Slow Process of Economic Reforms (Reasons)

The following points highlight the ten main reasons responsible for slow process of economic reforms. Some of the reasons are: 1. Partial Convertibility of Rupee 2. Delay in Implementing Direct and Indirect Tax reforms like DTC and GST 3. Slackening Pace of FDI Flow 4. Failure in Dismantling APM in Petroleum Goods 5. Failure to Contain Subsidy Bill and Others. 

Reason # 1. Partial Convertibility of Rupee:

Indian rupee was made partially convertible since 1992-93 by removing quantitative restrictions on payments relating to the international exchange of goods, services and factor income only on current account.

Till today the country could not introduce capital account convertibility, which refers to similar liberalization of country’s capital transactions such as loans and investment, both short term and long term as well as speculative capital flows.

But in the context of the need for attracting higher capital flows into the country, it is also important for the Government to introduce convertibility on capital account, as foreign investors may enter confidently only when there is an assurance that exit doors will always remain open.

Thus in order to attract greater volume of foreign investment like that of China, full convertibility of rupee, including capital account convertibility needs to be attained. Capital account convertibility is likely to be sustainable if it is supported by credible macro-economic policies, listing reduction in fiscal deficit, moderation in inflation and a flexible financial system for adapting with the changing situations.

Thus the present partial convertibility of rupee is thus one of the responsible factors for the slow process of economic reforms in India. Under the present level of trade deficit (10% of GDP), current account deficit (3% of GDP) and declining foreign exchange reserves, India cannot dare to go for current account convertibility of rupee.

Reason # 2. Delay in Implementing Direct and Indirect Tax reforms like DTC and GST:

The government of India has failed to maintain its time target in implementing direct and indirect tax reforms through introduction of new system of Goods and Services Tax (GST) and Direct Tax Code (DTC).

Country’s most ambitious tax reform measure GST, which seeks to replace a number of indirect taxes like excise duty, service tax on central account and value added tax (VAT) on states’ account by a singh structure, since November 2009, is yet to be finalised due to lack of consensus among the state governments.

The government introduced constitution Amendment Bill in the Lok Sabha on 19 December 2014. Drafting of model legislation for centre and state GST in concert with states is now under progress.

Similarly, the Direct Tax Code (DTC) proposal which seeks to overhaul the 50-year old income tax laws since August 2009 has also facing delay in its implementation due to lack of consumes among the member of Parliament.

Thus the proposed reforms as incorporated in DTC were targeted at simplification of tax system and its administration, rationalization of tax rates and broadening of its, tax base for attaining global standard.

The facial glamour of DTC has been lost due to non acceptance of its original version. Now the revised version of DTC as prepared by Parliamentary Standing Committee will be placed in the monsoon session of Parliament in 2012. Thus due to lack of consensus among the political parties, the process of tax reforms has been slowed down in our country.

Reason # 3. Slackening Pace of FDI Flow:

In India, the pace of FDI flows is slackened due to failure of the government in bringing necessary FDI policy changes. Since 1991-92, the FDI flows into India was all along lower but it is in 2008-09 the FDI flow reached the level of US$ 22,372 million and then again came down to US$ 21,564 million in 2013-14.

However, China has become successful in attracting FDI and has become a good destination for foreign investment because of its suitable policy reforms. It is only in recent years, the government has been able to attract FDI into machinery and equipment sector, transport equipment’s, power, telecommunications etc.

However, the recent government more to permit FDI into Multi-brand Retail trade has been thwarted due to lack of consensus among the coalition partners. Side by side, controversy related to promoting contract farming in agriculture for assuring remunerative prices to farmers and proper storage facility for their agricultural produce and the flow of FDI into it needs to be debated in a rational manner.

Mishandling of policy issues and tax environment in India have hurt investment environment seriously.

Reason # 4. Failure in Dismantling APM in Petroleum Goods:

The process of economic reforms in India is also slowed down due to failure of the government to dismantle administered price mechanism (APM) in determining prices of petroleum goods, leading to a huge loss to petroleum goods producing companies.

Central government has so far not allowed three PSU retail oil firms, viz., Indian Oil, Bharat Petroleum and Hindustan Petroleum to raise the prices of petroleum good, despite the import cost of crude oil input jumping upward.

Besides, India’s oil subsidy policy is certainly a short-sighted one because such shifting of the burden to future generations is purely unsustainable for both the government and the PSU oil companies of the country.

However, after the formation of UPA II Government, the government has taken certain steps to introduce the market determined price in case of petroleum (motor spirit). Thereafter since January 2013, the government decided to hike prices of Diesel at the rate 50 paise per litre in every month in order to reduce the subsidy burden.

Again after the formation of NDA II Government at the Centre, the Government has taken a bold decision to deregulate the Diesel price in October 2014. Thus the situation is likely to improve with such deregulatory measures undertaken phase-wise.

Reason # 5. Failure to Contain Subsidy Bill:

Failure of the government in containing subsidy bill on petroleum goods, fertiliser and food has been considered another important factor responsible for slackening off the process of economic reforms in India. Total subsidy bill is likely to increase to Rs 2,60,658 crore in 2014-15.

Alternative mechanism for containing subsidy bill in all fronts needs to be developed in rational manner at the earliest. A lower subsidy bill will always free up capital to be spent or invested on productive sectors.

Reason # 6. Growing Fiscal Deficit:

Although the government decided to contain the fiscal deficit in its budgets to the targeted level of 3.0 per cent of GDP but it failed to contain the same due to serious financial crisis faced by the country both internally and externally. Fiscal deficit reached the level of 6.3 per cent of GDP in 2009-10 and then declined to 4.1 per cent of GDP in 2014-15.

Reason # 7. Slow Power Sector Reforms:

Power sector reforms followed by the states in its second phase have been slowed down in recent years resulting slow pace of economic reforms in the country.

Thus the both the centre as well the states should try to expedite the second phase of power sector reforms by increasing efficiency in power generation sector, inviting private players into power generation, instituting independent power tariff regulatory authority etc.

Reason # 8. Failure to Rationalise Railway Freights and Fares:

The government has failed continuously to rationalize railway freights and fare, structure in recent years although, it has become imperative for restoring and maintaining the basic services and also for restoring financial health of Indian Railway.

Reason # 9. Failure to Finalize Land Acquisition Bill:

Land acquisition for the setting up of new industrial and infrastructural projects is quite important in present times because of growing controversy related to land acquisition. Due to lack of consensus among the coalition partners, the UPA-II government and NDA-II government has failed to finalize the Land Acquisition Bill resulting delay in promoting new industrial and infrastructural projects.

A large number of projects are stalled on account of land acquisition problems. Difference of opinion still persists among the Parliamentary Standing Committee (PSC) of Rural Development and the Ministry of Rural Development about the role of state on land acquisition for industry. Such differences was noticed when the PSC in its recommendation on May 17, 2012 opposed states role into land acquisition.

Reason # 10. Political Compulsion and Lack of Unified Strategy:

Lastly, political compulsion and lack of unified strategy among the coalition partners of government has been largely responsible for slackening the process of economic reforms in the country. In the absence of simple and absolute majority in both houses of Parliament, the ruling party of the NDA-II government has failed to bring dynamism in the economic reform process of the country.

Many important structural reforms are stalled because of lack of unified strategy in coalition politics.