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Ranjit Anantrao Shedge

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Ranjit Anantrao Shedge

Chapter I

INTRODUCTION

1. Title:

“Need of Second Generation Economic Reform – Analysis Of Associated Legislative

Enactments”

2. Research Aims And Objectives:

With the rapid growth and expansion of the economy, it is increasingly important to explore

the importance of ongoing legislative framework which is substantial part of economic

reform.

•To find out the adaptation those need to be made in legislation to cater the expectation

of Second Generation Economic Reform.

•To give an analytical overview of concerned legislation which are part of Second

Generation Economic Reform.

•To examine and analyze the related legislation from the perspective of international

organization like IMF, World Bank and find out hurdles in speed implementation of

reform process.

3. Research Questions

•Why do we need Second Generation Economic Reform and what are legal

considerations dealt with in Second Generation Economic Reform?

•Does Indian legislation follow the norms of International organization in Second

Generation Economic Reform?

4. Scope of the Research

2

It is important to every State to realize that, Economic policy of any nation is a powerful

instrument on the part of policy makers to direct the economy in the desired direction if

formulated such a policy properly and implemented effectively. Legislation forms a part of

economic reform. The India Economic Policy should be formulated keeping into

consideration India’s immediate as well as long term economic requirements.

Economic policy has, for many years been inward looking, provided a legislative framework

giving emphasis on protectionism. However, in the last two decades, to become a major

player in world economy, a comprehensive approach was taken. After the liberalization of

Indian Economy in the early 1990s, the Indian economy scenario witnessed a paradigm shift

of stance. India’s Economic Policy has cast off its protectionism image and became more

liberal. Initial years of reform which is termed as first generation economic reform laid

emphasis on liberalizing the economy. In mid90’s a need was felt to have legislative

framework to reap the fruits of liberalization, globalization and privatization. The legislative

framework should intend to create institutions which would promote the economic

integration.

Now the researcher thinks that the scope of this topic is increasing because of growth of

economy. And to have same growth the legislative framework needs to be established at right

time and right place. There is also need to analyze the existing legislative framework which

intends to increase the benefits of Globalization, liberalization and privatization.

5.Significance of the Research

This doctrinal research mainly explores the ‘legislative framework which is established as a

part of second generation’, and also gives an analytical overview of concerned legislations

and model legislation as anticipated by international organization.

There are two type of legislations which need to be formulated after opening up of economy

–Legislation which would create institutions which facilitates and boosts the free market

structure and other legislation which would take care of the class which are victim of opening

of economy.

Research focused on legislation which have created institutions facilitated and boosted the

free market structure. There are some hurdles in speedy implementation of such legislation.

Such legislations are to be in line with international scenario.

3

This research examines and analyses the Indian law, Model Law and foreign legislation to

find out whether Indian law is suitable enough to cope with the challenges posed by

Liberalization, Globalization and Privatization.

Relevant case laws are given where ever it is felt necessary. Indian cases are dealt under the

related topic.

6. Proposed Methodology

There is lack of literature on the particular topic of ‘second generation economic reform’

which puts researcher in the depth of what could be second generation economic reform and

its legislative perspective. It has made him to depend more and more on primary sources like

official documents of IMF, World Bank, legislation. Now realizing the benefits of the second

generation economic reform for India, it becomes a task for the researcher to critically

analyze the concept and to bring out the legal perspective of the economic reforms and the

role of legislative policies played in it. Taking into account the short comings of nondoctrinal

study viz. time consumption, thus doctrinal study of this research would be

efficacious.

This study undertaken is a doctrinal research which involves the collection of data from

primary sources as international conventions, treaties, Model Law, official documents of

IMF, World bank and concern legislation; secondary sources like books written by authors

and articles found in journals, magazines and websites. The data collected will be having

bases from case laws, research paper, encyclopedias and e-sources like Westlaw

international, LexisNexis and various official sites of IMF, World Bank and eventually to

navigate the conclusions and suggestions on the aforesaid study.

7.Tools of the Research

In the present context various tools both primary sources viz. official documents of IMF,

World Bank and concerned legislations, secondary sources, like books written by authors and

articles found in journals, magazines and websites and text books, judgments, articles, esources

etc. are used to aid and study the subject in all dimensions.

8.Sources of Tools

4

For the aforementioned tools various resources accessed were Library, Internet, News

Paper, Periodicals etc.

9. Review of Literature

•Author Dutt and Sundaram have discussed ‘Second Generation Economic

Reform’ in very brief. The necessary issue involved in the second generation

economic reform is dealt with. The book also deals with the various economic

policies adopted after independence period. Terminology requires to be known for

analysis of economic reform is also discussed. Indian perspective of Second

Generation Economic Reform and the utmost priority in reform path is pointed

out1.

•India year book 2009, published by Ministry of information and broadcasting has

dealt with the whole history of economic reform. Various fact and figures

mentioned in book has helped to understand the success and failure reform policy.

Various legislations like MRTP, FERA and their preceding versions are explained

in brief. This book is an authoritative in elucidating the policy of government

without any bias2.

•Bhattacharya (Dhires) dealt with study of economic Policy of India. He has

pointed out the radical shift of economic policy in 1991. The reasons of radical

shift of economic stance are mentioned out. Author has discussed the policy in

detail according to government3 .

•Grdhari D.G. dealt about the globalization of Indian economy. Author has

pointed out the reasons for globalization and outcome. The globalization and its

possible perils are also stated. The role of International organization in starting the

new era of globalization has also been discussed in brief4.

1DUTT AND SUNDARAM , Indian economy,ed.2005.

2 India 2009, Ministry of information and broadcasting,2009.

3 BHATTACHARYA (DHIRES) ,Concise History of Indian economy.

4 GIRDHARI D.G., Globalisation of Indian economy, Ed. 2005.

5

•Author Jain Gopal Lal, which contains the comparative study of the economic

phase. The concept of development economics has been mentioned. The history of

developmental economics has been pointed out at length stating the requisites of

it. It is worth mentioning that the author has pointed different perspective of

growth and development from different economist view. The recent concept of

sustainable growth has also been discussed5.

•Author Kapila uma, this book contains several independent chapters which are

very helpful for every researcher who is doing research on economic reform.

Author chose number of areas that commonly create hurdles in implementation of

economic reform. The interrelated problems about economic reform and

economy6.

•Phillip depicted the changing face of economy. Further it reflects growing subjects

of liberalization and globalization. One such important area is the use of

globalization as a tool in economic transformation7.

•Mukherjee A.K has dealt with study of hurdles in speedy implementation of

economic policies. Author has discussed various cases and its landmark impact on

economic policies of country. Legal aspect of economic policies has also been

discussed8.

•Patel I.G has presented an outline of economic reform developments, Processes

and Resources in India. It further dealt with expectation of international

organization on economic reform. And it has also highlighted the constraint in

India’s reform imperative9.

5 JAIN GOPAL LAL ,Economic Growth And Development , 1st Ed. 2000

6 KAPILA (UMA),Understanding The Problem Of Indian Economy, 2002 .

7 PHILLIP, Liberalization And Globalization When And Where” by 3rd Ed. 2000

8 MUKHERJEE A.K ,Aspect Of Some Economic And Constitutional Problems Of India

9 PATEL I.G ,Economic reform and global change, 2000

6

•Author Jomos K.S and Ben Fine has given information about the Washington

consensus and the reason for its emergence and failure. They have also discussed

the post Washington consensus. The Stiglith view about Washington consensus

and his new vision have also been mentioned ’. In preface author very rightly

suggested the distinction between Washington consensus and post Washington

consensus(Second generation of economic reform) 10.

•Ramayya clearly gives the basic structure of the establishment of NCLT and

NCLAT.It also gives comment on every newly amended sections. This book is

very helpful to discuss about how the High Court still is having basic powers to

deal with the company matters as discussed on page 318 of this book as ‘Writ

jurisdiction is not affected.’

This book also gives an idea about how the Independence of the Judiciary is not

affected by the establishment of this Tribunal by giving case laws which clarifies

that assistance by the experts is not considered as an Interference in Judiciary.

Also this book discusses about the principle of Natural Justice and how it relates

with the concept about Tribunal. So this book is very helpful to understand the

basic concept of research.

But this book does not discuss about practical aspect with regard to Company

Law Board which includes loopholes in exercise of power and procedural

aspect. Though Ramayya gives the idea about National Company Law

Tribunal but he does not give the reason why there is need of such vast power

to the Tribunal which is a matter of concern for this Research11.

•A Decade of Economic Reforms in India : The Past, The Present , The Future

Edited by Raj Kapila and Uma Kapila, Academic Foundation, 2002. Various

articles of distinguished economist has helped to understand priorities in

Indian economy and possible challenges put forth by globalisation,

liberlisation and privatisation. Topics like Economic reforms agenda, before

and after ten years of economic reforms, Economic reforms: a policy agenda

for the future, Economic reforms : a medium term perspective

10 JOMOS K.S AND BEN FINE, The new development economics –After the Washington consensus.

11 RAMYYA ,GUIDE TO THE COMPANY LAW , 16th ED. 2006

7

recommendation of Prime Minister’s economic advisory council are dealt

with which gives insight to reform path12.

•Competition Law :-Emerging Trends written by Prasad T.Satynarayan has dealt

with the need of competition law in India and global trends which are required

to be incorporated in Indian law. Author has also emphasized on the necessity

to change the competition policy as important component in reform path.

12 RAJ KAPILA AND UMA KAPILA,A Decade of Economic Reforms in India : The Past, The Present , The

Future , Academic Foundation, 2002

8

CHAPTER II

Overview of Second Generation Economic Reform.

The Indian economy currently stands among the world’s fourth largest growing economy in

terms of purchasing power parity and holds distinction of being a key contributor to Asia’s

balance of payment surplus13 .India’s economic development has tremendous success for the

country with the global image. 8% growth rate of India’s national income for consecutive

years is a true indicator of its growth story.

Economic policy of any nation is a powerful instrument on the part of policy makers to

direct the economy in the desired direction if formulated such a policy properly and

implemented effectively. The Indian Economic Policy is formulated keeping into

consideration India’s immediate as well as long term economic requirements. The India’s

Economic Policy adopted so far has given rich dividends. All the credit need to be given to

reform policy. The change from 1956 industrial policy which was based on Nehruvian

economic policy to the new industrial policy of 1991 has played a significant role in

economic boasting. One of the reason for this radical departure is the condition of Indian

economy in 1991. It had reached a stage of deep crises brought by Gulf war, lack of financial

discipline, failure of Monsoon and bunching of external payment obligation. India was for

first time close to committing default in its international commitments. India’s credit ratings

were downgraded and could not borrow from external commercial markets. The annual rate

of inflation touched 17%by August 1991. Foreign exchange reserve had plummeted to little

above 1 billion dollars barely sufficient to meet the import bill for a week14.

It was in this back drop, India launched the new economic policy announced in Dr

Manmohan Singh’s 1991 budget. Initial phase of reform, more emphasis was given on

stabilization and bringing Indian economy on the track was the short term objective. To have

structural adjustment programme was the medium to long term objective.

In essence it herald the era of liberalization which led to privatization and globalization. The

openness in economy was a radical change from earlier Indian economy which was

characterized by pervasive controls on all aspects of market- functioning of industrial

enterprises—entry, capacity expansion, exit, pricing and distribution15.

13 India year book 2009,Minstry of information and broadcasting 2009pg 124.

14 C. RANGARAJAN ,Decade of economic reform , pg 147,Vol 1 2000.

15 RUDDAR DUTT,Indian Economy, pg 357,2006 .

9

Multilateral institutions such as the World Bank and the WTO have exerted pressure on

governments to change official ideologies and adopt market-friendly liberalization policies16.

It would be fair to state that there was no coherent institutional road-map that Indian

reformers had in mind when the process of reform began17.The overall policies were shaped

by the “Washington Consensus” model.

Firstly, this meant focusing on reducing the fiscal deficit and downsizing the allencompassing

role of government in economy. The original intent of industrial and trade

policies were abolition of controls and trade liberalization, and these were pursued

vigorously. It was only during the mid-90s that institutional change relating to governmentbusiness

relations came into the policy radar. The need for better regulation in several

infrastructure sectors became apparent after the failure of efforts to disinvest in and to

privatize some large public sector infrastructure enterprises.

Secondly, policy makers began to refer to regulatory institution building and

associated legislative enactments as “Second Generation” reforms. Since then, there has been

a steady focus on the institutional dimension—in particular with respect to the establishment

of a number of regulatory institutions. The institutional framework governing the regulation

of business enterprises may well take a decade to attain mature stability. It is important to

appreciate the fact that this process of institutional reform is not being driven by any

particular political agenda18. It has acquired a momentum of its own. Different political

coalitions have ruled the Central government since 1991 without substantially reversing the

direction of institutional evolution.

The benefit of globalization and change in economic structure can only be reaped by proper

institutional and legislative framework .Second phase of economic reform is none the less a

march towards the achieving the objective of creating a proper frame work.

The process of institutional building which started in mid of 90’s now has been termed as

Second Generation Reform and as these institution has pivotal role to play in economics of

country, this whole process is part of Second Generation Economic reform. The initiation of

Second Generation Economic reform has its roots in Washington consensus. The process of

reform is continuing. What is right for economy today may not be the same after some

period. So it is worth important to analyses the reform path.

16 GREG BACKMAN,Globalisation tem it or scrap pg 82

17 C. RANGARAJAN, Decade of economic reform ,pg 122

18 India year book 2009,Minstry of information and broadcasting,2009.pg 561

10

The role to be played by law in economics is important. Though, Economics and law target

different things; while former focuses on maximizing individual benefit, the latter states that

present resources should be equally distributed among all sectors of society.

They have now become interrelated. After globalization and liberalization policies have

turned world into single market. India accepted globalization, liberalization as means to boast

economy and at last achieve poverty reduction and increase standard of living .This can only

be done by having proper reform path. Thus there have been need felt to design laws which

will reap the fruits of globalization. Only opening up economy is not enough to achieve the

commanding heights of economy. Second generation reforms are more than a response to the

fact that weak markets and institutions reduce gains from privatization and market opening.

Second-generation reforms can contribute to a longer-term, comprehensive alignment of

state, market, and civil society, which is required to maximize the potential benefits of

vigorous market competition. It mandates from state to find ways to effectively protect other

collective interests through better institutions and policy tools, market incentives, and

cooperation with civil society19.

These kinds of reforms are needed to sustain and consolidate the move to market-led

growth, which is evolving so rapidly that it is straining the capacities of lagging or obsolete

institutions to perform important functions such as providing security, repairing market

failures, and maintaining democratic legitimacy within the policy structure. In other words,

the central problem to be addressed by second-generation reforms is variable institutional

adaptation.

There are many players involved in the process of institutional building and enactment of

legislation. Legislature has to play proactive role by responding according to the needs of

competitive market and thereby enacting legislation with the time frame. Legislature more

often neglects the enactment of laws which regulate the market.

Legal process, spearheaded by the judiciary, plays a key role in channeling the evolution

towards a stable and rational regulatory framework. The judicial system upholding rule of

law is crucial. The judiciary, through legal processes, is playing a major role as a catalyst

towards the emergence of a new framework of government-business relations.

As law student it is important to find out —what role do legal institutions and legislative

policy play in boasting second generation economic reform—

19 www.imf.org/External/Pubs/FT/seminar/1999/reforms/jacobs.htm accessed on 15th JAN2010.

11

The second question is, to what extent law plays a role in economic activity and in harnessing

the benefits of globalization,

The third and final question is what steps if any can be taken to encourage the emergence of

the legislative framework which establishes legal institutions required in development of

country where those institutions have not evolved?

12

Chapter III

Second Generation Economic Reform:- Concept And Evolution

3.1 Introduction

The term `Second Generation Reform’ was coined by the IMF in the context of the

globalisation of the world economy, to benefit developing countries to a degree with

an increase in trade and investment20. Second Generation Reform would act as a

protective shield from certain problems resulted from liberlisation of economy. These

are of sufficient magnitude to result in near or complete marginalization of state if not

resolved.

The concept of second generation reform was evolved to insulate developing countries from

marginalisation in the wake of Globalisation. Globalisation would not only enhance the

benefits of sound economic policy but also acerbate the costs of bad policy. Developing

countries should adopt a policy, the effectiveness of which can be tested against the criterion

of whether the state is fulfilling “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.21”

3.2CONCEPT OF ECONOMIC REFORMS

The term ‘Economic Reforms’, has meant different things in different countries in different

situations. The reforms ultimately refer to the behavioral pattern in a given economic system

and not just to changes in economic policies called as policy reforms22 . It is the interaction

between the policy reforms and the changes in economic system that determines the success

or failure of the reform process. The term is also used to describe “significant changes in a

sizeable number of economic policies as part of a package of policy changes”. Thus the term

refers not to ad-hoc and piecemeal changes in policy but to fundamental changes with respect

to the extent of state intervention, greater reliance on market forces, institutional and

administrative changes, stabilization effort and removal or relaxation of controls.

20 www.thehindubusinessline.com/2000/02/28/…/122820pr.htm accessed on 15th Jan 2010

21 www.imf.org/External/Pubs/FT/seminar/1999/reforms/jacobs.htm accessed on 15th 2010

13

Second Generation Reform or Post-Washington consensus refers to major steps which are

being taken in path of structural adjustment or Washington consensus.

These may be summarized as follows –

Financial sector reforms23 :-Opening up of the insurance sector, restructuring the banks and

divesting government’s control on the nationalised bank in tune with Narsimhan committee

report(II)recommendations .

Legislative Action :- Amendment to Companies Act , passing up of Money Laundering Law

, setting up of competition commission in place of MRTP Commission , review and weeding

out of obsolete and archaic laws and regulation , establishment of institution required for

promotion free market structure .

Tax reform;- Introduction of full-fledged VAT ,Stricter compliance of existing tax laws

Social sector reform:- Effective safety net before restructuring industrial sector

,comprehensive old and social disability security ,spread of elementary education among

under privileged.

Major initiative are needed in legislative framework to root out main bottleneck in

utilizising the full potential of Globalisation,privatisation and liberlisation of economy.

3.4 Background of Economic Reform

Before directly moving on to the objective of second generation economic reform , it would

be appreciable to have quick review of India’s reform path .The reform path adopted only

suggest us the expected adaptation owing to our objective .The reform history can be divided

into three stages :-

Ist stage – 1950-1991 Nehruvian Phase

1991 to Mid 90’s First generation economic reform

Mid 90’s till now ongoing second generation economic reform

3.4.1 1950-1991 Nehruvian model

After independence ,we have accepted Nehruvian model which gave more stress on import

substitution24 .The early phase of our economy was a restrictive approach , more reliance was

placed on acquiring self sufficiency which thus reduced the need to have import . The major

industrial Policy and legislation in post independence period highlights the agenda of

government in regard to the nehruvian model.

23 RUDDAR DUTT,Indian economy, pg 452,2005.

24 Patel I.G Economic reform and global change” 2000 pg167.

14

The Industries Development and Regulation Act 1951 prescribed the requirement of

industrial licenses .More stress was given on state intervention .State intervention was done

under the pretext of unwillingness and incapability of private entrepreneurs for investment.

So public investment was the only means utilized for strengthening of economy25.

3.4.1.1 Industrial Policy Resolution 1956 (IPR1956).The second plan proposed on massive

industrialization with heavy industry in public sector .With the adoption of goal of socialist

pattern which demanded that the commending heights of economy should be controlled by

the state.

Industrial Policy Resolution 1956 expanded the licensing list which existed in 1948. The

essence of policy which continued with modification for almost two decades was that while

public sector had primary responsibility for rapid industrialization in key sector .Private

sector had complimentary and supplementary role .

3.4.1.2 Industrial policy Statement 1973

The new policy was made in the context of series of socialist policies including Bank

Nationalization 1969 and Monopolies Trade Practices Act 1969. While it reiterated the

philosophy of 1956. The statement made licensing stringent for large industrial houses. The

recognition of joint sector was another step . A secretariat of industrial approval was also

established for single window clearance.

3.4.1.3 In 1977 the Policy Statement emphasised on small and cottage industries and dereserved

certain industries for these sectors. Investment limit of 1lakhs was recognized. The

statement had bias against large scale industries. The establishment of District Industries

Centre was another notable reform26.Borrowing for Large scale industries was restricted; they

were to find resources from internal sources .

3.4.1.4 Industrial Policy Statement 1980.

It sought to reverse the ideological bias of 1977 statement27, by reaffirming its faith in

IPR1956. However it was outward looking in its commitment for liberalization of licensing

and export promotion .It advocated the coordinated development of small and large industries

.Industrial sickness was sought to address by the devising early warning system.

3.5 1991 to Mid 90’s First Generation Economic Reform.

25 RUDDAR DUTT, Indian Economy pg.357,2005.

26 India year book 2009 ,Ministry of information and broadcasting 2009pg561

27 RUDDAR DUTT, Indian Economy ,pg.357,2005.

15

The departure from earlier inward looking policy was changed in 1991. This was marked

with implementation of New industrial policy 1991 (NIP).

NIP 1991 was announced in wake of liberalization and stablisation that marks the virtual

departure from the IPR 1956 and de-licensed Permit Raj that it had spawned. The emphasis

was on deregulation and opening up.

Important measures under NIP1991 were as follows-

•Abolition of licensing for all industries except 15, which affect strategic or

environmental interest. This list has been further brought down to 6. The six

industries which still require an industrial licence are Distillation and brewing of

alcoholic drinks, cigars and cigarettes, electronics, aerospace and defence equipments,

industrial explosive hazardous chemicals, drugs and pharmaceuticals28.

•Drastic amendment to MRTP Act to eliminate approval for expansion.

Phased manufacturing program which sought a time table for indigenisation ,

abolished. Industrial location of policies amended to provide for restriction to

opening industries in large cities. Apart from arms and ammunition, atomic energy,

railway transport and Defence equipments, no other manufacturing sector is reserved

for public sector .Disinvestment of government’s share holding in PSU’s.

•Approval of Foreign Direct Investment upto 51 % in high priority industries without

preconditions. Prior clearance required if foreign investment does not fall in the above

category. Automatic clearance of foreign technology agreement in high priority

industries.

The First Generation Reforms(1991 to Mid of 90’s ) results have been a triumph of

competition. The wealth, innovation, and competitive advantage created by these reforms

launched a multi-decade process of market-oriented reform that is now a worldwide

phenomenon affecting the lives of billions of people.Subsequent to NIP 1991 several

procedural changes have been made .And with this the second generation reform was started .

Second generation reform would supplement basic reform structured on the achievement of

balance of payments viability, reduction of government deficits, trade liberalization and a

reduction of the role of the state. As the former IMF Managing Director, Mr. Michel

Camdessus, put it, “we have learned that this first generation reform is not, by itself, enough

28 India year book 2009 ,Ministry of information and broadcasting 2009pg561

16

either to accelerate social progress sufficiently or to allow countries to compete more

successfully in global markets.”29

3.6 Analysis of Second Generation Reform

It would be worthwhile to examine second generation reform in somewhat greater detail.

There are two main points:

The first generation of reforms was in phase of a transition and hence there was market-led

growth;

Whereas, second generation reforms are necessary to re-align fractured relations between the

institutions of the state, the market, and civil society to sustain market-led growth and boost

potential social welfare30.

The “First Generation Reforms” initiated in 1991 were crisis driven. The crisis in the balance

of payments and mounting fiscal deficits (both at the level of the Central and State

Governments) prompted the Congress-led Government under the stewardship of Mr. PV

Narasimha Rao to initiate economic reforms. At that time, the term “First Generation

Reforms” was not used, but after a decade of the working of the reform process, there is talk

about “Second Generation Reforms”. By implication, it is being made out that the earlier

phase of reforms was ‘First Generation Reforms”.

The basic question which is more in the nature of semantics, relates to the use of the word

‘generation’. The word ‘generation’, according to the concise Oxford Dictionary implies the

average time in which children are ready to take the place of their parents, usually

reckoned at about 30 years. The word ‘generation’ is also used with reference to technology

development, for instance, fourth generation computer. This marks a significant and critical

stage of technological development. Obviously, the use of the term ‘generation’ does imply a

time dimension. It is equally true that it does imply a significant change. For instance, the use

of the term, ‘generation gap’ does imply a significant change in the pattern of thinking

between the children and their parents. Since economic reforms were born out of an

economic crisis, the prevailing thinking among the people, the Government and the policy

makers had a keen desire to go in for a programme of structural adjustment which should

help to strengthen the process of stabilization by pulling the economy out of the crisis of

balance of payments and fiscal deficits.

29 www.thehindubusinessline.com/2000/02/28/…/122820pr.htm accessed on 15th Jan 2010

30 www.imf.org/External/Pubs/FT/seminar/1999/reforms/jacobs.htm accessed on 15th 2010

17

The use of the term ’Second Generation Reforms’ may be considered appropriate in the sense

in which the term ‘Second Generation/third Generation Computers’ is used, and thus it may

be considered as a watershed so as to transform the reform process from a crisis-driven to a

development-driven reform. In that sense the time dimension may be ignored. But if instead

of a qualitative change, the reform process only implies the intensification of the marker

forces, then the use of the term ‘Second Generation Reforms’ may be considered

inappropriate. For instance, the ASSOCHAM document ‘Strategizing Second Generation

Fiscal Reforms’ (August 2000) only intensifies the Liberalization, Privatization and

Globalization (LPG) process and as such it would be more appropriate to describe it as

‘Second Phase of Economic Reforms’, rather than ‘Second Generation Reforms’. Whether

one describes the rethinking on the reform process as ‘Second Generation Reforms’ or

‘Second Phase of Economic Reforms’ is an issue related to semantics. The more important

issue is whether there is a basic need to rethink about the strategy of development as being

propagated now under economic reforms. If this is so, the process of implementation of a

decade of reform measures must be kept in view.

The second generation of reforms does not distract attention from the urgent and difficult task

of moving forward with the first generation of reform; the transition from state-led to marketled

growth. First Generation Reforms aim at revitalizing market functioning through

economic liberalization and market opening, including withdrawal of the state from

ownership and from intervention in market entry, market exit, and pricing.

Liberalizing trade, empowering market competition and reforming government institutions

are mutually supportive elements of the first generation of reform. Stable macroeconomic

policy, flexible labor markets, appropriate regulation of capital markets, and complementary

structural reforms provide a supportive environment, and often a context of strong growth,

that facilitate adjustments that follow from regulatory reform.

Second generation reforms are more than a response to the fact that weak markets and

institutions reduce gains from privatization and market opening. Second-generation reforms

can contribute to a longer-term, comprehensive alignment of state, market, and civil society,

which is required to maximize the potential benefits of vigorous market competition. It

mandates from state to find ways to effectively protect other collective interests through

better institutions and policy tools, market incentives, and cooperation with civil society.

These kinds of reforms are needed to sustain and consolidate the move to market-led growth,

which is evolving so rapidly that it is straining the capacities of lagging or obsolete

institutions to perform important functions such as providing security, repairing market

18

failures, and maintaining democratic legitimacy within the policy structure. In other words,

the central problem to be addressed by second-generation reforms is variable institutional

adaptation.

It mandates to find ways to effectively protect other collective interests through better

institutions and policy tools, market incentives, and cooperation with civil society. For e.g.

Competition Act 2002 represented landmark in second generation reforms process31. The

Act, is modern competition legislation, that seeks to prohibit anticompetitive activities by

enterprises in the market place. The decades of government controls have resulted in a very

weak competition culture in the economy. Besides, there are several areas of the economy

which are still subject to a variety of government controls; in these sectors a truly competitive

market is still to evolve. Thus, while competition law seeks to prevent the market from being

undermined by enterprises, competition policy seeks to remove the anticompetitive effects of

the government and regulatory policies. It is also a tool towards better governance since it

advocates lesser control and discretionary powers in the hands of Government

functionaries32.

The thrust of First Generation Reforms was to enhance market capacities, with little attention

to state capacities. In Second Generation Reforms, the test for successful reform should be

that it does not erode but, rather, enhances the capacity of societies as a whole to promote

public welfare. What does this mean for the state? First, it means that, although regulation

will continue to be an important tool for advancing public policies, the state must improve its

policy capacities to diagnose problems more precisely, assess alternative solutions, and wield

a wider range of more effective and lower cost regulatory approaches and alternative policy

tools. Second, it means that governments must join forces with market and civil society

institutions, that is, co-operation with non-state institutions is needed to meet policy

challenges and public demands.

3.7 Comparative Analysis of First and Second Generation of Economic Reforms

Stage I (First Generation

Of Economic Reform)

Stage II (Second Generation Of

Economic Reform)

Priorities

Reduce inflation

Improve social conditions

Increase international

31 Jayantkumar , Competition law in India, pg 92

32Prasad T.Satyanarayan, Competition law and emerging trends,pg 79

19

Restore growth competitiveness

Maintain macroeconomic

stability

Reform Strategy Change macroeconomic

rules

Reduce size and scope

of the state

Dismantle institutions of

protectionism and states

Create and rehabilitate institutions

Boost competitiveness of the

private sector

Reform production, financing,

and delivery of health care,

education, and other public

services

Create “economic institutions of

capitalism”

Build new “international

economic insertion

Typical Instruments Drastic budget cuts and tax

reform

Price liberalization,

Trade and foreign

investment

liberalization

Private sector deregulation

Easier” privatizations

Reform of labor legislation and

practices

Civil service reform

Restructuring of government,

especially social ministries

Overhaul of administration of

justice

Upgrade of regulatory

capacities

Improvement of tax collection

capabilities

Sectoral conversion and

restructuring

“Complex” privatizations

Building of export promotion

20

capacities

I. Principal

Actors

Presidency

World Bank and IMF

Private financial groups

and foreign portfolio

investment

Presidency and cabinet

Public bureaucracy

Judiciary

Unions,

Political parties

Media

State and local governments

Private sector

Public Impact of

Reforms High visibility

Immediate

Medium and long term

Low public visibilityCentral Banks

Economic cabinet

Administrative

Complexity of

Reforms

 Moderate to low Very high

Nature of Political

Costs

 “Temporary corrections”

widely distributed among

population

Permanent elimination of

special advantages for specific

groups

Main Governmental

Challenge

Microeconomic management Institutional development

3.7 Objective:-Second generation reforms that both open up new areas for analysis, and

require re-examination of current concepts of desirable reform. The objective of second

generation reform as drawn out from various economist and international institutions33 are-

•New or adapted regulatory institutions supported by civil society are

required to maximize the potential benefits of vigorous market competition.

33 www.imf.org/External/Pubs/FT/seminar/1999/reforms/jacobs.htm accessed on 15th Jan2010

21

•State must find ways to effectively protect other collective interests through

better institutions and policy tools, market incentives, and cooperation with

civil society.

•State must avoid set of rigidities.

•State must find ways to credibly commit to policies consistent with marketled

growth.

•The touchstone of democratic legitimacy and the rule of law must be visibly

sustained as institutions and the policies change.

3.7.1. New or adapted regulatory institutions supported by civil society are required to

maximize the potential benefits of vigorous market competition.

Some economists have stressed the role of institutions in economic growth since the 1980s,

but this key question gained popular currency only in the last few years, because it is based

on a fundamental conceptual shift from a negative to a positive view of the role of the state.

At the core of the new institutional regime are competition, consumers, and corporate

governance institutions. The first generation of reforms created new competition problems in

some sectors, and in others expanded the scope for market abuses. Privatization of state

monopolies often created dominant private firms. In many sectors, deregulation attracted

substantial entry, followed by consolidation and concentration.

Competition policy is the principal component of the economic “constitution” that should

regulate new market relationships34. More than that, competition principles provide an

enduring framework for state actions throughout its functions. Abandoning concepts of “fair

competition” opens the door to many forms of state intervention. This conception does not

prescribe a laissez faire “struggle for survival,” but encourages rivalry while preventing

private firms from engaging in collusion or monopoly at the expense of the public. There is a

need to have Strong and effective competition institutions. To support consistent state/market

relations across the economy, competition principles should be built into the legislative fabric

of regulatory regimes. Policies pursued through regulation should be conceived as promoting

competition, rather than substituting for it, as much as possible.

In its largest sense, transparency can be understood only in terms of the relationships between

state, market, and society, which means, the organization of how the state projects its power.

34 PRASAD T.SATYANARAYAN, Competition Law And Emerging Trends,pg 79

22

Among all the structural reforms now underway, is an increase in transparency which is

likely to be the most fundamental and far-reaching in changing relationships.

Establishing new relations with market players through new instruments and structured

communications is also part of second generation of economic reform

Opening markets to international market players should be followed by improving due

process and administrative certainty which further would promote free market structure.

One of the most highly regarded institutions of modern regulatory governance is the

independent regulatory body. Dozens of these bodies have been set up in India in the last few

years alone. This trend is fueled by WTO agreements, by reforms in Europe and by policy

advice by the World Bank, the IMF, and other international institutions35.

The reasons for setting up these bodies is to shield market interventions from political

interference and to improve transparency, stability, and expertise are well known. The market

impacts of market-opening have been greatest in precisely those sectors where independent

regulators are most prevalent.

Independent regulators can reduce political will for real reform if governments believe that an

independent regulator can substitute for structural change in privatized monopolies. The

Securities Exchange Board of India is the best example where independent regulator has

shown far reaching impact on capital market36. Market structure which is evolved by efforts

of SEBI is more advanced and efficient than some of the developed nations. Electronic

trading in share is best example of SEBI leadership.

3.7.2. The state must find ways to effectively protect other collective interests through

better institutions and policy tools, market incentives, and cooperation with civil society.

The role of State is important in market economy. In First Generation Economic Reform it

was seen that the role of state was reducing. Liberalization of economy was seen as the

withering of role of state. The role of state in times of recession has increased manifold. State

cannot remain mere spectator in economy. The state has to perform the role of facilitator and

efficient regulator. The bailout packages was a tool used all round the world to protect the

market stakeholders. Thus need of protecting the market can be perceived as welfare agenda

of state. Till recently the role of state in capitalist economy was different than socialist

35 C. RANGARAJAN, Decade of economic reform ,pg 122

23

economy. In capitalist economy it was accepted fact that to do business is not the business of

government. Government intervention is minimum in capitalist countries. But it has changed

after globalization. After recession, in all economies the need to develop efficient regulatory

setup and institutional buildup was felt. The reason of economy failure during recession can

be attributed to the absence of efficient institutions. The state is not withering away in the

face of markets37. Perhaps as a natural consequence, the role of the state is growing in

insuring citizens against risks as dynamic markets increase insecurity and of welfare effects

of aging societies.

3.7.3. The state must avoid set of rigidities –

Regulatory rigidities are commonplace in our countries and many countries are now changing

laws and regulations established decades or even centuries ago for very different conditions.

Governments have forgotten the reason why many laws exist. In Australia, a Housing Code

that mandated a minimum distance between bathroom and kitchen was based on a short-lived

theory dating from the last century that smells carry disease, yet the regulation was changed

only in the 1970s. An eighteenth century ban in the United Kingdom on the sale of game

meat except in winter months was intended to prevent poisoning before refrigeration and was

lifted only in the 1980s38.

Regulatory rigidities are enormously costly. They slow innovations and force resources into

less valuable uses. In Japan, failure to update regulations governing medical devices means

that global manufacturers retain old production lines only to supply the Japanese market with

lower quality products at higher prices than the rest of the world39.Governments commonly

underestimate the velocity of change. Countries that respond too slowly in the

communications industry simply lose new investment, since the product cycle is 6-8 months.

One-half of the products that GE makes did not exist five years ago. In the United States,

regulatory reforms unleashed a level of innovation in products, services, production methods,

and corporate organization that is responsible for most of the economic gains, and the

importance of these effects demonstrates how much the regulatory structure had repressed

innovation in many sectors.

38 See OECD (1997), The OECD Report on Regulatory Reform (Paris), and OECD (1995) OECD

Recommendation on Improving the Quality of Government Regulation, with the Checklist for Regulatory

Quality (Paris). Also available on the OECD website at http://www.oecd.org/puma/regref/

39 OECD (1999), Regulatory Reform in Japan

24

In India also the old, obsolete laws were in force for many years. Like M.R.T.P which was

drafted in 1969 suitable for command and control era. After liberalisation though

amendments were made to bring M.R.T.P in tune with changing scenario but were limited to

promote competitive market. There were many rigid provisions in MRTP40 which needed a

review. But it took 2 decades to put a new legislation in place. Second Generation Economic

Reform expects that such type of rigidity should be avoided.

3.7.4. The state must find ways to have policies consistent with market-led growth.

State cannot rest by creating only the institutional framework. There is always a need of

innovation in policies ,so as to keep pace with changing phenomenon. There is always a need

to have policies consistent with market growth. Second Generation Economic Reform not

only expects to have institutions and legislative framework but such framework should adapt

itself with the market led growth. This is to create market with sustainable growth.

The recent Satyam scandal highlights the importance of securities laws and corporate

governance in emerging markets. Mounting evidence suggests that weak corporate

governance slows economic development. The Satyam scandal provides insight into the

problems that emerging markets face when they transit from locally controlled corporations

to globally traded corporations. There is a broad consensus that emerging market countries

must strive to create a regulatory environment in their securities markets that fosters effective

corporate governance. In addition to the new SEBI regulatory requirements, the Indian

Ministry of Corporate Affairs is drafting a new corporate code for Indian publicly listed

companies. The Ministry of Corporate Affairs expects to complete the new code by

December 200941. The new code will apply along with the regulatory obligations imposed by

the SEBI. Adherence to the Code will be voluntary; however, every company that deviates

from the code’s requirements must disclose the deviations to the ministry. The Ministry of

Corporate Affairs anticipates that the new code will impose more stringent disclosure

obligations than the SEBI currently requires.

The role of state as facilitator and regulator needs to find out ways to have policies resulting

into growth and factor distorting growth should be prevented.

40 discussed at length in Chapter 5

41www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf accessed on 20th Feb

2010

25

3.7.5. Democratic legitimacy and the rule of law must be visibly sustained.

The evolution, endurance, and creation of institutions in state, market, and society comprise

the main focus of second-generation economic reforms. Changing state/market relations is

not a zero-sum game in which markets expand at the expense of the state.

Institutions and legislative framework which has democratic legitimacy should be created.

This is necessary to build a faith of private players in institution and the legislative setup.

This will encourage foreign stakeholders to pose faith in the institutions. Such institutions and

legislative enactment should pass test of rule of law. Hon’ble Supreme Court has played a

pivotal role in upholding rule of law and protecting basic feature of constitution. Many

enactments which were part of second generation reform were challenged under Article

32,226 on the ground that they violate the mandate of Constitution and hence National

Company Law Board42 and Competition Commission43 were challenged in Madras High

Court and Supreme Court respectively.

The major benefits which are intended to harness by way of second generation reforms have

been44:

•Boosting consumer benefits by reducing prices for services and products such as

electricity, transport, and health care, and by increasing choice and service

quality.

•Reducing the cost structure of exporting and upstream sectors to improve

competitiveness in regional and global markets.

•Helping to increase employment rates by creating new job opportunities, and by

doing so reducing fiscal demands on social security, particularly important in

ageing populations.

•Maintaining and increasing high levels of regulatory protections in areas such as

health and safety, the environment, and consumer interests by introducing more

flexible and efficient regulatory and non-regulatory instruments, such as market

approaches.

42 Thiru R. Gandhi, President, Madras Bar Association v. UOI Comp.cases.51.,Mad.H.C(2004)

43 Brahm Dutt v. Union of India (2005) 2 SCC 431

44 The Ministry of Corporate Affairs expects to complete the new code by December 2009

26

Addressing the key challenges in the second generation of reform by way of building new

market institutions, meeting collective interests in dynamic markets, increasing the flexibility

and responsiveness of our national governments, reducing the costs of moral hazards, and

preserving the effectiveness of the state and the democratic rule of law thisw will reduce the

risks and costs of the profound changes moving across the globe, partly a consequence of

First Generation Reforms.

27

CHAPTER IV

NEED OF SECOND GENERATION ECONOMIC REFORM.

4.1Introduction:

The development debate has focused for more than a decade now on the social and economic

costs and benefits of global integration and on how to make globalization work

for all. Day-to-day activities are increasingly influenced by events happening on the other

side of the globe, while the practices and decisions of local groups can have significant global

echoes45.

Whether we like it or not, economic globalization has become a key feature of the life of

social and economic actors all around the world. Once we have acknowledged that

globalization is a fact, it is crucial to re-open the debate on the paths of sustainable

integration. Far from the one-path model of the Washington Consensus, structural adjustment

programmes should reflect the diversity of socio-economic contexts and the specific

conditions and needs for a pro-poor and pro-social justice integration of the countries of the

world, especially the poorest, into the global economy.

The current imperatives are sustainable human development and the fight against poverty and

inequalities. This requires, on the one hand, appropriate policies at national and local level for

an optimal use of globalization from a sustainable development perspective; and on the other

hand, effective economic reform that would promote human development and give

developing countries the opportunity to improve their living and working conditions.

It is the challenge of every nation to take efforts towards maximizing the benefits of

globalization and minimizing the evils of globalisation. To achieve the goals of globalization,

countries are forced to orient their policies towards growth.

The Stabilisation and Structural Adjustment Programmes introduced in India and the

subsequent Economic Reform initiatives indicate the efforts of Indian Government towards

this direction. So it is important to know about globalization and challenges it has posed

before countries and probable solutions to challenges.

4.2 Globalization :-Concept and challenges .

The World Bank defines globalization as “Freedom and ability of individuals and firms to

initiate voluntary economic transactions with residents of other countries46”. The

45 Held, D.. Democracy and the global order. Cambridge, Polity Press, p. 20. 1995

46DR S.P.GUPTA ,International Organization,pg 87

28

International Monetary Fund (IMF) defines as “the growing economic interdependence of

countries worldwide through increasing volume and variety of cross-border transactions in

goods and services, freer international capital flows, and more rapid and widespread diffusion

of technology47”.

According to Stiglitz48 “Globalization is the closer integration of the countries and peoples of

the World which has been brought about by the enormous reduction of costs of

transportation and communications, and the breaking down of artificial barriers to the flow of

goods and services, capital knowledge and (in a lesser extent) people across borders.”

In the words of Jagdish Bhagwati “Economic Globalization constitutes integration of national

economies into the international economy through trade, direct foreign investment (by

corporations and multinationals), short term capital flows, international flows of workers and

humanity generally, and flows of technology49”. In a broad sense, the term ‘globalisation’

refers to integration of economies and societies through cross country flows of information,

ideas, technologies, goods, services, capital, finance and people.

Globalization has many meanings depending on the context and on the person who is talking

about. Though the precise definition of globalisation is still unavailable a few definitions are

worth viewing,

Guy Brainbant says that the process of globalisation not only includes opening up of world

trade, development of advanced means of communication, internationalisation of financial

markets, growing importance of MNC’s, population migrations and more generally increased

mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution.

The term globalization refers to the integration of economies of the world through

uninhibited trade and financial flows, as also through mutual exchange of technology and

knowledge. Ideally, it also contains free inter-country movement of labour. In context of

India, this implies opening up the economy to Foreign Direct Investment by providing

facilities to foreign companies to invest in different fields of economic activity in India,

removing constraints and obstacles to the entry of MNCs in India; allowing Indian companies

to enter into foreign collaborations and also encouraging them to set up joint ventures abroad;

carrying out massive import liberalisation programs by switching over from quantitative

47www.imf.org/External/Pubs/FT/seminar/1999/reforms/jacobs.htm accessed on 15th Jan 2010.

48 Former Chief Economist at World Bank 1998.

49 JAGDISH BHAGWATI, Indefence of Globalisation,oxford Publication,pg 3,2005.

29

restrictions to tariffs and import duties, therefore globalization has been identified with the

policy reforms of 1991 in India50 .

The cross-border integration or connectivity aspect of globalisation has several dimensions

such as social, economic, cultural, environmental and political. Needless to state that

globalisation is a deliberately adopted economic strategy that stands on trade and technology

(2 T’s). But, the effects of globalisation are not just economic; they are social, cultural,

environmental and political. While social or cultural or political integration is inevitable in

the process of economic globalisation, they are to be treated as the effects and not the cause.

The elements such as trade in goods and services, movement of capital, flow of finance and

movement of people ensure the economic integration.

Historically speaking, globalisation is not a new concept51. There are several evidences of

integration across countries through several forms and flows of goods and services, transfer

of capital and technology, and migration of people. The 18th and 19th century evidences are

more of imperialist nation’s efforts towards the colonies and they laid their base on military

or political power. The present form of globalisation is basically trade and technology based

and driven by market power. In fact, globalisation perceives the economy and politics i.e.

market and state, as autonomous units and the nation-state as a minimalist entity. And

therefore, the process of globalisation envisages liberalisation, privatization, minimizing

economic regulations, rolling back welfare, reducing expenditures on public goods,

tightening fiscal discipline, favouring free flows of capital, strict controls on organised

labour, tax reductions and unrestricted currency repatriation. In this process, as nations come

together some sacrifice of sovereignty is inevitable, but it need not lead to surrender of

nation’s objectives and individuality.

The players of globalisation could be broadly grouped as pro-globalisation and antiglobalisation

players. The pro-globalisation players include international organisations such

as World Trade Organisation, World Bank, International Monetary Fund, The World

Economic Forum, United Nations Conference on Trade and Development, Organisation for

Economic Development and Cooperation; public affairs organisations like World Growth,

Institute of Economic Affairs, International Policy Network, Competitive Enterprise Institute

and World Business Council for Sustainable Development; and countries, institutions and

individuals receiving benefits due to globalisation. The anti-globalisation players include

50 DASGUPTA,Globalisation And Structural Adjustment,pg 24

51 GIRDHARI D.G, Globalization of Indian economy pg 43,ED 2005

30

anti-free trade NGOs, Environmentalists,Cultural Nationalists, Business Groups threatened

by international competition and left critics of capitalism52.

The supporters of globalisation argue that globalisation as the engine of growth,

technical advancement, access to international resources and their optimal use, raising

productivity, enlarging employment, increasing choice on commodities, lowering of costs,

improving standard of living, and bringing out poverty reduction along with modernisation.

Whereas, the critics argue that the causality is more and severe, widens the gap within and

between nations, exploitation of resources, decay of environment and loss of national

sovereignty.

There were measures which were taken by supporters of globalization to reap its benefits.

Starting from Washington consensus(structural adjustment) and after its failure to perform

the new set of measures were taken under the second generation reform.

The expression “Washington Consensus” came to stand for the stabilization, liberalization

and structural adjustment policies, advocated by the Bretton Woods institutions and the major

industrial countries. The various components of this policy package were summarized well

by John Williamson, who coined the phrase “Washington Consensus”, when trying to define

the set of policy reforms that most Washington officials thought beneficial for developing

countries in 199053.

The earlier IMF analysis of economic problems focused on excessive government

expenditure, over-valuation of currencies, quantitative controls over imports and negative real

interest rates54. The policies recommended cuts in government expenditure and getting prices

right. The Washington Consensus added ten new elements, which could be summarized as:

fiscal discipline, tax reform, interest rate liberalization, a competitive exchange rate, trade

liberalization, liberalization of inflow of foreign direct investment, privatization,

deregulation, secure property rights and, lastly, a redirection of public expenditure priorities

towards areas offering both high economic returns and a potential to improve income

distribution, such as primary health care, primary education, and infrastructure.

Trade liberalization involved the removal of quantitative restrictions on imports, reduction in

tariffs, the imposition of a uniform rate of tariffs, and free trade. In foreign investment, it

prescribed non-discriminatory treatment between domestic and foreign enterprises. It further

53 WILLIAMSON, J.. “What should the World Bank think about the Washington Consensus?”, in The World

Bank Research Observer, 2000,Vol.15, No. 2.

54 DR.S.P.GUPTA,International Organization,pg 85

31

stipulated the return of nationalized enterprises to private hands, the closure of loss-making

state enterprises, and a transfer of public firms to private hands. The domestic market

deregulation agenda included the establishment of free markets for goods, labour and finance.

In the 1990s, two new elements were added to secure political support for this package: the

“imposition” of local government “ownership” of the programme; and introduction of “social

safety nets”.

The objective of structural reforms was to enhance the role of market forces, thereby

strengthening the basis for strong and sustained growth. In the process, changes in the role of

the State through privatization and deregulation and external liberalization were meant

presumably to increase efficiency, and spur private sector activity in a growing number of

successfully managed economies in all regions.

However, the Washington Consensus was marked by an ideological bias towards the positive

role of liberalization in fine and the idea that market forces would respond quickly to promarket

structural adjustment programmes. Therefore, the Bretton Woods institutions tended

to over-emphasize liberalization policies in the pursuit of structural adjustment programmes,

disembedding them from a comprehensive development framework.

The lack of an integrated approach in the Washington Consensus explains why the

liberalization process, initiated in the 1980s, did not lead to deep economic structural

transformation or the expected investment and supply impact, through market mechanisms.

Indeed, one should give minimal credence to arguments involving various steps, such as,

stressed by the mainstream doctrine, of the virtuous circle regarding liberalization, structural

adjustment and growth, since each of these linkages can easily break along the

Way, particularly when austerity and instability reduce output and market incentives

directly, by-passing the resource reallocation upon which IMF programmes rely55.The

universal policy prescription from the Bretton Woods institutions was based on a revised

version of the well-known theory of the “trickle-down” that would result from the activation

of the following virtuous circle: liberalization leads to integration, which leads to economic

growth, which leads to poverty reduction. Given the strong correlation between growth and

poverty reduction, structural policy reforms were presumably designed to achieve efficiency

55 GILL, S.. “Theorizing the Interregnum: The Double Movement and Global Politics in the 1990s”, in B.,

Hettne, ed., International Political Economy – Understanding Global Disorder London, Zed Books, p. 66. 1995 .

32

and growth objectives, and also promote poverty reduction.56.The early 1990s was a period of

global utopia. The trend towards more integrated world markets was perceived as offering a

huge potential for greater growth and presenting unparalleled opportunity for developing and

post-communist countries to raise their living standards57.

In the 1980s and 1990s, the UN system was largely overshadowed by the Bretton Wood’s

institutions; which took the lead in developing policy ideas and action programmes. It was

subjected to increased pressure from some industrial countries to conform to the dominant

orthodox ideas in its technical work and counsel. This undoubtedly had a dampening effect

on the integrity and originality of work done by the UN agencies.

4.3 Results of structural adjustment programmes and need of policy review.

The past two decades witnessed a wave of economic liberalization and privatization that

swept the world. All categories of developing countries, as well as the transition economies,

sought to overhaul their economic and social policies to varying degrees. But there is a

growing realization that the new policies, even when fully implemented, did not fulfil their

promise of rapid growth and poverty reduction. External liberalization, and particularly

financial liberalization, has increased uncertainty and the potential impact of external shocks

– as we have seen in East Asia with the domestic, social and economic cost of the

international financial crisis of 1997.

In the 1980s, the international community offered structural adjustment as the answer. In

the 1990s, integration through external liberalization was the new, and only, answer. Sharp

contractions in demands, de-industrialization, the informalization of the economy and

recurrent international financial crises had reinforced the problems and harmed the poorest, in

many cases. In spite of continuing expansion in the developing countries as a whole, the

sustained economic boom in the US, the situation of the least developed countries did not

improve significantly, and in most cases economic growth failed to recover.

In the 1980s and 1990s, globalization was associated with declining growth rates as

compared to previous eras. Of 89 countries, 77 per cent – more than three-quarters – saw

their per capita rate of growth fall by at least 5 percentage points between the periods 1960-

80 and 1980-2000. Only 14 countries – 13 per cent – saw their per capita rate of growth rise

56 World Bank Implementing the World Bank’s strategy to reduce poverty. ,Washington D.C., World Bank,

pg.8, 1993.

57 IMF. 1997. “Globalization’s challenges for Africa”, in IMF Survey p. 177, Vol. 26, No. 11.

33

by that percentage from 1960-80 to 1980-2000. In Latin America, per capita GDP grew by 75

per cent in 1960-1980, whereas in 1980-98 it rose by only 6 per cent. For sub-Saharan Africa,

per capita GDP grew by 35 per cent in the first period, but it has since fallen by 15 per

cent.25 It is interesting to note that during the first period, import substitution

industrialization policies brought unprecedented economic growth to scores of countries in

Latin America, the Middle East, North Africa, and even to some in sub-Saharan Africa.

Meanwhile, economic growth has been dramatically reduced in the 1980s and 1990s, despite

a large increase in trade and a significant decline in tariffs in developing countries.

Most Latin American, African and transition economies were caught in “low or negative

growth equilibrium”, with stagnant or declining living standards for the majority. It is now

accepted by most specialists and development agencies that the pendulum had swung too far

in one direction. In 1980-98, the median per capita income growth in developing countries

was 0.0 per cent as compared to 2.5 per cent in 1960-79. This stagnation has been a

disappointment for the pro-Washington Consensus movement.58 Moreover, the economic

performance and social indicators of the least developed countries (LDCs) have lagged well

behind those of other developing countries over the past two decades. Indeed, while the per

capita GDP in LDCs in 1980 was 30.5 per cent of that in all developing countries, it had

fallen to 22.8 per cent by 1998.

The break-up of the communist political and socio-economic system and the building up of

market systems, in many cases through the “shock therapy” supported by Bretton Woods

institutions, was followed in practically all countries by drastic falls in production,

employment and public social expenditure. Between 1989 and 1993, real GDP fell by 15 per

cent in the five countries in Central Europe, by 32 per cent in South East European states, by

42 in the Baltic States and by 30 per cent in the ex-Soviet Union republics. By 1999, ten

years into the transition, only the Central European countries had exceeded earlier GDP

levels – and that by 9 per cent, a growth of less than 2 per cent per year. In the

Commonwealth of Independent States (CIS), output levels were 55 per cent below those in

1989, in South-Eastern European transition economies by 30 per cent and in the Baltic States

by 35 per cent. Total employment in the former communist countries was down by 15 to 20

per cent. Economic collapse had severe consequences for people: the number of people living

in poverty rose more than tenfold between 1988 and 1994, from 14 to 119 million. The

58 EASTERLY, W. 2001. The lost decades: Developing countries’ stagnation in spite of policy reform1980-

1998

34

Federation of Russia accounted probably for the biggest failure of all, with a GDP decline of

over 40 per cent, and an increase of its number of poor from 2 to 60 million by the mid-

1990s.59

In some parts of the world, poor growth performance and rising problems of unemployment,

job precariousness and social exclusion combined with a sharp increase of inequality in

income distribution within countries. In an impressive review of 73 countries, accounting for

80 per cent of the world population and 91 per cent of the world GDP-PPP, Cornia60 shows

that inequality within countries between the 1950s and the 1990s rose in 48 countries, and

remained constant in only 16 countries61. Only in nine countries is there evidence of a decline

in income concentration over the period. He also argues that, if inequality declined between

the 1950s and the 1970s, there was a reversal in inequality trends observed over the past two

decades

The lost decade of the 1980s and poor economic performance of most developing countries in

the 1990s call for a critical reassessment of the purported growth-fostering and povertyreduction

effects of the liberalization policies advanced by IMF and the World Bank to

legitimate their policy package. Recent economic literature shows that the growth impact of

economic liberalization still remains to be demonstrated, and is somewhat a matter of

controversy.

Effective pro-poor growth cannot be based on the “trickle-down” assumption, not even when

associated with capacity-building and empowerment measures to strengthen the chances of

the poor to participate in growth and its benefits. Alternative structural adjustment policies

are necessary, with a more favourable distributive impact on the poorest. Poverty reduction

and income distribution are not exclusive, but must go hand in hand to make globalization

work for all.

4.4 India’s growth analysis: Early liberalization period.

59 WEISBROT, M., D. BAKER, R. NAIMAN, G. NETA, “Growth may be good for the poor – But are IMF

and World Bank Policies good for growth?”, CEPR Briefing paper, May 2001.

60 American professor who is presently Dean of the Marriott School of Management at Brigham Young

University.

61 CORNIA, G,. Trends in income distribution in the post WWII period: Evidence and

interpretation, paper presented at the UNU/WIDER conference on “Growth and Poverty”, Helsinki, 25-26 May

2001, p. 19.

35

During the launch of liberlisation and acceptance of shift in economic paradigm has resulted

in mix bag of result. The policy maker at that time had two fold objectives

Firstly, alleviation of poverty and employment generation

And secondly, provide safety net to those affected by structural adjustment programme. At

that time per capita national output grew by 3.9%perannum. But this growth masked by

considerable distortion in distribution front. From data regarding prices indices, there is

evidences that poor became poorer despite safety net62. Growth was jobless growth i.e. which

does not increase employment potential. During the 90’s the pace employment grew slowed

down from 2.7% to 1.07%although GDP grew from 5.2%. to 6%.Though there are diverse

views about the real cause of decline in economic condition. Dr Bimal Jalan has observed

that the decline in economic condition cannot be attributed to structural adjustment

programme and stablisation measures. The impact of structural adjustment programme has to

be judged in medium term by its effect on growth and employment63.

Finance Minister Yashwant Singh in his budget speech 2000-01 stated very clearly that the

Government intends to carry forward the process of implementation of the Second

Generation Reforms. Elaborating on the philosophy of the Second Generation Reforms, he

stated; “Growth is not just an end in itself. It is the critical vehicle for increasing employment

and raising the living standards of our people, especially of the poorest. Sustained, broadbased

growth, combined with all our programmes for accelerating rural development,

building roads promoting housing, boosting knowledge-based industries and enhancing the

quality of human resources, will impart a strong impetus to employment expansion. There

can be no better cure for poverty than this in our country.” For implementation, the Finance

Minister laid down the following objectives64:

1. Strengthen the foundations of growth of our rural economy, especially agriculture and

allied activities.

2. Nurture the revolutionary potential of the new knowledge-based industries such as

InfoTech, biotechnology and pharmaceuticals.

3. Strengthen and modernize traditional industries such as textiles, leather, agro

processing and the SSI sector.

4. Mount a sustained attack on infrastructure bottlenecks in power, roads, ports,

telecom, railways and airways.

62 PATEL I.G, Economic reform and global change” ed.2000

63 DR BIMAL JALAN ,India’s economic policy ,1997,pg 49

64 Finance Bill 2001

36

5. According the highest priority to human resource development and other social

programmes and policies in education, health and other social services, with

special emphasis on the poorest and weakest sections of society.

6. Strengthen our role in the world economy through rapid growth of exports, higher

foreign investment and prudent external debt management.

7. Establish a credible framework of fiscal discipline, establish institutions without

which other elements of our strategy can fall.

4.5 Second Generation of Economic Reforms – New generation of economic policies.

Up to now, structural adjustment programmes focused mainly on economic liberalization,

and not on the sustainability of their reform package, implemented through high

conditionality mechanisms. Therefore, not only do structural adjustment programmes have to

be implemented most of the time in very difficult conditions of macroeconomic and political

instability, but they tend to aggravate the situation.

The IMF and World Bank are aware of the lack of a stable foundation for the liberalization of

economy. In its words:

“The challenge therefore is, how to minimise the tensions between globalization and the

pressures for socialisation of risk. If such tensions go unaddressed, the danger is that the

domestic consensus in favour of open markets will ultimately erode and trigger a generalised

resurgence of protectionism”65.

What lessons can be drawn from the record of past structural adjustment policies, that can

help improve their contribution to sustainable development in the years ahead? The global

economy is a source of opportunity in terms of profits, economic growth and better living

conditions, but also one of disruption, instability and growing inequalities if not handled

properly. In first generation reform more stress was on liberlisation of economy. Lack of

institution and regulatory framework was wide spread phenomenon in developing countries.

In India also institutions were absent. Many anti market forces took benefit of lack of

effective mechanism of regulation. Capital market scam is best example which took place in

initial days of liberalization .International Organization like IMF, World Bank advocated in

early 80’s structural adjustment as an answer. Holistic broad based approach should be

65 IMF. 1997. “Forces of Gobalization Must Be Embraced,” in IMF Survey 26, No. 10, p. 154.

37

adopted as endorsed in comprehensive development framework by World Bank66 . Economic

reform should be designed to promote a global integration that would improve the well-being

of populations, and especially of the poorest.

4.5 The Millennium Development Goals and structural adjustment

In 2000, the UN Secretary-General presented his Millennium report, Vision for the New

Millennium: We the Peoples: The role of the United Nations in the 21st Century.67 It sets

out the challenges of improving international governance and comprehensive framework in

the emerging global world economy. The report identified some basic priorities, such as

sustainable growth, employment generation, and building structures for global equity and

greater solidarity. The Millennium Development Goals and working towards their fulfilment

define a priority policy agenda for the UN and the international community. For example, if

the goals are to be approached in ways which strengthen structures which would reap the

benefits of globalisation.

These Millennium Development Goals embody a remarkable coalition of international

commitment and constitute a big step forward, as compared to anything the international

community had agreed to previously. The goals are specific and time-bound; they focus on

the poorest people of the earth, and directly relate to the reduction of both poverty and social

exclusion on a global scale. They define an immediate programme of action and country by

country monitoring. Economic reform must be redesigned to move towards these human

development goals, and the international system including the UN, WTO, Bretton Woods

institutions and donor countries must work together, as never before, to provide support to

individual countries in furtherance of that aim.

4.5.1Globalization must work for all – One of the most important areas for the UN’s future

work and analysis concerns better and fairer management of the global economy. The speed

and pattern of globalization, the existence of massive inequalities and widespread poverty,

the explosive growth of world civil society movements, the trends towards regionalization,

66 JOMOS K.S AND BEN FINE ,The new development economics –After the Washington consensus” pg

35,2000.

67 ANNAN K., Vision for the New Millennium: We the Peoples: the role of the United Nations in the 21st

Century, New York: United Nations. 2000

38

the emphasis on democracy, participation and accountability these and other important

developments have far-reaching implications..

Since the goal of development is the improvement of the well-being of mankind, economic

reform programmes should be designed as a tool to achieve this goal.

4.6 The Important Reform Measures Step Towards Globalization

Major measures initiated as a part of the liberalisation and globalisation strategy in the early

nineties included the following: 68

•Devaluation: The first step towards globalization was taken with the

announcement of the devaluation of Indian currency by 18-19 percent against

major currencies in the international foreign exchange market. In fact, this

measure was taken in order to resolve the BOP crisis.

•Disinvestment-In order to make the process of globalization smooth,

privatization and liberalisation policies are moving along as well. Under the

privatization scheme, most of the public sector undertakings have been are

being sold to private se

•Dismantling of The Industrial Licensing Regime At present, only six industries

are under compulsory licensing mainly on accounting of environmental safety

and strategic considerations. A significantly amended locational policy in tune

with the liberalized licensing policy is in place. No industrial approval is

required from the government for locations not falling within 25 kms of the

periphery of cities having a population of more than one million

•Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries

and encouraging non-debt flows. The Department has put in place a liberal and

transparent foreign investment regime where most activities are opened to

foreign investment on automatic route without any limit on the extent of foreign

ownership. Some of the recent initiatives taken to further liberalise the FDI

regime, inter alias, include opening up of sectors such as Insurance (upto 26%),

development of integrated townships (upto 100%), defence industry (upto

68GIRDHARI D.G.,globalization of Indian economy pg 17ed. 2005

39

26%), tea plantation (upto 100% subject to divestment of 26% within five years

to FDI), enhancement of FDI limits in private sector banking, allowing FDI up

to 100% under the automatic route for most manufacturing activities in SEZs.

•Non Resident Indian Scheme the general policy and facilities for foreign direct

investment as available to foreign investors/ Companies are fully applicable to

NRIs as well. In addition, Government has extended some concessions

specially for NRIs and overseas corporate bodies having more than 60% stake

by NRIs.

•Throwing Open Industries Reserved For The Public Sector to Private

Participation. Now there are only three industries reserved for the public sector.

•Abolition of the (MRTP) Act, which necessitated prior approval for capacity

expansion.

•Severe restrictions on short-term debt and allowing external commercial

borrowings based on external debt sustainability.

•Wide-ranging financial sector reforms in the banking, capital markets, and

insurance sectors,including the deregulation of interest rates, strong regulation

and supervisory systems, and the introduction of foreign/private sector

competition.

Thus in first half of 90’s more stress was given on the liberlisation of economy. The free

market structure was nowhere on agenda. Sound legislative framework was sidelined.

Creation of competitive market, dispute resolving mechanism was not put in place, and so the

need was felt to have second generation of reform which would accelerate the pace of growth

and development.

40

CHAPTERV

CONTRIBUTION OF INTERNATIONAL INSTITUTIONS IN PROCESS OF

ECONOMIC REFORM

5.1 Introduction

International organizations have become increasingly important actors in shaping the

domestic economic policies. These organizations have proliferated, have expanded in

membership, have acquired new legal enforcement powers, and have extended their reach

into the domestic economy in their member states. International Monetary Fund (IMF, or

simply the Fund), commanded significant resources and have acquired considerable

authority. These organizations have significantly become autonomous to create a new

international economic order .But there is wide disagreement about role of international

organization. Other critics have argued that international organizations are nothing more than

instruments in the hands of powerful state69.

No one can disagree with the degree of role played by International organization in shaping

of economic policies of countries. As like other issues the role of International organization

also has pros and cons. These International organisation have rewritten many rules ,polices

,regulation and laws. This legislative role is primarily played by imposing conditions on its

loans. However many conditions imposed have nothing to do with loan repayment. In other

sense policy of imposing conditionalities enables World Bank and IMF to impose its agenda

and political ideology on its borrowers. The International organisation including World Bank

, IMF are notably playing the role of lender but are using their power to pursue to legitimize

and legislative policy focusing on integration of economy. Mostly the borrowers are

developing nations found in vicious circle of economic crisis70.

Thus directly or indirectly International organization have made profound impact on

internal economic policy of country. It would be worthwhile to know about the contribution

of International organization in economic reform. The focus would be on the role of

International organisation in implementation of second generation reform. So it is necessary

to know objective of International organisation and methodology of implementation of

reform.

69 Dr. H.O Agrawal ,International law and human rights2003 pg 460

70 DR S.P.Gupta International organization pg 85

41

5.2 THE IMF: ESTABLISHMENT, PURPOSES, AND EVOLUTION

5.2.1Creation and the Purposes of the IMF

Following World War II, the international economic system was redefined by the agreements

of the United Nations (“U.N.”) Monetary and Financial Conference at Bretton Woods. These

agreements are known as the Bretton Woods system, which had three pillars: the IMF, the

International Bank of Reconstruction and Development (“World Bank”), and the General

Agreement on Tariffs and Trade (“GATT”). These agreements came about after the world

realized that concerted efforts to finance the reconstruction of Europe were necessary and that

there might be another Great Depression following World War II. It is very important to

remember that the U.N. Charter explicitly states that matters “essentially within the domestic

jurisdiction of any state” are not the concern of any international organizations that were

created at the close of World War II. This language of the U.N. Charter Article 2 is generally

applicable to all U.N.created organizations.

5.2.2 Purposes of IMF

On July 22, 1944, the U.N. Monetary and Financial Conference adopted the “Articles of

Agreement of the International Monetary Fund.” Article I provides that the IMF was

established:

a) to promote international monetary cooperation, exchange stability, and orderly exchange

arrangements

b) to foster economic growth and high levels of employment and

c) to provide temporary financial assistance to countries to help ease BOPs adjustment.

Therefore, its original mandates were enacted to enhance global stability and to ensure that

there were necessary funds for countries facing a threat of recession to pursue expansionary

policies.

5.2.3. History and Development of the IMF

Although there have been some changes in the Bretton Woods system in the last five decades,

the system remains mostly intact71. For example, floating currency exchange rates have

replaced fixed rates pegged to gold, and the IMF and World Bank now performs one of each

other’s original functions. However, one important change is the IMF’s stance towards its role

in the international monetary system. The IMF has taken the position that almost everything

falls within its domain, because almost any structural issue could affect the overall

performance of the economy. The IMF remains stalwart in this claim, despite the fact that its

71 Article Imf and conditionalities www.IMF.org/publication

42

role is explicitly limited by the Articles of Agreement to matters of macroeconomics when it

deals with a country.

Since the mid-1970s, industrialized countries have ceased to draw any resources from the

IMF. Currently, developing countries exclusively forms the IMF’s clientele, despite the fact

that since its inception, the IMF has never been viewed as having a specific role in

developing countries. The Bretton Woods system was designed by Western and for the most

part, developed countries that were (and continue to be) committed to the principles of free

market economics. Although the IMF conditionality remains firmly founded on exchange rate

devaluation and domestic demand restraint under the Articles of Agreement in practice

conditionality has been used to promote the Washington Consensus reflecting market

fundamentalist ideology. In response, some developing countries have argued that the Bretton

Woods system was, at best, not designed to meet the needs of less developed states, and at

worst, designed to perpetuate the dominance of Western countries. It is important to

remember that the concept of conditionality under the Articles of Agreement maintains the

implied jurisdictional barrier between the IMF and its sovereign states.

However, in reality, the intrusiveness of the IMF’s conditionality can be illustrated by its

structural conditionality covering pricing policy, trade liberalization, privatization, the

structure of taxes and government expenditure, and the reform of the financial sector.

The problem is that a state’s domestic economic policies cannot be separated from its

international economic policies, including the BOPs and the value of the state’s currency.

5.3 IMF Conditionality

When a country borrows from the IMF, its government agrees to adjust its economic policies

to overcome the problems that led it to seek financial aid in the first place. These loan

conditions also serve as a guarantee that the country will be able to repay the Fund. In recent

years, the IMF has streamlined conditionality in order to promote national ownership of

strong and effective policies72.

In recent years, the IMF has become more flexible in the way it engages with countries on

issues related to structural reform of the economy. As part of a wide-ranging reform of its

lending practices announced in March 2009, the IMF has also introduced a new lending

facility (the Flexible Credit Line) that, for the first time in the Fund’s history, does not

include program conditions once a country has met rigorous pre-qualification criteria.

72 www.imf.org/external/np/exr/facts/conditio.htm accessed on 15th JAN2010

43

Designing effective programs Conditionality in its broad sense embraces both the design of

IMF-supported program that is to say, the underlying macroeconomic and structural policies

and the specific tools used to monitor progress toward the goals outlined by the country in

cooperation with the IMF. Conditionality is aimed at helping member countries solve balance

of payments problems without resorting to measures that may put national or international

prosperity in jeopardy. At the same time, the measures are meant to safeguard IMF resources

by ensuring that the country’s economy will be healthy enough to repay the loan.

Conditionality under the IMF’s Flexible Credit Line takes the form of pre-defined rigorous

qualification criteria (known as ex-ante conditionality). For all other facilities, conditionality

involves the monitoring of program implementation (known as ex-post conditionality).

In deciding on program-related ex-post conditionality, the IMF is guided by the principle that

the member country has primary responsibility for selecting, designing, and implementing the

policies that will make the program successful. The member country’s policy program is

described in a letter of intent (which often has a memorandum of economic and financial

policies attached to it) that accompanies the country’s request for IMF financing. The

objectives of a program and the types of policies involved depend on country-specific

circumstances. But the overreaching goal is always to restore or maintain balance of

payments viability and macroeconomic stability, while setting the stage for sustained, high

quality growth.

5.4 Compliance with program conditions is assessed

Most IMF financing features phased disbursements and the linking of additional financing to

demonstrable policy actions. This aims to ensure progress in program implementation and to

reduce risks to the IMF. Program monitoring in these cases relies on different tools:

•Prior actions are measures that a country agrees to take before the IMF’s Executive

Board approves financing or completes a review. Such measures ensure that the

program has the necessary foundation to succeed, or is put back on track following

deviations from agreed policies. Prior actions could include, for example, elimination

of price controls or formal approval of a government budget consistent with the

program’s fiscal framework.

•Quantitative performance criteria (QPCs) are specific conditions that have to be met

for the agreed amount of credit to be disbursed. QPCs typically refer to

macroeconomic policy variables such as monetary and credit aggregates,

44

international reserves, fiscal balances, or external borrowing. For example, a program

might include a minimum level of net international reserves, a maximum level of

central bank net domestic assets, or a maximum level of government borrowing.

QPCs may be supplemented with indicative targets. These are often set for the later

months of a program, and are then turned into QPCs, with appropriate modifications,

as economic trends firm up73.

•Structural benchmarks are measures that are critical to achieve program goals. These

vary across programs but could, for example, include measures to improve financial

sector operations, build up social safety nets, or strengthen public financial

management.

•Program reviews provide a framework for the Executive Board to assess periodically

whether the IMF-supported program is broadly on track and whether modifications

are necessary for achieving the program’s objectives. Reviews are used to assess the

economic policies underlying a program from a backward-looking perspective

(assessing whether conditions have been met according to the agreed timetable) and a

forward looking perspective (assessing whether the program needs to be modified in

light of new developments).

5.5 Recent changes in conditionality

IMF lending has always involved policy conditions. Up until the early 1980s, IMF

conditionality largely focused on macroeconomic policies. Subsequently, the complexity and

scope of the structural conditions attached to IMF loans increased significantly. This

broadening and deepening of conditionality reflected in part the IMF’s growing involvement

in low-income and transition countries, where structural problems hampering broader

economic stability and growth were particularly severe.

In 2000, the IMF concluded an extensive review of conditionality as a process that also

involved consultations with stakeholders outside the IMF and aimed at enhancing the

effectiveness of IMF-supported programs. This review recognized that successful economic

policy programs must be founded on strong country ownership. Accordingly, the IMF has

been striving to focus more sharply and be clearer about the conditions attached to its

financing, and to be flexible and responsive in discussing alternative policies with countries

requesting financial assistance.

73 www.imf.org/external/np/exr/facts/conditio.htm accessed on 20th Feb 2010

45

Revised guidelines on conditionality, which take these objectives into account, were adopted

by the IMF’s Board in September 2002. The IMF’s Executive Board reviewed the application

of the new guidelines in March 2005, concluding that substantial progress had been made and

encouraging the staff to further these efforts.

In 2007, the IMF’s Independent Evaluation Office (IEO) completed an assessment of

structural conditionality in IMF-supported programs. The report provided impetus to the

ongoing effort to make conditionality even more focused and relevant. In light of the IEO’s

finding that the number of structural conditions had not declined and that some conditions

were not critical for the achievement of program goals, the IMF’s Executive Board called for

strengthened efforts to achieve parsimony by focusing on measures that are critical to the

success of programs and providing rigorous justification for conditions.

The management implementation plan in response to the Board-endorsed IEO

recommendations was discussed by the Executive Board in May 2008. The plan calls for

sharpening the application of the 2002 Guidelines on Conditionality by requiring better

justification of criticality, establishing explicit links between goals, strategies and

conditionality, and enhancing program documents. The plan also entails the upgrading of

MONA a database with information on the conditionality in IMF-supported programs to

improve program monitoring and making it available to the public74.

In March 2009, the IMF modernized its conditionality framework in the context of a

comprehensive reform to strengthen its capacity to prevent and resolve crises. The new

framework ensures that structural conditions linked to disbursements of IMF financing are

sufficiently focused and adequately tailored to member country’s different policies and

economic starting point. This is to be achieved by using pre-set qualification criteria under

the FCL and making traditional conditionality more flexible. In particular, monitoring of

structural reforms is now conducted fully in the context of program reviews, with the use of

structural performance criteria discontinued in all IMF arrangements, including those for low

income countries.

5.6 World Bank

World Bank was founded at international economic conference held at Bretton Woods in July

1944. It came into existence on December 27, 1945 and began its operation in June 1946. The

Bank became a specialized agency in relationship with the United Nations on November

74 www.imf.org/external/np/pdr/mona/index.aspx accessed on 21th Feb 2010

46

15,1947. The bank is an international co – operative organization, associated with the United

Nations. Its aim is to assist in reconstruction and development of members facilitating the

investment capital for productive purposes including the restoration of economies destroyed

or disrupted75. The bank lends funds for the development of economic facilities. It also

provides reformative assistance to member nations. It has played an important role in

devising reform strategy. It has been a leader in bringing an era of Liberalization,

Globalization And Privatization. Conditionalities were imposed to promote its ideology on

the crisis gulfed countries.

5.7 Second generation economic reform – New wine in old bottles

Review of ideas and practices of aid over the last three decades resulted in evolution of

concept second generation economic reform or post Washington consensus. The reason for

change in aid policy has been multifaceted, relating to factors such as performance of aid,

particular political economic environment.

During the first two decade of aid phenomenon (in 1959’s and 1960’s) the primary goal of

World Bank and Fund was to increase the aggregate growth rate of its recipients. Benefiting

from growth was supposed to trickle down. No measures were taken for poverty alleviation.

By late 60’s, the apparent failure of trickle down mechanism spawned increasing concerns

regarding poverty. At the same time, a new President arrived at World Bank Roberrt

McNamara 1973,who perceived poverty alleviation as mission and took it on Bank’s agenda.

The key objective of poverty reduction strategy included first to encourage the use of more

labour intensive process and products, remove all discrimination against small producers and

to shift public investment in favour of small producers. By the end of 1980 the proportion

Bank’s poverty lending increased to 30%76.

The next decade saw a set of events that were to affect the development scene dramatically.

Second oil shock provoked the rise of oil prices, interest rates followed the suit. In this

background World Bank, IMF launched its lending for structural adjustment. Under this

program, a loan would promote a dialogue with borrowing country about development policy

and policy reform. This came at the cost of conditionalites severely impairing the borrowers

capacity to set own development agenda. So the beginning of 1980’s saw a disappearance of

75 H.O. AGRAWAL, International Organization,pg 432, Universal Publication .

76JOMOS K.S AND BEN FINE “The new development economics –After the Washington consensus” pg

35,2000.

47

poverty from aid agenda. Significantly aid become increasingly structured around the ideas

and practices of World Bank and its Bretton Woods institutions IMF.

By mid of 1980’s the ideas about structural adjustment and stabilization program were

readily accepted. The conditions set up by World Bank and IMF aimed at economic policy

reform with purpose of eliminating all obstacles to perfect market were referred as

Washington consensus. While World Bank was originally involved in structural adjustment

program, acting on supply side of economy were as IMF concentrated on demand side of

economy i.e. money supply, budget deficit and exchange rates. But by 1990’s World Bank

had evolved from fraternal to identical twins; as the World Bank and IMF united the model

under the structural adjustment lending and facility.

During the 1998-90 the world bank and IMF’s conditionalities were distributed across

various sectors as follows, trade 15%, industry 7%, agriculture social sector 1%, financial

sector 8%. The Washington consensus relied on the theory of perfectly working markets.

Within this framework the government activity is limited to lump sum redistribution and

corrections of well defined set of market failures. By late 1980, one decade into structural

adjustment the World Bank could not avoid admitting the poor economic performance of

number of borrowing countries. The performance Bank’s portfolio had declined from

satisfactory outcomes falling from 85 from beginning to 69 at end of decade. The Bank and

Fund urged recipient government to adopt and set their own priority. Further effective change

cannot be imposed outside. The donors-recipient relation was cast in new light. The World

Bank’s report in sub Africa has equally conceded that growth did not necessarily reduce

poverty.

In 1998 WIDER lecture by former Chief Economist for the World Bank, Joseph Stiglitz,

strongly argued for reconsideration of Washington consensus77. He observed that the focus

on liberalization, deregulation and privatization is not enough. It should also have strong

legal framework as well as regulatory and oversight institutions and regulation for privatized

industry, competition policy, investment in human capital, technology policy. All these new

approach sought to achieve the broader goals. The issue was no longer whether the state

should or should not involve but rather how should state involve. New ways coordinating

economic activity were explored. The transition from Washington consensus to second

generation economic reform (Washington consensus) is based on broad conception of

77 JOMOS K.S AND BEN FINE , The new development economics –After the Washington consensus, pg 35

,2000.

48

development and the role of state. Now to promote the second generation economic reform

(post Washington consensus), World Bank and IMF are allocating aid selectively. It has been

argued that aid contributes to the development only when their good policies and institutions

prevail. There upon two pronged approach to aid allocation has been proposed-

•Channeling lending (aid flows to countries having appropriate

policy/institutional environment)

•And use non lending services (aid ideas) to support the emergence of sound

lending policies.

5.7 IMF and WORLD BANK

Though they are different institutions there are several reasons to believe that they are

inseparable twins –

•Membership in IMF is Requisite for membership in World Bank;

•Annual Meetings and World Bank are held jointly;

•Their governance structures are same. In fact there governing structure is over

lapping

•These two institutions share the same perception and paradigm of development.

The contrast between the vision of the founders of the Bretton Woods institutions and

those who operate them today is striking. In 1944, the architects of Bretton Woods

understood the risks of competitive devaluation. They understood that private global

financial flows, left on their own, would cumulatively lead to collective deflation. The

purpose of the IMF was to allow nations to stabilize their currencies without

contracting their economies. The idea was to inject an expansionary bias into the

system rather than a contractionary one, so that each member nation could pursue full

employment at home. This, the founders thought, would allow nations to accept free

trade. But free trade and free movement of capital, per se, was not the object of the

system. They were means, not ends.

Today’s statesmen have a very different view; and the Bretton Woods institutions,

particularly the IMF, have become instruments for the imposition of a single model. It is not

at all clear that this approach optimizes economic development, though it certainly benefits

commercial and financial elites.

5.8 Criticisms against IMF and World Bank working.

49

World Bank and the IMF encompass a whole range of issues but they generally centre around

concerns about the approaches adopted by the World Bank and the IMF in formulating their

policies. This includes the social and economic impact these policies have on the population

of countries who avail themselves of financial assistance from these two institutions. Critics

of the IMF are concerned about the conditionalities imposed on borrower countries. The IMF

often attaches loan conditionalities based on what is termed the ‘Washington Consensus’,

focusing on liberalization of trade, investment and the financial sector, deregulation and

privatisation of nationalised industries. Often the conditionalities are attached without due

regard for the borrower country’s individual circumstances and the prescriptive

recommendations by the IMF fail to resolve the economic problems within the countries.

IMF conditionalities may additionally result in the loss of a state’s authority to govern its own

economy as national economic policies are predetermined under the structural adjustment

packages. Issues of representation are raised as a consequence of the shift in the regulation of

national economies from state governments to a Washington-based financial institution in

which most developing countries hold little voting power. Critics of the IMF are also

apprehensive about the role of the Bretton Woods institutions in shaping the development

discourse through their research, training and publishing activities. As the IMF is regarded as

an expert in the field of financial regulation and economic development, their views and

prescriptions may undermine or eliminate alternative perspectives on development.

There are also criticisms against the IMF’s governance structures which are dominated by

industrialized countries. Decisions are made and policies implemented by leading

industrialized countries the G7 because they represent the largest donors without much

consultation with poor and developing countries78.

Apart from the numerous economic policy issues to which conditionality gives rise, there are

a number of important political and philosophical questions that have yet to be addressed

fully and openly by the Fund (and other IFIs) such as:

1) Can program ownership by a country be made compatible with externally imposed

conditionality? Can externally imposed policies or values become internalized in

recipient countries?

2) Is conditionality compatible with democracy? Can governments be held accountable

and responsible for the effects of policies imposed from outside? Who are

78 DR. S.P.GUPTA,International organization, pg .87

50

governments accountable to, their electorate or some external institution in which they

are underrepresented?

3) To what extent is IFI conditionality power without responsibility?

4) Should economic policy decisions that affect all be taken outside the domestic

political process?

5) Are the transparency and accountability of governments, which the IFIs

consider essential to good governance, compatible with conditionality?

6) Since the political viability of an adjustment program is related to the depth of

a crisis, the actions of the government and to the amount and timeliness of external support,

when can inadequate financial support by the international community be considered

responsible for its failure?

7) Governments and IFIs are prepared to intervene in the affairs of third

countries, but are they prepared to take political responsibility for the policies or measures

they sponsor?

5.8 Implementation of Economic Reform

Though criticisms are made on the working of IMF and World Bank but no one can deny the

genuine efforts taken to improve the condition of people all round the world. Washington

Conesus was strategy adopted in 80’s to achieve development by economic integration. The

lacunae or loopholes in Washington Consensus are rectified by Second generation economic

reform or World Bank’s comprehensive development Framework. Fund and World Bank

have used conditionalities to promote the reform ideology. It will be early to predict the result

of second generation economic reform because the whole process is still ongoing.

CHAPTERVI

SECOND GENERATION ECONOMIC REFORM IN INDIA AND ANALYSIS OF

ASSOCIATED LEGISLATION AND INSTITUTIONS.

6.1 Introduction

According to P.Chidambaram79,

“The failure to build legal capacity in matters concerning the economy is as grave as the

failure to build capacity in our roads, railways, ports, and airports. As India integrates itself

with the global economy, the inadequacy of the legislative framework has become more

glaring”.

In 1998 Joseph Stiglitz, former chief economists at World Bank, strongly argued for

reconsideration of the Washington consensus, which for him, had advocated the use of a

small set of instruments including macroeconomic stability liberalized trade and privatization

to achieve a relatively narrow goal of economic growth. For him a Washington consensus has

not been sufficiently successful. These necessitated to have strong legal framework as well as

regulatory and oversight institution, competition policy. In all these areas government was to

complement the market. The comprehensive development framework, put forward by World

Bank president, endorsed the holistic broad based approach to development. Constraints on

development were now structural and social, not remedial solely through economic

stabilization or structural adjustment (World Bank 1999)80. The new agenda thus tried at least

in principle the need for retreat of the state. The post Washington consensus or Second

Generation Economic Reform approached to have emergence of sound policies

,establishment of appropriate institutional environment . The aid policy of World Bank or

IMF as stated in policy document, “In sum, there is no value in providing large amounts of

money to a country with poor policies ,even if it technically commits to the conditions of a

reform program …in a country with poor policies donor should concentrate on activates on

activities that might support reform in long run”81.

Many developing countries to cope with IMF and World Bank requirement tried to initiate

the change in legislative framework and establish regulatory institutions for sustainable

economy. India also initiated the process of reform during the period in Mid of 90’s,

successive governments have carried forward the country’s economic reforms in Industrial ,

79 Former Finance Minister of India from May 2004 to November 2008 .

80 JOMOS K.S AND BEN FINE “The new development economics –After the Washington consensus”pg 46,ed

2000.

52

Trade and Financial sectors. The approach of the Government has been to gradually move

towards comprehensive re-structuring of the economy to reap the benefits of the fast

changing global business environment.

6.2 Major Changes During The Past Decade

Some of the major changes during the past decade that have significantly contributed to

economic reform in the country are:

a. The Foreign Exchange Management Act (FEMA), 1999 replaced the Foreign Exchange

Regulations Act (FERA), 1973 with the objective of ‘facilitating external trade and

payments’ and ‘promoting the orderly development and maintenance of foreign exchange

market in India’ including introduction of convertibility of rupees on current account.

b. Further, the enactment of Fiscal Responsibility and Budget Management (FRBM) Act in

2003 marked a significant reform initiative taken both by Central Government and some

States in the context of fiscal responsibility82.

c. The Insurance Regulatory and Development Authority Act, 1999 is a major milestone in

liberalisation as it opens the way to private entry into the insurance business, which has been

a Government monopoly83.

d. New Telecom Policy was implemented in 1999 to facilitate India’s vision of becoming an

IT superpower and develop a world class telecom infrastructure in the country.

e. Replacement of MRTP Act, 1969 by Competition Act of 2002, in view of the policy shift

from curbing monopolies to promoting competition. The Competition Act was enacted that

marks a conscious departure from the previous Monopolies and Restrictive Trade Practices

Act (MRTP). The Competition Law aims at doing away with the rigidly structured MRTP

Act and is more flexible. Also, the regulatory authority under the Act i.e. `Competition

Commission of India’ is being set-up; with the aim of centralizing under one umbrella all

controls to eliminate the negative aspects of competition.

f. Electricity Act, 2003 was enacted to create competitive environment which will result in

enhancing quality and reliability of service to consumer.

g. The Foreign Trade Policy was notified incorporating the Export and Import incentives and

also several other initiatives have been taken for Export Promotion84.

82 India year book ,Minstry of information and broadcasting pg. 282

83M.N.SRNIVASAN, Principles of insurance law , pg.1391,2006

84 Foreign trade policy 2009 , Ministry of commerce and industry.

53

h. The Foreign Direct Investment policy has been reviewed and liberalised to promote FDI in

various sectors.

i. Tax reforms have taken place in a major way including rationalization of both direct and

indirect tax laws. Customs tariffs have been lowered and Service tax net is being widened.

The input tax credit for both excise duty and service has been streamlined. One of the

important tax reforms has been introduction of State-level Value Added Tax to replace the

Sales Tax. Introduction of Goods & Services Tax regime to be effective from 01.04.2010 is

underway.

j. A number of Rules and Regulations have been issued by the Securities and Exchange

Board of India (SEBI), to develop the capital market on healthy lines and to protect the

investor’s interests in securities

k. Special Economic Zones (SEZs) are being set up under Special Economic Zone Act, 2005

to enable hassle free manufacturing and trading for export and to free the industry from the

plethora of rules and regulations governing imports and exports85.

The immediate priorities of reform were to change the Competition policy, replace the

obsolete Foreign Exchange Regulation Act, amendment to Company Law 1956,Debt Laws ,

set up of regulatory bodies IRDA, making more efficient the existing bodies like SEBI. These

all Legislative changes are made keeping in mind to create investor competitive market

atmosphere and derive more benefits from globalization. Though it is difficult to review all

the legislative changes which were taken as a part of second generation reform so important

changes are been discussed at a length.

6.3 MRTP to Competition law

It is about 15 years since India started comprehensive economic reforms. These reforms have

covered a broad canvas, including several sectors of the economy and government economic

activity. The reforms gave rise to an enormous churning as competitive forces entered the

economy86. In the beginning, many businesses that lacked competitiveness were forced into

extinction, and many jobs were lost. These were the initial years of pain. What we are

witnessing now is the gain from the new economic model. Businesses that have grasped the

new reality have restructured, cut flab, and enhanced efficiency. The competition has

85 India year book 2009, ministry of information and broadcasting.

86 JAIN GOPAL LAL “Economic growth and development ” , 1st Ed. 2000 pg. 38

54

produced many winners, and business confidence today is at its highest levels. To the Indian

consumer, competition has brought lower real prices, better quality, & wider choices.

Economic theory recognizes the advantages of competitive markets for economic growth and

consumer welfare. Joseph Stglitz, the renowned (Nobel) economist has stressed that, strong

competition policy is not just a luxury to be enjoyed by rich countries, but a real necessity for

those striving to create democratic market economies87.

Competition policy operates in two broad areas. One is a set of government and regulatory

policies that enhance competition, give primacy to market forces, allow entry and exit, reduce

administrative controls and minimize regulations. The other area of competition policy is a

law to prohibit anti-competitive practices and regulate mergers that might adversely impact

competition. The two areas of competition policy are therefore mutually complementary,

with competition policies focusing on removing public or government restraints on

competition, & competition law focusing on preventing private restraints from inhibiting

competition. Today, most countries have embraced or moved towards a market based

economy, recognising competition as a central principle in their economic reforms.

Competition policy is recognized as a crucial component of a good business environment,

and is a priority area for reform in Asia. Competition policy sets a more consistent framework

within which the business sector operates. More effective competition creates a level playing

field, and reduces opportunities for corruption and rent-seeking. It creates more space for

entrepreneurs and small and medium-sized enterprises. Effective competition enhances

innovation and promotes investment and growth. Competition policy can also contribute

directly to poverty reduction by reducing prices and improving access to services.

6.3.1 Competition Policy reform for India- Need and importance.

Effective competition can play an important role in economic growth and poverty reduction.

Where competition is vigorous, producers will seek the most efficient methods of production,

innovation will be encouraged and resources will be used to produce the goods and services

society values most highly. Consumers will benefit from lower prices, better quality and a

wider range of goods and services88.

Within the right framework, markets work to society’s advantage, but can fail. One cause of

market failure is anti-competitive practices by firms. Another is inappropriate policies or

regulations that restrict entry to or exit from markets, and/or limit the exercise of competition.

87 JOMOS K.S AND BEN FINE , “The new development economics –After the Washington consensus”pg 46.

88 JAYANT KUMAR ,Competition law in India pg .97

55

Competition policy seeks to help markets to work well; it does not second-guess or replace

them.

As economies liberalise, deregulate and privatize, they should be concerned to see that the

removal of formal barriers is not followed by re-monopolization by dominant private actors.

Much of Asia has made impressive strides in economic growth in recent times. But hundreds

of millions of people in the region still live in poverty. Achieving the Millennium

Development Goals, in Asia as elsewhere, requires rapid and sustained growth. It is now

widely accepted that the private sector must be the engine of growth, and that governments

must create environments that allow the private sector and markets to flourish.

In 2005, the need for competitive markets was emphasised in flagship publications of the

World Bank and the Asian Development Bank. The ADB observed that:

“…the importance of competition for achieving a higher rate of innovation and adoption of

new technologies over time is critical for sustaining Asia’s rapid growth. Yet competition is

not automatic, and is not the same as laissez faire.”

. As the ADB pointed out

“competition policy is complementary to other policies. Consequently, liberalisation and

privatisation policies cannot be expected to automatically contribute to economic growth if

competition policy and institutional infrastructure are lacking.”

International competitiveness has many determinants, but firms are unlikely to become

internationally competitive if they do not operate in a competitive domestic environment.

6.3.2Competition policy globally

While the United States has had a competition (‘antitrust’) law for over 100 years, the

introduction of competition law by other nations was a slow process until fairly recently. As

late as 1990, only about 30 countries had a competition law. There was a blossoming of

competition law in the 1990s, when over 50 competition laws were added. The reasons for

the upsurge in interest since 1990 include fundamental changes in national economic policy,

including trade liberalization, privatization and de-regulation, as well as the requirements of

bilateral investment treaties and policy changes related to applications for WTO membership.

In addition to national competition laws, several regions have, or are seeking to introduce,

regional competition law. Regional competition laws can deal with cross-border competition

problems that are beyond the jurisdiction of national competition authorities and that can hold

back the growth of trade between member states, such as international cartels.

Competition policy is a well-known cornerstone of the EC, and the success of the EC’s

competition policy in helping to bring about market integration has encouraged countries in

56

developing regions to seek to apply it. The EC enforces its competition law very actively, and

has imposed some high penalties, the largest to date being the 497 million Euro fine ($613

million) imposed on Microsoft in 2004 for abuse of dominance.

COMESA (the Common Market for Eastern and Southern Africa) has adopted a regional

competition law, and is now working on its implementation. A regional competition law is in

the early stages of implementation by UMEOA (the West African Economic and Monetary

Union). The Treaties that established CARICOM and MERCOSUR each provide for a

regional competition law, although these provisions have not yet been put into effect89.

The link between growth and poverty reduction was recognised by the World Bank in its

World Development Report 2005, which emphasised the importance of competition for

investment, and which noted how competitive pressure leads to innovation, new products and

new technology.

6.3.3Evolution of Competition Law in India

While our principal focus here will be on India’s new law, it is important to recognize that

this is not India’s first competition law. Unlike many other developing countries, India has

had a competition law for some time – in fact, since 1969. We begin, therefore, with a short

discussion of the historical development of antitrust in India before moving to our review of

the new law which is a part of second generation economic reform.

Competition policy in India draws inspiration from the Articles 38 and 39 of the Constitution

of India (which came into effect January 1950), which are a part of the Directive Principles of

State Policy. These articles reflect the aim of moving India toward a welfare state, and

building a just and equitable society, and mandates that the State shall, in particular, direct its

policy towards securing (a) “that the ownership and control of material resources of the

community are so distributed as best to subserve the common good” and (b) “that the

operation of the economic system does not result in the concentration of wealth and means of

production to the common detriment.”

Accordingly, after independence, the government of India assumed increased responsibility

for the development of the country, and followed policies what may be called “Command

and Control” laws, rules and regulations. In 1951, the Industries (Development and

Regulation) Act (IDRA) was implemented, through which the government sought even

greater control of the industrial sector through an industrial licensing policy, which required

89 www.dfid.gov.uk/Documents/…/briefing-competition-policy-reform.pdf accessed on 15th Jan 2010.

57

firms in many industries to have licenses for the entry into a business or the expansion of an

existing business90.

In this situation, a series of three government studies led to the enactment of the Monopolies

and Restrictive Trade Practices Act (MRTP) (1969), the first competition law in India91.

6.3.4. Monopolies and Restrictive Trade Practices Act (MRTP Act) (1969)

The preamble to the MRTP Act describes it as: “An Act to provide that the operation of the

economic system does not result in the concentration of economic power to the common

detriment, for the control of monopolies, for the prohibition of monopolistic and restrictive

trade practices (RTPs), and for matters connected therewith or incidental thereto92”. The Act

was amended significantly twice, first in 1984, adding consumer protection provisions. In the

next amendment in 1991, provisions related to concentration of economic power and various

restrictions on dominant undertakings, like prior approval of federal government for setting

up a new undertaking, were removed from the Act. Below, we discuss the MRTP Act briefly

The MRTP Act was clearly a product of the “command and control” mindset that dominated

Indian government thinking at the time it was drafted. There was more of an effort to control

who entered, exited, expanded and contracted in an industry than to foster true competition.

Under the Act, a company was classified as an “MRTP Company” when it by itself or

together with its interconnected undertakings had an asset value of at least one billion Indian

rupees or was dominant in the relevant market (i.e. commanded a market share in excess of

one-quarter (25%)). Such MRTP companies were required to be registered with the federal

government and to obtain government approval to expand an existing undertaking, establish

an undertaking or carry out a merger, amalgamation, or takeover, as these were believed to

lead to an undesirable concentration of economic power.

Prevention of Restrictive Trade Practices (RTPs): The Act defined a RTP as a practice

“which has, or may have, the effect of preventing, distorting or restricting competition in any

manner and in particular, (i) which tends to obstruct the flow of capital or resources into the

stream of production, or (ii) which tend to bring about manipulation of prices, or conditions

of delivery or to affect the flow of supplies in the market relating to goods or services in such

90 India year book ,2009,ministry of broadcasting.2009

91 The three government studies are: (a) “Hazari Committee Report on Industrial Licensing Procedure” (1955)

Ministry of Industry, Government of India, New Delhi, (b) “Mahalanobis Committee Report on Distribution and

Levels of Income” (1964) Government of India, New Delhi, and (c) “Monopolies Inquiry Commission Report’”

(1965) Government of India, New Delhi.

92 “Monopolies and Restrictive Trade Practices Act” (1969), Act No. 54 of 1969, Government of India.

58

manner as to impose on the consumer unjustified costs or restrictions93” Broadly, the RTPs

listed in the MRTP Act are: (i) refusal to deal, (ii) tie-up sales; (iii) full line forcing; (iv)

exclusive dealings; (v) concerted practice; (vi) price discrimination; (vii) re-sale price

maintenance; and (viii) area restriction.

The MRTP Act states all the above types of RTPs to be legally prejudicial to the public

interest. Hence, anyone against whom the charge of RTP has been established can only plead

for gateways provided in the MRTP Act.

Prevention of Monopolistic Trade Practices (MTPs): According to the Act, an MTP is a trade

practice, which has, or is likely to have, the effect of: (i) maintaining the prices of goods or

charges for services at an unreasonable level by limiting, reducing or otherwise controlling

the production, supply or distribution of goods or the supply of any services or in any other

manner; (ii) unreasonably preventing or lessening competition in the production, supply or

distribution of any goods or in the supply of any services; (iii) limiting technical development

or capital investment to the common detriment or allowing the quality of any goods

produced, supplied or distributed, or any services rendered, in India, to deteriorate; (iv)

increasing unreasonably: a) the cost of production of any goods; or b) charges for the

provision, or maintenance, of any services; (v) increasing unreasonably: a) the prices at

which goods are, or may be, sold or re-sold, or the charges at which the services are, or may

be, provided; or b) the profits which are, or may be, derived by the production, supply or

distribution (including the sale or purchase of any goods or in the provision or maintenance

of any goods or by the provision of any services; and vi) preventing or lessening competition

in the production, supply or distribution of any goods or in the provision or maintenance of

any services by the adoption of unfair methods or unfair or deceptive practices.

Prevention of Unfair Trade Practices: Unfair trade practices (UTPs) were included in the

1984 amendments of the MRTP Act, and effectively fall under the following categories: a)

misleading advertisements and false representations, b) bargain sales, bait and switch selling,

c) offering of gifts or prizes with the intention of not providing them and conducting

promotional contests, d) product safety standards, and e) hoarding or destruction of goods.

6.3.5. Enforcement Authorities: The MRTP Act provided for a MRTP Commission, whose

Chairman is required to be a person who is or has been or is qualified to be a judge of the

Supreme Court or High Court. The Commission will consist of not less than two and not

more than eight other members. The Commission is assisted by the Director General of

93 Section 2(o), MRTP Act, 1969

59

Investigation and Registration for carrying out investigations, for maintaining register of

agreements and for undertaking carriage of proceedings during the enquiry before the MRTP

Commission.

The powers of the Commission include the powers vested in a civil court and include further

powers: (i) to direct an errant undertaking (under RTP or UTP) to discontinue a trade practice

and not to repeat the same; (ii) to pass a ‘cease and desist’ order; (iii) to grant temporary

injunction, restraining an errant undertaking (under RTP, or UTP) from continuing an alleged

trade practice; (iv) to award compensation for loss suffered or injury sustained on account of

RTP or UTP; (v) to direct parties to agreements containing restrictive clauses to modify the

same; (vi) to direct parties to issue corrective advertisements; and (vii) to recommend to the

Central Government, division of undertakings or severance of inter-connection between

undertakings, if their working is prejudicial to public interest or has led or is leading to an

MTP or a RTP.

Thus the MRTP Commission could pass final orders in respect of RTP, and UTP, but only

had an advisory role in the disposal of cases of MTPs and concentration of economic power.

The central government had the sole authority to pass final orders in these other cases.

Appeals against the MRTP Act can only be heard at the Supreme Court.

6.3.6 Economic Reforms and 1991 Amendments to the MRTP Act

The year 1991 was a watershed year in the Indian economic history, as it witnessed sweeping

reforms in many areas of government policies, with a remarkable change from the previous

“command and control” regime to a more market-driven one. A new Industrial Policy was

announced by the government in July, 1991 based on the pillars of liberalization and

competition94.

Keeping pace with such reforms in other policy areas, an important set of amendments to the

MRTP Act were introduced in 1991. Two of the five major areas of the MRTP Act, namely

prevention of concentration of economic power to the common detriment; and control of

monopolies, were de-emphasized, after the 1991 amendments to the MRTP Act. More

specifically, provisions relating to concentration of economic power and various restrictions

on MRTP companies (e.g. the requirements to obtain prior approval of the Central

Government for establishing a new undertaking, expanding an existing undertaking,

amalgamations, mergers and takeovers of undertakings) were all deleted from the statute.

Strikingly, then, merger control was effectively removed from the MRTP Act.

94 AHLUWALIA, MONTEK S (2002) “Economic Reforms in India since 1991: Has Gradualism Worked?” The

Journal of Economic Perspectives, ), pp. 67-88 , Vol. 16, No. 3 ,Summer, 2002

60

Further, in the same year the government, through a notification, brought previously exempt

public sector enterprises, cooperative societies and financial institutions under the purview of

the Act.

6.3.7Problems with the MRTP Act

The MRTP Act was not very successful in its stated objectives. This was partly because the

Act was created at a time when all the process attributes of competition such as entry, price,

scale, and location were regulated through other policies over which the MRTP Commission

had no influence. Unfortunately, while the MRTP Act was created to check the various

competition concerns that resulted from the then command and control regime, it was not

empowered to change the very elements of the regime that resulted in such concerns.

For example, chapter III of the MRTP Act mandated that dominant companies were required

to seek permission from the federal government (not the MRTP Commission) to expand,

establish new undertakings, and to merge or acquire other businesses. The Government may

at its discretion refer the request to the MRTP Commission for its opinion, but, in any case, it

was not bound by the MRTP Commission’s opinion. In fact, the frequency with which cases

were sent to the MRTP Commission for an opinion was extremely low. As a result, the

MRTP Commission became largely toothless to act against dominant undertakings.

Moreover, no action was taken to reduce concentration of economic power that was already

widespread at the time of passing of the MRTP Act, as noted by the three studies that led to

its enactment.

Another problem stemmed from the lack of proper definitions in the Act. A perusal of the

MRTP Act shows that there is no definition of certain offending anti-competitive practices,

for example, cartels, price-fixing, predatory pricing, and bid-rigging, with the result that

bringing successful actions became very difficult.

6.3.8Reasons for a New Competition Law

Several factors contributed to the need for a new competition law for India. Most importantly,

it was seen that India needed a law reflective of its more open approach to business –

protections for competition and the competitive process should replace governmental

command and control mechanisms. Further, over the years, a large number of judicial

decisions had weakened certain aspects of the MRTP Act. For example, in a case involving

the American Natural Soda Ash Corporation (ANSAC), the Supreme Court of India had

61

directed that the MRTP Commission is not permitted to take actions against international

cartels if the cartel meetings took place outside the country95.

Another contributing factor relates to the changing international economic environment.

India’s Ministry of Commerce set up an Expert Group on interaction between Trade and

Competition Policy, subsequent to the establishment of a similar group at the WTO,

following the Singapore Ministerial Declaration of 1996. The Expert Group reported that

there was a need for an appropriate competition law to protect fair competition and to check

anticompetitive practices, many of which could surface during the implementation of WTO

Agreements96.

In view of the above, the Government appointed a High Level Committee on Competition

Policy and Law in October 1999 to propose a modern competition law for the country in line

with international developments. Finally, the Competition Act 2002 was enacted in January

13, 2003 to replace the MRTP Act. The Competition Commission of India (CCI) was

established in October 2003 to implement the provisions of the Act. Some constitutional

issues delayed implementation of the law, but these appear to have been resolved with the

passage of the Competition (Amendment) Bill, 2007.

6.3.9 Competition Act (2002) after the Competition Amendment Bill (2007)

Since 2003, India has been in a unique situation with respect to its competition regime, in that

it has two competition laws, the outgoing — but still functional — MRTP Act (1969) and the

newly enacted, but not yet (at this writing) activated, Competition Act (2002). However, the

Competition Act will supersede the MRTP Act soon. The delay is due to a writ petition in the

Supreme Court which challenged the validity of the Act. It claimed that since the CCI would

exercise judicial functions, in view of the doctrine of separation of powers recognized by the

Indian Constitution, the Chairman of the CCI should necessarily be a judge chosen by the

chief justice of India97. The Competition Act has been consequently amended, making the

CCI an expert body, and providing for the creation of an appellate body to hear appeals from

the decisions of the Commission, and to provide that the Commission’s orders be executed by

a civil court.

While the main reason for the amendment was the objection of the Supreme Court, the

policymakers took the opportunity to incorporate other changes and delete some other

95 Supreme Court (2002), “Haridas Exports Vs. All India Float Glass Manufacturers Association”, 6 SCC 600

96 Ministry of Commerce, Government of India (1999) “Report of the Expert Group on Interaction between

Trade and Competition Policy

97 Supreme Court (2005) “Brahm Dutt vs Union of India”, Writ Petition (civil) 490 of 2003. Date of Judgement:

January 20, 2005.

62

sections to face the changing situation, and correct certain loopholes in the Act. In the end,

the Amendment bill (2007) amended a majority of the sections of the original Act..

6.4 FERA TO FEMA

Soon after India’s independence, the government enacted the foreign exchange regulation Act

1949 and further amended .The measure objectives of FERA were

A) The conservation of India’s precious foreign exchange resources and

B) The issue of guidelines to the foreign investors to invest in India’s core sectors.

FERA,1973 was enacted during the time of command and control era, when India had less

than billon dollar in foreign exchange reserves. All spheres of the economy were under

government’s regulation. Under FERA all transactions in foreign exchange and all

transactions with non-residents were absolutely prohibited, except where specific relaxations

were made. Similarly, non-residents were also not permitted to have any dealings in India.

However the practical and day to day provision were not contained in the Act, but in the

guidelines issued by the government of India. These Guidelines related to foreign business in

India as for instance, the necessity of branches and all subsides of foreign company to have

minimum Indian equity participation of 26%.

FERA came under severe criticism particularly for the section which stipulated for

prosecution of a person for contravention for any provision and regulation. In this case the

onus of proving that he had requisite permission was on accused. This often led to harassment

of bona fide persons and companies with show cause notices and prosecution for alleged

violation for FERA on narrow technical grounds. At the same time, however thousands of

crooks, both individuals and company managed to evade and avoid the draconian provisions

of FERA and got away scot free.

The Foreign Exchange Management Act(FEMA) was introduced in July 1998 in Parliament

to repeal FERA,1973 and to consolidate and simplify the law relating to foreign exchange

with the object of facilitating external trade and payments and promoting the orderly

development and maintenance of foreign exchange market in India.

6.4.1 Evolution of FEMA

As mentioned at beginning, FEMA was sought to repeal FERA 1973 because the condition

under which FERA was enacted and implemented do not exist anymore. For instance, India

has now huge forex reserve. It is, however true that the size of economy in general and

external transaction in particular have gone up substantially even then no one can deny the

fact that situation on external front in recent times is in a great deal favourable than at any

time in past. Hence, there is no place for fear complex that characterized regulatory efforts in

63

past. For another, with liberalizations that has come to be accepted as framework of

management of economy, strict exchange control regime as visualized in FERA had to be

abolished.

FEMA 1998 attempts to simplify the provisions of FERA in fact, there are several major

changes in immediate effects and relevance, particularly those relating to certain substantive

matters and contravention and punishments.

Besides, there is major shift under FEMA, 1998 from under FERA 1973, all transactions in

foreign exchange and all transaction with non-resident were absolutely prohibited and

specific relaxation were made. Similarly non-residents were also not permitted to have any

dealing in India under FEMA1998, however the major focus is on transaction involving

Foreign exchange and Over dealing with non residents in India have been substantially

diluted, though not eliminated.

Another major change under FEMA is that only a monetary penalty will be slapped on

convicted and there is no punishment by way of imprisonment for contravention of any of the

provisions. The only circumstance under which imprisonment is for non-payment of such

penalty. Under FERA, the enforcement directorate had sweeping powers to arrest anyone

suspected indulging in forex violation. Case under FEMA will also have to be referred by

RBI.

6.5 Prevention of Money Laundering Act, 2002.

Prevention of Money Laundering Bill 1998 was introduced in parliament in July 1998 along

with FEMA Bill and was passed as an Act in 2002. Basically, Money Laundering Act aims to

prevent concealing of a transaction dubious or of illegal origin. The Act proceeds to address

laundering of money derived from Specified offences listed under the Indian Penal Code, the

Immoral Traffic Act,1956, the Arms Act,1959,The Narcotics Drugs and Psychotropic

Substances Act 1985,and Prevention of Corruption Act 199898. All the above Acts does not

define Money Laundering Offences. Money Laundering Offences will have following

ingredientsa)

A crime should have been committed,

b) There are proceeds of or gains from crime,and

c) There is transaction in respect of proceed of gains.

In other words “whoever acquires, possesses, transfer any proceeds of crime or enters into

any transaction which is related proceeds of crime either directly or indirectly or conceals

98 RUDDAR DUTT,Indian Economy,pg832,2005.

64

or aids in the concealment of proceeds of crime, commits the offence of money

laundering ”. In simple language money laundering refers to the cunning act of vesting

proceeds of crime with legitimacy.

The money laundering Act includes all major offences which help in generation of Black

money. However tax invasion including smuggling have been kept out of definition of

money laundering. The Act takes care of menacing proportion of money laundering.

6.6 New Company Law in tune with Second generation economic reform

The Indian Corporate Sector has been gaining importance over the past few years, especially

since the introduction of liberal economic policies in 1991. With the policy emphasis shifting

away from securing commanding heights of the economy for the public sector, the share of

private sector in the paid-up capital (PUC) of India’s corporate sector has more than doubled.

The number of companies in India expanded from about 30,000 in 1956 to nearly 7 lakhs at

the same time, the increasing number of options and avenues for international business, trade

and capital flows had imposed a requirement not only for harnessing entrepreneurial and

economic resources efficiently but also to be competitive in attracting investment for growth.

These developments necessitated modernization of the regulatory structure for the corporate

sector in a comprehensive manner.

Thus, two things are apparent. One, the role of private sector has enlarged significantly after

liberalization. And two, stock market has acquired an important position and can be expected

to play a larger role in the coming years. This is the background in which the prolonged effort

at revamping of the Company Law should be examined.

The Companies Bill, 2009 is divided in 28 Chapters consisting of 426 Sections, as opposed

to the 658 Sections of the existing Companies Act, 1956. The Bill, inter alia, reinforces

shareholder’s democracy, facilitates e-Governance in company processes, recognizes the

liability of Boards, directors and senior management personnel of companies, provides for a

new scheme for penalties and punishment for non compliance or violation of the law,

harmonizes corporate regulation with action by sectoral regulators, incorporates a new

framework for mergers and amalgamations of companies and provides an extensive

Insolvency Code based on the latest principles recommended by the United Nations

Commission on International Trade Law (UNCITRAL).

The Companies Act, 1956 is the principal landmark legislation that governs companies in

India. The Act prescribes provisions for protection of the interests of the investors, creditors

and public at large but at the same time permits the management to utilize its resources for

optimum results and prosperity.

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Over the years, the functioning and operation of the Act brought to light several lacunae and

defects in its provisions. In order to remove these defects, the Act was amended from time to

time, comprehensively. If we compare Companies Act, 1956 with Companies Bill, 2009 the

following changes can be termed as radical.

•All restrictions on managerial remuneration removed.

•Concept of one-person company introduced.

•Companies (except NBFC and Banks) prohibited from accepting public deposits.

•In addition to Company Secretary and Managing Director / Manager, a company

having prescribed paid up capital should have ‘Chief Financial Officer’.

Some of the important provisions of the Bill, in comparison with the Companies Act, 1956

which promote the competitive market and boost in economic activity are dealt in detail –

6.6.1 Incorporation of Companies

The procedure for incorporation of companies has been streamlined and made easier. This is

primarily in light of e-Governance facilities. The principal changes are as follows:

1. The provisions under the current Companies Act, which prescribed minimum paid-up

share capital for private and public companies have been scrapped.

2. Chapter I of the Act provides for incorporation of a one-person company and a small

company.

A one-person company is a company which has only one person as its member. It can have a

minimum of one Director. The Memorandum of a One Person Company shall indicate the

name of the person, or any changes thereto, who shall become the member of the company in

the event of the subscriber’s death, disability or otherwise. If the liability is limited, the

company should add the words “OPC Limited” at the end of its name. Further, a One Person

Company is exempt from holding its Annual General Meeting.

6.6.2 A small company means a company, other than a public company:

(i) whose paid-up share capital does not exceed such amount as may be prescribed and the

prescribed amount shall not be more than five crore rupees; or

(ii) whose turnover as per its last profit and loss account does not exceed such amount as may

be prescribed and the prescribed amount shall not be more than twenty crore rupees.

But this does not include a holding or a subsidiary company, a company formed for charitable

objects and a company formed under a Special Act.

3. Under the current Companies Act, a company formed for charitable purposes is prescribed

under Section 25. But under the Companies Bill, 2009 the same provisions have been

incorporated under Section 4.

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4. The provisions relating to Certificate of Commencement of Business have been dispensed

with. But a public company has to file with the Registrar a declaration as to payment of

shares by the subscribers to the Memorandum and a verification of the registered office of the

company.

5. It is proposed to relax the restrictions limiting the number of partners in entities such as

Partnership Firms, Banking Companies to a maximum 100, with no such ceiling as to

professional associations regulated by Special Acts.

6.6.3 Securities and share Capital

1. Under the Companies Bill, 2009 a company may issue Global Depository Receipts

after passing a special resolution at the general meeting of the company.

2. A company shall not be permitted to issue shares at discount (with the exception of

sweat-equity shares) and any such issue shall be void.

3. In case of infrastructure projects, a company may issue redeemable preference shares

for a period beyond 20 years, subject to the redemption of such percentage of shares

as may be prescribed on an annual basis at the option of such preferential

shareholders.

4. Further if a company is not in a position to redeem any preference shares or to pay

dividend, if any, on such shares in accordance with the terms of issue, it may, with the

consent of the holders of three-fourths in value of such preference shares and with the

approval of the Tribunal on a petition made by it in this behalf, issue further

redeemable preference shares equal to the amount due, including the dividend

thereon, in respect of the unredeemed preference shares, and on the issue of such

further redeemable preference shares, the unredeemed preference shares shall be

deemed to have been redeemed.

5. Certain changes have been made with respect to issue of share certificates. The

certificates of all securities allotted, transferred or transmitted shall be delivered:

(a) within two months after incorporation, in the case of subscribers to the

memorandum;

(b) within two months from the date of allotment, in the case of any allotment of any

of shares;

(c) within one month from the date of receipt by the company of the instrument of

transfer under sub-section (1) or, as the case may be, of the intimation of transmission

under sub-section (2), in the case of a transfer or transmission of securities;

(d) within six months from the date of allotment in the case of any allotment of debenture.

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6. A company has been prohibited from issue of shares with differential voting rights.

7. In case of reduction of share capital, an application should be made to the National

Company Law Tribunal. The Tribunal shall give notice of such application to the Central

Government and to the Securities and Exchange Board, in the case of listed companies, and

the creditors of the company. The Tribunal shall take into consideration the representations, if

any, made to it by that Government, the Securities and Exchange Board and the creditors

within a period of three months from the date of receipt of such notice.

The Companies Bill, 2009 is intended to modernize the structure for corporate regulation in

India and represents a major reform statement by the Government to promote the

development of the Indian corporate sector through enlightened regulation. The expectation

of second generation economic reform to create free market structure and promote

competition is attained by incorporating various provisions in the new companies Bill. In

view of various reformatory and contemporary provisions proposed in the Companies Bill,

2009 together with omission of existing unwanted and obsolete compliance requirements, the

companies in the country would be able to comply with the requirements of the proposed

Companies Act in a better and more effective manner.

The Companies Bill, 2009, thus, will enable the corporate sector in India to operate in a

regulatory environment of best international practices that foster entrepreneurship, investment

and growth. The proposed legislation will facilitate faster business decisions. Further the

Companies Bill will encourage foreign investors as it will create an enabling environment.

The Bill has also proposed some far-reaching changes in the statutory framework and is

expected to address the business and investor community’s desire for a more contemporary

and effective regulatory environment. It primarily seeks to reduce government control over

corporate processes, impart greater transparency, focus on corporate governance, stricter

compliance requirements and greater accountability to stakeholders.

Thus legislative changes which are made as part of second generation economic reform are

vital in creation of competitive market. The expectation of Second Generation Economic

Reform is to have sound policies and sustainable institutions which would support the

process of Liberlisation, Globalization And Privatization. The analysis of legislation points

towards the utmost priority of enactment. The major benefits which are intended to harness

by way of second generation reforms have been99:

99 www.imf.org/External/Pubs/FT/seminar/1999/reforms/jacobs.htm accessed on 15th Jan2010

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•Boosting consumer benefits by reducing prices for services and products such as

electricity, transport, and health care, and by increasing choice and service

quality.

•Reducing the cost structure of exporting and upstream sectors to improve

competitiveness in regional and global markets.

•Helping to increase employment rates by creating new job opportunities, and by

doing so reducing fiscal demands on social security, particularly important in

aging populations.

•Maintaining and increasing high levels of regulatory protections in areas such as

health and safety, the environment, and consumer interests by introducing more

flexible and efficient regulatory and non-regulatory instruments, such as market

approaches.

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Chapter VII

HURDLES IN IMPLEMENTATION OF SECOND GENERATION ECONOMIC

REFORM.

7.1 Introduction

Nowadays the destiny of any nation depends to a large extent on the legal framework that it

has. A strong legal framework ensures overall progress and development of the nation, which

requires a dynamic legal system, which would be able to face all the changes in the corporate

world within it and reform itself with the times.

The legal reforms pending in second generation economic reform have therefore become

extremely fundamental in the determination of India’s future.

The legal reforms have to keep pace with the Economic reforms and both, need to be

scrutinized and regularly updated in order to ensure that the economic development as

envisaged is to take flight. Thus to keep the momentum of growth going it is always

necessary to have consistent policies. This requires right polices at right time. What may be

right today may not be the same always. This stands true for both law and economics. So

today for all the nations may it be developed or developing, to have correct policies at right

time and its implementation is necessary.

Formulation, enactment and implementation of legislation is a big issue. There are many

players involved in this task. In democratic and welfare state like ours the whole process

needs to be more transparent and accountable. Due to many stakeholders the whole process

becomes time consuming and cumbersome. Economic laws require immediate and timely

action. No one can deny the consequences of delayed implementation of policies.

Second Generation Economic Reform demands Legislative Action which includes

Amendment to Companies Act , passing up of Money Laundering Law, setting up of

Competition Commission in place of MRTP Commission, review and weeding out of

obsolete and archaic laws and regulation, establishment of institution required for promotion

of free market structure. The whole process of formulation, enactment and implementation

started in mid of 90’s and is still ongoing. The still ongoing 2nd generation reform process

raises many issues and motivates to find out the reason for delay and hurdles in its

implementation. To be more precise we are concerned with speedy implementation of

legislative component of Second generation economic reform. Parliament is the sovereign

body to fulfill the aims and objective enunciated in the Preamble and Directive Principles

under Part IV of Constitution of India. This implementation is done by Parliament by directly

legislating or by way of delegating the authority to statutory body like SEBI( deal‘s with

70

capital market) to make rules or decide policy. Parliament has enacted various legislations

which has promoted the free market structure and fair competition. Parliament has received

mandate to enact various laws and to play proactive role in process of economic reform.

Parliament has received mandate for economic reform from constitutional provisions. In this

context, the Constitution of India provides for:

(a) Justice – social, economic and political (Preamble);

(b) State policy must secure that the ownership and control of material resources are

distributed to sub-serve the common good (Article 39(b));

c) State policy must secure that the operation of economic system does not result in

concentration of wealth and means of production to the common detriment (Articles 39(c)).

Thus it is the obligation on the parliament to enact laws to fulfill the objective enunciated in

the Constitution.

7.2 In preceding chapter, legislations which have been enacted as part of second generation

economic reform are discussed. But there are various reasons due to which enactment and

implementation of legislation is delayed. The hurdles or reasons for delayed formulation and

enactment has its roots in the whole process. The reason for delay can be broadly divided into

two as

•Legislative framework.

•Delay due to Judicial pendency.

7.2.1 Legislative framework.

Strong legal frame work is the soul of economy. It facilitates faster business decisions.

Economic law encourages foreign investors as it will create an enabling environment.

Legislation have some far-reaching changes in the statutory framework and is expected to

address the business and investor community’s desire for a more contemporary and effective

regulatory environment. It primarily seeks to impart greater transparency, focus on corporate

governance, stricter compliance requirements and greater accountability to stakeholders.

No one can deny the necessity of having the detailed scrutiny of policy and the need for

democratic mandate to the enactment. Before the policy becomes law, it has to pass through

various processes. No special priority is given to the economic laws for enactment. Often

serious legislations which have potential to promote economy are waiting for clearance for

decades.

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The best example of delay in enactment of economic policy is the company law,

competition Act and FEMA. These laws took many years to get enacted and enforced.

7.2.2 Case of Company law:-

Need was felt to have new company law according to changing economic secenario in 1993.

From then efforts were taken to have new comprehensive company law. Recent efforts were

taken in 2004. The Ministry of Company Affairs carried out a comprehensive review of the

provisions of the Companies Act, 1956 on the basis of a detailed consultative process. Further

a `Concept Paper on new Company Law’ was placed on the website of the Ministry on 4th

August, 2004. The inputs received were put to a detailed examination in the Ministry.

The Government constituted an Expert Committee on Company Law under the Chairmanship

of Dr. J.J. Irani on 2nd December 2004 to advice on new Companies Bill. The Committee

submitted its report to the Government on 31st May 2005. In addition to this, detailed

consultations were carried out with various Ministries, Departments and Government

Regulators. The Companies Bill was accordingly drafted in consultation with the Legislative

Department of the Central Government.

In furtherance of the same, the Companies Bill, 2008 was introduced in the Lok Sabha on

23rd October, 2008. But due to dissolution of the Fourteenth Lok Sabha, the Bill lapsed.

Recently on August 2009, the Government decided to re-introduce the Companies Bill, 2008

as the Companies Bill, 2009, without any change except for the Bill year and the Republic

year. Still the bill is in process. Such type of delay hampers the growth of nation many fold.

7.2.3 Competition Law

Effective competition can play an important role in economic growth and poverty reduction.

Where competition is vigorous, producers will seek the most efficient methods of production,

innovation will be encouraged and resources will be used to produce the goods and services

society values most highly. Consumers will benefit from lower prices, better quality and a

wider range of goods and services. The need to have comprehensive competition policy was

an utmost priority in mid 90’s. But it took a decade to enact the comprehensive legislation.

India’s Ministry of Commerce set up an Expert Group on interaction between Trade and

Competition Policy, subsequent to the establishment of a similar group at the WTO,

following the Singapore Ministerial Declaration of 1996. The Expert Group reported that

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there was a need for an appropriate competition law to protect fair competition and to check

anticompetitive practices, many of which could surface during the implementation of WTO

Agreements.

In view of the above, the Government appointed a High Level Committee on Competition

Policy and Law in October 1999 to propose a modern competition law for the country in line

with international developments. Finally, the Competition Act 2002 was enacted in January

13, 2003 to replace the MRTP Act. The Competition Commission of India (CCI) was

established in October 2003 to implement the provisions of the Act. Some constitutional

issues delayed implementation of the law, but these have been resolved with the passage of

the Competition (Amendment) Bill, 2007. India is perhaps the only nation in recent times that

is bringing into force its Competition Act in bits and pieces, by notifying one Section after

the other. China notified its anti-monopoly legislation in August 2008 in one go.

Thus whole edifice of legislature makes the process of legislation time consuming. Due to

other political issues many times important policy issues are often left unaddressed. India due

to delayed legislation has embarked on two opposite programmes very often. For e.g. 1991

National industrial policy was announced in wake of liberlisation and stablisation marks the

virtual departure the IPR 1956 and de-licensed permit raj that it had spawned. The emphasis

was on deregulation and opening up. But at the same time it continued with the old monoply

restrictions and trade practices act 1969, restricting the competition and creating hurdle in

free market structure. Such diverse policy has very often been implemented.

7.3 JUDICIAL REVIEW

Indian constitution, amongst its salient features is characterised by

(i) Parliamentary democracy, and

(ii) A system of delicate checks and balance with the separation of powers

between the three wings of state the legislature, the executive and the

judiciary.

As the final interpreter of the Constitution, the judiciary also has the power to strike down

particular laws passed by the Parliament if it believes that these are a violation of the basic

structure of the Constitution. Judiciary has always played an important role in upholding the

constitutional mandate .Power of judicial review has been specifically recognized in Art

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13(2),32, 131, 136 and 226 of our constitution .Court can strike down law passed by

Parliament or State Legislature if

(1) it is beyond its legislative competence as provided in Art 245, 246, 248and

other provision.

(2)if it violates any F.R conferred by Part III .

Or (3) if it transgress specific provisions of constitution imposing limitation upon

legislature under Art 254.

Or (4)if it violates basic feature of constitution.i.e. separation of power, judicial

review etc.

The Supreme Court, in the Bank Nationalization case of 1970100, displayed no inhibition in

probing the allegations that the Indira Gandhi’s government’s economic policy was

discriminatory and deficient on compensation. As a corollary, it even

Struck down the nationalization law. But post-liberalisation, the SC, in the Balco case of

2001, upheld the Vajpayee government’s disinvestment policy by adopting the principle

that “in the case of a policy decision on economic matters, the courts should be very

circumspect in conducting any inquiry and must be most reluctant to impugn the judgment

of the experts.” It is interesting to note the rather conservative approach of the Supreme

Court of India while interpreting the economic policy of the Government of India. The

relevant extract is quoted hereafter: “Process of disinvestment is a policy decision

involving complex economic factors. The Courts have consistently refrained from

interfering with economic decisions as it has been recognised that economic expediencies

lack adjudicative disposition and unless the economic decision, based on economic

expediencies, is demonstrated to be so violative of constitutional or legal limits on power

or so abhorrent to reason, that the Courts would decline to interfere. In matters relating to

economic issues, the Government has, while taking a decision, right to “trial and error” as

long as both trial and error are bona fide and within limits of authority. There is no case

made out by the petitioner that the decision to disinvest in BALCO is in any way

capricious, arbitrary, illegal or uninformed….”101

7.3.1Cases of delay due to judicial pendency.

The Competition Act, 2002 (“the Act”) was enacted by Parliament of India in

December 2002. It received the Presidential assent on 13th January, 2003.

100 R.C.Cooper Vs Union of India,AIR 1970 SC 564.

101 Balco Employees Union (Regd.) V. Union Of India AIR 2002 SC 350

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Pursuant to the Act, the Competition Commission of India (the Commission) was

established and one Chairperson as also an Administrative Member of the Commission were

appointed on 14th October, 2003. However, before the Chairperson could enter office, a

Public Interest Litigation was filed before the Supreme Court of India on 30th October, 2003

inter alia challenging the appointment on the grounds, amongst others, that since:

(a) The proposed Commission, to be headed by a bureaucrat, would replace the MRTP

Commission which had all along been headed by a Judicial Member;

(b) Commission had adjudicatory functions which warranted that the Chairperson must be a

Judicial Member.

The matter was finally disposed of by the Supreme Court of India in January 2005 noting that

the Government of India was introducing an amendment to the law to constitute a judicial

appellate authority while leaving the expert regulatory space to the Commission without

answering the challenge.

In this backdrop, the Act was amended in September 2007 providing for setting up of a

Competition Appellate Tribunal (“the Appellate Tribunal”) headed by a Judicial Member to

adjudicate appeals and the compensation claims arising out of the decisions of Commission.

Ever since its enactment in 2002, the provisions of the Act have selectively been brought into

effect. The substantive provisions being Sections 3 to 6,18 to 21, 26 to 33, 35, 38-39, 41-48

and 66 are yet to be enforced. On 28th February, 2009, the Government appointed the

Chairperson and two other Members of the Commission, who have assumed office. Two

other Members have been appointed and they too have assumed office recently. Processes for

appointing the Chairperson and two Members of the (Appellate Tribunal) are at the active

stage of consideration by the Supreme Court of India and the Government, respectively.

It has been over seven years since the Competition Act 2002 came into force. But certain key

provisions of the amended Competition Act, meant to give full power to the anti-monopoly

watchdog, Competition Commission of India (CCI), are yet to be notified

7.3.2 National Company Law Tribunal

The Companies Act, 1956, has provided the legal framework for corporate entities in India.

The need for streamlining this Act was felt from time to time as the corporate sector grew in

pace with the Indian economy. By the Companies (Amendment) Bill, 2001 introduced by

Shri Arun Jaitley, on 30th August 2001 which received the Parliament’s assent sought to

75

make changes with regard to the jurisdiction in case of disputes among others.102 The Central

Government shall by a Notification in the Official Gazette, constitute an Appellate Tribunal,

which will be called as The National Company Law Appellate Tribunal. The National

Company Law Tribunal was to be set up which would replace the existing Company Law

Board, the Board of Industrial and Financial Reconstruction, the Appellate Authority of

Industrial and Financial Reconstruction and the High Court and it sought to consolidate and

entrust the powers and jurisdiction of the aforementioned judicial and quasi- judicial bodies

to the National Company Law Appellate Tribunal. Changes were therefore incorporated in

the Companies Act and Part IB and Part IC were added to the Act by the Companies (Second

Amendment) Act, 2002. This Tribunal came into existence because pendency of cases in

Judiciary mainly in High Court and in Company Law Board. Lack of strength and efficiency

considered as major reasons for this worst condition in Indian Judiciary.

National Company Law Tribunal is nothing but the expansion of the Company Law Board, it

only differs in its powers and strength. But these powers of the Tribunal is very vast in nature

so such wholesale transfer of powers was struck down by the Mardas High Court in Madras

Bar Association v/s Union Of India103 as a violation of basic features of the Constitution

which mainly includes Separation of power and Independence of the judiciary. Appeal

against the decision of Madras high court is still pending in the Supreme Court on the ground

that it violates the basic feature of the Constitution .

No doubt the check of judicial authority on the validity of legislation on constitutional

mandate is necessary. But such type of reformative legislations should be given the utmost

priority by the judiciary. The delay in disposal of such matters means delay in

implementation of legislation. Such types of delays have far reaching effects on the

economics of the country. Success of democracy depends not only on freedom of judiciary

but also, on the quick grant of the justice. Though we feel proud of having the largest

democracy and freedom of judiciary, we really lack the will to achieve the values of

democracy and upheld the constitutional mandate. If the judiciary plays a crucial role in

democracy it should serve by delivering justice more quickly. If securing justice is the key

mandate of the Constitution the word ‘quick’ has to be added to it and it will then mean that

the justice is not denied to anyone.

102 www.loksabha.nic.in accessed on 20th Jan 2010

103Thiru R. Gandhi, President, Madras Bar Association v. UOI Comp.Cases.510,Mad.H.C.(2004).

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However we should not resort in extra-ordinary hurry-up of cases by whatever means. As

justice delayed is justice denied, similarly, the saying, ‘justice hurried is justice buried’ is

equally true. In fact, the untiring efforts put by ‘Indian Judiciary’ has done a commendable

job of imparting justice without fear and favour, and has created the faith in people that they

are the savior of the Indian Democracy.

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CHAPTER VIII

CONCLUSION AND RECOMMENDATIONS

The legal framework has changed drastically after Liberalization and globalization. All credit

needs to be given to Indian economic reform. Indian Economic Policy casted off its

protectionism image and became more liberal in 1991. Initial Years of reform which is

termed as first generation economic reform laid emphasis on liberalizing the economy. The

“First Generation Reforms” initiated in 1991 were crisis driven. The crisis was in the balance

of payments and mounting fiscal deficits.

The Washington Consensus or First Generation Economic Reform gave more stress on fiscal

discipline, tax reform, interest rate liberalization, a competitive exchange rate, trade

liberalization, liberalization of inflow of foreign direct investment, privatization,

deregulation, secure property rights, and lastly, a redirection of public expenditure priorities

towards areas offering both high economic returns and a potential to improve income

distribution, such as primary health care, primary education, and infrastructure. The First

Generation reforms(1991 to Mid of 90’s ) have resulted into a extensive competition and

thus, the thrust of first generation reforms has become a catalyst to enhance market

capacities, with little attention was paid to state capacities.

The First Generation Reform was based on “trickle-down” theory. It intended that

liberalization would result into integration, which leads to economic growth and there by

lead to poverty reduction. Given the strong correlation between growth and poverty

reduction, structural policy reforms were presumably designed to achieve efficiency and

growth objectives. Washington consensus relied on the theory of perfectly working markets.

But which sufficiently failed.

Concept Second Generation Economic Reform or post Washington consensus evolved

because of review of ideas and practices of aid over the last three decades. The reason for

change in aid policy have been multifaceted, relating to factors such as performance of aid,

particular political economic environment.

In mid90’s a need was felt to have legislative framework to reap the fruits of liberalization,

globalization and privatization. The legislative framework should intend to create institutions

which would promote the economic integration. These new approach sought to achieve the

broader goals. The issue was no longer whether the state should or should not involve but

rather how state should involve. New ways coordinating economic activity were explored.

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The transition from Washington consensus to second generation economic reform

(Washington consensus) is based on broad conception of development and the role of state

International organizations have become increasingly important actors in shaping the

domestic economic policies. Now to promote the second generation economic reform (post

Washington consensus), world bank and IMF are allocating aid selectively. It has been

argued that aid contributes to the development only when there good policies and institutions

prevail. There upon two pronged approach to aid allocation has been proposed-

•Channeling lending (aid flows to countries having appropriate

policy/institutional environment)

•And use non lending services (aid ideas) to support the emergence of sound

lending policies.

Thus it becomes a priority before the developing as well as developed nations to build the

strong legal framework and regulatory institutions.

Researcher has discussed about the need to have Second Generation Economic Reform as

well as its legal consideration. The anaylsis of Indian legislation as per norms of international

organization in Second generation economic reform has also been done.

Joseph Stiglitz, Former chief economists at World Bank, strongly argued for reconsideration

of the First generation Economic Reform (Washington consensus), which for him, had

advocated the use of a small set of instruments including macroeconomic stability liberalized

trade and privatization to achieve the a relatively narrow goal economic growth. For him

Washington consensuses have not been sufficiently successful. These necessitated to have

strong legal framework as well as regulatory and oversight institution, competition policy.

Many developing countries to cope with IMF and World Bank requirement tried to initiate

the change in legislative framework and establishment regulatory institutions for sustainable

economy. India also initiated the process of reform during the period in Mid of 90’s,

successive governments have carried forward the country’s economic reforms in Industrial ,

Trade and Financial sectors. The approach of the Government has been to gradually move

towards comprehensive re-structuring of the economy to reap the benefits of the fast

changing global business environment. The immediate priorities of reform were to change the

Competition policy, replace the obsolete foreign exchange Regulation act, amendments to

Company Law 1956, Debt Laws and set up of regulatory bodies like IRDA, enhancing

efficiency of the existing regulatory bodies like SEBI. These all Legislative changes are made

79

with the ulterior motive of creating investor competitive market atmosphere and derive more

benefits from globalization. Economic Laws require immediate and timely action. No one can

deny the consequences of delayed implementation of policies.

The whole process of formulation, enactment and implementation started in mid of 90’s and

it’s still ongoing. The current ongoing 2nd generation reform process raises many eyebrows

over it’s absolute success and compels to find out the reason for delay and hurdles in its

implementation.

Strong legal frame work is the soul of economy. Often serious legislation which have

potential to promote economy are waiting for clearance for decades. The best example of

delay in enactment of economic policy is the company law, competition Act and FEMA.

These laws took many years to get enacted and enforced. Such type of delay hampers the

growth of nation many fold.

Recommendations and Suggestion:

The Researcher is of the opinion that for speedy enactment and implementation of economic

reform should be set on the utmost priority by the State, owing to significance and impact of

such reforms on socio-economic fabric of the society. The best solution for giving priority for

enactment and implementation should be implemented by creating a statutory body

exclusively taking care to reduce all possible delay.

Statutory body would suggest government for the enactment and implementation of

legislation and prioritize law making process according to the importance of legislation. It

should be a holistic think-tank, capacity building and service delivery body to help corporate

growth, reforms and regulation through synergized knowledge management, global

partnerships and real time solutions.

•This statutory body should consist of the parliamentarians as member of

statutory body. The benefit of taking parliamentarian as members would be

very effective as their recommendations would be taken quite seriously by

government and tabled before the house for enactment.

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•the statutory body should be full-fledged body like law commission which

should work all round the year and cater with the needs of changing market

and economy.

•This body should have experts from economics and legal fraternity. Economist

would cater need of market and jurist will take care that the enactment is in

consonance with established principle of law and constitutional mandate.

Though the world is passing through a difficult phase of economic and

financial crisis, in India the pressure on the financial systems has been

considerably reduced due continuous monitoring and timely steps. To avoid

such crisis the Government as well as the corporate sector must develop

capacity to foresee such crisis and take corrective action well in advance. A

mechanism needs to be developed through which the Government, Regulators

and the Corporate can work jointly to avoid such crisis. Thus, all pending

economic legislations in Parliament can be cleared expeditiously.

Another reason for delay in implementation of legislation is judicial review by Supreme Court

and High Courts. The Supreme Court and High Courts should set up a special bench to deal with

the petitions challenging the legislation which have economical importance. Judiciary should

give early hearing to “cases having serious impact on the National Economy”.

During the pendency of the petitions, the legislators should proactively amend the Law if the

petition has merit and law violates the basic feature of constitution as it was done during

Competition law case pending in Supreme Court.

The Ministry of Corporate Affairs in India has established the Indian Institute of Corporate

Affairs (IICA) as a unique world-class institution for holistic treatment and coverage of all

subjects involved in, or impacting on, corporate functioning e.g. management, economics,

finance, taxation, accountancy, law and regulation. This institute shall act as think tank and

advisor the concern Ministries for streamlining economic functions and activities in India.

 


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venkat
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