Meaning of Economic Reform

The term economic reform indicates necessary structural

adjustments to external events.
It includes the function of countrys spending to the level
parallel to its income and thereby reducing fiscal deficits.
This requires gradual reduction in imports and increase in
exports.

The present process of economic reforms was born out of the

crisis in the economy, which climaxed in 1991.
 Need of Economic Reform
Increase in Fiscal deficit
Increase in adverse balance of payments
Gulf Crisis
Fall in Foreign exchange reserve
Rise in prices
Poor performance of Public Sectors
 Economic Reforms in India
Obligatory Reform

Other countries voluntarily started some reforms post

Washington consensus.
For India it was due to Balance of payments(BOP) crisis.
Under EFF(Extended Fund Facility) IMF had extended external
currency support to Mitigate our BOP Crisis.
Major Conditions:
Devaluation of Rupee by 22 percent.
Drastic decrease in import tariff from peak of 130% to 30
percent, now its 15%.
All Govt expenditure to be cut down by 10%
(Pension/PF/Subsidies/Govt Operation Expense)
Economic Reforms Measures
1. Macro Economy Stabilization
Policies intend to boost aggregate demand in the economy by
focussing on increasing the purchasing power of masses.
Creating more gainful job opportunities.

2. Structural Reforms
Policies intend to boost aggregate supply in the economy by
focusing on productivity & production.
More no of economic activities implies more purchasing
power.

Both the reforms are interlinked & interdependent.

Planning model
Till the rise of Soviet Union(Around 1949),most of the
economy was capitalist economy.
Post adoption of Planning model by Soviet Union, most of the
developing countries followed it.

India adopted the planning model due to:

Fear of foreign dominance.

Protectionist Economic policy with import substitution was
introduced in India.
Limiting the import of industrial goods to promote domestic
players.
Washington Consensus
By 1970s,world had realized, socialist & Planned model of
development had failed.
1980,new development strategy was implemented. Capitalist
approach of development was again introduced.
Emphasis was on minimum role of Govt in economy.
Govt of socialist and planned economy was asked to liberalize
and privatize the economy.

These broad guidelines are called Washington

Consensus.
Mixed Economy
Private & public sector exist side by side.
East Asian Economy promoted a successful
development strategy i.e. Mixed Economy
Perfect balance of state role & Market/ Pvt
sector role in the economy.
State Role was limited to augmenting &
governing the market-Not replacing it.

Two Types:
1. Capitalist Mixed
2. Socialist Mixed
LPG
LIBERALISATION - DIRECTION
PRIVATISATION - PATH
GLOBALISATION - GOAL
GLOBALISATION
INCREASE IN ECONOMIC INTEGRATION AMONG NATIONS
UNRESTRICTED CROSS BORDER MOVEMENTS OF GOODS & SERVICES, CAPITAL AND
LABOUR FORCE WTO
WHEN OUR LIFE IS AFFECTED BY THE EVENT OCCURRED IN FAR DISTANT PLACES
LIBERALISATION
GROWTH OF MARKET / CAPITALIST
DECREASING INFLUENCE OF STATE / PLANNED ECONOMY INCREASE OF FREE/
CAPITALISTIC ECONOMY
CURTAILS POWER OF PARLIAMENT.
STATE MARKET MIX CONCEPT
PRIVATISATION
PROCESS OF STATE ASSETS TRANSFERRING TO PRIVATE ASSETS.
WAY OF PRIVATISATION-
Denationalisation
100% transfer of state ownership to Private Sector (1980s UK, 1990s Italy, Spain & France)
Disinvestment
Selling shares of State-owned Enterprises to Private Sector
Deregulation
Promotion of private sector by Di-licensing, De-reservation, Ease of doing business, cut in
subsidies
Devaluation
Official lowering of the value of a country's currency within a fixed exchange rate system, by
which the monetary authority formally sets a new fixed rate with respect to a foreign
reference currency or currency basket.
Foreign Direct Investment (FDI)
Investment made by a Foreign Company in business interests in the form of business
operations or acquiring business assets
WHY GLOBILISATION IN INDIA ???
USSR DISINTEGRATION
OIL CRISIS IN WORLD
ECONOMIC CRISIS IN 1990S (FISCAL DEFICIT 12.7% IN 1989, FOREX RESERVE FOR THREE
WEEKS)
KEY STEPS OF LPG 1991
DEVALUATION BY 20%
FDI IN VARIOUS SECTOR BY 26%
$2.2 BILLION LOAN IN EXCHANGE OF OUR GOLD RESERVES.
DEREGULATION IN EXPORT & IMPORT
IMPORT TARIFF REDUCTION UP TO 300%
DISINVESTMENT OF PSU SECTOR IN TO PRIVATE SECTOR
POSITIVE IMPACT
INDIA HAS BECOME THE WORLD-WIDE LEADER IN IT/ ITES & HOSPITALITY.
PRICES OF ALL IMPORTANT COMMODITIES HAVE REDUCED, THEREFORE SO IS
BENEFITTING THE COMMON MAN.(EXAMPLE - TELECOM SECTOR)
EMERGING ONE OF THE FASTEST GROWTH ECONOMY
CREATION OF HIGH EMPLOYMENT IN VARIOUS SECTOR
POSITIVE IMPACT
NEGATIVE IMPACT
FOCUS SHIFTED FROM AGRICULTURE
DISPARITY BETWEEN RURAL & URBAN INDIA
THREAT OF TERRORISM & OTHER COUNTRY INFLUENCE.
DIRECT EFFECT OF OTHER ANY DISRUPTION OF OTHER ECONOMY
HAMPERING CULTURE OF INDIA AND SME MARKETS

INDIA SHOULD CAREFULLY HANDLE FDI OTHERWISE IT WILL BE THE BIGGEST BLUNDER IN
THE HISTORY- RAGHURAM RAJAN
Generation of Indian Economy Reform

FIRST GENERATION OF INDIAN ECONOMY REFORMS

SECOND GENERATION OF INDIAN ECONOMY REFORMS
THIRD GENERATION OF INDIAN ECONOMY REFORMS
FOURTH GENERATION OF INDIAN ECONOMY REFORMS
CURRENT SCENARIO
First Generation of Indian Economy Reforms

IMPORTANCE TO PRIVATE SECTOR(DE-LICENSING AND DE-

RESERVATION)
PUBLIC SECTOR REFORMS(DISINVESTMENT)
TAX REFORMS
EXTERNAL SECTOR REFORMS(FERA FEMA)
FINANCIAL SECTOR REFORMS
Second Generation of Indian Economy Reforms

FACTOR MARKET REFORMS( ADMINISTRATIVE PRICE MECHANISM )

PUBLIC SECTOR REFORMS
LEGAL SECTOR REFORMS
REFORMS IN CRITICAL AREAS
 INFLATION

In economics, inflation is a sustained increase in the general price level of goods

and services in an economy over a period of time.
The inflation rate is a key parameter on basis of which central government
proposes its monetary and fiscal policy from time to time.
The rate of inflation is measured on the basis of price index, Which is of two
types - Whole sale price Index and Consumer Price Index.
CAUSES OF INFLATION

Demand Pull Inflation

A miss match between demand and supply pulls up the prices.
Extra purchasing power to the consumer over the same level of production.

Cost Push Inflation

The price rise is a result of increase in Production cost.
MEASURES TO CHECK INFLATION

Supply Side measure

Cost side measure

Tighter Monitory policy

TYPES OF INFLATION

Low Inflation

Galloping Inflation

Hyperinflation
OTHER VARIANTS OF INFLATION:

1)Bottleneck inflation: supply falls and demand remains constant.

2)Core inflation: Calculated based on the CPI excluding the volatile industries.
3)Inflationary gap or Fiscal deficit: Phenomena of Government spending's more than income.
4)Deflationary gap or fiscal surplus: Shortfall in the government spending's over the income.
5)Inflation spiral: It is wage price spiral.
6)Reflation: Measures taken by the government to reduce
unemployment and increase demand.
7)Stagflation: When inflation and unemployment at higher levels.
8)Skewflation: Act of experiencing inflation in particular sector.
9)Base effect:

[current price index Last year price index]

Current inflation rate = Last year price index
 Effects of inflation:
1)On lending
2)On aggregate demand
3)On investment
4)On saving
5)On expenditure
6)On exchange rate
7)On exports
8)On imports
9)On employment
10)On wages
11)On self employed
 Inflation in India
INDICES TO CALCULATING INFLATION IN INDIA
INDIA CALCULATES ITS INFLATION ON TWO PRICE INDICES
WHOLESALE PRICE INDEX (WPI)
CONSUMER PRICE INDEX (CPI)
 Consumer Price Index
Depending upon the socio-economic differentiations among
consumers, India has four differing sets of CPI with some
differentials in the basket of commodities allotted to them.

Index Agency Base Year

CPI-UNME CSO, Ministry of Statistics and 2012

Programme Implementation (MOSPI)

CPI-AL Labour Bureau, Ministry of Labour and 1986-87

CPI-RL Employment (MOLE) 1986-87
CPI-IW 2001
 Inflation rate calculator Formula

Purchasing power = Amount of money * (cpi (this year) / cpi (last

year)).
Inflation rate = cpi (this year) - cpi (last year) / cpi (last year) * 100
 How inflation is measured in India?
India is the only major country that uses a wholesale index to measure inflation.
Most countries use the CPI as a measure of inflation, as this actually measures
the increase in price that a consumer will ultimately have to pay for.
But why is India not switching over to the CPI method of calculating inflation?
Finance ministry officials point out that there are many intricate problems from
shifting from WPI to CPI model.
First of all, they say, in India, there are four different types of CPI indices, and
that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The
four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual Employees;
CPI Agricultural labourers; and CPI Rural labour.
Secondly, officials say the CPI cannot be used in India because there is too much
of a lag in reporting CPI numbers.
 Trends in Inflation
Decadal inflation in India looks comparatively normal with reference to many
developing economies. But it has sporadic incidences of double-digit tendencies
mainly due to supply-side shortfalls caused by droughts (monsoon failures),
price rise of crude oil in the international market or fund diversions due to wars

Economists have pointed out all possible reasons (the so-called good and bad )
behind the inflationary pressures in the economy of which we may have a brief
review:
Structural Inflation
Cost-Push Inflation
Fiscal Policy
 HEALTHY RANGE OF INFLATION
India started inflation targeting by the early 1970s. It was in 1973
that the inflation crossed 20 per cent mark on account of the
international oil price rise and the government (the Indira Gandhi
Government) devised a severe anti-inflation package which
included directly restricting the disposable incomes of the people
(this measure was used for the first time in India).
The package had an impact and by March 1973 the inflation calmed
down to 5.7 per cent.
This was the time when the RBI was given a new function inflation
stabilization and India entered the era of monetary controls for
inflation. With inflation targeting there started a debate concerning
the healthy range of inflation for the Indian economy, i.e., by mid-
1970s.
 We may have some official and non-official versions of the suitable range of inflation pointed out
from time to time:
(i) The Chakravarty Committee (1985) treated 4 per cent inflation acceptable for the economy in
its report on the monetary system. He also added that this level of price rise will facilitate the
purpose of attracting investment for the desired level of growth.
(ii) The Government of India accepted a range of 4 to 6 per cent inflation as acceptable for the
economy citing the world average of 0 to 3 per cent at the time (1997-98).64
(iii) The RBI Governor C. Rangarajan advocated that inflation rate must come down initially to 6 to
7 per cent and eventually to 5 to 6 per cent on an average over the years.65
(iv) The Tarapore Committee on Capital Account Convertibility recommended an acceptable range
of 3 to 5 per cent inflation for the three year period (199798 to 1999-2000)
By February 2015, the Gol did put in place a mechanism to target inflation (Agreement on
Monetary Policy Framework) under which the Consumer Price Index (Combined) is to be targeted
by the RBI between the range of 2 to 6 per cent on the annual basis. Thus, the focus is shifting to
the CPI from WPI. This way, in place of the WPI-based inflation, the CPI-C inflation has been made
the anchor rate of inflation for monetary policy purpose.
Business Cycle
DEPRESSION

RECOVERY

BOOM

STAGNATION

SLOWDOWN

RECESSION
Depression
LOW AGGREGATE DEMAND

LOWER INFLATION

INCREASING UNEMPLOYMENT

FORCED LABOUR-CUTS OR RETRENCHMENT

Recovery
UPTURN IN AGGREGATE (TOTAL) DEMAND

INCREASED PRODUCTION

INCREASED DEMAND AND INFLATION

CHEAPER LOAN

INCREASED EMPLOYMENT
Boom
PROLONGED INCREASE IN DEMAND

EXCEEDS SUSTAINABLE PRODUCTION LEVELS

DEMAND SUPPLY LAG IS VISIBLE

DEMAND AND SUPPLY DISEQUILIBRIUM

INCREASED EMPLOYMENT
Recession
GROWTH RECESSION

DOUBLE-DIP RECESSION
THANK YOU