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  Public sector reforms in India & China  
 

HARI BANSH JHA

Because of the growing importance of emerging power of India and China at the global stage, no talk is complete without mentioning them. Many researches have been conducted on the factors that led India and China to achieve higher rate of economic growth. It was found that the public sector reforms played key role in pushing the growth rate higher in both these countries. Since the public sector occupied predominant position as spender and employer, its role was eminent in setting the policy environment in India and China. In view of this development, there have been serious efforts made in many countries to speed up the process of public sector reforms.

Understanding the pre-eminent role of public sector, China began to introduce public sector reforms programs in 1978 whereas India initiated public sector reforms programs almost 13 years later in 1991. The pre-reform economic system in China was a copy of centrally planned economy of the Soviet Union, albeit with some modifications. In fact, China introduced public sector reforms in a gradualist manner as many people believed that the reforms in public sector would help the country to achieve higher rate of economic growth.

In the course of implementing public sector reforms, China introduced competitive environment for business by changing centrally planned economy into market economy. It adopted open door policy as long-term economic policy of the country. Accordingly, the laws and regulations of the land were framed in a way that it could attract foreign investment. As per the new provisions made, the land could be leased to the investors for 15 years and if needed even up to 75 years. Foreign trade was decentralized and the value added tax system was introduced. Some of these measures soon helped China to achieve higher rate of economic growth, though it was at the cost of suppressing peoples’ consumption.

On the other hand, the Indian model of economic growth was based on the approach of mixed economic system, which inherited ethos from both the capitalist and socialist system. The rate of economic growth in this model of economic growth was very low, which was often called ‘Hindu rate of economic growth’ – a derogatory term to express lower rate of economic growth.

Eventually, the lower rate of economic growth pushed India to a severe crisis in balance of payments in 1991. This further led to severe liquidity crisis. As a result, the foreign exchange reserves in the country plummeted to such an extent that the government had no option left but to resort to such harsh measures as selling its stock of gold to obtain foreign exchange, using special facilities at IMF and receiving emergency bilateral assistance from Japan and Germany.
Unlike in China, the public sector reforms in India were due to the compulsion of economic crisis. But such measures paid dividend soon. Remarkably, the GDP growth rate that had dipped to as low as 0.9 percent in 1991-92 recorded a spectacular growth of 5.1 percent in 1992-93 and 6.2 percent in 1995-96.

In order to face the severe economic crisis, the government of India introduced public sector reforms effectively and efficiently in 1991. Simultaneously, such reforms were introduced in industrial policy, trade policy, exchange rate policy, foreign investment policy, taxation policy, etc. Most importantly, under the industrial policy reforms, the licensing system was abolished for most of the industries. The limit to investment in large Indian/foreign companies was abolished. Private sector was allowed to operate in all kinds of industries other than those related to strategic and defense units. Also, access to foreign technology was increased. Similarly, under the tax reforms, a number of measures were adopted not only to broaden the tax base, but also to simplify the tax laws, rules, procedures and forms. The structure of custom duties was also simplified. And in the financial sector, sweeping reforms were made in banking, insurance and capital market.

Unlike in China, the public sector reforms in India were due to the compulsion of economic crisis. But such measures paid dividend soon. Remarkably, the GDP growth rate that had dipped to as low as 0.9 percent in 1991-92 recorded a spectacular growth of 5.1 percent in 1992-93 and 6.2 percent in 1995-96.

It is evident that before the introduction of public sector reforms, both Indian and Chinese economies were largely state controlled and isolated from world economy. Their rate of economic growth was very low. However, in the process of integrating with the world economy, both India and China tried to liberalize and modernize their economies. All possible efforts were made to lower trade barriers, create congenial environment to attract foreign investment and ensure deregulation of industries. With the liberalization of the domestic economies, the banks were also liberalized.

Once the state control mechanism was replaced by integration of the respective economies with the world economy, both India and China began to make miracles by achieving higher rate of economic growth. In both of these countries, the public sector reforms promoted accountability, effectiveness and efficiency in service delivery and ensured transparency in order to achieve higher rate of economic growth.

Gradually, understanding the role of the private sector, efforts were made by India to create friendly environment for private sector investment and for this infrastructure facilities were built. In China, too, the government had developed various infrastructural facilities including of course roads, electricity to attract Foreign Direct Investment (FDI). Political stability backed by good governance system also facilitated the growth of domestic and foreign investment. Thus, the public sector reform was not competitive but complimentary to the development of private sector investment and/or FDI in Indian and Chinese economic growth model.

However, there are some missing links in regard to information on public sector reforms. Much needs to be done to analyze the nature and mode of reforms introduced by India and China in the public sector domain. Also, it will be useful to discuss how such reforms were made compatible with the growth of private sector. Still more needs to be worked out in regard to similarities and differences in the approaches of public sector reforms in India and China. Such a perspective would prove useful to many of the countries as to which of the two different models adopted by India and China are suited to them. It will open avenues to the countries aspiring to have higher rate of economic growth and high standard of living to pick up best from the two different models of economic growth and then make them applicable in their respective environment

Statistics show that currently the rate of economic growth in India in 2011 is 8.8 percent while in China the GDP growth is recorded a little higher as 9.7 percent. Economic miracle in India and China established a fact that higher economic growth is possible not only in comparatively closed society such as China, but also in democratic and a more open regime like India. In this regard, the Indian diplomat Ronen Sen rightly said, “Today what we have done is proven that democracy and development, federal democracy and development, with devolution, are inseparable.”

dr.hbjha@gmail.com
 
Published on 2011-05-14 01:10:15
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