MACRO ECONOMIC STABILISATION Macroeconomic stabilization involves returning to low and stable inflation and a sustainable fiscal and

BOP position. Stabilization is necessary to overcome a crisis but it assumes a special importance if structural reforms are also introduced together with stabilization. Government in 1991, committing itself to a comprehensive program of structural reforms, it accorded an overriding priority to the stabilization of the economy. To this end, a policy to control inflation was adopted, and measures for fiscal correction and improving the BOP position were undertaken.

Control of inflation:
This could be brought down on the one hand by introducing fiscal and monetary discipline in the economy and on the other by improving output and supply position. It seems that Government achievements are modest on both fronts.

Fiscal adjustment: Fiscal adjustment is necessary for dealing with the twin problems of high domestic inflation and large deficits in the BOP. Fiscal deficit of the Govt was less than 6% of GDP at the beginning of the 1970s. However, it rose to 10.6% of GDP in 2002-03. To have fiscal adjustment, Central Govt announced its Fiscal adjustment program includes: Curtail Non-plan expenditure Optimization of Resource mobilization Reduce Govt expenditure by reducing expenditure on defence, administration. Reduction in subsidy payments Reduction in interest payments

Control block money

Other sources of revenue mobilization are user charges on publicly provided utilities such as irrigation, electricity, water, Road transport etc.

BOP Adjustment:
At present BOP position is not as precarious as it was in 1991. The accumulation of Foreign Exchange Reserves, suggests that the Indian economy has moved to a somewhat stale and sustainable BOP position in the last so many years. In India, the BOP problems arose largely from inadequate coverage of imports by export earnings. Which required a series of moves on the exchange rate and the exchange rate regime?

Steps considered to improve the BOP position are: Devaluation of Rupee Partial convertibility and fully convertibility Monitoring the developments in the financial markets at home and abroad Structural Reforms:

Trade and capital flow reforms

Industrial deregulation Public sector reforms & Disinvestment Financial sector reforms

Causes for Destabilization: Energy crisis & Gulf War Monsoon Failures & Wars Acute Foreign exchange shortages High inflation Unsustainable fiscal and current account deficit

Mounting up of internal & external debt

Excessive Govt Regulations Administering pricing Unwarranted subsidies High taxation Under utilization of capacity Low productivity Stagnant saving and investment ratio

Steps taken by Govt: Deregulation of private investment Inviting foreign capital Privatization of public sector Deregulated interest rates Deregulated the financial markets Remove the controls on labor and external market Removal of administrative controls on pricing Relicensing of industrial sector Relaxation of MRTP Act Fiscal sector reforms Import liberalization and export promotion Reforming of tariff structure Improving of FER Introduction of current & capital account convertibility

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