CRITICAL APPRAISAL OF LPG POLICIES

AN APPRAISAL OF LPG POLICIES (ECONOMIC REFORMS)

Arguments in Favour of Economic Reforms:

• Increase in rate of Economic Growth: The growth in GDP was 5.6% during 1980-91. During 2018-19, growth in GDP is estimated at 7.2% as compared to growth rate of 6.7% in 2017-18.
  • During the reform period, the growth of agriculture has declined and industrial sector reported fluctuation, whereas, growth of service sector has gone up. This indicates that the growth is mainly driven by the growth in the service sector.
  • Since 2012-to 15, there has been a setback in the growth rates of different sectors. Agriculture recorded a high growth rate during 2013–14 but witnessed a negative growth rate in the subsequent year. The service sector witnessed the highest ever growth rate of 10.3% in 2014-15. The industrial sector witnessed a steep decline during 2012–13 but began to show growth thereafter.
• The inflow of Foreign Investment: The opening up of the economy has led to the rapid increase in foreign direct investment (FDI). The foreign investment (FDI and foreign institutional investment) increased from about US $ 100 million in 1990-91 to US $ 73.5 billion in 2014-15. With the launch of the 'Make in India initiative in September 2014, Foreign Direct Investment (FDI) Policy was further liberalized. Due to this reason, FDI inflow in India increased by 48%.
• Rise in Foreign Exchange Reserves: There has been an increase in the foreign exchange reserves from about US $ 6 billion in 1990-91 to about US $ 321 billion in 2014-15. India is one of the largest foreign exchange reserve holders in the world.
• Rise in Exports: During the reform period, India experienced a considerable increase in exports of auto parts, engineering goods, IT software and textiles.
• Control on Inflation: Increase in production, tax reforms and other reforms helped in controlling the inflation. The annual rate of inflation reduced from the peak level of 17% in 1991 to around 5.48% in 2015-16.
• Increase in the role of the Private sector: Abolition of licensing system and removal of restrictions on the entry of the private sector, in areas earlier reserved for the public sector, have enlarged the area of operation of the private sector.

Criticism of Economic Reforms

• Growing Unemployment: Though the GDP growth rate has increased in the reform period, such growth failed to generate sufficient employment opportunities in the country.
• Neglect of Agriculture: The new economic policy has neglected the agricultural sector compared to the industry, trade and services sectors.
  • Reduction of public investment: Public investment in agriculture sector, especially: infrastructure, which includes irrigation, power, roads, market linkages and research and extension (which played a crucial role in the Green Revolution), has been reduced in the reform period.
  • Removal of subsidy: Removal of fertilizer subsidy increased the cost of production which adversely affected the small and marginal farmers.
  • Liberalization and reduction in import duties: This sector has been experiencing a number of policy changes such as (a) Reduction in import duties on agricultural products (b) Removal of minimum support price, and (c) Lifting of quantitative restrictions on agricultural products. All these policies adversely affected the Indian farmers as they now have to face increased international competition.
  • Shift towards cash crops: Due to Export-oriented policy strategies in agriculture, the production shifted from food grains to cash crops for the export market. It led to a rise in the prices of food grains.
• Low level of Industrial Growth: Industrial growth recorded a slowdown due to the following reasons:
  • Cheaper Imported Goods: Due to globalization, there was a greater flow of goods and capital from developed countries and as a result, domestic industries were exposed to imported goods. Cheaper imports replaced the demand for domestic goods and domestic manufacturers started facing competition from imports. For example, cheaper Chinese goods pose a big threat to Indian manufacturers.
  • Lack of infrastructure facilities: The infrastructure facilities, including power supply, have remained inadequate due to a lack of investment.
  • Non-Tariff Barriers by Developed countries: All quota restrictions on exports of textiles and clothing have been removed from India. But some developed countries, like the USA, have not removed their quota restrictions on the import of textiles from India.
• Ineffective Disinvestment Policy: The government has always fixed a target for disinvestment of Public Sector Enterprises (PSES). For instance, in 2014-15, the target was 56,000 crore, whereas, the achievement was about 34,500 crore. However, according to some scholars, the disinvestment policy of government was not successful because:
  • The assets of PSEs were undervalued and sold to the private sector.
  • Moreover, such proceeds from disinvestment were used to compensate shortage of government revenues rather than using it for the development of PSEs and building social infrastructure in the country.
• Ineffective Tax Policy: The tax reduction in the reform period was done to generate larger revenue and curb tax evasion. But, it did not result in an increase in tax revenue for the government
  • Tariff reduction decreased the scope for raising revenue through customs duties.
  • Tax incentives provided to foreign investors to attract foreign investment further reduced the scope for raising tax revenues.
• Spread of Consumerism: The new policy has been encouraging a dangerous trend of consumerism by encouraging the production of luxuries and items of superior consumption.
• Unbalanced Growth: Growth has been concentrated only in some select areas in the services sector, such as telecommunication, information technology, finance, entertainment, travel and hospitality services, real estate and trade, rather than vital sectors, such as agriculture and industry, which provide a livelihood to millions of people in the country.