott, Maurice & Deepak Lal (1990) (eds) : Public Policy and Economic Development : Essays in Honour of IMD Little, Clarendon Press, Oxford
_______
Reforms
Agriculture Reforms
| Year | Reforms Initiated |
| December 1992 | Government placed Draft Agricultural Policy Resolution (DAPR) in the parliament in December 1992.Modified draft placed in parliament on May 14, 1993. Resolution seeks to – Decided to step up public investment in agriculture to accelerate the development of rural infrastructure.Dovetail research and development in agriculture.Poverty alleviation, unemployment to be top priority.Agro-based industries to be promoted.Strengthening of cooperatives.Involvement of NGOs in agricultural development. |
| 1997 | Recommendations of High Powered Fertilisers Pricing Policy Review Committee (C.H. Hanumantha Rao Committee) suggested fertiliser industry be deregulated, units be allowed to fix their retail pricing. |
Agriculture Price Policy Reforms
| Year | Reforms Initiated |
| Situation Prior to Reform | Objective is to evolve a balanced and integrated price structure by ensuring remunerative prices to the growers and safeguarding the interests of the consumers.Procurement/minimum support prices fixed for seven cereals (paddy, wheat, jowar, bajra, maize, ragi and barley), four pulses (gram, arhar, moong, urad), seven oilseeds (ground nut, sunflower, soyabean, rapesead and mustard, safflower, toria and copra), four other commodities (sugarcane, cotton, jute, tobacco).Prices are fixed by Government on recommendation from Commission for Agricultural Costs and Prices (CACP).Government also supplies six commodities through PDS – wheat, rice, sugar, imparted edible oils, kerosene, soft coke. |
| Jan 1992 | A scheme of Revamped Public Distribution System has been launched in about 1700 blocks falling in drought prone, desert, integrated tribal development project areas and designated hilly areas.Prices for RPDS foodgrains will be lower by Rs.50 per quintal than the central issue prices. |
| August 1994 | New Scheme for utilisation of surplus food stocks to benefit weaker section– supply of subsidised wheat to Modern Food Industries Ltd. and franchised unitssupply of subsidised foodgrain to SC/ST/ObC hostels. |
| Proposed July 1996 Implemented June 1997 | New targeted PDS scheme to streamline PDS announced.States to identify below poverty line (BPL) families and ensure guaranteed supply 10 kg per month to them at prices lower than CPI.Special card to be issued to BPL families for better monitoring of delivery system. |
Industrial Policy Reforms
| Year | Reforms Initiated |
| Situation Prior to Reforms | Since the Industrial Policy Resolution, 1956, 17 industries were reserved for investment by the public sector. Private sector was allowed to invest in these sectors on a selective basis. An industrial licensing policy attempted to allocate resources for industry efficiently. Foreign participation in industries restricted. Opposition to Foreign Capital. |
| 1991-92 | Statement on industrial policy tabled on 24th July, 1991 stated that only 8 industries will continue to be reserved. Iron and steel, electricity, air transport, ship building, heavy machinery industries were dereserved. |
| 1992-93 | Manufacturing of industrial alcohol delicensed.The System of Endorsement of Capacity Expansion under modernisation/renovation was discontinued except in industries under compulsory licensing.Private sector invited to invest in oil exploration and refining.Power sector is opened to both domestic and foreign investment. An Investment Promotion and Project Monitoring Cell set up in Department of Industrial Development to provide information and guidance to entrepreneurs. |
| 1993-94 | With effect from March 26, 1993, 13 minerals, earlier in public sector, have been opened for private sector. Consequently, the number of industries reserved for public sector is reduced to 6 viz., defence products, atomic energy, coal and lignite, mineral oils, railway transport, minerals specified under the Atomic Energy Order, 1953.‘Motor Car’ and ‘White Goods’ industries delicensed with effect frofm April 28, 1993. Hence, the number of items, in respect of which industrial licensing is compulsory is reduced to 8.Readymade garments dereserved from small scale sector.Sick Industries Companies (Special Provision) Act, 1985 (SICA) amended in December 1993 to facilitate early detection of sickness in companies and speedy enforcement of remedial measures. |
| 1994-95 | Industrial licensing for almost all bulk drugs abolished.Automatic approval of foreign investment up to 51 per cent and foreign technology agreements permitted for bulk drugs and formulation.Five year tax holiday for new industrial undertakings in all backward states. |
| 1996-97 | Delicensing of consumer electronics, only 14 industries remain under the purview of industrial licensing.Disinvestment Commission has been set up for identifying PSES for equity disinvestment as well as for working out the modalities of disinvestment.Foreign Investment Promotion Council constituted to facilitate foreign investment in the country.Foreign Investment Promotion Board (FIPB) revamped to make foreign investment rules more transparent.Foreign Institutional Investors allowed to make equity investments in unlisted companies and the limit of investment of 5 per cent of total equities in a single company by an individual FII has been raised to 10 per cent. Government has decided to set up a Tariff Commission which will advise government on appropriate tariff levels. Guidelines on Euro Issues and External Commercial Borrowing (ECB) have been liberalised to ease the access of Indian companies to international capital market. |
| 1997-98 | The number of industries subject to compulsory industrial licensing has been reduced from 14 to 9.The investment ceiling on plant and machinery for SSI undertakings/ancillary industries has been enhanced from Rs.60 lakh/Rs.70 lakh to Rs.3 crore and for tiny units from Rs.5 lakh to Rs.25 lakh.List for industries eligible for Foreign Direct Investment under the automatic approval route of rBI has been expanded.Equity investment up to 100 per cent by NRIs/OCBs has been permitted in high priority industries.Aggregate Portfolio Investment Limit of 24 per cent for NRIs/OCBs/ FIIs has been raised to 30 per cent.A High Powered Export Promotion Board has been set up to improve export performance.Enhanced autonomy granted to selected PSES referred as ‘Navaratna’.Two more PSEs, GAIL and MTNL given same status.97 other profit making PSUs referred to as ‘mini-ratnas’ granted greater autonomy. |
Reforms in Infrastructure : Power
| Year | Reforms Initiated |
| 1994 | The Government decides to set up a National Power Tariff Board to evolve broad principles and guidelines to ensure uniform approach in the fixation of power tariff. |
| 1995 | Government of India decides to extend counter guarantees to the eight fast track Independent Power Projects (IPP) with total generating capacity of 5000 MW. |
| 1996 | Common Minimum Action Plan for lower introduced.Government to set up Central Electricity Regulatory Commission (CERC).Governments agree to a gradual programme of private sector participation in the distribution of electricity.Government to encourage co-generation/captive power plans. |
| April 25, 1998 | Government of India issued the Electricity Regulatory Commission Ordinance, 1998 for setting up the Central Electricity Regulatory Commission (CERC) at Centre and State Electricity Regulatory Commission (SERC). |
Reforms in Infrastructure : Telecommunication
| Year | Reforms Initiated |
| 1992 | Value Added Services (VAS) opened to the private sector. These services include cellular mobile phones, radio paging, electronic mail, voice mail, audiotex services, videotex services, data services using VSATS and video conferencing. |
| May 1994 | The National Telecom Policy (NTP), 1994 opened up basic telecom services to competition. Private initiative will be used to complement DOT efforts to raise additional resources. Permitted foreign equality participation of 49 per cent in joint ventures in basic telecom services.Decided to set up the Telecom Regulatory Authority of India (TRAI) to separate regulatory function from policy formulation and operational functions. |
| February 20, 1997 | TRAI begins functioning. To discharge regulatory functions to provide a level playing field in the telecom sector. Enable market-making and fixing of tariffs. |
Reforms in Infrastructure : Road Sector
| Year | Reforms Initiated |
| 1994 | The Motor Vehicle Act of 1988 was amended with a view to simplify procedures and to give more powers to the state governments in matter of granting driving licenses and permits.Road sector declared an industry to facilitate borrowings on easy terms and to permit floating of bonds.MRTP provision relaxed to allow large private firms to enter highway sector. |
| 1995 | National Highway Act amended to allow private participation by enabling levy of a fee on national highways, bridges and tunnels. |
| June, 1997 | Policy on Toll Structure for four lane national highways and other related issues announced. |
Reforms in Infrastructure : Port Sector
| Year | Reforms Initiated |
| Position Prior to Reforms | Governed by Indian Ports Act, 1908, Major Port Trusts Act, 1962. These acts have enough flexibility to allow private participation in ports. |
| 1991 onwards | Since 1991, process of privatisation of ports have started within the ambit of existing statutory provision. Activities offered from private participation : building and maintenance of containers, terminals and cargo handling facilitiesstorage and warehouse facilitiespilotage servicedredging |
| 1997 | Guideline for foreign investment in port sector further liberalised. Automatic approval will be accorded for foreign equity participation up to 74 per cent of construction activities in ports. In addition to this, automatic approval will be given for majority foreign equity up to 51 per cent for support services like operation of loading, discharging etc.Policy decision has been taken to allow joint ventures to BOT power projects.A Tariff Authority for Major Ports (TAMP) has been set up to fix and revise various port charges to be collected by private providers of port facilities.To have an integrated approach to the development of major and minor ports, Maritime State Development Council (MSDC) has been formed. An Empowered Committee on Environment Clearances (ECEC) has also been constituted. |
Infrastructure : Overall Policy Reforms
| Year | Reforms Initiated |
| 1997 | Coverage of the term ‘infrastructure’ expand to include telecom, oil exploration and industrial parks to enable these sectors avail of fiscal incentives.Holding companies/promoters allowed to raise ECB up to US$ 50 million to finance equity in a subsidiary/joint venture company in infrastructure projects. ECB permitted to be utilised for infrastructure projects.Infrastructure Development Finance Company (IDFC) established as a private company with public funding to provide long term finance for infrastructure sector.SEBI has allowed FIIs to invest in unlisted companies. Implies they can invest in infrastructure. |
Reforms in Education
| Year | Reforms Initiated |
| Situation Prior to Reforms | State action were governed by following policies – National Policy on Education (1986)National Adult Education Programme (1978)National Literacy Mission (1988)Scheme of Vocationalisation of Secondary Education, 1988. |
| 1992 | A National Development Council Committee on Literacy was set up in April 1992 to give decisive lead in universal literacy. The Committee submitted its report in September 1993. Suggested purposeful networking of government and non-government organisation at the grass-root level. |
| 1994 | District Primary Education Programme (DPEP) initiated with IDA credit of US$ 260 mn from World Bank. |
| 1995 | National Literacy Mission (WLM) to make 100 million persons literate by the end of Eighth Plan mandated. |
| August 1995 | National Programme of Nutritional Support to Primary Education (Mid-Day Meal Programme) launched. |
Reforms in Health
| Year | Reforms Initiated |
| Situation Prior to 1991 | As a signatory to the Alma Ata Declaration in 1978, government is committed to the goal of “Health for All by 2000 AD”.National Health Policy, 1983 is the blueprint for action for government and non-government voluntary agencies.Existence of Several Diseases Control Programmes. |
| 1996 | “Health for All” strategy reoriented towards “Health for Under-privileged”. |
| July 1996 | Conference of Chief Ministers on Basic Minimum Services target 100 per cent coverage of primary health services facilities in rural and urban areas. |
| 1997 | “National Illness Assistance Fund” set up to ensure necessary financial assistance to patients below poverty line for medical treatment. |
Reforms in Water Supply
| Year | Reforms Initiated |
| Situation Prior to Reforms | State subject.Implemented under State Sector Minimum Needs Programmes. Also centrally sponsored schemes. |
| 1996 | Accelerated Rural Water Supply Programme initiated (100 per cent grants -in-aid from centre with matchifng contribution from states)National Drinking Water Mission renamed as Rajiv Gandhi National Drinking Water Mission. |
Leave a Reply