Whither India?

• Several approaches to this question• Society in transition in which the main

problem lies in securing– Short-term stabilization– Medium-term economic growth– Long-term sustainability

• High cost of delay will have to be paid domestically

Reform Process so far• First Generation – externalities and learning by

doing• The immediate goal of macroeconomic

stabilization has been more or less achieved• Huge slack in the economy - whence first

generation reforms led to significant leaps in the early years

• Biggest success of reforms – forex and debt management

• Better on the Easy, Slack on the Tough

Issues

• Agriculture, which accounts for 25% of GDP but 60% of employment (and this proportion is worsening) has been virtually untouched by reforms

• Fiscal discipline – arresting the fiscal deficit

• Health, Education, Infrastructure are not squarely on the agenda

Issues

• emphasis on reforms of product markets by abolishing industrial licensing and import barriers. left the factor markets such as labor markets, land markets and capital markets, the natural resources market such as water, and institutions mostly untouched

• Have reforms helped the poor?– Trickle down effect

• Geographically uneven growth

Environment

• As reforms have progressed– Complexity of our polity has increased– Duration of our governments uncertain– Interplay of vested interests confusing

• Requires coordination between all the central government ministries as well as cooperation from the state governments

Second Generation• Second-generation reforms included labor law

reforms, pension fund reforms, subsidy reforms, increased social sector spending and agriculture reforms– Medium term fiscal consolidation through expenditure

control– Restructuring PSUs– Reducing long term interest rates– Reform in higher education– Market for corporate control competitive– Strengthening regulation of FIs & markets– Privatisation of banks

Budget Strategy (2002-2003)

Continue the emphasis on agriculture and food economy reforms

Enhance public and private investment in infrastructure

Strengthen the financial sector and capital marketsDeepen structural reforms and regenerate industrial

growthProvide social security to the poorConsolidate tax reforms and continue fiscal

adjustment at both the Central and State levels

Economic Policy

• Preparing an exit policy

• Restructuring agriculture

• Policy on Privatisation and restructuring public enterprises

• Reducing indebtedness

Social Policy• Establishing a social safety net• Creating a fund for retraining and learning

new skills• Combating communalism• Redefining the terms of implementation of

the notion of compensatory discrimination• Intensifying national integration through

heightened awareness of the need to formulate and implement a UCC on the basis of consensus arrived at as a result of public debate

Political Reform

• Redefining Center/State relations

• Debate on Presidential form of government

• Federal/Unitary divide

• Reducing central control and introducing greater accountability by increasing public participation in governance

Key to the future will lie in the ability to establish

– Effective and complete decentralization– Efficiency before equity– Means to overcome institutional, ideological

and ecological barriers to good governance: transparency

Major impediment lies in refusal to change the mindset derived from

– Stilted entrepreneurship of a controlled economy

– Relatively closed society

Middle class both a curse and a blessing– A growing market offset by the get rich quick

mentality, which is at the base of the ubiquitous problem of corruption

Moral of the Story

The prospects of a successful transition are uncertain, but there is, for better or for worse,

simply no other way!

Definition of Competitiveness

A Nation’s competitiveness is the degree to which it can under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously expanding the real income of its citizens

Definition of CompetitivenessBased on

• superior productivity performance

• economy’s ability to shift output to high productivity activities, which in turn can generate a high level of wages

Associated with• rising living standards

• expanding employment opportunities

• ability of a nation to maintain its international obligations

Not merely• a measure of a nation’s ability to sell abroad

• or to maintain a trade equilibrium

India’s Special Strengths & Weaknesses(Source: 1998 Global Competitiveness Report)

Strengths Scale Rank

Stock Market (1 – 7)

Science and Engineering

Labor Force

Rule of Law

Stock market is important for new financing 5.42 13

Schools excel in basic science and math 5.27 16

Country has large pool of competent scientists & engineers 6.37 1

Engineering as a profession greatly attracts young talent 6.26 1

Country has first class business schools to train managers 5.05 8

Country has an abundant labor force 6.77 1

Judiciary is independent of the Government 5.40 9

Compliance with court ruling is high 5.37 14

Firms have recourse to courts for challenging govt. action 5.56 19

India’s Special Strengths & WeaknessesWeaknesses Scale Rank

Financial Markets (1 – 7)

Infrastructure

Corruption & Bribery

Citizens prohibited from investing in foreign stocks, bonds 1.60 53

Financial sector sophistication is lower than intl. Norms 2.74 43

Venture capital is scarce 2.63 50

Overall infra is far worse than major trading partners 1.92 53

Road infra constrains business development 1.85 53

Port facilities are underdeveloped 2.18 53

Direct dial phone service is prohibitively expensive 2.94 53

Country suffers from severe power shortages 1.94 53

Extra payments connected with permits/licenses common 2.79 48

India’s Special Strengths & WeaknessesWeaknesses (contd.) Scale Rank

Public Administration (1 – 7)

Research & Development

Labor Regulations

Admin. Regulations that constrain business are pervasive 2.90 47

Government subsidies keep old industries alive 2.68 52

Civil Service is subject to political pressures 2.65 43

Tax evasion is rampant 2.27 48

The business sector spends little on R & D 2.11 52

Research collaboration does not exist bet. Univ. & industry 2.66 53

Firms fail to commercialize academic research 2.66 51

Companies poorly adapted to absorbing new tech. 2.29 34

Average workers are unproductive 2.94 51

Hiring and firing practices severly restricted 2.16 53

Lab. reg. impede adj. in work hrs. to meet changes in dem. 2.58 49

Highlights• Agriculture – proposed to be opened up

– Decimalization of the export of agricultural commodities and phasing out of remaining export controls

– Expansion of futures and forward trading to cover all agricultural commodities

• Infrastructure– The focus of reform has shifted from generation

to transmission and distribution.– Major ports to be corporative in a phased

manner

Highlights (contd.)

• Banking– A new Bill on Banking Sector Reforms to

strengthen creditor rights through foreclosure and enforcement of securities by banks and financial institutions

• Petroleum– Pricing of products market determined– Liquidation of the Oil Pool Account

Highlights (contd.)

• Move towards greater capital account liberalization

• Subsidies on kerosene, LPG, sugar, fertilizers reduced

• Additional outlays linked with progress of reforms