Structural Reforms

Structural Reforms

Subject : Economy

Context:

The chief economist of the International Monetary Fund (IMF) India needed key structural reforms in order to achieve the ambitious target of being a USD 10 trillion economy.

Challenges India facing:

• Higher crude oil and fertiliser prices will spike domestic inflation;
• Global slowdown will reduce exports– reducing domestic growth and worsening the trade deficit;
• A strong dollar-result in reducing our forex reserves and reducing our capacity to import goods.
• Rising fiscal deficit– on account of lower demand among most Indians, the government might be forced to spend more towards providing basic relief in the form of food and fertiliser subsidies.

Structural reforms:

• Structural reforms tackle obstacles to the fundamental drivers of growth by liberalising labour, product and service markets, thereby encouraging job creation and investment and improving productivity.
• They are designed to boost an economy’s competitiveness,growth potential and adjustment capacity.
• Typical structural reforms include policies that:
  • make labour markets more adaptable and responsive
  • liberalise service sectors, boost competition in product and service markets, specific sectors, or improve the overall business environment
  • encourage innovation
  • improve the quality of public taxation systems
  • address the challenges of population ageing on the welfare state.
• Example– In order to get out of the macro-economic crisis in 1991, India launched a New Economic Policy, which was based on LPG or Liberalisation, Privatisation and Globalisation model.
  • The broad range of reforms under the LPG model included:
    • Liberalising Industrial Policy: Abolition of industrial license permit raj, Reduction in import tariffs, etc.
    • Beginning of Privatisation: Deregulation of markets, Banking reforms, etc.
    • Globalisation: Exchange rate correction, liberalising foreign direct investment and trade policies, Removal of mandatory convertibility cause, etc.