Economic Environment

and Policy (EEP)

Session-3

Economic Systems, Planning

and Reforms in India

Dr. Tarun Das, Professor, IILM

Prof. Tarun Das, IILM EEP Session-3 1

Contents of this presentation
1. Economic Systems
2. Types and dimensions of planning
3. Economic Planning in India
4. Background of reforms in India
5. Scope of reforms in India

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 1. Economic Systems

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 1.1 Various Economic Systems
• Economic system means relations
among economic agents as regards
ownership of resources, modes of
production, and distribution of goods &
services.
• It also includes institutions,
arrangements and methods to deal
with production and distribution.
• Economic system determines who
owns the means of production; who
provides labour; and how relative
shares of wages, interests, rents and
profits are determined.
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 1.2 Various Economic Systems

In brief an economic system

defines the institutional
framework regulating
business.

Economic systems can be

broadly classified as
Capitalist, Socialist and
mixed.
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 1.3 Market Economy or
Capitalism
• According to Karl Mark, regarded as father of
socialism and communism, there are two distinct
groups of people- Capitalist (who owns huge
assets) and the Proletariat (who does not possess
any assets).
• In a capitalist society, means of production are
owned and controlled by the capitalists.
• Proletariat owns only labor. It lacks bargaining
power, provides cheap labor and makes
significant contribution to output.
• But a major share of national income is taken
away by the capitalist in the form of rents,
interests and profits.

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 1.4 Market Economy or
Capitalism
• There exist wide disparities of incomes of the
rich and the poor.
• High income inequalities and significant poverty
ratios are dominant features of capitalism.
• Capitalism is often called free market economy
which is not planned or controlled by a central
authority and where government intervention is
minimum. Govt makes basic rules and
regulations for market players and formulates
public policies for addressing inequalities and
market imperfections.
• USA and Canada are the very good examples of
market economy.

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 1.5 Centrally Planned/ Socialist
Economy
• In a socialist economy, means of
production are owned and controlled by
the state. Individual consumers and
producers loose their sovereignty.
• Govt sets the rules and goals for the nation
under which economic agents are made to
work accordingly.
• There is small level of inequality justified
by the differences of individual capabilities.

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 1.6 Centrally Planned/ Socialist
Economy

• The institution of private property does

not exist to perpetuate inequality.
• People contributes to the public
exchequer according to their capacity
to pay, but receives govt transfers
according to their needs. There is fair
distribution of national income among
people by the state.

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 1.7 Command and Communist
Economy
• It is the extreme form of centrally planned
economy. This system refers to the political
and economic development proposed by
Karl Marx and developed and implemented
by V.I. Lenin.
• Under this system people rule both
politically and economically and there is a
classless society.
• Totalitarian system of govt ruled by single
authoritarian party.
• All means of production are owned and
controlled by the govt which also
determines types, quantity, quality and
prices of goods and services to be
produced.
• China, Russia, Cuba, are best examples.
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 1.8 Mixed Economy
• Mixed economic system is the middle path
between free market economy and the pure
socialist economy. It allows the co-existence of
both private and public sectors.
• Indian economy is a very good example of
mixed economy.
• Since independence and beginning of planning
Indian govt has adopted the basic principle of
“Growth with social justice and equity”.
• Initially, many heavy industries were reserved
for the public sector. Since 1991 govt has
adopted new economic policy and has opened
most of the sectors for private investment.
• Govt is also encouraging public-private
partnership.

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 2. Economic Planning in India

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 2.1 Types of Planning
Policy planning versus physical planning
Indicative planning versus target setting
Consistency versus optimizing approach
Sectoral versus economy wide planning
Selective versus all purpose planning
Learning versus blue print approach
Consultancy versus dirigist approach
Monitoring trends versus forecasting
future
Sound public investment programs versus
overall investment planning
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 2.2 Dimensions of Planning
Macro planning (National level)
Meso (Middle level- States, UTs)
Spatial (over space- SEZs, EPZs)
Regional (over regions- planning for
North Eastern States)
Local (Municipalities, Corporations)
Sectoral (over industries/ sectors)
Micro (at unit levels- corporate
planning)
Inter temporal (over time)
Intergenerational (over generations)

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2.3 Economic Planning in India (1)
 Since the beginning of the five year plans in 1951
Indian govt has adopted a mixed economic system
guided by “Socialistic Pattern of Society” and basic
objective of “Growth with Social Justice and Equity”.
 Although basic objective remains the same, the
emphasis and the type of planning model differed in
subsequent five year plans.
 Over the years Indian economy has become more
liberal, more globalized and more people oriented.

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 2.4 Economic Planning in India
Plan and Planning
(2)
Focus on Ave.
period Model growth

First Plan Harrod Agriculture/ 3.6

(1951-56) Domar rural sector

2nd Plan Mahalanobis Heavy 4.3

(1956-61) Model Industry

Third Plan Leontief Public Sector 2.9

(1961-66) input-output enterprises

Plan Holi- Swaminatha Green 4.0

day(66-69 n Model Revolution
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 2.5 Economic Planning in India
(3)
Plan and Planning Focus on Ave.
period Model growth

5th Plan Sukhomaya Poverty 4.8

(1974-79) Chakravarty reduction

Annual No Model Control of -4.9

(1979-80) inflation

Sixth Plan Sukhomaya Industrial 5.6

(1980-85) Chakravarty Liberalisation

7th Plan
Prof. Tarun Das, IILM Leontief ICT,
EEP Session-3 5.7 17
(1985-90) Input- Transport
 2.6 Economic Planning in India
(4)
Plan and Planning Focus on Ave.
period Model growth

8th Plan Leontief Growth and 6.2

(1992-97) Input- Poverty
Output reduction
9th Plan As above As above 5.5
(1997-02)

10th Plan As above As above 7.8

(2002-07)

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11th Plan As above Faster and 9%
3. Economic Reforms in India

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 3.1 Background of Economic Reforms in
India
• It is well known that in 1990-91 India faced
an unprecedented foreign exchange crisis
due to adverse impact of the Gulf war n the
Indian economy.
• Our foreign exchange reserves dwindled to
less than $1 billion sufficient to finance only
two weeks imports of essential items.
• Non-resident Indians started withdrawing
their deposits at a faster speed.
• International credit rating organizations
downgraded Indian scrips.

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 3.2 Background of Economic Reforms in
India
• Windows of international commercial lending
were closed for Indian corporate bodies as they
lost confidence on the Indian economy.
• At home there was fall of industrial output, high
inflation at 16 percent and widespread
unemployment.
• In order to create International confidence the
government o India had to lift gold physically
from the chest of the Reserve of Bank of India at
Bombay and deposit it with the Bank of England
at London and the Bank of Japan at Tokyo.

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 3.3 Core Objectives of Reforms
• At that time in July 1991 the new govt
with Narasimha Rao as PM and
Manmohan Singh as Finance Minister lost
no time to initiate 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).
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 3.4 Indian Economy in
Pre-Reforms Period
 Mixed economy, but too closed
 Far behind world-wide globalization
 High level of control, licenses and regulation
 Monopolistic practices in public utilities
 Complex tax regime with high rates
 High tariff walls & QRs on imports
 Rigid factor markets-land, labour, capital
 High fiscal deficits and public debt
 Precarious balance of payments

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 3.5 Rationale for Reforms
Over control, over regulation, licensing and
high taxes and duties resulted in :
Low efficiency and productivity
High transactions cost
Corruption and rent seeking
Non-optimal allocation of resources
Sub-optimal choice of size, technology and
location of industries
Low quality but high prices of products
Bureaucratic inefficiency and red tape
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 3.6 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 constraint
 Agency constraint- ideology of party in power
 Preference for national-level decentralization
 Prioritisation and sequencing of reforms
 No write-off / rescheduling of external debt
 Practically no sacrifice made by people

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 3.7 Challenges of reforms
 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.

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 3.8 Reorientation of Public Policies
 To create enabling environment for public-
private partnership
 To link fiscal incentives to productivity
 To streamline public investment programs
 To reorient planning for multi-stakeholders
consultations, flexibility, decentralisation,
selectivity, monitoring and co-ordination
 To repair market failures
 To strengthen structures & institutions

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 4. MAJOR REFORMS

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 4.1 Macro adjustment policies
• Macro adjustment policies can be broadly
divided into two groups- stabilization
policies and structural reforms.
• While stabilization policies aim at reducing
macro economic imbalances by attacking
demand, structural reforms aim at
increasing supply and improving
productivity and growth by encouraging
competitiveness, efficiency and dynamism
of industries and the corporate sector.

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 4.2 Economic Reforms since 1991

Structural Reforms
Stabilisation Policies
• Reforms in agriculture,
• Fiscal policies industry and infrastructure
• Monetary policies • Reforms in trade and
• Exchange rate policy external sector
• Tariff policy • Financial sector reforms
• Wage-income policy • Public sector reforms
• Administered price • Social sector reforms
• Factor market reforms
policy
- Land, Labor, Capital

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 4.3 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
1.Quantitative licensing 1.Abolition of industrial and
on trade and industry trade licensing
2.Removal of state
2. State regulated monopolies, privati-sation
monopolies of utilities & divestment
and trade 3.Liberalisation of financial
3. Govt control on and capital markets
finance and capital 4.Liberal regime for FDI,
markets portfolio investment,
4.Restrictions on foreign technology
foreign investment
and technology
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 4.4 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
5.Import substitution 5.Export promotion and
and export of export diversification,
primary goods no import bias
6.High duties & taxes 6.Significant reduction
with multiple rates and rationalisation of
and large dispersion all taxes and duties
7.Sector-specific 7.Sector-neutral
monetary, fiscal and monetary, fiscal and
tariff policies tariff policies
8.End-use specific, 8.Flexible interest rates
multiple & controlled without any end-use
interest rates

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 4.5 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
9.Foreign exchange 9.Abolition of exchange
control, no converti- control, full converti-
bility of rupee bility on current A/C
10.Multiple and fixed 10.United and market
exchange rates determined exch.rates
11.Administered prices 12.Abolition of all
for minerals, utilities, administered prices
essential goods except for few drugs
12.Tax concessions on 12.Rationalised and
exports and savings being phased out

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 4.6 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
13. No change, budget
13.Explicit subsidies on
subsidies on LPG and
food, fertilisers, and kerosene introduced
some essential items 14.No change, but user
14.Hidden subsidies on charges are being
power, urban rationalised, and subsidies
targeted
transport, public
15.Acts governing consumer
goods, POL rights, IPR, independent
15.General lack of regulatory authority
consumers protection
and other rights

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 4.7 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
16.Central planning, 16.Decentralisation, sound
discretion, high institutional framework,
reforming civil services
degree of 17. No change- corporate
bureaucracy governance and social
17.Outdated responsibility introduced.
Companies Act 18. No change in labor policy,
little change in land markets
19. No change
18. No exit policy for
land and labour
19.Outdated legal
system and
commercial laws

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 Thank you
Have a Good Day

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