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2. Goods and services tax (GST)
Contents:


  1. India's Economic Reforms, - Oxford Scholarship
  2. India's Economic Reforms, 1991-2001
  3. What are India’s strengths?
  4. What are India’s strengths?

Between — and — the percentage of the population in poverty declined from In the latest period for which data on poverty are available, — to —, the percentage fell much more sharply to The record on inclusiveness is more mixed if we look at other indicators. Employment generation is a problem area and there is a widespread perception that faster growth has not been accompanied by a commensurate expansion in the number of good quality jobs created. Open unemployment levels are quite low, but that is because in the absence of social security, people cannot afford to stay unemployed, so they take whatever jobs they can find.

There is evidence that large numbers of people are engaged in employment that does not come up to their expectations. The mismatch between job seekers and the availability of acceptable jobs is particularly great if we consider the young, and better educated entrants into the labor force. Providing younger and better educated people with the kind of jobs they expect will be a major challenge in the years ahead.

The Indian manufacturing sector is not creating as many quality jobs as it could. Part of the problem is that Indian labor regulations are much less flexible than those in other developing countries. This has hindered the development of midsize companies, capable of modernizing production and being competitive in world markets, which can also create quality jobs. Another measure of inclusiveness, which has received much attention in the last decade, is the provision of essential public services such as education, health, clean drinking water and sanitation.

These services not only directly increase the welfare of the population, they also increase human capability, and are, therefore, key determinants of the growth potential. There is evidence that the efforts being made in these areas are leading to improvements in each dimension, but the pace of improvement is slower than it should be.

There are also issues of quality. India has now achieved near universal enrollment of children in primary schools, and the gender balance is also quite good, but the quality of education imparted in public schools is not up to expectations. Much the same can be said of public facilities for health delivery especially in rural areas. Progress has been most disappointing in environmental sustainability. Whatever metric we use, whether it is maintaining the cleanliness of natural water bodies, or limiting the withdrawal of ground water to sustainable levels, or controlling air pollution in the cities, or achieving desired levels of forest cover, there are not only shortfalls from targets, but in most cases actual deterioration.

It is essential to evolve credible plans for turning around current trends in this area. This is not an unreasonable target since the economy did achieve 8. However, it cannot be taken for granted. The middle income trap refers to situations where countries can grow rapidly from low to middle income status by dealing with some basic problems, but then stall in the face of more complex challenges which call for new policy responses.

It is easy to compile a long list of reforms that need to be implemented, but it is more useful to identify those that are most critical at present. Macroeconomic stability is a precondition for successful growth in an open economy. The Monetary Policy Committee provides a new institutional discipline for Monetary Policy, and the Fiscal Responsibility and Budget Management FRBM Act does the same for fiscal stability in terms of the targets laid down for fiscal deficits and debt trajectories.

The third leg of the tripod of macrostability is exchange rate management which is discussed in Mohan and Ray Infrastructure deficiencies are a critical constraint to achieving high growth in India and massive infrastructure investment is needed to make up the gap. Since public resources will not be enough, it will be necessary to induce private enterprise to help in this area and several institutional reforms are needed to create an environment conducive for private investment.

India will definitely need to invest more in health and education and this will call for significant increases in expenditure by the central and state governments. However, increased expenditure has to be accompanied by improvements in state capacity. The GST is a major structural reform that has been introduced in There are problems with the present form of the GST — too many commodities have been excluded and there are too many rates.

These can be easily corrected, and this must have priority, perhaps after the next general election. The recent Insolvency and Bankruptcy Code is another major reform that promises to inject discipline into the credit markets, helping banks recover whatever they can from their large accumulated nonperforming assets NPA.

However, in the process public sector banks will have to take large haircuts. A viable plan for recapitalizing the banks needs to be worked out. It could avoid this by agreeing to reduce government equity to a minority. This will be politically difficult, but should be attempted at least for some banks. Finally, the economy needs to be run in a manner which places domestic producers under pressure to modernize their production and remain competitive. The rise of protectionism in developed countries could give a fillip to those who favor greater protection at home.

It will require wisdom and statesmanship to stay the course and remain open. Hideki Esho raises a point argued by Rodrick and Subramanian that the turning point of the Indian economy was earlier than , and should be in the early s. Another historical point that Esho recalls is a series of balance of payments crises in the s to the s, following food and grain shortages. The crisis was caused by an excessive fiscal expansion. Protection of small and medium size firms with obsolete technologies seems to be the reason. Basri wonders why the reforms produced such a radical change from the past.

If a crisis was the driver, why was not a crisis in the s, such as the crisis, a driver?

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If this is the case, why did it work in but not in ? Ahluwalia explained the difference between the policy responses to the crisis and those to the crisis as follows. Although the devaluations were similar, their contexts were very different. In , there was no internal thinking about reform, and the devaluations were part of the conditions forced upon India by the IMF and the World Bank. In , there was already internal thinking about reforms, and the reforms were owned by the Indian government. However, due to these changes, the left faction in India lost credibility and posed few objections to the reforms.

Basri also questions the gradualism that Ahluwalia emphasizes. Ahluwalia seems to emphasize democracy requires gradualism. But is that so? Ahluwalia contrasted the change in India gradualism with the East European big bang. The East European big bang was a revolution getting rid of communism. In India, it was not a revolution, but a new government.

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India's Economic Reforms, - Oxford Scholarship

The Prime Minister gave the Finance Minister authority to adopt the policies necessary for the reforms. In connection with a lack of manufacturing growth like East Asia, Basri points out that India has strong services exports. Ahluwalia answered the question why India is not good at manufacturing, but is good at services by arguing that the labor regulations are not the same and the needs for infrastructure are different. Getting access to the internet is easier than building electricity generators, and road and rail networks.

In the floor discussion, an additional possible factor for why the was so radical was raised by Takatoshi Ito. Ito wonders whether the rivalry with China also explains the current Modi reforms. The impressive sustainability of China's high economic growth in the s and s gave a push toward more reforms under Modi.

Ahluwalia, answering affirmatively to the issue about the external factors for reforms, recalled that he was in a Rajiv Gandhi delegation visiting China in , and that the Indian technocrats were aware of the reforms and economic performances in East Asia. But, this awareness was not shared by the general public. Jha wondered about the role of the real depreciation of rupee in economic development. Ahluwalia agreed with the thesis that a devaluation creates room for change. He recalled a letter he wrote to Finance Minister Singh back in recommending a strategy of lowering tariffs and removing import controls supported by an exchange rate change.

In the past, everybody was in favor of lowering tariffs, and everybody was in favor of devaluing and getting rid of import controls, but they had not integrated the two points. Ahluwalia in his paper takes this issue one step further by arguing that lost customs revenues should be made up by indirect taxes. Ahluwalia admitted that India is still lagging behind East Asian countries because the lowering tariff becomes a moving target. Mohan also wondered why the entry rate into the corporate sector has been declining.

Mohan thought some of the financial resources, which could be lent to corporate sectors, are diverted to other purposes, such as microfinancing and infrastructure under the Public—Private Partnership scheme. It is not clear what kind of reforms would result in achieving these conditions. Chalangphob Sussangkarn wondered about the role of technocrats versus politicians. Based on his experiences in Thailand, he argued that when the politicians become very strong then the role of technocrats basically declines a lot.

Indian Economy for UPSC CSE (IAS): Economic Policy, Supply, Demand, and more - Unacademy

He wondered if that is the situation in India. First, the minimum income should be debated. Second, India is trying to join the trend of establishing free trade agreements FTA , and there needs to be a discussion of the relationship between FTA and domestic reform. Marcus Noland asked whether the ethnic and religious background makes a difference that matters in politics and economic performances in India.

But is there a consensus among technocrats, which is supposed to be free from those backgrounds? Rakesh Mohan and Partha Ray examine the history of monetary policy in India from to the present. Prior to , Indian monetary policy had enjoyed a good period in terms of growth and inflation outcomes. India moved from a monetary aggregate targeting regime to a multiple indicators approach in the late s, and improved the efficacy of monetary policy transmission as described in Mohan A technical advisory committee on monetary policy was appointed in lieu of a conventional Monetary Policy Committee.

India's Economic Reforms, 1991-2001

Given the volatility of capital flows, the Reserve Bank of India RBI solved the tensions of the impossible trinity by choosing noncorner solutions: the exchange rate was largely market determined, but the RBI from time to time did intervene in the foreign exchange market; and the capital account was not fully convertible though capital flows were substantial in both directions. The exchange rate exhibited significant fluctuations in both directions. It was fortunate that the external environment was benign as well. Monetary policy in the period following the Lehman Brothers collapse, —, was marked by two major features: i monetary policy was eased in the face of heightened inflation, perhaps in tune with the global bandwagon of monetary stimulus; and ii there was little foreign exchange market intervention.

Both had their costs — i inflation shot up; and ii the real exchange rate first appreciated, and then substantially depreciated during May—August, The depreciation was part of the massive capital outflows both debt and equity following the taper tantrum, caused by Ben Bernanke in May Monetary policy since September to date was marked by two key changes: i the adoption of inflation targeting initially informally and then formally from onward ; and ii a return to more active foreign exchange intervention by the RBI.

The adoption of inflation targeting has coincided with low inflationary outcomes in India. However, inflation targeting is still in its infancy in India.


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  • 1. Demonetisation.
  • HIGHLIGHTS?

The future of inflationary outcomes is uncertain, now that globally oil prices are rising; the government of India is contemplating increasing minimum support prices of select agricultural commodities; and there are possibilities of fiscal slippage. The main reason for avoiding the international bandwagon of inflation targeting during — was not the neglect of price stability as an objective of monetary policy, but the presence of huge structural shocks in the inflationary process in India, primarily emanating from food and fuel.

One is less sure of targeting headline inflation which has a large structural component and at the same time targeting the core neglecting a large chunk of the commodity basket will not make much sense to the public at large.

India implemented the great demonetization during November—December , with the announced objective of addressing a black money or an income tax evasion problem. From a monetary policy viewpoint, the demonetization turned out to be flawed. First, the currency to deposit ratio has been on a secular decline in India since the early s, and demonetization has created an insignificant blip in this process. Hence, most of people who had accumulated cash found ways to exchange it for new currency.

Demonetization created a problem of excess liquidity in banks as old cash was deposited with them. The RBI handled this well through the use of a number of instruments including the Market Stabilization Scheme MSS , which had earlier been developed to handle the liquidity problems arising out of large capital inflows. This past experience has turned out to be handy at the current juncture. Consequently, India has been almost consistently incurring a current account deficit. This is met primarily by three sources: i foreign investment; ii external commercial borrowing, and iii bank capital.

In such a situation, apart from maintaining a calibrated face of capital account convertibility, the RBI has been intervening in the foreign exchange market primarily to dampen volatility, but not to target any fixed level of the exchange rate nominal or real. Mohan and Ray are rather skeptical about how well inflation targeting would work in India. They thought the multiple indicators approach from the s to worked well, but that monetary policy from to was too loose causing the inflation rate to rise sharply, maybe to mitigate spillovers from the quantitative easing in advanced countries.

The high inflation episode motivated policy makers to adopt inflation targeting. According to Mohan and Ray, the interest in inflation targeting was limited in the RBI at that point. Rajan pushed for inflation targeting when he became Governor of the RBI in , and it was de facto adopted in Ito points out that the actual inflation rate successfully followed this glide path. However, Mohan and Ray believe that luck contributed to this success. Ito concludes with a remark that India has become in the latest addition to a list of inflation targeters in Asia, following Korea, Thailand, Indonesia, and the Philippines.

He argues that India will practice inflation targeting and improve it, just as the other Asian inflation targeters have done so. Chalongphob Sussangkarn recalls that he was involved in introducing inflation targeting in Thailand first as a member of the Monetary Policy Committee with Governor Chatumongkol Sonakul in , and then he oversaw a revision of the Bank of Thailand BOT Act in as Minister of Finance. Thailand initially set the range for the inflation rate from 0. The wide band helps to establish the credibility of an inflation targeting framework early by hitting the target.

The wide band makes it easy to accommodate other objectives when the actual inflation rate is well inside the band. In , the government wanted the BOT to raise the interest rate, to appreciate the baht, which the Governor refused. The Governor was sacked. In —, the government wanted the interest rate to be lowered to stimulate the economy, but the BOT lowered it only gradually. Hal Hill opened the floor discussion. He pointed out that fiscal deficits have been large in India, and wondered whether that put constraints on other policies, such as monetary policy and exchange rate policy.

Athukorala asked about the movement of the real exchange rate, which seems to be appreciating. He asked whether that causes difficulties for the exporting industries. Basri asked how the RBI responded to energy price fluctuations and the US quantitative easing and capital inflows from to When capital flows are coming, one has to use many tools including a fiscal policy tightening.

Mohan confirmed based on his experiences that the RBI monitors the exchange rate and actively intervenes in the foreign exchange market to avoid extreme volatility. But over the years, the RBI has kept expanding the degree of flexibility. In relation to foreign exchange market intervention, Mohan pointed out that foreign reserves can increase roughly in proportional to the GDP growth to support the growth in the monetary base. This is apart from the use of foreign reserves for a safety net. Mohan thought the cost of maintaining foreign reserves was not so much. Ahluwalia recalled that as a tradition, neither the government nor the RBI would comment on the exchange rate.

At least, the nominal exchange rate is market determined. Mohan expressed the opinion that he would have intervened much more between and Mohan continued to express his view that the real appreciation is partly due to strong service exports and remittances. They are financing merchandize deficits. In a sense, the strengths in services and remittances act as if they are causing the Dutch disease.

Then, Ahluwalia showed his skepticism by arguing that India is adopting an inflation targeting framework when it is being discredited. The RBI is given independence and a single mandate. Ito rebutted this by saying that an inflation targeting framework does not necessarily mean that the central bank pays attention only to one variable, the inflation rate.

The central bank has to forecast the future inflation rate, so that all the major macrovariables including the growth rate and the real exchange rate should be looked at in the forecasting process.

What are India’s strengths?

This is often called a flexible inflation targeting. Mohan objected to the explanation of flexible inflation targeting, saying that there is no difference from what the RBI had been doing before adopting inflation targeting. He raised a question of whose expectations it is that inflation targeting is supposed to anchor. Or the expectations of workers in large cities? He also raised a question of the relevant time horizon. Or the central bank governor may have to be accountable for the actions of a previous governor.

Jha raised the argument about whether the consumer price index CPI is a good measure to target, because a housing price bubble could happen without CPI inflation. He wondered whether housing prices or the Wholesale Price Index should also be looked at. Jha defended the demonetization by saying that some criminals had been caught in process. Mohan agreed that which price index to adopt has important implications. Then a tightening would hurt exporters and industries. The government is voicing this concern.

Iwata pointed out that the RBI has extensive regulatory powers, and wondered whether the RBI coordinates with the government on debt management policy, macroprudential policy, and the nonperforming loans problem. But, that is more traditional before the movement for separating supervision authority from the central bank, like in the UK, when it created the Financial Services Authority FSA. But, after the crisis, the supervisory power were taken back into the central bank. A similar trend is observed in the USA. Mohan added that the independence for inflation targeting was mistaken.

Micro, small and medium enterprises MSME have a very important position in economic activities in many countries. These figures represent only formal firms, and the figures would be much greater if informal firms, which are found in large numbers particularly in developing countries, are included. Some MSME act as a social safety net for poor families by providing them with an opportunity to work and earn income, while some MSME contribute substantially to economic growth by supplying parts and components to large firms, or by playing a role of supporting industry.

This problem is particularly acute for informal firms. Takashi Kurosaki attempts to fill this gap by examining small and micro entrepreneurs in Delhi, India, using a primary dataset collected by his research group. By analyzing this aspect, he attempts to overcome the limits of the existing empirical research using a dichotomous definition of informality solely based on registration. The quantitative analysis comparing registered more formal and unregistered more informal enterprises reveals the following. Unregistered firms were smaller and headed by less educated entrepreneurs than registered ones, and their disadvantage in fixed capital investment was compensated by active innovation in process and marketing.

Unregistered firms depended more on cash transactions than registered firms; unregistered firms were affected more adversely by the demonetization than registered firms. In the micro and small enterprises sector in Delhi, registered and unregistered firms coexist with different kinds of superiority, and their mode of business transactions is highly sticky. Kurosaki obtains several important policy related findings.

Second, the credit access at the time of firm establishment continues to affect firm performance and changes the impact of registration on firm performance. Those micro enterprises that had been highly constrained in access to institutional credit at the time of their establishment performed worse than others even after they were registered. It appears that the introduction of the GST in July was more effective in promoting registration than demonetization, since unregistered firms felt the pressure to register from their business network.

What are India’s strengths?

First, the profitability of unregistered firms is found to be higher than that of registered firms in the bivariate comparison, but not in the regression analysis. He further notes that registered firms have an incentive to underestimate their profits, because they pay taxes. Morgan interprets this finding as indicating that educational attainment may be a significant barrier for unregistered firms. Morgan thinks this reflects a large managerial gap between registered and unregistered firms.

Morgan asserts that these findings seem to indicate that differences between registered and unregistered firms may be greater than Kurosaki suggests, and, thus, the potential contribution of unregistered firms to economic development may be relatively limited. Hill raises an issue on the factors affecting the status of a firm, registered and unregistered. Hill thinks the registration status of a firm depends on the nature of the regulatory regime.

The other point Hill raises is that the status of a firm may change in an evolutionary process. Firms start out being small and unregistered owing to financial and information constraints, and then the successful ones evolve along a dynamic, experimental path and become registered. If this is the case, a snapshot dichotomy may be observing a transitory state of affairs that changes over time. Hill points out several unexpected or interesting findings.

One of them is the limited impact of access to finance on the performance of unregistered firms. Mohan asked three questions. First, he found that the profitability levels for both registered and unregistered firms are very high. He wanted to know if imputed wages and taxes are taken account of in computing profits. The initial effect of the introduction of the GST was negative on the economy.

The initial implementation of the GST was not handled well — small businesses in particular were confused about onerous reporting requirements, which placed a large compliance burden on them. While the initial effect of the GST policy on the Indian economy was a negative shock, the long-term impact is likely to be strongly positive. Modi delivered on a large number of important public goods schemes, which built on the initiatives of the previous government. As part of the Pradhan Mantri Awaz Yojana initiative, the number of rural houses built increased threefold from to There was also a large push on rural electrification to ensure all villages had an electricity connection by This sector has experienced a prolonged period of decline in rural incomes since , leading to what may has been termed an agrarian crisis.

This would have prevented the return of food price inflation, which was a major source of discontent with the previous government. Low pay, earnings mobility and policy — Manchester, Lancashire. Edition: Available editions United Kingdom. Kunal Sen , University of Manchester. Delivery of public goods Modi delivered on a large number of important public goods schemes, which built on the initiatives of the previous government.

Tens of thousands of farmers protest in Mumbai.