Economic Reforms in India (Second Generation)

In this article we will discuss about the second generation of economic reforms in India:- 1. Subject-Matter of Second Generation of Economic Reforms 2. Second Generation of Reforms 3. Fiscal Strategy for Second Generation Reforms.

Contents:

1. Subject-Matter of Second Generation of Economic Reforms
2. Second Generation of Reforms
3. Fiscal Strategy for Second Generation Reforms

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1. Subject-Matter of Second Generation of Economic Reforms:

In order to consolidate its attempts towards further economic reforms. India is now committed to undertake second generation of economic reforms so as to realise its benefits within definite time frame. On November 27, 2001, the then Prime Minister Mr. A.B. Vajpayee constituted a Cabinet Committee on Economic Reforms under him to try to accelerate second generation of economic reforms.

Members of this high-power committee includes—Home Minister, Finance Minister and Commerce Minister, Other members of the Committee includes Minister of Law. Rural Development, Disinvestment and Agriculture and also Deputy Chairman of the Planning Commission. This is the first time a cabinet committee of this type has been constituted by the government.

The decision to constitute such a committee was taken after a meeting of the Prime Minister’s Economic Advisory Council in September 2001. The council headed by the Prime Minister considered ways to give a push to the economy. The main functions of the committee include over-seeing, directing and facilitating policy and institutional reforms.

Second generation of economic reforms in the country gave special stress on fiscal reforms, financial reforms, structural reforms, labour law reforms etc. Major fiscal reforms have been undertaken for broadening the income tax base and streamlining the excise and customs duty structures.

Major financial sector reforms undertaken by the government include allowing private companies to enter into insurance sector, allowing foreign bank to open their branches in India.

Implement of New Growth Strategy:

In his budget speech 2000-01, the then Finance Minister Yashwant Sinha clearly stated that the Government wants to carry forward the process of introducing and implementing the Second Generation Reforms at the earliest.

Commenting on philosophy of Second Generation Reforms Mr. Sinha observed, “Growth is not just an end in itself. It is critical vehicle for increasing employment and raisin-g the living standards of our people, especially of the poorest.

Sustained, broad based growth, combined with all our programmes for accelerating rural development, building roads, promoting housing, boosting knowledge based industries and enhancing the quality of human resources, will impart strong impetus to employment expansion. There can be no better cure for poverty than this in our country.”

In order to implement the new growth strategy the then Finance Minister identified the following new objectives for attaining required growth:

(i) To strengthen the foundations of growth of the rural economy of our country, especially agriculture and allied activities.

(ii) To nurture the revolutionary potential of the new knowledge based industries viz., InfoTech, biotechnology and pharmaceuticals.

(iii) To strengthen and modernize the country’s various traditional industries like textiles, leather, agro- processing and the SSI sector.

(iv) To accord highest priority on human resource development and other social sector programmes and policies related to education, health and other social services giving special emphasis on the poorest and weaker sections of the society.

(v) To mount sustained attack on infrastructure bottlenecks in power, roads, railways, airways, ports and telecom.

(vi) To strengthen our role in the world economy through rapid growth of exports, enhancing higher foreign investment and arranging prudent external debt management.

(vii) To establish a credible framework on fiscal discipline.

It is agreed by everybody that the “First Generation Reforms” initiated in 1991 were mostly crisis- driven. After continuing such reforms for a decade, people and experts are now advocating to bring certain changes in its strategy and are taking about the introduction of “Second Generation Reforms”.

The budget for the year 2001-02 had laid out a comprehensive agenda for the Second Generation of Economic Reforms.

Accordingly, the budget outlined the following broad strategies:

1. Speed up agricultural sector reforms and better management of food economy.

2. Intensify infrastructure investment, continued reform of the financial sector and capital markets and deepening of structural reforms through removal of remaining tiresome control constraining economic activity.

3. Attain human development through better educational opportunities and programmes of social security.

4. Impose stringent expenditure control on non-productive expenditure, rationalisation of subsidies and improvement in the quality of Government expenditure.

5. Accelerate privatisation process and restructuring of public enterprises.

6. Enhance revenue through widening of tax base and administration of a fair and equitable tax regime.

Again the budget for the year 2002-03 also aimed to consolidate and implement these policies at all levels.

The budget proposed to take this process further at State level through a strategy of reform which includes the following:

1. Continue the emphasis on agriculture and food economy reforms.

2. Enhance public and private investment in infrastructure.

3. Strengthen the financial sector and capital markets.

4. Deepen structural reforms and regenerate industrial growth.

5. Provide social security to the poor.

6. Consolidate tax reforms and continue fiscal adjustment at both Central and State levels.

During the first decade of our economic reforms, the country has experienced a moderately higher growth rate ranging between 6 to 7 per cent, build up a foreign exchange reserves to the extent of $ 51.05 billion in 2001-02; managed its external debt to the tune of US $ 100.4 billion in 2001, improved its export-import ratio to 87 per cent, contained the wholesale price index to the tune of 3.5 per cent and finally could marginally reduce the fiscal deficit from 6.6’per cent of GDP in 1990-91 to 5.7 per cent in 2001-02.

Thus the economic reforms have been able to stabilise the fundamentals of the economy and could shift the gear of the economy from crisis-driven economic reforms to development-driven one.

Keeping this trend in mind, the then Finance Minister in his budget (2000-01) speech observed, “I propose to put India on a sustained, equitable and job-creating growth path of 7 to 8 per cent per year in order to banish the scourge of poverty from our land within a decade. The next 10 years will be India’s decade of development.”

Thus during the first phase of our economic reforms, industrial sector got the priority, neglecting the potential of the agriculture sector. In this connection, Mr. A. Saith observed, “India is considered to be a good performer,” but the “industrial primacy strategy has failed to generate employment, the relative neglect of agriculture has further reduced the labour absorptive capacity of the economy, especially when compared to the rate of expansion of the population at working stage.”

Establishing inter-relationship between agriculture and industry Kaliarajan, Sankar and Shand in their joint study observed, “More importantly, our results support the view that reforms should ideally be targeted at both sectors given the bi-directional interdependency prevailing in most states and for all India. Reforms that encourage investment in agriculture and raise incomes will effectively expand the market for manufactures. The fact that agriculture has relatively low import intensity makes this sector all the more attractive as a target for reform. Put another way, a reform process that ignores agriculture also ignores the sector’s capacity to contribute to a more rapid overall rate of growth. Advantage should be taken of the fact that most agricultural commodities are efficient export-tables or efficient import substitutes. Investment in agricultural diversification, e.g., into higher value added commodities such as fruits, vegetables, milk and milk products and into agro- processing, together with investment in neglected areas with unexploited agricultural potential, e.g. the Eastern region, could provide another surge in rural purchasing power which could in turn stimulate expansion in a modernising manufacturing sector and inject further dynamism into the inter-sectoral relations which this study suggests can be the basis for the acceleration of India’s growth rate.”

Thus considering these analyses, it can be argued that the extent of the coverage of first phase of reform process has been quite narrow. It failed to touch agriculture and small scale industry, whose labour absorption capacity is quite high.

Thus the Second Generation Reforms should enlarge its coverage to include agriculture and small industry so as to expand the employment opportunities. Such expansion of employment opportunities and its quality can create a serious impact on reduction of poverty in the country.

New Economic Strategy of Reforms of UPA Government, 2006:

The UPA Government under the leadership of Prime Minister Manmohan Singh outlined a new economic line of “walking on two legs”.

In this new strategy, the government was committed to removing shackles on business but at the same time felt seriously that failure to address questions of equity and justice in favour of only market and individual forces would result in an unsustainable path of development.

The new strategy pledged to reverse the poor infrastructure for which there was need for massive investments but at the same time identified a check on wasteful subsidies and better targeting as part of fiscal responsibility and prudence in expenditure management.

Accordingly, addressing the Hindustan Leadership Summit on 15th Nov. 2005, the Prime Minister observed, “We cannot ignore the dualism in our society and economy any longer. There is an India that wants to move forward even faster. That is an India that is unable to catch up.

“The challenges before any government in this vast and diverse land is to allow those who can and wish to run to do so, even as we help those who are unable to even walk to be able to do so. No government can ignore either challenge.”

The new strategy suggests that the Government needs to show fiscal responsibility and prudence in expenditure management so that fiscal and monetary stability is not impaired. It is also necessary that, the citizen must be convinced about paying at-least a medium of user charges for the use of public utilities—for preventing wasteful usage and generating resources for investment in better services.

Enterprises in both public and private sectors must run efficiently, compete with the rest of the world and generate profits which can be ploughed back for social development.

While arguing on the problems of bureaucratic obstacles, the Prime Minister observed, “in the past, we shackled them with rules and regulations. Regrettably, in many areas, we continue to do so even today. Even today we have unshackled them on paper, we are yet to do in practice. Bureaucratic mindset and corruption continue to act as roadblocks to enterprise and progress.”

Thus the present condition shows that the country has failed to address the questions of equity and justice to all sections’ of the society and such a situation would lead forward then unsustainable path of development.

The Reserve Bank of India in one of its current reports observed that economic reforms have slowed down the rate of job creation though it accelerated GDP growth rate. Thus reforms of Indian economy have brought many disappointments along with it. Slow down of the rate of job creation might be seen as the most important failure of the process.

These loopholes must be plugged in before allowing them to pose a potentially serious problem. As about 25 per cent of the population of the country is currently living below the poverty line. Thus the justice should reach to this larger section of poor people.

Thus the economy should assure the maintenance of higher growth rates in the coming years but at the same time should generate employment for the unemployed and should also address the needs of deprived sections of the society with sincere motive.

2. Second Generation of Reforms:

Reduction of Poverty:

The First Generation of Reforms has not become successful on the front of reduction of poverty from which the country is suffering extensively. Dr. S.P Gupta, member, Planning Commission has established an inverse relation between poverty and GDP growth and thereby pointed out that the percentage of below poverty line (BPL) population has increased from 35.07 per cent in 1993-94 to 37.23 per cent in 1997 although during this period the GDP growth rate was nearly 6.9 per cent per annum.

World Development Report, 2000-01 pointed out that in 1997 (taking $ 1 per day as the measure for International Poverty Line) about 44.2 per cent of India’s population was living below the poverty line. Taking this figure as 419 million persons living in extreme poverty in India, its share worked out at 34.95 per cent of the world’s total poor people.

However, it does not simply point out that India has failed in its poverty reduction programme. But whatever it has achieved that is not adequate considering the magnitude of the problem.

The Mid-term Progress Report of the World Bank on its Country Assistance Strategy (CAS) for 2001- 04 stated that India has made substantial progress in poverty reduction during the last decade, but needs to accelerate its efforts if it is to meet the Millennium Development Goals (MDGs) agreed upon by international community.

The report said “India can be proud of its impressive progress in poverty reduction during the 1990s, the progress which has touched many lives. But there is still much to do to improve access to basic services for poor people and to continue current rates of increase in incomes, both essential ingredients for the achievement of the MDGs.

It will be difficult to raise—or even sustain—economic growth rates without substantial progress in fiscal consolidation, faster structural reform and improved Governance”.

The Report further states that India’s growth prospects are weakened by excessively high fiscal deficits, resulting in one of the highest levels of public debt in its history, a slowdown in the implementation of structural reforms; and a financial system that is successful at mobilising savings but not in their efficient allocation.

The CAS has proposed assistance to states that are implementing wide ranging reform programmes, as a complement to a strong but focused programme of support to the Government of India on key national issues.

Thus the Second Generation Reforms should incorporate following strategy for reduction of poverty:

(a) To enhance income earning opportunities for removing income poverty;

(b) Empowerment of the poor by introducing various schemes;

(c) To implement the poverty eradication programmes in a proper manner so as to assure that the benefits of the programmes reach the target groups; and

(d) Providing security so as to overcome risks arising out of ill health, epidemics, natural disasters and violence.

In this connection, World Development Report, 1990 pointed out the following two pronged strategy for reduction of poverty—Countries that have been most successful in attacking poverty have encouraged a pattern of growth that makes efficient use of labour and have invested in human capital for the poor.

Both elements are essential. The first provides the poor with opportunities to use their most abundant asset—labour. The second improves their immediate well being and increases their capacity to take advantage of the newly created possibilities. Together, they can improve the lives of most of the world’s poor.

Social Sector:

The concept of social sector has become very much important. The Government is allocating a major amount of its expenditure on social sector, i.e., on education, health and family welfare, water supply, sanitation, housing, rural development, nutrition, minimum basic services and social welfare.

During the first phase of economic reforms, the Government made an attempt to contain fiscal deficit and thereby undertook measures for reduction of public expenditure. Such reduction in Government expenditure is being made in those areas where the Government get less resistance from pressure groups. As for example, the Government failed to reduce fertiliser and other subsidies as a result of powerful farm lobbies.

Therefore, the Government has identified the soft sectors like social sectors for bearing the brunt of the expenditure reduction policy. Even within the social sector, certain items of expenditure which are benefitting the less privileged sections are curtailed first.

As for example, the Government, while failing to raise the tuition fees of Colleges and Universities, the Government made an attempt for reducing the extent of fee concessions, allocation of fund for giving scholarships to poor and needy students, cutting the number of research fellowships etc.

In this connection, Dr. P.R. Panchamukhi observed, “If subsidies are withdrawn from higher education, then the axe is likely to fall on these first generation leaders, who have found an option effect wide open before them to move to higher education after receiving school education.”

It would have been better to implement the J.P, Naik formula by raising fees in higher education and also simultaneously increase the number of free-ships and stipends for the poor and needy students. Unfortunately, this was not followed.

The health sector has also experienced the same trend, where the primary health centres located in rural areas or in slums are being deprived in respect of routine supply of medicines and equipment’s. Thus in the absence of proper strategy, neither the Government has been able to mobilise or augment additional revenue by taxing the rich nor they have been able to pay adequate stress on attaining equity by providing basic amenities to the poor and needy people of the society.

Thus the main objective of developing social sector remains neglected. Under this present scenario, the Second Generation of Reforms should give adequate stress on the development of social sector by undertaking programmes on education, health and poverty reduction.

Such development of the social sector would go a long way in improving the skills and abilities of the poor so that they can render positive and productive contribution to the economy of the country.

Changes in Policy Directions:

During the First Phase of economic reforms introduced since 1991, the spread of the reform process was quite narrow, restricted to the issues of industry and corporate sector of Indian economy. The reform process failed to touch the various issues related to agriculture and small scale industry.

Thus the Second Generation Reform must enlarge its scope to agriculture and small industry for expanding employment opportunities. Thus agriculture and rural development strategy should get higher priority on this current reform programme.

Moreover, the Government should invest adequately on education and health sector for raising the capabilities of the poor so that they can engage themselves in the newly emerging activities of self employment. Thus the investment in the social sector should be enhanced at any cost which would rightly benefit the poor and needy sections of the society.

Again, the Second Generation Reforms should try to reduce the fiscal deficit of the Centre to the extent of 3 per cent of GDP and for States to 2 per cent of GDP and accordingly should attain zero revenue deficit at the earliest.

In order to attain zero-revenue deficit, the Government should undertake the following steps:

(i) Controlling administrative expenditure,

(ii) Reduce non-merit subsidies,

(iii) Follow disinvestment in loss- incurring enterprises,

(iv) Improving cost recovery of services provided by the Government,

(v) To improve the working of SEBs and state road transport undertakings,

(vi) Reducing the burden of public debt,

(vii) Widen the tax base by enlarging the tax net towards agricultural taxation and service tax,

(viii) Check evasion of taxes by tightening tax administration,

(ix) mobilise additional resources and

(x) Raise the productivity of public sector undertakings.

It can now be broadly conceived that the objective of Second Generation of Reforms is to attain growth with social justice. Thus the reform programme should undertake pro-poor growth strategy and thereby give adequate stress on enlargement of employment opportunities, poverty reduction programmes, enhancing capabilities of the poor and empowerment of the backward sections of the society.

Thus the Budget 2003-04 rightly mentioned “our reform agenda must not be held hostage either to yesterday’s debates or to subjective and selective interpretations of it. This is a collective need for the nation’s growth, which all of us have to address together.” It would now be better to look at the policy initiatives undertaken by the Government in respect of financial sector reforms, labour law reforms and other reforms.

Financial Sector Reforms:

In near future, the financial sector of the country will have to be tackled at four different levels simultaneously.

The first level relates to public regulation of these companies, the second is related to its organisational structure, the third is related to the technological upgradation of these companies and the fourth is related to the required changes of the psyche of the employees of those companies related to banks and insurance so as to change their attitudes towards their customers for surviving in this mighty competitive environment.

Labour Law Reforms:

Under the Second Generation of Reforms, Labour law reforms also received considerable significance. The Government constituted the Second Labour Commission in 1999 with Sri Ravinder Verma as its Chairman so as to suggest rationalisation of existing labour laws relating to labour in the organised sector and to suggest an umbrella legislation for ensuring a minimum protection to the workers engaged in the unorganised sector.

The commission had also taken care they need to ensure minimum leave, protection and welfare to labour and many other issues relating to health security of the labourers in general. The Commission in its 1759 page report dealt with various labour related issues viz., right to work as per choice, right against discrimination, the prohibition of child labour, labour administration etc.

The commission proposed to set up a Central Labour Relations Commission for Central undertakings and a State Labour Relations Commission for state level undertakings and also a National Labour Relations Commission for hearing the appeals against the decisions taken by the aforesaid two commissions.

Regarding the controversial issue of ‘Closure of Companies’, the commission argued in favour of allowing closure and provided adequate compensation to workers. Thus in case of closure of an establishment employing 300 or more workers, the employer will seek permission to the government ninety days before the intended closure and simultaneously serve a copy of the same to the recognised negotiating agent.

If within 60 days of receipt of application, permission of closure is not granted by the appropriate authority, permission will be deemed to be granted. In that case closure of establishment would become much easier and more legal than earlier situation.

The Commission has also proposed to reduce government holidays and also suggested that both the Centre and State governments should follow an uniform policy of holidays. The Commission argued to follow rigid attitude towards hours of work. Accordingly, total number of hours should not be more than nine hours and per week load should not exceed 48 hours.

But within this stipulated period there may be flexibility and there may be compensation for overtime work.

The Commission also recommended that contract labour shall not be engaged for maintaining core production or services but the same can be utilised for subsidiary sector only, which are many in number.

Thus the Commission recommended amendment of Industrial Disputes Act and Contract Labour Act, increase in working hours, reduction in number of holidays, fresh norms for functioning of trade unions and also for streamlining the labour laws by enacting in umbrella of seven new labour laws. In the mean time, the NDA Government has proposed certain changes in its labour laws.

In respect of labour law reforms, the group of Ministers report on it was presented in the cabinet meetings held on 22nd February, 2002. In this meeting the cabinet approved the Finance Minister’s promise made while presenting budget for the year 2001-02.

The proposed changes in the labour law reforms draft include the following clauses:

1. Organisation having less than 1,000 employees can close the unit without seeking government clearance.

2. All flash and lightning strikes will be illegal. Employees working in public utility services will have to give 45 days notice and at other places 30 days.

3. An employer can lay off 2 per cent staff per year linking it with his productivity.

4. In case of retrenchment the employers will have to give compensation of 45 days salary for each completed year as different from the earlier 15 days.

5. Employers can now be jailed for six months with a fine of Rs 2,000 for violating provisions of IR Act.

Above clause of labour reform process though enables employers having a strength of less than 1,000 workers to close unviable units without seeking mandatory clearance from the government, it contains certain measures which are pro-labour and would not be liked by industry managers.

In fact, the present law protects neither labour nor the honest employer and has only encouraged dishonest producer. What is actually needed at the moment is adequate labour flexibility but the government proposal is not a solution because it seeks companies to pay heavy compensation beyond their capacity.

The viable solution would perhaps create a fund with cumulative process of contribution from both employers and workers to take care of retrenchment. Introduction of unemployment insurance can also serve to give some respite to the retrenched workers. This could perhaps bring a better solution to the vexed issue and break the statement in government move for labour flexibility.

Thus the proposed labour law reforms have raised a serious controversy over the issue. Recently the Government of India convened Indian Labour Conference (ILC) on 28th and 29th September, 2002. The two- day session of ILC ended without a consensus on two most crucial issues which were key to the future of economic reforms—the Second National Labour Commission report and the disinvestment policy.

This unabated stand off on labour law reform and disinvestment has once again negated the “consensus call” by the Prime Minister and has raised a challenge before the Government. However, the ILC managed to hammer out some formulae aimed at firming up a “social safety net” and streamlining the crisis ridden small scale industry sector.

The ILC proposed a National Social Security Authority under the Prime Minister, more government spending for social security of workers, special funds with tripartite contributions and many other schemes for labour welfare. It also agreed on the need to “simplify and rationalise labour laws” to prepare small scale industries so as to face the challenges of globalisation.

The present UPA Government at the Centre is seriously thinking for bringing some reforms in its labour laws and to make it more flexible. The present government feels that instead of applying present labour laws in the commercial institutions enriched by foreign investment, the flexible laws should be applied so that the management of these companies be given liberty to finalize the job terms in consultation with the labourers.

The National Manufacturing Competitiveness Council (NMCC) recently forwarded a proposal for raising the productivity where they suggested some measures for attaining 12 per cent growth target as wall as for introducing labour law reforms. The NMCC is of the view that labour welfare and ‘labour flexibility’ should proceed simultaneously.

They further argued that the government should keep the Contract Labour Act (1970) unchanged and rather make the clause no. 10 of the Act more stronger in the interest of the contract labourers.

Thus the government now wanted to follow the Chinese path in respect of labour reforms where the agreement between the employers and employees had become the present tradition to settle everything in the labour market instead of imposing complete government control in it.

In the mean time, the Prime Minister Dr. Manmohan Singh has also set up an Investment Commission headed by industrialist Ratan Tata. This Investment Commission has submitted its detail recommendations to the Prime Minister on 2nd March 2006 which favoured effective mechanisms to deal with divergence in Centre-State investment related policies, like power sector, labour law, urban land and agricultural marketing reforms.

The Commission argued that labour flexibility should be provided by removing the requirement of state government approvals and permitting contract labour in all areas.

Planning Commission Deputy Chairman Montek Singh Ahluwalia, while addressing a conference of trade union body AITUC on 10th February, 2006, favoured labour reforms but without adopting “Hire and fire” system. He was of the view that rigidities in labour laws were affecting the domestic job market and raising costs of companies especially in manufacturing sector.

Flexibility in labour laws, contract farming and speedy infrastructure development were vital for attaining 10 per cent economic growth. Thus it is observed that bringing some flexibility in labour laws in India is the need of the hour.

However, in a developing country like India the quest of high economic growth is quite justified but that cannot be attained at the cost of neglect of social security.

Thus a correct strategy is to be formulated where labour laws must be conducive to attainment of high growth and at the same time adequate considerations should be given to safeguard the interests of the working class as well as to tackle the problem of unemployment faced by the country in recent times.

Pension Reforms:

One of the important aspects of second generation of economic reforms is the pension reforms. With the increase in the number of pension holders and also with the mounting increase in expenditure on pension head and also to provide pension to workers in unorganised sector, the Government is contemplating to bring some fundamental changes in the strictures and rules governing the pension benefits in the country following the footsteps of various developed countries of the world.

It is observed that the problem associated with the ageing of populations afflict both the developed countries and emerging economies with varying intensities. As the population of the country ages, the capacity of the economy to sustain the higher elderly population needs to be enhanced.

However, India is better placed fortunately in terms of its demographic problem and richer through the experiences of other countries’ pension reforms. The present time is quite opportune for the creation of a modern and sustainable pension system. With the increase in life expectancy due to improved medical facilities the number of people living beyond the working age would increase over time.

Moreover, an average retired person is expected to draw pension for a minimum period of 17 years. Considering this scenario, a worker would take to save enough so as to survive with all minimum requirements for nearly two decades after retirement.

Until now social security or protection is practically non-existent for a large majority of the population of India with some exceptions like the National Old Age Pension Scheme which has a very poor coverage. Pension benefits are not available to about 57 per cent of the population and 74 per cent of the work force, the majority of whom are in the unorganised sector.

To look it in another way, retirement benefits, in one form or the other, are currently available to only about 13 per cent of the working population, including government employees.

Another problem attached to pension is its unfunded character. Such unfunded pensions have been a major fiscal drag worldwide. In India, the pressure of pensions on Central and State finances is becoming increasingly burdensome. Total pension outgo in respect of Central Government employees as a proportion of GDP, after-rising 0.38 per cent in 1990-91 to 0.74 per cent in 1999-2000, declined to 0.56 per cent in 2003-04 (RE).

The outgo in absolute terms increased from Rs 2,138 crore in 1990-91 to Rs 15,367 crore in 2003-04 (RE). As a proportion of net revenue receipts, expenditure on pensions after increasing from 3.9 per cent in 1990-91 to 7.9 per cent in 1999-00, started declining from 2001-02 to reach 5.8 per cent in 2003-04 (RE).

The compound annual average growth rate of the pension outgo of the Central Government was 21 per cent during the 1990s. Pension payments at the State Government level have also risen sharply during the last 10 years.

The annual average increase in pension outgo for States during 1990s was 27 per cent. Pension expenditure of states as a proportion of revenue receipts rose from 5.4 per cent in 1990-91 to more than 10 per cent in 2000-01.

Under the present situation, a modern, well-regulated pension sector, managed by professional pension fund managers, will be very much suitable for India’s financial system and improve resource flows in the form of long term debt and equity to sound projects, especially in infrastructure.

Moreover, the pension sector can also be a major customer of insurance companies for the purpose of converting a stock of pension wealth at retirement date into an effective flow of monthly pensions in the form of annuities.

Aim:

Pension reforms is going on all over the world. Global pension reform experience over the past 10 years has shown that “no one size fits all”.

The two common aims of the pension systems are:

(i) Reducing poverty and eliminating the risk of rapidly falling living standards in post-retirement period, and

(ii) The broader goal of protecting the elderly from economic and social crisis.

Under the present financial scenario, India needs a pension system which is self sustainable, universally accessible, especially to cover the uncovered unorganised sector workers on a voluntary basis; low-cost, efficient and available throughout the country; equitable and pro-labour and does not inhibit labour mobility; and well regulated so as to protect the interests of subscribers.

On 23rd August 2003 Government of India decided to introduce a new restructured defined contribution pension system for new entrants to Central Government Service, excepting Armed Forces, in the first stage, replacing the existing defined benefit system. Subsequently, the New Pension System (NPS) was operationalized from January 1, 2004 through a notification dated 22nd December, 2003.

In the mean time, India has embarked on the path of pension reforms after an extensive process of discussion and policy debate starting from 1998 and several Budget announcements to the effect.

The new pension system (NPS) is the outcome of the policy efforts and recommendations of Project OASIS (Old Age Social and Income Security) of the Ministry of Social Justice and Empowerment, of a Ministry of Finance Working Group on this subject and a high level expert group headed by Shri B.K. Bhattacharya.

After examining these reports, NPS was implemented for Central Government employees (excluding defence personnel) recruited on or after April 1, 2004. This NPS is a new restructured defined contribution pension system applicable, in the first stage, to new entrants to Government Service, except armed forces.

The NPS will be available, on a voluntary basis, to all persons including self-employed professionals and others in the unorganised sector. However, mandatory programmes under the Employees’ Provident Fund Organisation (EPFO) and other special provident funds continue to operate as per the existing system under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 and other special Acts governing these Funds.

The NPS architecture is specially designed for salability, outreach, fair play and low cost and provides choices to individual participants. In order to run the system effectively; a sound regulatory framework is an imperative. The NPS envisages individual retirement based accounts, with the worker empowered to exercise choice of investment.

There are features such as full portability and flexible switching in the hands of the workers. It is quite important to mention here that the scalability of the NPS extend to cover even the low paid workers of the unorganised sector.

In the past, all attempts to provide social security to low-paid workers have failed mainly because of problems of delivery mechanism. In the mean time more than 1,00,000 employees of the Central Government are mandatorily covered under the system and about 15 State Governments have notified defined contribution pension systems based on the NPS.

Again the Budget for 2004-05 announced that suitable legislation to provide a regulatory framework for the scheme would be introduced in Parliament. Accordingly, the Pension Fund Regulatory and Development Authority (PFRDA) Ordinance, 2004 was promulgated on December 29, 2004. Later, a bill replacing the Ordinance was introduced in Parliament on March 21, 2005. The Bill was also refused to the Standing Committee on Finance.

The Committee has also submitted its report on July 26, 2005 with certain recommendations. The recommendations of the committee have been examined and a proposal for amending the PFRDA Bill 2005, based on the recommendations of the Committee is under active consideration of the Government.

In the mean time, an interim regulator, the Pension Fund Regulatory and Development Authority (PFRDA) was constituted through a Government resolution dated 10th October 2003 as a precursor to a statutory regulator and became operational from January, 2004. PFRDA will establish the institutional architecture of the NPS including CRA and pension funds.

It will also frame investment guidelines for pension funds. PFRDA is empowered to impose stringent penalties for any violation of the law. The regulator will also create a special fund which will be used for educating and protecting the interests of subscribers to schemes of pension funds.

Ministry of Finance recently convened a conference of Chief Minister and Finance Ministers on January 22, 2007. Majority of the State Government participants, in general, welcomed the move towards a fiscally sustainable pension system for civil servants and the establishment of an old age income security system for all Indian.

Following the path followed by the Central Government 17 states have notified a defined contribution pension system for their new employees. In the conference itself, states were assured that the PFRDA Bill will be amended to provide an option for investing 100 per cent of pension funds in government securities, entrusting the job of fund management, initially only to public sector fund managers etc.

The investment pattern for non-government provident funds, whether conservative or restrictive would be adopted as an interim model, pending the passage of the PFRDA Bill.

Again on 4th October, 2012, the government unleashed a second wave of reforms and thereby decided to open the pension sector to foreign investment and also raised the FDI cap in insurance from 26 per cent to 49 per cent even after facing stiff opposition to its decisions on FDI in retail and also threats to block these legislations.

Thus the pension reform initiatives undertaken by the Government is progressing satisfactorily to convert the pension return into a funded one and to make it a broad-based one for covering a huge number of low paid workers of the unorganised sector of the country.

Other Reforms:

There have also been enabling reforms in the spheres of trade and foreign investment. Reforms in public sector enterprises are underway to reduce pressures on public finances, increase the efficiency of public sector and reduce incremental capital-output ratio (ICOR).

Legal, institutional and regulatory frameworks in insurance, banking, capital markets, power, ports and telecommunications are also being strengthened to induce private investment in infrastructure. The Union Budget 2001-02 announced various measures for further deepening of the capital markets and the financial sector and also for allowing private entry in insurance.

3. Fiscal Strategy for Second Generation Reforms:

Fiscal reforms are one of the important components of fiscal reforms. To control fiscal deficits and revenue deficits both at Central Government and State Governments is an important agenda of economic reforms. Although initial success was attained to contain fiscal deficits in the initial years of first phase of economic reforms, but later on the same trend could not be sustained for a long period, Now-a-days, both the Centre and the States are facing acute problem of fiscal deficits even after a decade of reforms.

In this connection, the Eleventh Finance Commission observed, “Expenditure growth was reined in and the deficits were down, but only for a while, it would appear. After remaining sub-due at a relatively moderate level, the budget imbalances widened as the decade was coming to a close, with fiscal stress turning acute in 1998 – 99…….. The fact of the matter is that no sustained improvement can come about unless the root causes of the malaise that afflicts our public finances are correctly diagnosed and addressed frontally with a carefully designed plan of action”.

It is found that, the most important reason responsible for growing fiscal deficits in both Centre and States is its rising revenue deficits. The combined revenue deficit of both centre and states reached the peak level or 6.81 per cent of GDP in 1998-99.

Thus considering the loopholes in the fiscal policy followed during 1990s in India, the Second Generation of Reforms should outline a broad fiscal strategy considering the prevailing situations.

The basic elements in this new fiscal strategy should include the following points:

1. To attain zero revenue deficits during the next three to four years,

2. To reduce the fiscal deficit to the tune of 3 per cent of GDP for the Centre and 2 per cent for the States.

3. To continue the programme of disinvestment of loss making enterprises in the public sector.

4. To raise the capital expenditure on rural infrastructure for stimulating the growth of agriculture and allied activities along with rural development.

5. To reduce the volume of non merit subsidies and hidden subsidies benefitting the richer and well- to-do sections of the society.

6. To create an environment so as to attain a better cost recovery in various social and economic services maintained by the Centre as well as State Governments.

Thus both the Centre and the State Governments should try to adopt these policies sincerely and shed their policies of competitive populism while executing hard decisions.