Tuesday, May 26, 2009

Role of government and economic reforms

How economic reforms have affected the role of government? Explain in detail with examples/illustrations.

Economy reforms have also witnessed a big change in the role of the Government over time. Ever since independence till around the 1980s, as we discussed in the previous units, our objective was to have planned economic development without adopting extreme forms of capitalism or communism.
Heavy industry and infrastructure were left in the hands of the Government to develop. The Government decided upon priority sectors. In agriculture, development was encouraged along capitalistic lines. To prevent monopoly, mitigate cyclical fluctuations, lessen interpersonal inequalities of income and wealth and promote economic development, measures of command and control were frequently resorted to, though some measures operating through the market mechanism were also adopted. Little attention was however paid by the Government to prevent environmental degradation or reduce inter-regional or gender-based inequalities.
The situation in which we found ourselves by the 1980s was not a happy one. Our
Government could not provide adequate infrastructure facilities. While we had some success in increasing agricultural production, the level of our per capita consumption of food was woefully low. Further, agriculture, even now, seems affected by the vagaries of the weather, causing cyclic fluctuations in the economy. You will find that there have been an official statement that while the Indian economy has grown, this growth has not trickled down sufficiently. Further, Government-owned enterprises in basic and heavy industries were functioning far from efficiently and have mostly been using outdated technology. Moreover, because of resort to command and control measures, a number of private sector units of the Indian economy were also more or less in the same boat. There were hence slow rumblings of change in India’s economic policy form the 80s.
It soon became clear, however, that such gradual changes will simply not work. The unprecedented crisis in the Indian economy in 1990-91 was the last straw on the camel’s back. Our foreign exchange reserves fell to an all-time low level of $ 2.2 billion. Inflation rate had already crossed the double-digit figure and was actually at 14%. Fiscal deficit had risen to 8.4% of the Gross Domestic Product. The current account deficit on balance of payments was as high as $ 9.9 billion. International Credit Rating agencies went on to considerably downgrade India’s creditworthiness.
The Government and many economists agreed that a shock therapy was immediately required to pull the Indian economy out of the woods. The World Bank agreed to bail India out, but imposed certain conditionalities for doing so. It wanted two major types of programmes to be carried out. Firstly, there were to be short-term stabilization measures to control inflation and wipe out the balance of payments deficit. These were agreed upon. You are aware that attempts are being made to rationalize subsidies and cut down wasteful Government expenditure to reduce the fiscal deficit. The rupee has been devalued to correct the balance of payments deficit. Secondly, there had to be structural reforms to make the Indian economy competitive and attain a high rate of growth with social justice. These have also been accepted and measures are being taken to liberalize and globalize the Indian economy.
As a result of all this, there was considerable rethinking, reinforced by the conditionalities imposed by the World band to help India out of her difficulties. Steps began to be initiated in the 1980s and these gathered considerable momentum in the 1990s. A sea change has thus come about in the economic role of the Government in India since the 1990s. Many of the sectors reserved for the public sector have now been thrown open to the private sector. More and more physical controls are being replaced by measures to guide the economy through the market mechanism. Restraints in the way of international trade and factor movements are being gradually reduced. The seeming intention is to make the Indian economy face international competition and become efficient in performance. The Government role in the provision of public goods is not likely to increase, but as regards the protection of the environment, the Government is likely to play an increasing role.

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