Indian Economic Environment

Now, you may be anxious to evaluate the Indian economic environment in terms of the conceptual framework just  suggested. You may note that the national economic environment of a country can be described and analysed in terms of its (a) data environment, (b) system environment, and (c) industry or electoral environment and nature of competition. In subsequent units, you will be exposed to the details of Indian economy's data environment i.e., the physical trends and structural co-efficient. The system environment of Indian economy will also be dealt with in detail, in terms of various policy statements, planning techniques, organisation and structure of the capital market, role and responsibility of the private and public sector, etc. The system environment encompasses the entire institutional framework of the economy. An overview of that system environment is presented in this section. For the time being, you should be more interested in the evaluation rather than evolution of the present Indian economic system. 

You might have come across the statement that India S is a mixed economy. In fact, India has a very complex mixed economic system.  Let us elaborate this further. 

'Firstly,  a simple mixed economic system is characterised by the existence of private and public sectors. India has a multiplicity of sectors: private (dominant undertakings, foreign companies, etc.); public, joint, co-operative, workers' sectors and also 'tiny sector'. We hear of different walks of Indian economy: big sector, small sector, heavy sector, light sector, licensed sector, delicensed sector, national sector, core sector. reserved sector, etc. India is a complex vector of sectors. 

Secondly, a simple mixed economy is characterized by complimentary between planning and pricing. India has a multiplicity of mechanisms at work: five-year plans, annual plans during plan Holidays, pointed economical reform and reconstruction programmes during and after plan vacation, ideas of rolling plans; an elaborate system of controls and regulatory measures, attempts towards streamlining and simplification of procedures, private traders and public distributors for the same product and hence a system of dual prices, ceiling prices, floor prices, subsidized prices, statutory prices, retention prices, procurement prices, levy prices. and free market prices: contradistinction monetary policies and expansionary fiscal policies, etc. In India there is a complex system of liberal rules, strict regulations. control median, planning and a host of price regulations. 

Finally, a simple mixed economy is expected to reach a target level of social welfare and for this, task, the profit policies are to be designed according to a social purpose. The social welfare function in India is defined by the multiplicity of objectives which are sometimes conflicting in nature. For example,  in terms of our five-year plans, India is aiming at efficiency, justice and stability. Productive efficiency in a static sense refers to the efficiency-allocation of the given resources. Productive efficiency in its clammily sense refers to economic growth. The fruits of economic growth have to be distributed fairly among the masses; social justice is to be so attained as not to endanger stability of prices, incomes, balance of payments, etc. The Indian plans have always emphasized the objectives like full-employment of labour, full capacity utilization of plant and equipment, arid self-sufficiency. In the long-run, these objectives may be compatible with each other, but in the sphere of operation these objectives come in conflict with each other. For example, in order to promote a higher rate of growth, heavy industrialization and large investments are undertaken. Such investments increase the flow of  faster than the flow of output. This generates inflationary forces. Thus price stability conies in conflict with economic growth. Similarly, economic growth comes in conflict with social justice. Progressive tax system is used as a means to reduce income inequalities, but same tax policy hampers private incentives to invest and to generate the growth forces thereby.  Foreign exchange remittance helps the country in overcoming balance of payments difficulties, but it increases the domestic money supply and the prices. Examples can be multiplied to demonstrate the inherent conflict among the objectives which the mixed economy of Indian hopes to achieve. To top it all, different instruments have been used to attain different target variables - fiscal policies for growth with justice, monetary policies for price stability with growth, price and output controls for price stability with justice. This has led to further confusion. 

To sum up, the so-called mixed economical system of India sometimes gives the impression of a mixed-up economic system that is characterized by multiply of sectors, multiplicity of instruments, multiplicity of objectives and multiplicity of adjustments to resolve the conflicts between various sectors, between instruments and between objectives. 

The present day mixed economy of India has evolved through a series of policy formulations and legislation. It started with the industrial Policy Resolution of 1948. This was followed by the Industries (Development and Regulation) Act, 1951. 

Directive Principles of State Policy, 1954, Industrial Policy Resolution, 1950, Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 and its subsequent amendments, industrial Licensing Policy, 1970 and its subsequent amendments and Foreign Exchange Regulation Act (FERA), 1973 and its subsequent amendments. These enactments and policy formulations have been supplemented from time to time, by comprehensive Five-Year, 20-Point Programmes, controls and regulations on prices, output, production, distribution and trade, and various nationalization schemes and anti-poverty schemes. 

During the 1980s, the Indian mixed economy took a decisive direction. It all started with the announcement of Industrial Policy Statement of 1980. The purpose of this policy was to ensure attainment of socio-economic objectives such as optimum utilisation of capacity, maximum production, employment generation, export promotion, portion substitution, consumer protection, correction of regional imbalances through tlie development of industrially backward areas and 'economic federalism' with an equitable spread of investment among large and small units, among urban and rural units, etc. To achieve these objectives, it was decided to increase the investment limit to Rs. 2 lakhs for tiny units, Rs. 20 lakhs for small-scale units and Rs. 25 lakhs for ancillary units. Some other important provisions of the 1980 policy  are as follows : 

• regularisation of excess capacity; 
• an automatic expansion at the rate of 5% per annum to the maximum of 25% in five years, in all the industries of basic, critical and strategic importance; 
• promotion of 100% export-oriented units: 
• development of 'nucleur plants' (on the lines of District Industries Centres); 
• revival of sick units through a package of modemisation measures: and 
• re-orientation of the public sector, including the development of its managerial cadres.

As a follow-up to the 1980 statement, the government announced some further concessions on April 21, 1982. Among these, the important ones were the following , 

• the list of 'core sector' industries had been revised by including five more industries. It implied that the FERA companies and large houses would be allowed to setup industries in those areas; 
• The industry had been allowed 33.3% capacity over the best production during the last five years over and above the 25% excess production; and 
• large houses and multi-nationals would be permitted to set up units outside,the core sector if the nullity are predominantly export-oriented, i.e. 60% export in respect of items not reserved and 75% for items reserved for small-scale sector.

Such liberalization measures  were supplemented by relaxation in price and distribution in the provisions of MRTP Act relating to the definition of 'market dominance', exemption from the need to obtain MRTP clearance for production in sectors of 'national priority', etc. Such measures were specifically designed to assist the expansion of industrial production during 1982, the Productivity Year. 

During 1983-85, the Industrial Policy measured  by the Government of India placed emphasis on moderation and technological  up gradation of better capacity utilization and larger production. For example, in order to promote demand, excise duties were reduced on commercial vehicles, refrigerators, batteries, treys and tubes. Major concessions in excise and import duties were given for the benefit of the electronics industry with effect from October 1, 1983.

With the installation of the new Government under the dynamic leadership of young Prime Minister, Late Shri Rajiv Gandhi, steps were taken towards evolving a dynamic economic system. There was then a feeling that the Indian economy has received a fresh lease of life. 

The Seventh Five-Year Plan (1985-90) provided a new direction to the development of the Indian economic system. As per the Plan, new parameters of efficiency and equity are being established. This has posed new challenges to the public sector. The public sector is now required to lead a complex and demanding process of absorbing and developing new technology. It lias to master the imperatives of modernization. It has to first establish and thereafter spread a new work-culture in the industry that is based on productivity, efficiency and quality: it has to generate larger surpluses for investment and bring about development of material as well as human capital. As our then Prime Minister stated : 

Development is not about factories, clams and roads. Development is about people. The goal is material, cultural spiritual fulfillment,for the people. The human ,factor is of supreme value in development.

The private sector has also been assigned a more challenging role than ever before. The percentage share of private sector in the total Plan outlay has been stepped up to 52% (in the 7th Plan) from about 47% (in the 6th Plan). Of course, it must denoted that presently, the.focus is more on 'output' than on 'outlay'. The share of the private sector has been increased on grounds of efficiency. It has been observed that return measured in terms of output per unit of outlay is higher in the private sector than in the public sector. 

During 1985-87, the Governmental took a large number of measures to encourage the private  sector. Some of these measures which are broadly referred to as 'privatization' and 'liberation'  are given below : 

• Private bids have been invited for oil drilling by both Oil and Natural Gas Commission and Oil India Ltd., on a contract basis. 
• Mangalore and Karnal refineries are being set up in the joint sector. 
• More recently, as part of the Assam accord, the Government has announced that it will assist in the setting up of a small size refinery in the private sector in Assam. 
• In the power sector, apart from the expansion of the 'Tata Thermal Unit', the Government has hinted at the possibility of the private sector setting up new units.
• The Government has decided in principle to encourage the private fluids including foreign capital for setting up container terminals and port development. 
• At a meeting of a Parliamentary Consultation Committee on Civil Aviation, the Government has proposed 'Air Taxi Service' in the private sector. 
• The Government has accepted in principle a proposal to allow private and co-operative bodies to put up TV terminals and to run Post Offices. 
• The Centre has asked the State Governments to cellist private belletrist in the field of building roads and bridges. 
• The Department of Mines has set up an Expert Committee to suggest steps lo release sole of the mineral-bearing areas reserved for the public sector to the private sector. 
• It has also been decided that private sector will be allowed to manufacture solar cells - currently, it is a monopoly of public undertakings namely, Bharat Heavy Electricals Ltd. and Central Electronics Ltd. 
• The Board of Directors has been reconstituted for urlits like Air India and Indian Airlines, so as to run then on principles of professional management by experts drawn front both private and public sectors. 

The public sector units like NTPC and IT1 have been allowed to float bonds to raise capital. This is a tendency towards market orientation. 

All these  together indicate that our Government is determined to allow private sector's entry into Schedule 'A'  industries which have been hitherto reserved for the public sector. Additionally, the Government has also announced  treasures effecting delicensing, broadbanding, decentralization, denlocratisation, liquidation of inefficient and sick public sector units, de-reservation of sectors hitherto meant  exclusively for the spinal sector, tax reduction, raising of investment limit, relaxation of MRTP and FERA controls, de-control of sectors like essential drugs: liberal import of foreign technology, foreign capital and foreign enterprise: etc. All these measures add up to a  amount of economic liberalization. In some quarters, such liberalisation is being interpreted as the  'revival of Capitalist Development Process'. Such interpretation  may only encourage the ideological debate concerning the present state of the mixed economy of India. However, the practical stand of the Government is that such measures only constitute a movement towards an 'efficiency-oriented cysteine. 

These developments at home coincided with similar trends towards embarkations in other parts of the world which finally gave rise to the New Economic Policy ill mid-1991. The liberalization, privatization  and globalization measures envisaged in it are to be found in the Industrial and Trade Policy documents.