Public Policy By Tarun Das

Public Policy by Tarun Das 1

Role of Public Policies and Public Institutions in Market

EconomyDr. Tarun Das, Eco. Adviser,

MOF


Role of Public Policies and Public Institutions

in Market EconomyContents

1. Economic Reforms in India2. Policies and institutions3. Impact on the economy

4. Concluding observations


I. Economic Reforms in India

•


1.1 Economic Reforms in India

• Since July 1991 India has initiated wide-ranging reforms in trade, industry, financial and public sectors.

• To improve efficiency, productivity and international competitiveness of Indian industries and to impart dynamism to overall growth process.

• Emphasis is on the role of market economy and the so-called LPG (liberalization and privatisation along with globalization).


1.2 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 ratesHigh tariff walls & QRs on importsRigid factor markets-land, labour, capitalHigh fiscal deficits and public debtPrecarious balance of payments


1.3 Rationale for ReformsOver control, regulation, licensing and

high taxes and duties resulted in :Low efficiency and productivityHigh transactions cost Corruption and rent seekingNon-optimal allocation of resourcesSub-optimal choice of size, technology and

location of industriesLow quality but high prices of productsBureaucratic inefficiency and red tape


1.4 Challenges of Public Policy To break the nexus among vested interests

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

and bureaucrats to accept change, To achieve sustained growth with equity and

social justice so that fruits of reforms reach everybody,

To involve all stakeholders in the process of development, because we know that no reforms can succeed unless we are able to take the people along with us.


1.6 Unique Features of Reforms

Gradual, Step by Step, Evolutionary and Cumulative Approach, not a Big Bang, Shock Therapy or Revolutionary Approach

General political consensus Strong emphasis on “human face”Sovereignty and nationality constraintAgency constraint- ideology of party in

powerPreference for national-level decentralizationPrioritisation and sequencing of reforms No write-off / rescheduling of external debt Practically no sacrifice made by people


2. Public Policies and Public Institutions


2.1 Reorientation of Public PoliciesTo create enabling environment for

public-private partnershipTo link fiscal incentives to productivityTo streamline public investment To repair market failuresTo strengthen structures and institutionsTo emphasis on consultations, flexibility,

decentralization, selectivity, outcome, implementation, evaluation, monitoring and co-ordination of policies


2.2 Redefining the role of Bureaucracy

There is a distinct change of mind set of the government officials:

From a controller to an enablerFrom a supplier to a facilitatorFrom an operator to a policy makerFrom a regulator to a trustee of social

equity and environmental sustainability


2.3 Redefining the role of govt

Both well governed state and well functioning markets are essential for high growth and sustainability.

Government and free markets should supplement and complement each other

Govt to withdraw from sectors where private participation is more productive

Scope of government to remain large in social sectors and infrastructure.


2.4 Markets and Institutions Efficient markets are central for rapid and

successful economic development. But the real markets are neither competitive nor

perfect. Government’s role is to correct market imperfections by strengthening institutions.

Institutions play an important role in developing fair, competitive, inclusive, efficient, and integrated markets.

Institutions are also essential for implementing and evaluating public policies.

Institutions include organisations, rules, laws, conventions and informal norms.


2.5 Role of Public Institutions

Successful development requires solid public institutions:

To protect property rights, To regulate market agents, To maintain macro-economic stability, To ensure social equity and justice, To provide social safety nets, To resolve conflicts. All these help in reducing transactions costs

and provide incentives for competition.


2.6 Building Efficient InstitutionsInstitution building is diverse involving all

stakeholders viz. policymakers, corporate bodies and civil society.

It is an evolutionary and cumulative process, and requires open mind by all stakeholders to accept new ideas and innovations and to reward merits.

Most of the institutions that support markets need to be developed by the government for regulating, stabilizing and legitimizing their scope and functions.


2.7 Institutions for Good Governance

Good Governance requires the development and strengthening the following institutions:

Economic and political institutions- Law and order, tax administration, social security systems, regulatory institutions, labour laws.

Independent audit- financial, performance and policy audit.

Independent judiciary, Free Press, Private voluntary organisations (NGOs).


2.8 Progress until nowSignificant progress has been made in

these respects since 1991. Indian economy today is more liberal

and open, and there is greater participation of people in development.

Regulatory bodies have been set up for ports, telecom, electricity, insurance, pension, (POL under consideration).

Govt desires to set up Competition Commission

Although slow, outdated laws and Acts are being amended.


2.9 Social Sector Development

“Growth with social justice” has been basic objective of Indian planning

Several anti-poverty programs are in operations for decades.

Two basic approaches for poverty reduction- Trickle down and direct attack on poverty.

Employment Guarantee ActEducation Cess and Sarva Siksha YojanaRole of NGOs and SHGs in social sector


3. Impact of Reforms


Impact on GrowthUNDP Report on Globalization has

mentioned that growth under globalization has been jobless, rootless, ruthless,

But, no such adverse effects have happened in India.


3.1 India emerged as one of the fastest growing economies in 1990-2001

6.2 6.0 5.9

10.0

7.77.4 6.7

6.56.36.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Country

Aver

age

grow

th ra

te in

199

0s (%

)


3.2 India moved on a higher growth path

(Real GDP growth rate in per cent)

5.6

1.3

5.9

7.8

5.8

4.0

8.5

6.26.9

4.84.4

6.16.5

7.37.3

5.1

0123456789


3.3 Sectoral growth rates and shares in GDP (%)

Sectors GR1980-1990

GR1992-2005

Share in GDP1990-91

Share in GDP2004-05

Agriculture 3.1 2.7Industry 7.2 6.6Services 6.5 8.4GDP 5.5 6.4


3.4 Employment growth rates and shares in India (%)

Sectors GR1983-1993

GR1993-2000

Share in Employ.

1983

Share in Employ.1999-00

Agriculture 2.2 0.0 63.2 56.7Industry 15.6 17.5Services 21.2 25.8Employ-ment

2.7 1.1 100 100


3.5 Composition of sectoral GDI (%)

1990-91 2002-03A. Agriculture & allied 8.4 8.9B. Industry 53.0 46.9C. Services 38.5 44.2D. Total GDI 100.0 100.0


3.6 Impact on Financial SectorsItem Mar-96 Mar-98 Mar-041.No.of foreign banks 33 42 332.New private banks 9 9 103.Gross NPA ratio 24.8 16.0 7.24.Net NPAs ratio 10.7 8.2 3.05.Op. profits ratio 1.6 1.8 2.76.Net profits ratio 0.2 0.8 1.17.CRAR (Capital adequacy ratio) No. of Banks-- Below 9% 31 6 2-- 9 to 10% 10 16 1-- Above 10% 43 71 878.Number of banks 84 93 90.


3.7 Improvement in Current Accounton External Sector (as % of GDP)

-3.1

-0.3

-1.7

-0.4

-1.0

-1.7-1.2 -1.4

-1.0 -1.0-0.5

0.71.2

1.8

-0.9

-4

-3

-2

-1

0

1

2

3


3.8 Substantial increase in Foreign Investment (US$ bln)

0.1 0.1 0.6

4.25.1 4.9

6.05.4

2.3

5.15.9

6.7

4.6

11

12.5

0

2

4

6

8

10

12

14in

US

$ bi

llion


3.9 Significant reduction in External Debt Service Ratio (at end March)

(% of gross current receipts)35.3

30.227.5

25.4 25.9 26.223.0

19.5 18.817.1 16.2

13.415.8

17.8

12.3

0

5

10

1520

25

30

35

40


3.10 Significant reduction in External Debt/GDP ratios (at the end March)

28.7

38.7 37.533.8

30.827.0

24.6 24.3 23.6 22.1 22.6 21.1 20.2 18.616.7

051015202530354045


10.2

8.3

7.0

3.9 4.3

5.4

7.2

5.44.4 4.0 3.6

2.8

4.45.1

0

2

4

6

8

10

12

3.11 Reduction in Short Term Debt to Total External Debt Ratio (end March)


5.8 9.2 9.819.3 25.2 26.4 29.4 32.5 38.0 42.3

55

76

113

142

21.7

-20

0

20

40

60

80

100

120

140

160

in U

S $

billi

on

3.12 Substantial Build-up of Foreign Exchange Reserves

(end March)


2.5

5.3 4.9

8.6 8.46.5 6.9

8.2 8.2 8.6

11.3

13.8

1820

6

0

5

10

15

20

25

in U

S $

billi

on

3.13 Steady Improvement in Import Cover of FER (Number of months)

(end March)


3.14 Expenditure on social sectors

Year Total Expend. As % of

GDP

Expenditure on social sectors as % of total

expend.

Expenditure on social sectors as % of

GDP

1992-93 17.4 7.8 1.4 2000-01 2005-06

15.5 17.0

11.1 11.5

1.7 2.0


3.15 Basic Indicators of Human Development-1

Year

Life expectancy at birth (years)

Literacy rate (percent)

1951 32.1 18.3 1961 41.3 28.3 1971 45.6 34.5 1981 50.4 43.6 1991 59.4 52.2 2001 63.5 65.4


3.16 Basic Indicators of Human Development-2

Year

Birth rate Per 1000

Death rate Per 1000

Infant mortality rate

Per 1000 1951 39.9 27.4 146 1961 41.7 22.8 146 1971 41.2 19.0 129 1981 33.9 12.5 110 1991 29.5 9.8 80 2001 25.8 8.5 68


3.17 Reduction of Poverty Year Poverty Ratios (%) Number of Poor (Million)

______________________ _________________________ Rural Urban Combined Rural Urban Combined __________________________________________________________ 1973-74 56.4 49.0 54.9 261 60 321 1977-78 53.1 45.2 51.3 264 65 329 1983-84 45.7 40.8 44.5 252 71 323 1987-88 39.1 38.2 38.9 232 75 307 1993-94 37.3 32.4 36.0 244 76 320 1999 27.1 23.6 26.1 193 67 260

_________________________________________________________________


4 Strengths, Challenges and Prospects


4.1 Strengths of Indian Economy Fourth largest economy in terms of PPP-

adjusted GDP after USA, China and Japan

Largest pool of technical manpower Largest share of working population Largest English speaking population Huge domestic market with second

largest population, democracy, free press, independent judiciary

Rich natural resources, well established financial system, wide spread infrastructure, dynamic private sector


4.2 Illiberal Conclaves What is less clear is the drawing line between

invisible hand of markets and the helping hand of the government.

There are still ‘illiberal conclaves’ such as inflexible land and labour markets, municipalities and corporations, outdated laws and legal procedures, rigid institutional rules and practice.

Govt is in the process of second generation reforms to remove these constraints on growth and development.


4.3 Concluding Remarks As first generation reforms take root and second

generation reforms unfold, India is emerging as a favourite destination for investment and a land of immense opportunity for all.

India should maintain its open door policy in goods & services production, investment, trade.

Carried to their logical ends, economic reforms would make India as one of the most dynamic economies of Asia by 2010.

India is “an economic miracle” waiting to happen. All the stakeholders have to play a distinct role in

that exciting process of development.


Thank youHave a Good Day

Public Policy By Tarun Das

Economy & Finance

Transcript of Public Policy By Tarun Das