Indian Economic Policy
Indian Economic Policy
Indian Economic Policy
seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian
socialism. Policy tended towards protectionism, with a strong emphasis on import substitution,
industrialization, state intervention in labour and financial markets, a large public sector, business
regulation, and central planning.[12] Five-Year Plans of India resembled central planning in the
Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical
plants, among other industries, were effectively nationalized in the mid-1950s.[13] Elaborate
licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were
required to set up business in India between 1947 and 1990.[14]
Before the process of reform began in 1991, the government attempted to close the Indian
economy to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs
and import licensing prevented foreign goods reaching the market. India also operated a system
of central planning for the economy, in which firms required licenses to invest and develop. The
labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied
before a firm could be granted a licence to produce and the state would decide what was
produced, how much, at what price and what sources of capital were used. The government also
prevented firms from laying off workers or closing factories. The central pillar of the policy was
import substitution, the belief that India needed to rely on internal markets for development, not
international trade—a belief generated by a mixture of socialism and the experience of colonial
exploitation. Planning and the state, rather than markets, would determine how much investment
was needed in which sectors.
– BBC[15]
In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly
reduced License Raj and also promoted the growth of the telecommunications and software
industries.[citation needed]
The Vishwanath Pratap Singh government (1989–1990) and Chandra Shekhar Singh government
(1990–1991) did not add any significant reforms.
[edit] Impact
The low annual growth rate of the economy of India before 1980, which stagnated around 3.5%
from 1950s to 1980s, while per capita income averaged 1.3%.[16] At the same time, Pakistan grew
by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and in Taiwan by 12%.[17]
Only four or five licences would be given for steel, power and communications. License owners
built up huge powerful empires.[15]
A huge public sector emerged. State-owned enterprises made large losses. [15]
Infrastructure investment was poor because of the public sector monopoly.[15]
License Raj established the "irresponsible, self-perpetuating bureaucracy that still exists
throughout much of the country"[18] and corruption flourished under this system.[8]
Impact of reforms
The HSBC Global Technology Center in Pune develops software for the entire HSBC group.[21]
The impact of these reforms may be gauged from the fact that total foreign investment (including
foreign direct investment, portfolio investment, and investment raised on international capital
markets) in India grew from a minuscule US$132 million in 1991–92 to $5.3 billion in 1995–96.
[22]
Cities like Gurgaon, Bangalore, Hyderabad, Pune and Ahmedabad have risen in prominence and
economic importance, became centres of rising industries and destination for foreign investment
and firms.
Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after
Independence to 7½ per cent currently, a rate of growth that will double average income in a
decade. [...] In service sectors where government regulation has been eased significantly or is less
burdensome—such as communications, insurance, asset management and information technology
—output has grown rapidly, with exports of information technology enabled services particularly
strong. In those infrastructure sectors which have been opened to competition, such as telecoms
and civil aviation, the private sector has proven to be extremely effective and growth has been
phenomenal.
– OECD[9]
In labour markets, employment growth has been concentrated in firms that operate in sectors not
covered by India’s highly restrictive labour laws. In the formal sector, where these labour laws
apply, employment has been falling and firms are becoming more capital intensive despite
abundant low-cost labour. Labour market reform is essential to achieve a broader-based
development and provide sufficient and higher productivity jobs for the growing labour force. In
product markets, inefficient government procedures, particularly in some of the states, acts as a
barrier to entrepreneurship and need to be improved. Public companies are generally less
productive than private firms and the privatisation programme should be revitalised. A number of
barriers to competition in financial markets and some of the infrastructure sectors, which are
other constraints on growth, also need to be addressed. The indirect tax system needs to be
simplified to create a true national market, while for direct taxes, the taxable base should be
broadened and rates lowered. Public expenditure should be re-oriented towards infrastructure
investment by reducing subsidies. Furthermore, social policies should be improved to better reach
the poor and—given the importance of human capital—the education system also needs to be
made more efficient.
Economic liberalization
Economic liberalization is a very broad term that usually refers to fewer government regulations
and restrictions in the economy in exchange for greater participation of private entities; the
doctrine is associated with classical liberalism. The arguments for economic liberalization include
greater efficiency and effectiveness that would translate to a "bigger pie" for everybody.
Most first world countries, in order to remain globally competitive, have pursued the path of
economic liberalization: partial or full privatisation of government institutions and assets, greater
labour-market flexibility, lower tax rates for businesses, less restriction on both domestic and
foreign capital, open markets, etc. British Prime Minister Tony Blair wrote that: "Success will go
to those companies and countries which are swift to adapt, slow to complain, open and willing to
change. The task of modern governments is to ensure that our countries can rise to this
challenge."[1]
Many countries nowadays, particularly those in the third world, arguably have no choice but to
also "liberalize" their economies in order to remain competitive in attracting and retaining both
their domestic and foreign investments. In the Philippines for example, the contentious proposals
for Charter Change include amending the economically restrictive provisions of their 1987
constitution.[3]
The total opposite of a liberalized economy would be North Korea's economy with their closed
and "self sufficient" economic system. North Korea receives hundreds of millions of dollars
worth of aid from other countries in exchange for peace and restrictions in their nuclear
programme. Another example would be oil rich countries such as Saudi Arabia and United Arab
Emirates, which see no need to further open up their economies to foreign capital and
investments since their oil reserves already provide them with huge export earnings.
The service sector is probably the most liberalised of the sectors. Liberalisation offers the
opportunity for the sector to compete internationally, contributing to GDP growth and generating
foreign exchange. As such, service exports are an important part of many developing countries'
growth strategies. India's IT services have become globally competitive as many companies have
outsourced certain administrative functions to countries where costs are lower. Furthermore, if
service providers in some developing economies are not competitive enough to succeed on world
markets, overseas companies will be attracted to invest, bringing with them international best
practices and better skills and technologies[4]. The entry of foreign service providers is not
necessarily a negative development and can lead to better services for domestic consumers,
improve the performance and competitiveness of domestic service providers, as well as simply
attract FDI/foreign capital into the country. In fact, some research suggest a 50% cut in service
trade barriers over a five- to 10-year period would create global gains in economic welfare of
around $250 billion per annum[4].
Yet, trade liberalisation also carries substantial risks that necessitate careful economic
management through appropriate regulation by governments. Some argue foreign providers
crowd out domestic providers and instead of leading to investment and the transfer of skills, it
allow foreign providers and shareholders to capture the profits for themselves, taking the money
out of the country[4]. Thus, it is often argued that protection is needed to allow domestic
companies the chance to develop before they are exposed to international competition. Other
potential risks resulting from liberalisation, include[4]:
However, researchers at thinks tanks such as the Overseas Development Institute argue the risks
are outweighed by the benefits and that what is needed is careful regulation[4]. For instance, there
is a risk that private providers will ‘skim off’ the most profitable clients and cease to serve certain
unprofitable groups of consumers or geographical areas. Yet such concerns could be addressed
through regulation and by a universal service obligations in contracts, or in the licensing, to
prevent such a situation from occurring. Of course, this bears the risk that this barrier to entry will
dissuade international competitors from entering the market (see Deregulation). Examples of such
an approach include South Africa's Financial Sector Charter or Indian nurses who promoted the
nursing profession within India itself, which has resulted in a rapid growth in demand for nursing
education and a related supply response[4].
As outlined above, the process of defining HRM leads us to two different definitions. The first definition of HRM is
that it is the process of managing people in organizations in a structured and thorough manner. This covers
the fields of staffing (hiring people), retention of people, pay and perks setting and
management, performance management, change management and taking care of exits from the company to round
off the activities. This is the traditional definition of HRM which leads some experts to define it as a modern version of
the Personnel Management function that was used earlier.
The second definition of HRM encompasses the management of people in organizations from a macro
perspective i.e. managing people in the form of a collective relationship between management and employees. This
approach focuses on the objectives and outcomes of the HRM function. What this means is that the HR function in
contemporary organizations is concerned with the notions of people enabling, people development and a focus on
making the “employment relationship” fulfilling for both the management and employees.
Human resources may be defined as the total knowledge, skills, creative abilities, talents and
aptitudes of an organization's workforce, as well as the values, attitudes, approaches and beliefs
of the individuals involved in the affairs of the organization. It is the sum total or aggregate of
inherent abilities, acquired knowledge and skills represented by the talents and aptitudes of the
persons employed in the organization.
The human resources are multidimensional in nature. From the national point of view, human
resources may be defined as the knowledge, skills, creative abilities, talents and aptitudes
obtained in the population; whereas from the viewpoint of the individual enterprise, they
represent the total of the inherent abilities, acquired knowledge and skills as exemplified in the
talents and aptitudes of its employees.