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DPSM assignment

Development Process and Social Movements in Contemporary India (University of

Delhi)

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Development process and social movements

Name : Rishav ranjan

Class : BA Polscience hons.
Section: A
Roll no: 7051
Assignment: 1

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A CRITICAL ESSAY ON ECONOMIC REFORMS IN INDIA AND ITS IMPACT ON THE ORGANIZED
AND UNORGANIZED SECTORS.

INTRODUCTION

The major argument of the proponents of 'Economic Reform' was that the earlier planned development
in India from 1951 to 1990 has restricted the growth of the Indian economy. International financial
institutions have long argued that a market economy will release the tiger of India caged by the
restrictions of the planned regime. The so-called 'Economic Reform Programme has started in 1991 with
a lot of expectations, but after almost 30 years of reforms, Indian economy in 2019-20 was in a sorry
state with declining growth rate, high inflation and capital flights. The recent behaviour of the Indian
economy with rising balance of trade deficits brought back the fear of a repetition of the bankruptcy of
1991.

For the purpose of analysis, we divide the whole period into two parts: (a) period of structural
adjustments from 1991 to 2001; (b) period of the reformed economy since 2001. The period from 1991
to 2000 can be broadly defined as the period of structural adjustment, where the old structure of
planned mixed economy was dismantled gradually and public sector enterprises were privatized in many
extents. The period from 2000 to present can be broadly defined as a reformed economy when the
balance of payments is yet not fully liberalised and there are still some public sector enterprises left to
be privatize.

Economic growth during and Post- Reforms

Economic reforms started in 1991-1992. The argument of the proponents was that the previous regime
of the planned economic development in India has the result of a very slow growth of the economy, the
so-called 'Hindu' rate of growth. The 'Reform process' was expected to bring in a new phase of rapid
economic development by removing the distortions caused by restrictive government policies under the

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'planned' regime of 1951-1990. The overall growth rate of the GDP (Gross Domestic Product) in the
'planned regime' has not done that badly during 1980-1990 compared with the 'reformed' regime during
the 1990s. In fact, in the later part of the 'reformed' regime from 1997 the growth rate of the economy
was much worse than during the 'planned' regime. This is true in almost every area, per-head income,
fixed capital formation, government consumptions, and growth rates for industry, agriculture and the
efficiency of capital. Only in service, sector and private investments did better during the 'reformed'
regime. In agriculture, the most important part of the economy, the performance of the ‘reformed’
regime is the worst. The saving rate during the 'reformed regime’ was stagnant for a long time, recently,
it has gone up mainly due to the massive portfolio investment.

Liberalization measures have benefitted a minuscule section of the society. They have encouraged
growth of monopoly houses which reflected in rapid growth of their assets like Tata, Ambani, Adani, etc.
Economic 'reforms', particularly the liberalisation measures, have enabled private companies to earn
huge profits even during the latter half of the 1990s when industrial growth was sluggish.

Public Distribution System

The government in a way has rendered the Public Distribution System (PDS) irrelevant. People are
divided into two categories - those below the poverty line (BPL) and those above the poverty line (APL).
A large number of people above the poverty line are poor but the issue prices of food grains, which
were fixed for them under the PDS, are either equal to the prices prevailing in market or even higher.

Two major factors are responsible for the present ruination of agriculture in this country. First, in its
eagerness to reduce fiscal deficit, the government has substantially reduced the development
expenditure in agriculture. Second, import liberalisation has contributed in a big way in reduction in the
prices of agricultural products. Having failed in getting remunerative prices for their products, many
farmers have curtailed their farm operations, which in turn have increased unemployment among the
agricultural workers. Import liberalisation is thus a major cause of the existing plight of the peasantry.
Suicides by many farmers in the recent past reflect the consequences of the liberalisation measures.

Effects of the reformed trade policy are being felt in agriculture in India. Rice farmers are getting
bankrupt because their cost of production is more than the market price as rice is being imported from
Thailand and South-east Asia. Wheat price is falling. However, because of the electoral importance of
the wheat-growing regions, the farmers are receiving price supports and subsidies from the
governments. Wheat is being imported from Australia. In future, it will be imported from EU.

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Poverty and Inequality

The economic reforms have contributed to increased poverty and economic inequality. First, we need to
examine as to what has happened to incidence of poverty. According to the NSS (National Sample
Survey) in 1983, while 45.6 per cent of the rural population was below the poverty line, the incidence of
poverty in urban areas was around 40.8 per cent. Hence, the overall incidence of poverty for the country
as a whole was 44.5 per cent. By 1990-1991, the incidence of poverty had declined to 35.0 per cent in
the rural areas and to 35.3 per cent in the urban areas. Taking the two sectors together, the incidence of
poverty was 35.1 per cent. This implies that during the 1980s the increase in growth rate, coupled with
the poverty alleviation programme, led to a significant decline in the spread of poverty. This trend was
however reversed during the 1990s and the liberalisation decade witnessed a steep rise in the incidence
of poverty particularly in the rural sector. In 1998, 45.2 per cent of the population in rural areas was
below the poverty line. Even overall situation was not distinctly better as at the country level, rural and
urban sectors considered together 43 per cent of the population was below the poverty line. The rise in
the overall poverty ratio during the post-reform period in spite of the higher GDP growth is to be
attributed to the growing rural-urban divide.

According to 55th round of NSS survey, an overwhelming 79 per cent of workers in the unorganized
sector, or 394.9 million workers or 86 per cent of the working population, live on an income of less than
Rs.20 a day, according to the National Commission for Enterprises in the unorganized sector. Based on
the 66th round of the national sample survey for 2009-2010, if the average monthly consumption
expenditure is taken as the benchmark of what an individual needs to survive, the poverty line would be
Rs.66. 10 for urban areas and Rs.35. 10 for rural regions, while about 65 per cent of the population will
be below the poverty line.

Employment

The most important indicator of success of an economic regime is in the employment generations. In
this matter, the 'reformed' regime has little to demonstrate. There is no reliable statistics regarding
unemployment in India, so we do not know how far the fear of the ordinary people about the 'Reform-
Process' as job-destroyer is justified. The only statistics, the government produces on employment, are
on the organised sector of the economy, which is a very small part of the economy. Increase in
employments in the public sector was much higher during the 'planned' regime of the 1980s than during
the 'reformed' regime of the 1990s. This is true for both the manufacturing and the construction sector.

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In the private sector, although the total generations of employment are higher during the 'reformed'
regime, in the construction sector it has failed. In manufacturing if we look at the detail, we can see that
the employment actually went down from 6.85 million, in 1998 to 66.2 million in 2000; in agriculture
employment went down from 1.49 million in 1992 to 1.42 million in 2000; in mining it went down from
1.12 million in 1994 to 1.01 million in 2000. The only sector that has showed improvement is the service
sector of finance, real estate, etc., where employment went up continuously from 1991. Data for
employment is available only up to 2003; thus, we can compare the situation between 1991 and 2003
regarding employments in different sectors of the economy for the both private and the public sec- tor.
As we can see from Table 7, employment increase only marginally during this period of 12 years of the
'Reformed' economy; it has declined in the public sector in both mining and manufacturing. In the
private sector, too, employment declined in the mining, constructions; in agriculture it increased only
marginally. In other sectors, it increased mainly in the finance sector. The improvements in the private
sector could not compensate for the decline in employment in the public sector. The ratio of
employment to gross national income declined significantly during the 'Reformed' period. Thus, it
proved the inefficiency of the 'Reformed' economy regarding the generation of employment prospects
for the country.

IMPACT OF ECONOMIC REFORMS ON ORGANIZED AND UNORGANISED SECTOR

The Planning Commission's special group on employment generating growth has noted that "even if the
organized sector grew at 20 per cent per annum and the private organized sector at 30 per cent per
annum, their contribution to total employment would increase hardly by 1.5 to 2.0 per cent of the total
over the Tenth Plan" [Planning Commission 2002]. Hence, in order to increase employment, the
unorganized sector has to be specially targeted. The idea is not new, as it was earlier envisaged in the
Second Plan, which "aimed at expanding employment opportunities of which the bulk was to be
provided by the unorganized sector". This was expected to improve productivity, bring about greater
equality and alleviate poverty. However, this was not realized due to the multiplicity of forms of
production organization and the variety of enterprises in this sector, which was beyond the analytical
framework of planning in India. Hence, most policies were geared towards organized sector income and
employment growth. The economic reforms initiated in 1991 were also meant to reverse the poor
growth performance. It was expected that rapid and sustained growth of output and employment would
reduce poverty.

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Linkages between organized (formal) and unorganized (informal) sectors

Formal and informal sector are linked through production linkages, consumption linkages and
technological linkages. According to Ranis and Stewart (1999), traditional informal sector produces
consumer goods only, sold mainly to the low income consumer. Modern informal sector produces both
consumer goods and capital goods, serves both low and middle income consumers. These goods often
compete with the goods produced by the formal sector. On the one hand, the consumer goods
produced by the modern informal sector, generally consumed by the sector itself and the people
engaged in the formal sector. On the other hand, the intermediate products and simple capital goods
produced by the modern informal sector that partly used the sector’s own need and partly serve the
demand of the formal sector. Thus, modern informal sector’s production is complementary to and as
well as competitive with the formal sector.

Even post-liberalization the employment was mostly generated by unorganized sector and the tendency
of ‘hire and fire’ increased heavily. The formal sector manufacturing and agriculture and been in
shambles, it is only the service sector that has succeeded in generating considerable employment.
Liberalization has brought about an increased uncertainty for the huge portion of Indian workforce. As
far as its effect on overall employment and in turn poverty reduction is considered, it is very marginal. In
a nutshell, India’s post structural adjustment experience has been patchy, visible only in certain sectors,
while bringing in new informal sectors like construction and hospitality but with very volatile
employment patterns.

CONCLUSION

The 'Reformed' economy has produced two India, one very tiny part of the economy, including the IT
sector, the financial services and trading sector, has prospered. However, there is a general decline in
agriculture, construction and mining. The growth of the economy is fuelled by increasing flows of short-
term foreign investments both in the share market and in the real estate business, which has suddenly
raised the growth rate since 2004. The balance of payments still has deficits along with the balance of
trade. The only positive factors in India's external account are the growth of exports of IT-related
services and remittances from the Indians living abroad. The real economy and employment have not
responded positively yet to the so-called 'Reforms'. In the case of India's earlier bubble of 1985 to 1989,
the cause was the sudden increase of government consumptions for non-development purposes
financed by foreign borrowings and short-term foreign funds parked in India. In the current bubble, the

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cause is the sudden inflows of foreign funds to satisfy the appetite of speculative demands in the share
market and real estate business. Borrowings by Indian companies from foreign sources are a major
factor in this scene.

Without a vigorous public investment that feeds the private investments, the country could not be
developed for the satisfaction of the people at large. Success or failure of any economic programme is
measured by the welfare it generates for the people. Economic and administrative reforms are needed
in India but these reforms should be aimed at reduction of corruptions, increased efficiency, increased
employments and reduction of inequality and poverty. Given the rapidly declining prospect, it is high
time to change tracks from a totally free enterprise economy to a regulated economy for the benefit of
the people.

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