Planning and Reforms by Prof. Tarun Das

8/14/2019 Planning and Reforms by Prof. Tarun Das

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Prof. Tarun Das, IILM EEP Session-3 1

Economic Environment

and Policy (EEP)Session-3

Economic Systems, Planningand Reforms in India

Dr. Tarun Das, Professor, IILM


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Contents of this presentation

1. Economic Systems2. Types and dimensions of planning3. Economic Planning in India4. Background of reforms in India

5. Scope of reforms in India


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1. Economic Systems


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1.1 Various Economic Systems Economic system means relations

among economic agents as regardsownership of resources, modes ofproduction, and distribution of goods &services.

It also includes institutions,arrangements and methods to dealwith production and distribution.

Economic system determines who

owns the means of production; whoprovides labour; and how relativeshares of wages, interests, rents andprofits are determined.


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1.2 Various Economic Systems

In brief an economic systemdefines the institutionalframework regulating

business.

Economic systems can be

broadly classified asCapitalist, Socialist andmixed.


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1.3 Market Economy or

Capitalism According to Karl Mark, regarded as father of

socialism and communism, there are two distinctgroups of people- Capitalist (who owns hugeassets) and the Proletariat (who does not possessany assets).

In a capitalist society, means of production areowned and controlled by the capitalists.

Proletariat owns only labor. It lacks bargainingpower, provides cheap labor and makessignificant contribution to output.

But a major share of national income is takenaway by the capitalist in the form of rents,

interests and profits.


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1.4 Market Economy or

CapitalismThere exist wide disparities of incomes of the

rich and the poor.

High income inequalities and significant povertyratios are dominant features of capitalism.

Capitalism is often called free market economywhich is not planned or controlled by a centralauthority and where government intervention is

minimum. Govt makes basic rules andregulations for market players and formulatespublic policies for addressing inequalities andmarket imperfections.

USA and Canada are the very good examples ofmarket economy.


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1.5 Centrally Planned/ SocialistEconomy

In a socialist economy, means of

production are owned and controlled bythe state. Individual consumers andproducers loose their sovereignty.

Govt sets the rules and goals for the nationunder which economic agents are made towork accordingly.

There is small level of inequality justifiedby the differences of individual capabilities.


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1.6 Centrally Planned/ SocialistEconomy

The institution of private property doesnot exist to perpetuate inequality.

People contributes to the public

exchequer according to their capacityto pay, but receives govt transfersaccording to their needs. There is fairdistribution of national income among

people by the state.


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1.7 Command and CommunistEconomy

It is the extreme form of centrally plannedeconomy. This system refers to the political

and economic development proposed byKarl Marx and developed and implementedby V.I. Lenin.

Under this system people rule bothpolitically and economically and there is a

classless society.Totalitarian system of govt ruled by single

authoritarian party. All means of production are owned and

controlled by the govt which also

determines types, quantity, quality andprices of goods and services to beproduced.

China, Russia, Cuba, are best examples.


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1.8 Mixed Economy Mixed economic system is the middle path

between free market economy and the pure

socialist economy. It allows the co-existence ofboth private and public sectors. Indian economy is a very good example of

mixed economy. Since independence and beginning of planning

Indian govt has adopted the basic principle of

Growth with social justice and equity. Initially, many heavy industries were reserved

for the public sector. Since 1991 govt hasadopted new economic policy and has openedmost of the sectors for private investment.

Govt is also encouraging public-privatepartnership.


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2. Economic Planning in India


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2.1 Types of Planning

Policy planning versus physical planning

Indicative planning versus target setting

Consistency versus optimizing approach

Sectoral versus economy wide planning

Selective versus all purpose planningLearning versus blue print approach

Consultancy versus dirigist approach

Monitoring trends versus forecastingfuture

Sound public investment programs versusoverall investment planning


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2.2 Dimensions of Planning

Macro planning (National level)

Meso (Middle level- States, UTs)Spatial (over space- SEZs, EPZs)Regional (over regions- planning for

North Eastern States)

Local (Municipalities, Corporations)Sectoral (over industries/ sectors)Micro (at unit levels- corporate

planning)

Inter temporal (over time)Intergenerational (over generations)


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2.3 Economic Planning in India (1)

Since the beginning of the five year plans in 1951

Indian govt has adopted a mixed economic systemguided by Socialistic Pattern of Society and basic

objective of Growth with Social Justice and Equity.

Although basic objective remains the same, the

emphasis and the type of planning model differed insubsequent five year plans.

Over the years Indian economy has become more

liberal, more globalized and more people oriented.

i l i i di


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2.4 Economic Planning in India(2)

Plan andperiod

PlanningModel

Focus on Ave.growth

First Plan(1951-56)

HarrodDomar

Agriculture/rural sector

3.6

2nd Plan(1956-61) MahalanobisModel HeavyIndustry 4.3

Third Plan

(1961-66)

Leontief

input-output

Public Sector

enterprises

2.9

Plan Holi-day(66-69

Swaminathan Model

GreenRevolution

4.0

2 5 E i Pl i i I di


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Plan and

period

Planning

Model

Focus on Ave.

growth

5th Plan(1974-79)

SukhomayaChakravarty

Povertyreduction

4.8

Annual(1979-80)

No Model Control ofinflation

-4.9

Sixth Plan(1980-85)

SukhomayaChakravarty

IndustrialLiberalisation

5.6

7th Plan(1985-90) LeontiefIn ut- ICT,Trans ort 5.7

2 6 E i Pl i i I di


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Plan and

period

Planning

Model

Focus on Ave.

growth

8th Plan(1992-97)

LeontiefInput-

Output

Growth andPoverty

reduction

6.2

9th Plan(1997-02)

As above As above 5.5

10th Plan(2002-07)

As above As above 7.8

11th Plan As above Faster and 9%


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3. Economic Reforms in India

3 1 Background of Economic Reforms in


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3.1 Background of Economic Reforms inIndia

It is well known that in 1990-91 India facedan unprecedented foreign exchange crisisdue to adverse impact of the Gulf war n theIndian economy.

Our foreign exchange reserves dwindled toless than $1 billion sufficient to finance only

two weeks imports of essential items.

Non-resident Indians started withdrawingtheir deposits at a faster speed.

International credit rating organizationsdowngraded Indian scrips.


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3.2 Background of Economic Reforms inIndia

Windows of international commercial lendingwere closed for Indian corporate bodies as theylost confidence on the Indian economy.

At home there was fall of industrial output, highinflation at 16 percent and widespreadunemployment.

In order to create International confidence thegovernment o India had to lift gold physicallyfrom the chest of the Reserve of Bank of India atBombay and deposit it with the Bank of England

at London and the Bank of Japan at Tokyo.


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3.3 Core Objectives of Reforms

At that time in July 1991 the new govtwith Narasimha Rao as PM andManmohan Singh as Finance Minister lostno time to initiate wide-ranging reformsin trade, industry, financial and publicsectors;

To improve efficiency, productivity andinternational competitiveness of Indianindustries and to impart dynamism tooverall growth process.

Emphasis is on the role of marketeconomy and the so-called LPG(liberalization and privatisation along withglobalization).


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3.4 Indian Economy in

Pre-Reforms Period

Mixed economy, but too closedFar behind world-wide globalization

High level of control, licenses and regulation

Monopolistic practices in public utilities

Complex tax regime with high rates

High tariff walls & QRs on imports

Rigid factor markets-land, labour, capital

High fiscal deficits and public debtPrecarious balance of payments


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3.5 Rationale for Reforms

Over control, over regulation, licensing andhigh taxes and duties resulted in :

Low efficiency and productivity

High transactions cost

Corruption and rent seeking

Non-optimal allocation of resources

Sub-optimal choice of size, technology and

location of industries

Low quality but high prices of products

Bureaucratic inefficiency and red tape


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3.6 Unique Features of Reforms

Gradual, Step by Step, Evolutionary and Cumulative

Approach, not a Big Bang, Shock Therapy orRevolutionaryApproach

General political consensus

Strong emphasis on human face

Sovereignty and nationality constraint

Agency constraint- ideology of party in power

Preference for national-level decentralization

Prioritisation and sequencing of reforms

No write-off / rescheduling of external debt

Practically no sacrifice made by people


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3.7 Challenges of reforms

To break the nexus among vested interests so

that reforms can be implemented,To change the mind-set of all policymakers

and bureaucrats to accept change,

To achieve sustained growth with equity andsocial justice so that fruits of reforms reacheverybody,

To involve all stakeholders in the process ofdevelopment, because we know that noreforms can succeed unless we are able totake the people along with us.


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3.8 Reorientation of Public Policies

To create enabling environment for public-

private partnershipTo link fiscal incentives to productivityTo streamline public investment programs

To reorient planning for multi-stakeholdersconsultations, flexibility, decentralisation,

selectivity, monitoring and co-ordination

To repair market failuresTo strengthen structures & institutions


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4. MAJOR REFORMS


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4.1 Macro adjustment policies

Macro adjustment policies can be broadly

divided into two groups- stabilizationpolicies and structural reforms.

While stabilization policies aim at reducingmacro economic imbalances by attackingdemand, structural reforms aim atincreasing supply and improvingproductivity and growth by encouragingcompetitiveness, efficiency and dynamism

of industries and the corporate sector.


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4.2 Economic Reforms since 1991

Stabilisation Policies Fiscal policies Monetary policies Exchange rate policy Tariff policy Wage-income policy Administered price

policy

Structural Reforms Reforms in agriculture,

industry and infrastructure

Reforms in trade and

external sector Financial sector reforms

Public sector reforms

Social sector reforms

Factor market reforms

- Land, Labor, Capital


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4.3 Paradigms of Reforms since 1991Pre-Reforms Period

1.Quantitative licensing

on trade and industry

2. State regulated

monopolies of utilities

and trade3. Govt control on

finance and capital

markets

4.Restrictions on

foreign investment

and technology

Post Reforms Period

1.Abolition of industrial and

trade licensing

2.Removal of state

monopolies, privati-sation

& divestment

3.Liberalisation of financialand capital markets

4.Liberal regime for FDI,

portfolio investment,

foreign technology


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4.4 Paradigms of Reforms since 1991Pre-Reforms Period5.Import substitution

and export ofprimary goods

6.High duties & taxeswith multiple rates

and large dispersion7.Sector-specific

monetary, fiscal andtariff policies

8.End-use specific,multiple & controlledinterest rates

Post Reforms Period5.Export promotion and

export diversification,no import bias

6.Significant reductionand rationalisation of

all taxes and duties7.Sector-neutral

monetary, fiscal andtariff policies

8.Flexible interest rateswithout any end-use


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4.5 Paradigms of Reforms since 1991Pre-Reforms Period

9.Foreign exchangecontrol, no converti-

bility of rupee

10.Multiple and fixed

exchange rates11.Administered prices

for minerals, utilities,

essential goods

12.Tax concessions on

exports and savings

Post Reforms Period

9.Abolition of exchangecontrol, full converti-

bility on current A/C

10.United and market

determined exch.rates12.Abolition of all

administered prices

except for few drugs

12.Rationalised and

being phased out

4 6 P di f R f i 1991


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4.6 Paradigms of Reforms since 1991

Pre-Reforms Period

13.Explicit subsidies on

food, fertilisers, and

some essential items

14.Hidden subsidies on

power, urbantransport, public

goods, POL

15.General lack of

consumers protectionand other rights

Post Reforms Period

13. No change, budget

subsidies on LPG andkerosene introduced

14.No change, but user

charges are being

rationalised, and subsidies

targeted

15.Acts governing consumer

rights, IPR, independent

regulatory authority

4 7 P di f R f i 1991


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4.7 Paradigms of Reforms since 1991

Pre-Reforms Period16.Central planning,

discretion, highdegree ofbureaucracy

17.OutdatedCompanies Act

18. No exit policy forland and labour

19.Outdated legalsystem andcommercial laws

Post Reforms Period16.Decentralisation, sound

institutional framework,reforming civil services

17. No change- corporategovernance and socialresponsibility introduced.

18. No change in labor policy,

little change in land markets19. No change


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Planning and Reforms by Prof. Tarun Das

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