Economic Reform in India: Challenges, Prospects, and Lessons
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Contents:
The transfer of people from relatively low-productivity occupations in agriculture to higher-productivity jobs in manufacturing and services represents an additional source of potential growth in the coming decades. A third characteristic that is likely to support future growth is India's relatively young population Graph The majority of the population is of working age 15—64 years old , and the United Nations projects the working-age population to continue to grow until around By comparison, China's working-age population has already peaked.
The projected rise in the working-age population implies a gradual decline in the dependency ratio the share of the population that are children or past retirement age , which should lower the fiscal burden of health, education and aged-care expenses. More generally, it suggests that the economy's aggregate output will continue to expand even if the level of labour productivity is unchanged.
In fact, labour productivity has recorded robust growth in recent years Graph At least in part, it is likely that this represents the outcome of a series of reforms since the early s that sought to deregulate industrial licensing, privatise state-owned firms and open markets to domestic and international competition Ahluwalia ; Panagariya This suggests that the future trajectory of productivity growth will partly depend on the success or failure of the current round of government-led reform initiatives.
Since forming government in , the Modi administration has introduced a series of policies and reforms that seek to boost investment, strengthen productivity and support the processes of industrialisation and urbanisation. The administration also introduced a GST in July to raise productivity and increase fiscal revenue by reducing tax evasion.
Asia's Next Emerging Giant?: Political Change and Economic Reform in India
The GST replaced central and state taxes that resulted in duplicate taxation and reduced efficiency in numerous ways — for example, many such taxes were levied at state borders, increasing the cost of logistics and interstate transportation. The removal of these distortions should help to support growth in coming years. Despite fears that the GST would harm near-term economic prospects, its introduction caused only modest short-term disruption to economic activity and, aside from a spike in the monthly CPI in July , inflation has not been noticeably affected.
In addition, the government has introduced a number of financial reforms to address the problem of bad debts in the banking system, which is widely thought to have dampened the supply of credit and weighed on growth in private investment. In May , the government passed the Insolvency and Bankruptcy Code that consolidated existing legislation into a single code, clarifying the law and imposing a time limit of days for the resolution of cases Ministry of Finance Collectively, these initiatives may make it easier for bad debts to be recovered, relieve pressure on banks with high levels of stressed loans, and thereby improve incentives for banks to extend credit to the corporate sector.
In other areas, the government's reform agenda has faced roadblocks. For example, reforms to make it easier for land to be acquired for investment purposes have prompted legal challenges, forcing the central government to leave the burden of land reform to be assumed by state governments. The program is designed to reform the government's welfare programs by allowing subsidy payments, pensions and unemployment benefits to be credited directly to individuals' bank accounts.
This is intended to reduce tax fraud and increase financial inclusion. Although parliament has passed the legislation, its legality has been challenged on privacy grounds in the Supreme Court. The government has made a number of interventions to cut red tape — for example, reducing the discretion of federal labour inspectors, rationalising the numerous overlapping labour regulations that employers were required to comply with, and simplifying environmental approval procedures for investment.
Although the reform agenda has experienced setbacks and delays, it has probably contributed to stronger public investment and a strengthening of business confidence.
Economic reforms Recommendations for a new economic agenda for India | ORF
The recovery in Indian imports in recent years has been mirrored in bilateral trade flows between India and Australia, which raises the question of whether this trend will continue. In the future, policies to accelerate urbanisation and industrialisation, if successful, are likely to boost India's demand for raw materials used in the steelmaking process — iron ore and coking coal — including from Australia. Rising per capita incomes can also be expected to support demand for imported services such as tourism and education, which Australia already exports to India.
Australia's bilateral trade with India has grown significantly over the past two decades. This partly reflects ongoing trade reform in India, which has increased the openness of its economy. After peaking in , exports to India declined sharply, reflecting the stagnation of Indian coal demand and a slowdown in education exports Graph However, exports have recovered in the past three years, reflecting a broad-based recovery across goods and services, spurred by the recovery in Indian domestic demand.
Australian imports from India are relatively small; India is Australia's twelfth largest import source.
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The largest import categories are refined petroleum, travel mainly tourism and business services. Despite strong growth in recent decades, considerable potential exists for trade between Australia and India to expand further. Since , Australia and India have periodically convened negotiations to conclude a Comprehensive Economic Cooperation Agreement to reduce barriers to trade in goods and services. While there have been no new bilateral free trade negotiations since September , both countries have been engaged in the Regional Comprehensive Economic Partnership negotiations, a proposal for an ASEAN-centred regional free trade area.
Tanzi ed. Of the 30 companies constituting the Sensex in , only 9 were still there two decades later. In India, criminals take part in politics and often become cabinet ministers. Hyderabad: ASCI, The Main Successes over the Past 25 Years India was in such poor shape before that it takes an effort to recall how bad things were. India's share of global trade fell steadily from 2. Purists will object that the judiciary should stay within its area and not interfere in the executive branch.
India's demand for resource commodities, in particular, is likely to rise as industrialisation and urbanisation continue over the next few decades. The Indian Government has forecast that domestic steel production will increase to million tonnes by , more than triple its current production Ministry of Steel The projected growth in Indian steel output is likely to support demand for iron ore and coking coal.
India's coking coal reserves are small and tend to be of relatively low quality due to their high ash content Department of Industry and Science Although the Indian Government has prioritised research and development seeking to reduce the use of coking coal in the steelmaking process Ministry of Steel , Australian coking coal exports to India are likely to continue to grow strongly given the expected growth in steel production.
With regard to iron ore, India is already largely self-sufficient and possesses large high-quality iron ore reserves Indian Bureau of Mines Projections by Australia's Department of Industry, Innovation and Science suggest that India may not be able to increase production at a sufficient rate to meet forthcoming demand arising from steel production DOIIS , p However, the Indian Government has recently eased mining bans and export taxes that were in place between and USGS If these spur a revival in domestic production, they may reduce the potential for Australian exports to be required to meet India's demand for iron ore.
Any further expansion of Australia's resource trade with India will take time. One reason is that India's pattern of urbanisation to date has been quite different from Australia's largest trading partner, China. Notably, the proportion of dwellings made in India using steel-reinforced concrete is much smaller than in China, reflecting the large proportion of the population still living in rural areas D'Arcy and Veroude For coal, another reason is that the Indian Government has a policy goal of self-sufficiency in coal production Goyal In keeping with India's carbon dioxide emission reduction commitments, the government's Draft National Electricity Plan projects a strong increase in energy derived from renewable sources Ministry of Power The policy projects that India's annual thermal coal production capacity will peak at 1.
Modi's Economic Reforms in India: Editors' Overview
Australian services are the second largest category of exports to India, accounting for just under a quarter of total exports. In , two-thirds of total services exports came from education services which account for the majority of travel exports in Table 1.
India is the second largest source of international student enrolments in higher education in Australia Graph The number of students from India enrolled in higher education in Australia has trended higher over time, except for a period of decline between and , following widespread local and foreign media coverage of incidents of violence against Indians, including students, living in Australia.
However, since , Indian student enrolments in Australia have grown rapidly, in part because Australian universities have begun to collaborate with Indian institutions to develop joint study programs and research institutes. Agricultural trade with India may also afford opportunities for Australian exporters in the years ahead. Sustained growth in agricultural output over the past few decades has enabled India to become a net exporter of agricultural products.
Yet India's crop output is highly sensitive to its monsoon season and other weather events, so imports are often required to supplement domestic supply. Australian exports of pulses to India have increased significantly over the past decade, as the Indian Government has reduced import duties to ensure domestic supply.
As India continues to grow, there is potential for these exports to expand further to help India improve its food security. However, the Indian Government has also used trade policy in the past to support its farmers, creating uncertainty for exporters. A combination of policy reform and the reversal of a negative terms of trade shock have helped the Indian economy realise its strong potential for growth, underpinned by a rising working-age population and rapid growth in labour productivity.
The government's economic reform program, which is targeted at facilitating urbanisation and expanding the manufacturing sector, has supported a rebound in business confidence and stronger growth in investment.
Despite the recent increase in crude oil prices and the depreciation of the rupee, the Indian economy is therefore in a better position today than it was several years ago. As domestic economic conditions have improved, they have in turn driven a recovery in India's imports and a pick-up in Australia's exports to India of both goods and services. In the future, domestic policies in India such as a focus on self-sufficiency in coal production may limit the scope for growth in certain types of bilateral trade. However, the potential for future growth, and the existing trade relationship in areas such as education services and agricultural products, suggest that Australia could benefit from expanded trade in goods and services with India in coming years.
In , India accounted for 1. See Morgan Stanley See Reuters Basu et al question the effectiveness of the use of import duties on gold during this episode.
'The transformation of India in the past couple of decades from a slow growth economy to the ranks of the fastest growing economies in the world is not a mystery. The essays in this volume are written by leading economists working on the Indian economy. They collectively emphasize the importance of policies and.
The program resulted in a large but temporary contraction in the total currency in circulation. While the number of non-cash payments has subsequently increased, the Indian economy is still largely reliant on cash, and the total currency in circulation currently exceeds its level before the reform. In particular, the government sought to amend the Land Acquisition, Rehabilitation and Resettlement Act to remove majority landowner consent provisions, social impact assessment requirements and restrictions on land acquisition by private entities.
While the bill passed the lower house of parliament in , it was blocked by the upper house. For examples of these initiatives, see Mandhala , Dhoot , Bhan and Singh For example, see Mason For example, in December , a tariff was placed on imports of chickpeas and lentils due to an abundance of domestic supply.
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Abstract The Indian economy has experienced a notable turnaround in recent years. Graph 1. Graph 2. The number of persons below the poverty line was million in compared to million in This means that the absolute number of poor declined very slowly during the post-reform period.
Essay: Indian Economy and Economic Reforms
So, the trickledown effect of the growth process did not benefit the poor. One of the causes of poverty is growing unemployment or underemployment. Total employment increased from lakhs in to 3, lakhs in and then to 3, lakhs in The rate of growth of employment was of the order of 2.
Since the reform process is limited to the organised sector, more so to the large corporate sector, the growth rate of employment in the organised sector decelerated to 0.