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Contemporary Issues In Indian Economy
Second Generation Reforms : Need For Continuity
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Introduction The "second generation" reforms are aimed at ensuring that the State fulfils its proper role in a market economy, by creating a level playing field for all sectors and implementing policies for the common good, particularly social policies that will help to alleviate poverty and provide more equal opportunity. The Second Generation reforms enables middle and low income countries to grasp the opportunities presented by the globalisation process. The second generation of reforms shall focus on the three pillars of Expansion, Inclusion and Excellence.
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Second generation reforms may be seen as the set of measures needed to enable a country to attain, in a sustained way, high- quality growth. These reforms focus on four areas in particular: Good Governance – As defined by the IMF as increased transparency of government operations to limit opportunities for corruption and enhanced public accountability, enforcing a simple and transparent regulatory framework for the privatised sector, guaranteeing the professionalism and independence of the judiciary, and enforcing property rights - is, according to the IMF, essential for reaping the benefits and mitigating the costs of globalisation.
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Deeper Structural reform – includes civil service reform, labour market reform, trade and regulatory reform, and agrarian reform. Capital Account Liberalization - to allow the Fund to actively pursue capital account liberalisation - removal of quantitative controls, taxes, and subsidies on capital movements in adjusting countries. Previously, the Fund has been limited to dealing with current account transactions although capital account liberalisation has been included in reform programmes where it has been deemed desirable. The IMF argues that capital account liberalisation has spurred the process of globalisation and liberalisation is necessary in order for countries to reap the benefits of a globalised economy.
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Composition of Fiscal Adjustment -The composition of government spending is very important, particularly for redistributing resources within an economy to address issues of inequality, and for encouraging investment and saving. The IMF claims to improve the quality of public spending by reducing budget deficits and improving the composition of government spending. The Fund advocates that the compositions of spending can be improved by: focusing resources on the education and health sectors and reducing spending on the military to a minimum; reforming public health and pension systems; and providing well targeted and affordable social safety nets. The Financial System - paying greater attention to the soundness of banking systems and encouraging greater transparency, better data dissemination and the liberalisation of capital accounts.
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Need For Continuity The Second Generation reforms are of great importance and hence, there is need for its continuity in India, so that high quality growth can be achieved. The following points give reasons to call for continuity of reforms:- 1. Reforming State Governments' economic administration and improving the effectiveness of local self-governing institutions received considerable attention. It became clear that the next stage of the reform process had to take place in these tiers of administration. At present, too many restrictions exist in the inter-State flow of both factors of production and finished goods for the country to take advantage of its size and reach. Similarly the ``subsidy and reservation raj'' is standing in the way of efficient use of resources. The key to the success of local bodies lies in the erection of an appropriate incentive structure and attention to the actual operation of the existing institutions, rather than in merely pouring in finances.
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2. Legal reform In India, It was urged that while old and dysfunctional laws be removed, legislation had to be introduced in many areas that had become crucial to the rapid economic development of the country. It was claimed rightly that economics should no longer be treated as ``science of choice'' but as ``science of contracts''. Dr. Manmohan Singh said, “If we are to have a society as we must be where the common man and common woman gets speedy and affordable access to justice, if we are to have in our country the turbulence in effect of the Rule of Law, if we are to have an economic environment where contracts are easily enforceable, then we must ensure that our law teachers, practicing advocates, corporate legal luminaries, legal advisors, judicial officers and legal facilitators are indeed men and women of very high intellectual calibre. And this is possible only if there is dramatic reform and improvement in the scope and quality of our legal education system.”
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3. Very High Lending Rates - The Indian financial system is dominated by banks (they account for estimated 60% of finance raised by the commercial sector) enjoying a near monopoly over the supply of credit in the country. This near- monopoly explains why lending rates in India are higher than most emerging market peers and why Indian banks enjoy some of the healthiest net interest margins globally. Indian banks have a comfortable positioning within the financial system with barriers to entry, low bargaining power of borrowers and a low threat of substitution from alternative sources of finance. Also, restrictions on access to external commercial borrowings (ECBs) means that the foreign capital route, too, cannot be exploited fully. Quantitative restrictions on ECBs prevent larger companies from accessing this route while smaller companies cannot access this route on account of restrictions on the maximum spread at which foreign loans can be raised.
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4. Unsatisfactory Financial Depth - However, in terms of overall financial depth, the size of the financial system relative to the economy of India does not compare favourably with other countries or even most other emerging markets at a similar stage of development. Despite the apparent strength of the banking system, the ratio of private sector credit to GDP is still low by international standards (see Chart 1). Some of the restrictions on the banking system, and the incentives for banks to hold government bonds rather than make loans, have stifled lending. Consequently, the average ratio of loans to deposits in the Indian banking system is much lower than in most other countries.
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Chart 1
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5. For Better Implementation- In order to resolve the tension between the individuality of each country's institutions in the social, cultural, and political domains and the apparent demands of globalization for harmonization of standards and norms, we need Second Generation Reforms Much of the present work to strengthen the international financial architecture aims to achieve better governance and greater transparency through developing internationally recognized standards. And these standards, codes, and practices when applied at the national level, represent a major contribution to implementing second generation reforms. We must find ways of helping countries to recognize the benefits of adopting these changes while respecting their sovereignty, emphasizing the voluntary, market-based aspect of reforms.
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6. Create Balance Between Public and Private sectors - Many of the issues-standards, the balance between public and private sectors, and the quality of fiscal adjustment-go to the heart of countries' social and political decision-making. Certainly international agencies have a role to play through policy dialogue, technical cooperation, and financial support. But years of experience have demonstrated that stabilization policies or structural reform are truly effective only, where the national authorities-and even more important, the people are committed to change. This is where mechanisms for engaging civil society-labour organizations, employers, domestic NGOs, religious groups, and other local bodies-are essential for a participatory approach to reform and to development. We must find most effective ways of encouraging governments to foster a constructive relationship with civil society.
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7. To Counteract Corruption- Corruption in India is a consequence of the nexus between Bureaucracy, politics and criminals. India is now no longer considered a soft state. It has now become a consideration state where everything can be had for a consideration. Today, the number of ministers with an honest image can be counted on fingers. Foolproof laws should be made so that there is no room for discretion for politicians and bureaucrats. Responsiveness, accountability and transparency are a must for a clean system. Bureaucracy, the backbone of good governance, should be made more citizen friendly, accountable, ethical and transparent. Cooperation of the people has to be obtained for successfully containing corruption
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8. Conspicuous Failure in Education - Even after six decades of development planning, a considerable number of children are unable to achieve elementary education. Even though Secondary level of education is not the ultimate stage in the education field, the dropout rate for classes (I-X) was as high as 62-64% for girls and 60% for boys. There has been a noticeable shift in the management pattern of the schools recently. The percentage of unaided Public sector school has doubled from 15% in to 30% in The share of government aided schools has dropped down from 85% in to 70% in This shift clearly points out that since parents are keen on spending for the quality education of their children, more investment in government aided schools is required.
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9. Slow agricultural growth is a concern for policymakers as some two-thirds of India’s people depend on rural employment for a living. Current agricultural practices are neither economically nor environmentally sustainable and India's yields for many agricultural commodities are low. Poorly maintained irrigation systems and almost universal lack of good extension services are among the factors responsible. Farmers' access to markets is hampered by poor roads, rudimentary market infrastructure, and excessive regulation. Adoption of modern agricultural practices and use of technology is inadequate, hampered by ignorance of such practices, high costs, illiteracy, slow progress in implementing land reforms, inadequate or inefficient finance and marketing services for farm produce and impracticality in the case of small land holdings.
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10. Poor Infrastructure - India's low spending on power, construction, transportation, telecommunications and real estate, at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates. This has prompted the government to partially open up infrastructure to the private sector allowing foreign investment, and most public infrastructure, barring railways, is today constructed and maintained by private contractors, in exchange for tax and other concessions from the government. Electricity Transmission and distribution losses amount to around 20%, as a result of an inefficient distribution system, handled mostly by cash-strapped state-run enterprises. Substantial improvements in water supply infrastructure, both in urban and rural areas, have taken place, with the proportion of the population having access to safe drinking water rising from 66% in to 92% in 2001 in rural areas, and from 82% to 98% in urban areas. however, quality and availability of water supply remains a major problem even in urban India, with most cities getting water for only a few hours during the day.
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Conclusion India's rich and complex political process being what it is, focusing solely on the big picture could bog down progress. Hence, it is important to get the process of reforms going and build up some momentum as people see the benefits. New policies, and certainly adapted institutions, are essential to help us respond as the world evolves, often in unexpected directions, and at unpredictable speed. I would certainly encourage you to review thoroughly our experience thus far with second generation reforms, and to consider how to strengthen their implementation. And as one generation of experience leads to another, it is suggested that it might not be too early to imagine the next round of reforms.
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Bibliography 09/prasad.htm HTM minister-and-law-minister-on-second- generation-reforms-in-legal-education
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