linkages between research, policy analysis and outcome, bytarun das published in gdn monitor

8/14/2019 Linkages Between Research, Policy Analysis and Outcome, byTarun Das published in GDN Monitor

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FINAL REPORT

September 2005

Linkages between Research, Policy Analysis and

Reform Outcomes in India*

Tarun Das and Arvind Virmani

With Tejinder Singh Laschar


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Linkages between Research, Policy Analysis and

Reform Outcomes in India*

Tarun Das and Arvind Virmani

With Tejinder Singh Laschar

Contents

1 Background and outline of the study1.1 Introduction, scope and outline of the study1.2 Background and rationale1.3 Methodology

1.3.1 Surveys and data collection1.4 Systems and Procedures for policy planning1.5 Players in policy making and policy implementation

1.5.1 Policy making1.5.2 Policy implementation

1.6 Role of Ministry of Finance

2 Institutional set up for research and policy planning1.7 Role of development research1.8 System of institutional arrangements1.9 Quality and relevance of both public an private research1.10 Social science research in India1.11 Role of regional research institutes

1.11.1 Indian Council for Research on International Economic Relations1.11.2 Insitute for Social and Economic Change (ISEC)

1.12 Strengths and weaknesses in the inter-linkages

1.12.1 Communications within he governments1.12.2 Network among the research institutes1.12.3 Interactions between government departments and research institutes1.12.4 Transparency, publicity and dissemination of research

3 Bridging Research and Policy in External Sector1.13 External sector reforms1.14 Policy initiatives by the government

1.14.1 Committees and working groups1.14.2 Capacity building for external debt management

1.15 Backward looking: episode study on foreign exchange liberalisation

1.16 Forward looking: empirical study of Indian Journals1.16.1 Selection of articles1.16.2 Analysis of Journal articles1.16.3 Impact of research on policy

1.17 Concluding remarks

4 Bridging Research and Policy in Privatization Strategy1.18 Introduction1.19 Bridging research and policy in privatization


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1.20 Labour laws and backward looking approach1.21 Linkages between research and policy- forward looking approach

1.21.1 Classification of research papers1.21.2 Impact of research on policy

1.22 Labour regulation, investment, employment and poverty1.23 Labour legislation and reforms

1.24 Role of trade unions1.25 Concluding remarks

5 Bridging Research and Policy- Results of a Survey1.26 Survey of eminent researchers and policy makers

5.1.1 Characteristics of respondents1.27 Components of questionnaire and survey results

1.27.1 Areas of research1.27.2 Motivation of research1.27.3 Knowledge about responses by the policy makers1.27.4 Bureaucratic characteristics in policy implementation1.27.5 Factors influencing research1.27.6 Process of reforms1.27.7 Predictability of reforms, reforms window and policy crisis1.27.8 Characteristics of policy makers1.27.9 Quality of government research1.27.10 Main barriers to use research in policy planning1.27.11 Important measures to enhance policy-research interlinkages

1.28 Summary of forward looking and backward looking approach1.29 Concluding observations

6 Conclusions and recommendations1.30 General observations1.31 Political economy context1.32 Bridging research and policy in external sector reforms1.33 Bridging research and policy in privatization strategy1.34 Bridging research and policy in labour reforms1.35 Measures to strengthen linkages between research and policy

1.35.1 Relevance and utility of research1.35.2 Policy and research networks1.35.3 Effectiveness of policy dialogues and policy makers and researchers1.35.4 Organizational and institutional set up1.35.5 System of communications

1.36 Factors affecting research uptake


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Text Tables

Table 1.1 Paradigms of pro-market reforms in India since 1991Table 3.1 Articles from IEJ and EPYTable 3.2 Analysis of journal and other articlesTable 3.3 forward looking articles suggesting policy change

Table 3.4 Important policy suggestions extracted from the papersTable 4.1 Progress of amendments of selected acts on labour reformsTable 4.2 Classification of articles published in the Indian Journal Labour Economics by quality,relevance and type of researchTable 5.1 Summary of survey on interlinkages between research and policy.

Figures

Figure 5.1 respondents positionsFigure 5.2 Specializations of respondents

Selected references

Annexes

Annex-1: Questionnaire for distinguished researchers and policy makersAnnex-2: Quantum and Quality of Social Science Research in IndiaAnnex-3: Extern al sector reforms and their impact on Indian economy

Annex-4.1: Privatisation policies and labour reforms in IndiaAnnex-4.2: Review of papers in selected numbers of the Indian Journal of Labour EconomicsAnnex-4.3: Review of policy suggestions in published papers of the Indian Journal of LabourEconomics during 1997-2000 and their impact on government policyAnnex-5.1: Survey results for distinguished researchersAnnex-5.2: Survey results for distinguished policy advisersAnnex-5.3: Survey results for both distinguished researchers and policy advisers


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1 BACKGROUND AND OUTLINE OF THE STUDY

1.1 Introduction, scope and outline of the study

India is indeed a success story of economic reforms. Because of its vast size, it also provides a good

example of having a wide network of research institutes, and effective linkages betweendevelopment researchers and policy planners. Reforms launched in 1991 have placed India on ahigher growth profile with lower inflation rate, higher employment and lower levels of poverty.These achievements are attributable to measures like a pragmatic policy planning framework andgood governance and effective linkages between development research and policy planning.

The case study of India makes a critical appraisal of theses linkages since 1990 attemptedsuccessfully in the sphere of external sector and with much lesser success in privatisation and labourreforms. Further, the case study investigates key issues affecting research and policy linkages,identifies strengths and weaknesses, and suggests measures for improving these linkages, focussingon practical usage for policy makers and researchers.

It examines how policy planning was influenced by research and what feedback it had on theresearch institutes. It examines whether public and private research departments supplement eachother or duplicate research, and whether they have a well-qualified staff with a blend of theoreticalknowledge and practical experience. The study investigates the key issues and institutionalframework for conducting research and establishing linkages between policy makers anddevelopment researchers. The study deals with success stories as well as failures and theirconsequential impact on the progress of reforms in the external sectors and labour market sectors .

Research methodology involves a combination of desk study and surveys. Desk study makes acritical review of publications in important Indian economic journals, working papers of selected

research institutes, and recommendations by government expert committees and working groups.This is supplemented by surveys of distinguished policy makers and researchers.

The study attempts to address a number of key questions, specifically the following:

(a) To what extent has development research helped the policy makers in the economicministries of Government of India?

(b) What feedback was received by the institutes from the government for improving the scopeand relevance of research and enhancing their research capabilities?

(c) What are the systems and institutional arrangements among the research institutions and thegovernment for continual research and dialogue on economic policies?

(d) Does public and private research complement or substitute each other?(e) Have the linkages among government departments and research institutions helpedgovernment policy advisers to provide improved policy advice, better coordination andcooperation among various Ministries?

(f) Has the existing system of interlinkages helped the improvement for better collection anddissemination of data and information on socio-economic statistics, and generate publicawareness for need of reforms?

(g) What is the present system of public funding of private research? Has it in any way affectedadversely the autonomy of the private research institutions?


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Table-1.1: Paradigms of Pro-Market Reforms in India since 1991

Pre-Reforms Period Post Reforms Period

1. Quantitative licensing on external trade,industrial size and investment

2. State regulated monopolies of utilities and

external trade3. Dominant role of public sector in capital-intensive industries and infrastructure

4. Strict Government control on finance andcapital markets

5. Restrictions on foreign investment andtechnology transfer

1. Abolition of industrial, investment and tradelicensing

2. Removal of state monopolies in production,

trade and distribution of utilities3. Infrastructure opened for private investmentand disinvestment in public enterprises

4. Significant liberalisation of financial andcapital markets

5. Liberal regime for Foreign Direct Investment,portfolio investment, foreign technology

6. Import substitution and export of primarygoods

7. High duties and taxes with multiple rates andlarge dispersion

8. Sector-specific monetary, fiscal and tariffpolicies

9. End-use and sector-specific, multiple andcontrolled interest rates

6. Export promotion and diversification, noimport bias

7. Reduction and rationalization of taxes andduties

8. Sector-neutral monetary, fiscal and tariffpolicies

9. Flexible interest rates without any end-use orsector specifications

10. Strict foreign exchange control, allocation offoreign exchange in different sectors

11. No convertibility of rupee on current andcapital account

12. Multiple and fixed exchange rates determinedby the Reserve Bank

13. Administered prices for minerals, utilities andessential goods

14. Tax concessions on exports and savings

10. Abolition of foreign exchange control, andallocation by the government

11. Full convertibility of rupee on current accountand gradual convertibility on capital account

12. Unified exchange rate and market determinedexchange rates

13. Abolition of all administered prices except forfew life saving drugs

14. Rationalized and being phased out

15. Central planning, discretionary process, highdegree of bureaucracy

16. General lack of consumers protection and otherrights

15. Decentralization, sound institutionalframework, reforming civil services

16. Acts governing consumer rights, IPR,independent regulatory authority

17. Outdated Companies Act and restrictions onforeign employment and salaries

18. Existence of Monopolies and Restricted TradePolicies (MRTP) Act

19. No exit policy for land and labour, high stampduties and registration fees

20. Outdated legal system21. Explicit subsidies on food, fertilizers, and some

essential items22. Hidden subsidies on power, urban transport,

public goods, POL

17. Amendment of companies Act for ensuringgood corporate governance

18. MRTP Act abolished and Competition Lawenacted

19. No basic change in labor policy, and slowprogress of reforms in land markets

20. No change21. No change, budget subsidies on LPG and

kerosene introduced22. No change, but user charges are being

rationalized, and subsidies targeted

Source: Das (2003)


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It may be observed from Table-1.1 that significant reforms had taken place in the external sector.Quantitative restrictions on foreign trade are virtually abolished and maximum customs duty hasbeen reduced from 400% in 1990 to 20% in 2004 to improve competitiveness of Indian industries.India undertook general policies and strengthened legal and regulatory systems leading to a stablemacroeconomic framework, liberalization of industry and capital markets and non-discriminatoryfiscal and monetary policies.

Exchange rates of Indian Rupee vis--vis other currencies are market determined. Rupee is nowfully convertible on current account and almost fully convertible on capital account for the non-residents. To moderate the monetary impact of huge reserve accumulation, government prepaid partof external debt, liberalized external commercial borrowing and permitted outward foreigninvestment during 2003-2004. All manufacturing sectors have been open for foreign investmentsubject sectoral caps on equity. Further, except retail trade all other service sectors are also nowopen for foreign investment, though sectoral caps still exist in some of them. Foreign equity up to100% is allowed in most infrastructure sectors.

Reforms in external sector were facilitated by studies by researchers and successful linkagesbetween research and policy planning. As in the case of external sector, there was no dearth ofresearch studies on labour reforms and there existed close interaction among policy makers,researchers, trade unions and other stakeholders. However, reforms in labour markets and labourlaws have been limited and slow due to the existing socio-political compulsions. Thus, these twosectors are chosen to indicate the contrasts as regards linkages between research and policy. Thestudy emphasises the role of political context for bridging research and policy.

Certain unique features characterize Indian reforms scenario. The reforms have been gradual incontrast to the Big Bank or Shock Therapy Approach; being gradual consequentially they have had ahuman face. Issues like India being a sovereign democratic republic with independent judiciary havebeen all pervading and have had their deep-rooted impact on the reforms process.

To sum up, given a multi-party democracy, ongoing reforms are based on general politicalconsensus and have a bias for employment generation and poverty reduction. Political economydemanded that reforms should have a human face and should not make a compromise for nationalsecurity, public health and safety, and environment protection.

The impact of reforms on growth and poverty reduction had been encouraging. India moved up on ahigher growth path around seven per cent. Inflation declined from 16 percent in June 1991 to aroundfour percent. Poverty ratio declined from 36 percent in 1993-94 to 26 percent in 1999-2000. Therewas no wage freeze and retrenchment of employees.

There has been a significant improvement in the external sector. India overcame a severe balance ofpayments crisis without any debt write-off. Subsequently, India was able to prepay a part of externaldebt to the multilateral funding agencies and bilateral countries.

Total foreign exchange reserves increased from US$1 billion, equivalent to two weeks imports inJune 1991 to US$146 billion equivalent to 15 months of imports in September 2005. The currentaccount balance, which recorded a deficit of 3.1 percent of GDP in 1990-91, had a surplus for threeyears since 2001-02. Foreign investment inflows improved from total of US$1 billion in 1980s to$40 billion in 1990s due to stability of the exchange rate, continual reforms in infrastructure andliberalisation of foreign investment policies.


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External debt indicators also showed steady improvement. In terms of stock of external debt, Indiasposition improved from the third rank after Brazil and Mexico in 1990 to the eighth rank afterBrazil, China, Russian Federation, Argentina, Turkey, Mexico and Indonesia in 2003. The debt-to-GDP ratio declined continuously from 38 per cent in 1991 to 17 per cent in 2005. The debt-serviceratio (i.e. the ratio of total debt services to gross receipts on the current account of the external

sector) also declined continuously from 35 per cent in 1990 to 16 per cent in 2005. The World Banknow classifies India as a low indebted less developed country.

India is one of the few countries, which reaped these benefits without serious economic disruptionsor much sacrifice made by the people. Many countries with significant reforms experienced highrates of inflation, unemployment and poverty at the initial stage. There was no such adversesituation in India, as Indian reforms program emphasized the development of an appropriate safetynet for the vulnerable and weaker sections that could be adversely affected by such structuralreforms.

1.3 Methodology

We have applied both the forward-looking approach and backward-looking approach as suggestedin the BRP Secretariat paper on research methodology (GDN 2004). The forward-looking approachfocuses on individual pieces of research and examines whether research has had any influence ormaterial impact on policymaking. More specifically, recommendations made by researchers and thelinkages from research to policy planning are examined to understand why in some cases theserecommendations were accepted by the government and why in other cases these were rejected.Specific cases of the forward-looking approach include (a) external sector reforms and (b) Reformsin labour markets.

The backward-looking approach starts with a major policy change and tries to identify researchesthat led to the policy change or to examine whether this policy change induced new fields ofresearch. A detailed episode study relates to exchange rate liberalisation, one of the most successfulreforms in India. Other examples, where backward looking approach is adopted, include partialconvertibility of rupee on capital account.


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1.3.1 Surveys and data collection

The basic data and information on the explanatory variables (viz. the context, evidence, links andexternal influence etc.) have been collected on the basis of desk studies and detailed surveys andinterviews. For this purpose a detailed questionnaire (Annex-1) was prepared for distinguishedresearchers and policy advisers in the government. Surveys tried to answer a set of questions,

particularly the following:Do researches influence policy in a uni-directional way (the linear model) or there is feedback oneach other?Is there a clear divide between researchers and policy advisers (the two communities model) or theysupplement and complement each other?Is the production of knowledge confined only to the positive effects of policies (the positivisticmodel)?How can research be transported effectively for policy planning?How can research change the mindset of the bureaucrats?Is there strong correlation between educational background and international exposure of policymakers and uptake of research?How can research help in building up knowledge and public awareness?

The target groups addressed in the study include selected government ministries and researchinstitutions. Government ministries include the Ministries of Finance, Industry and Commerce,Labour and Employment, and the Planning Commission. Senior advisers and policy makers in thesedepartments were interviewed and requested to respond to detailed questionnaire on bridgingresearch and policy planning. Selected research institutes include the major institutes (indicated inAnnex-2), which not only have strong interlinkages with the government departments but alsoreceive project or recurring grants from the government and various multilateral funding agenciessuch as the World Bank, Asian Development Bank, UNDP, USAID and others. In addition to theresearch institutes, surveys were conducted with the research departments of the major trade andindustry associations, who have close interactions with the government and are represented invarious Committees or Expert Groups appointed by the Government.

1.4 Systems and Procedures for policy planning

Before examining Interlinkages between research and policy, it is necessary to understand thesystems and established procedures for policy formulation in India. As India is a sovereigndemocratic republic with independent executive, legislative and judiciary systems and free press,existing political economy plays an important role for determining the scope of reforms and policies.In fact, Indian foreign exchange crisis after the gulf war in 1990 induced the then government toundertake wide-ranging reforms in various sectors at a faster speed, which was not politicallyfeasible under tranquil conditions.

Policy formulation, particularly enactment of a new law or amendment of existing one, is a longdrawn process after consulting all stakeholders. Initiatives for policy proposals are taken by theconcerned ministry i.e. by the Ministry of Finance (MOF) and the Ministry of Industry andCommerce (MOIC) for external sector reforms, and the Ministry of Labour and Employment(MOLE) for labour reforms. MOF is assisted by the Consultative Committee on Finance, the MOICby the Advisory Board on Industry and Trade, and the MOLE by the Standing Labour Committee.


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In the case of labour reforms, the Standing Labour Committee consists of concerned Secretaries inthe Central government, labour secretaries of all states, eminent labour economists andrepresentatives of trade unions, private employers and industry associations. The Standing LabourCommittee meets at least once in a year and recommends policy proposals for consideration by thegovernment. The draft policy paper prepared by the Ministry is put up for discussion by theCommittee of Secretaries (COS) under the chairmanship of the Cabinet Secretary. The revised

policy note by the COS is examined by a Group of Ministers (GOM) and then by the CabinetCommittee on Economic Affairs (CCEA) under the chairmanship of the Prime Minister. Afterapproval by the Cabinet, policies can be implemented by an executive order if it does not conflictwith any act or constitutional provisions.

If any policy reform has wider economic and social implications and concerns any existing Act orconstitutional provisions, it requires the ratification by the Parliament. However, once approved bythe Parliament, policies are irreversible. Amendment of any Act or the Constitution requires at leasttwo-thirds majority of the members of Parliament. During 1990s in general there had been coalitiongovernment at the Centre with various political parties having thin majority and diverse ideology.Therefore, any amendment required the support of some opposition parties to gather two-thirdmajority. The same procedure holds good for other policies. Consequently, progress of reforms insome sectors such as privatisation, labour laws and labour relations had been very slow.

1.5 Players in Policy Making and Policy Implementation

In India, the role of the following players is important for bridging research and policy.

1.5.1 Policy Planning and Formulation

At the bottom layerof the policy-making pyramid, professionals and advisers influence decisionmaking in three ways. First, sound professional understanding and advice are essential in the caseof technically complicated issues like exchange rate, financial sector reform or regulatory systems.Second, leaving aside the rare cases where the Secretary to a Department is himself a professional,an advisor can influence the pace of reforms and fill gaps in the knowledge of the secretary. Third,even in the case of less technical subjects, professional advice can influence acceptance or rejectionof research and policy. Conversely, an advisor who is not knowledgeable about the marketeconomy will be ignored by a pro-reform secretary and may become a partner of an anti-reformcamp.

At the second layer, senior Civil Servants push the reforms for acceptance by the Ministers. Seniorcivil servants are an elite group usually characterised by permanence, security, high entry standards,promotion by merit and code of political neutrality. In local governments (especially at State Levels, Municipalities and Corporations) bureaucrats regularly interact with the public and have widediscretion over allocations and distributions of benefits. They work in various public serviceorganisations and play an important role in implementation of social and economic policies.

The Political Executives (Ministers or Members of Parliament) generally do not have time to readlengthy research reports or regularly interact with researchers who remain at the end of a long chainof gatekeepers and condense, crystallize and present their ideas.

At the top level, dynamism and leadership of the Prime Minister are very relevant to the width,depth and pace of reforms in India. The Prime minister represents the collective political wisdom


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and ideology of the government. Major reforms cannot be initiated or sustained without the clearbacking of the Prime Minister. In a coalition government, as has happened in India in recent years,the role of the Prime Minister becomes critical in persuading coalition parties with differingeconomic ideology.

1.5.2 Policy Implementation

Institutions for policy implementation are equally important. These include legal and institutionalframeworks and management skills. Without a proper legal framework, policies do not havepolitical legitimacy; without appropriate institutions policies will not work; and without a workingset of rules and regulations institutions cannot function properly. Therefore, an effective co-ordination and synergy among policies, legal and regulatory bodies and other institutions forimplementation of policies are important.

In India, a number of institutions at different administrative levels have responsibilities inimplementing government policies. Four clusters of such institutions operating at national and locallevels can be identified. The central government ministries, regulators and other agencies belong tothe first cluster and have interest in both policy making and policy implementation. They form thecore of the national level institutions. Their directives (for various development programs such aspoverty alleviation and employment guarantee schemes) are carried out by the state governments,which form the second cluster. Local government institutions (such as municipalities, corporations,district boards etc) form the third cluster and are expected to bring the local perspectives in planningand implementation. In the fourth cluster belong the various grass-root level units (such as villagepanchayats, co-operatives and community based organisations such as non-governmentalorganisations) and are expected to receive financial support from other three clusters and to providepublic services to the community.

Various studies by the Planning Commission (2005) indicate that policies adopted at the nationallevel and passed on successively to the lower levels are assumed bureaucratically to have beenimplemented. In between the clusters there are serious communications and information gap andconsiderable leakage of resources. It is, therefore, necessary to have proper co-ordination amongvarious implementing agencies and to have policy audits to evaluate whether policies are translatedproperly into actions and whether multitude of administrative decisions reach concerned partiesaccurately and in time.

Reform actions can be initiated at any level but they move up and down and the final outcomedepends on effective interactions among them. There is no incentive within the system to eitherreward a reformist policy adviser or to punish one who obstructs reforms by putting bureaucraticobstacles. Successful reforms are, therefore, heavily dependent on the personal knowledge andinitiative of the individuals who happen to be in the right place at the right time (under a positive orat least neutral minister).

1.6 Role of Ministry of Finance

Research uptake generally depends on the qualifications and mindset of advisers in the government.During reforms period since 1991, there was emphasis in the government to send middle-level andupper-level advisers for refresher courses and training on economic policies. There was alsoemphasis to recruit more advisers at the upper level directly from the academic institutes or


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international bodies. These measures helped to have professionalism in policy planning and greateruptake of research.

During initial phase of reforms (1991-1996), Ministry of Finance led by the then Finance MinisterManmohan Singh acted as the nodal ministry for research studies and reforms and was guided bythe conditionalities set by the international funding agencies to have access to external finance. The

then Secretary, Economic Affairs Montek Singh Ahluwalia played a critical role in implementingpolicy and institutional reforms. One of the key reasons for his success was his intellectualversatility, natural talents and skills for management of people and knowledge. He was ably assistedby a group of economic advisers at various levels viz. Shankar Acharya, Arvind Virmani and TarunDas (the last two are the authors of this report). All of them were highly educated professionals andhad experiences in working with the international organisations. As a result, the degree of researchuptake was significantly high and the speed of reforms was commendable. With the exit of keypolicy makers from the Ministry of Finance, there was slowdown of reforms in the second half of1990s.

Presently, Manmohan Singh has come back to the government as the Prime Minister and MontekSingh has returned as the Deputy Chairman of the Planning Commission. The present Financeminister P. Chidambaram is equally reform-minded with rich experience and knowledge, and hasinducted Rakesh Mohan and Parthasarathy Som as Secretary and Adviser respectively who haveinternational experience in policy planning and research. Consequently, economic reforms, whichwere driven to the back seat in the last few years, are coming forefront.


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2. INSTITUTIONAL SET UP FOR RESEARCH AND POLICYPLANNING

2.1 Role of Development research

The efficacy of government policy planning in India has long been facilitated by sound socio-economic research undertaken in the country. Policy oriented research with its tremendous socialand economic implications, particularly for improving social welfare, has filled gaps in economicpolicymaking. Despite serious challenges in the face of liberalisation and globalisation and politicalconstraints in the context of democratic set up, the relative success of Indias reform programme,especially since 1991, is witness to India having achieved a two-way relationship between researchand policy. India, therefore, is a successful example of economic reforms and effective linkagesbetween policy and research.

Indias success story in terms of economic performance and structural reforms started only in thelast decade or so. But, its richness in terms of quality and standard of research, especially as

compared to other developing countries, has been acknowledged by the global research community.Public-private participation in development of social and physical infrastructure has led to aphenomenal increase in the demand for information and analysis of various aspects of the economyfor policy planning. This in turn has led to a rapid expansion of research organizations andinstitutions outside the government resulting in independence for collection and interpretation ofdata from various sources. From the point of view of public policy planning, there has been atremendous development of diverse and often conflicting sectoral and regional interests andideologies (Vaidyanathan, 2001).

2.2 System of institutional arrangements

Indias public and private research system is one of the largest in the world with a large number ofresearch institutes dealing with socio-economic issues. Most of these research institutes are directlyfunded either by the government or by the University Grants Commission or the Social SciencesResearch Council (SSRC), which in turn receive grants from the Ministry of Human ResourceDevelopment. These research institutes also receive research funds from the multilateral fundingagencies like the World Bank, Asian Development Bank, International Labour Office, FAO, UNDP,UNESCO, ESCAP and others.

In some cases, such as science and technology (S&T) and agriculture, research is primarily underthe purview of the government. The public agricultural research system is led and managed by theIndian Council of Agricultural Research (ICAR), while public research on S&T is led by the Indian

Council for Research on Science and Technology. However, research expenditures constitute only asmall proportion of total expenditure of the government. For example, government of India (GOI)expenditures on agricultural research and education amounted to Rs 16 billion per year in the early2000s, equal to 0.5 percent of agricultural GDP and only 4 percent of agricultural subsidies on foodand fertilizers provided by the government (World Bank 2004).

Total R & D expenditure in India at 1.23 percent of GDP in 1989-2000, although higher than that at1 per cent in China and 0.1 per cent in Thailand, is considerably lower than that in U.S.A. (2.7%),Japan (3%), Germany (2.5%), and Korean Republic (2.7%) (World Bank 2003). In USA the Federal


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government provides nearly 40% of total R & D funds and the remaining 60% is provided by theindustry, state governments, Universities and other non-profit institutions. In Japan, while thegovernment provides only 16% of R & D expenditure, the rest is provided by the industry. InGermany, 35% comes from government sources and the remaining 65% is borne by the industry. InSouth Korea, the ratio of government and private investment in R & D changed significantly from97:3 in 1963 to 15:85 in 1990s. In contrast, R&D expenditures in India as in China and Thailand are

mostly funded by the public sector (Das 2002).

Government Departments dealing with economic issues such as Economic Affairs, Agriculture,Food and Civil Supply, Industry, Commerce, Labour, Telecommunications, Planning Commissionetc. have in-house research divisions under the overall supervision of economic advisers. Most ofthese advisers are career government servants recruited under the Indian Economic Service. At thehigher level there are also lateral recruitment of advisers from outside. These advisers come fromuniversities, private research institutes and international organisations etc. either on permanent basisor on fixed-term contract with the government. Various industry associations and chambers ofcommerce have also in-house research divisions and economic advisers.

While there is need to further increase budgetary allocations, there also is an urgent need to improvethe effectiveness of existing expenditures. Critical weaknesses identified include proliferation ofresearch institutes resulting in resources being spread thinly and lack of focus on areas of relevanceand opportunity. There is a multiplicity of institutes leading to duplication of research. There isweak accountability for performance; inadequate collaborative multi-disciplinary research; weakinteraction among researchers, public and the private policy makers (World Bank 2004).

2.3 Quality and relevance of both public and private research

Over the years, India has built a wide array of R&D institutions to support the development anddiffusion of industrial technologies. It has virtually all basic, applied, hardware and software andR&D institutions, some of which have world-class standards. But, these institutions have failed tocommercialise R&D activities as these are virtually financed and controlled by the public sectorwithout any linkage with the private sector. Since 1993 Government had encouraged private sectorfunding of research institutions by providing tax reliefs on R&D expenditure.

Most of the social science researches are funded by the government or grants from multilateralagencies. Project grants in research institutes are generally policy oriented, as these are provided onthe basis of specified studies. On the other hand, as the promotion prospects of university lecturersdepend on number of publications, researchers in universities and other academic institutesconcentrate on theoretical research and econometric modelling which have higher chances of beingpublished in academic journals. Research fellowships are also provided for conducting research forobtaining Ph.D. degrees. These research studies have very little relevance for policy issues.

There are various associations dealing with specific fields of research within social sciences. Theseinclude Indian Economic Association, Indian Econometric Society, Indian Association for Researchin Income and Wealth, and Associations of Agricultural Economists, Labour Economists,Ecological Studies etc. These associations hold annual conferences and publish journals on the basisof papers presented in these conferences. Indian Economic Journal and Indian Economic Reviewpublished by the Indian Economic Association and the Journal of Quantitative Economics publishedby the Indian Econometric society generally deal with theoretical studies, while other journals


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published by other associations generally deal with contemporary economic issues and have majorimpact on policy planning by the government.

2.4 Social Science Research in India

In 1969, the Indian Council of Social Science Research (ICSSR) was established to encourage the

development of autonomous research capacity in the country through institutes that were free topursue their own research agenda, publish their own findings and engage in public discussions anddebate on economic planning and development. Clearly, research in India, which was earlier almostentirely confined to universities, has undergone a dramatic change in the last 50 years.

India has witnessed phenomenal growth in the number of higher educational and research institutesduring past five decades. It has a wide range and network of economic research institutions witheffective linkages with policy makers. These institutes range from nodal agencies and departmentswithin the government to government funded specialized autonomous institutions studyingparticular sectors, non-government research institutes set up by the private corporate enterprises,trade and industry associations, university departments, advanced research centres outside theuniversities and activist NGOs etc. Annex-2 provides an account of the development, quantum andquality of social science research in India over the years.

2.5 Role of Regional Research Institutes

As mentioned in section-1, research methodology for the India case study involved conductingsurveys and interviews of eminent researchers in selected research institutes. These institutes wereselected from different regions of India in order to examine the variation in the general policymaking context among the Indian states. In this section we deal with research profiles of two leadinstitutes viz. ICRIER (Indian Council for Research on International Economic Relations), NewDelhi and the Institute for Social and Economic Change (ISEC) located in the Bangalore city of thestate of Karnataka. The choice of ICRIER is for obvious reason that it is the executive agency forthe BRP case study for India. As ICRIER is situated at New Delhi, it has concentrated research onmacro-economic issues relevant mainly for policy planning in the Central government and themultilateral institutions. On the contrary, ISEC basically deals with micro and state level issues.Both these institutes have made valuable contributions to policy planning and helped in bridgingresearch and policy.

2.5.1 Indian Council for Research on International Economic Relations

Experience of ICRIER (Indian Council for Research on International Economic Relations) for thelast 15 years of policy analysis and reform in government had been highly encouraging andrewarding. There is close interaction between government policy makers and ICRIER researchteam, and most of their recommendations have found place in government policy making. This isbecause ICRIER has emphasised policy-oriented research and research-oriented policies.

The output of ICRIER research is communicated to policy advisors and policy makers in a varietyof ways. These include the publication of working papers, policy briefs, a web site, and organisinginternal and external seminars and workshops with all stakeholders and having continual dialogueswith policy makers. An attempt is made to disseminate the results of specific project studies to thewider policy community. ICRIER also tries to bring to the public and the policy makers the benefitof research and high quality researchers from India and across the World.


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On going research studies are discussed at regular monthly meetings. These have been organisedinto specialised sub-groups. Each person provides a brief presentation of progress made on thestudy and receives inputs and suggestions from other researchers. An important input in this contextis from those with experience in policy. This has strengthened the link between policy and researchby sensitising researchers to policy issues and helping them to include policy variables into the

analysis.

ICRIERs goal is to develop excellence and expertise in selected areas. This has two implications.First, given that ICRIER is a relatively small organisation it has to focus on a few broad areas.Second, it has to develop synergies among different streams of work. It has, therefore, specialisedin two major areas viz. international economics and macroeconomics and a third broader area ofdomestic policy reforms. International Economics work at ICRIER can be divided into threecategories viz. trade and financial flows, the impact of international policies on the Indian Economy,and multilateral, regional and bilateral trade issues and agreements. Trade includes both goods andservices and to some extent ICRIER has been a pioneer in Services related studies in India. Studieson finance and capital flows include studies equity flows and FDI. Technology flows andknowledge networks are also part of this topic. Another dimension of this work is in terms ofinternational agreements and their impact, in the context of multilateral discussions (WTO), regionalarrangements (SARC) and bilateral PTA/FTAs.

The Macro-economic research is focussed on issues concerning economic growth, poverty andemployment. Global research on economic growth has shown that there are very few universallessons that apply to all countries at all points of time. Country specific research is, therefore,essential and forms major part of ICRIER research i.e. how to initiate, promote and sustain growthboth at the macro and the regional (State) levels in India. As the issues on poverty and employmentare closely linked to income growth, inter-relations between growth, poverty and inequality formessential part of the ICRIER research agenda. ICRIER also takes up traditional macro-economicissues relating to monetary, exchange rate, fiscal policy, labour markets and reforms as these havesignificant impact on international competitiveness of Indian industries.

ICRIER has taken up studies related Indias multilateral, regional and bilateral relations, andprovided extensive support to the ministry of commerce and industry in the context of the ongoingmultilateral negotiations at WTO. Background studies have also been done for bilateral free tradeagreements and regional arrangements. These studies combine some element of research, policyanalysis and recommendations. They have an inherent advantage in bridging research and policy,because those who commission the study are deeply involved with the studies from the verybeginning. They have an interest in using its output as their views had been fully heard and thestudies are based on sound and scientific methodology, impartial analysis and international bestpractices. In addition, having paid money for the study there is an inherent incentive to utilise theproduct.

2.5.2 Institute for Social and Economic Change (ISEC)

ISEC, Bangalore is an institute for interdisciplinary research and training in social sciences. It wasestablished in 1972 by renowned educationist and economist Professor VKRV Rao who alsoestablished earlier the Delhi School of Economics and the Institute of Economic Growth in Delhi.The ISEC Board of Governors under the chairmanship of the Governor of Karnataka compriseseminent professors and secretaries to the state and central government as members.


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ISEC caters to the requirements of a wide social science community and provides guidelines andrecommendations to the state government on subjects relating to agricultural development and ruraltransformation, decentralization and local governments, development administration, ecologicaleconomics, education, population planning and social issues.

Major ongoing research projects at the Institute cover a wide range of social science themes such asfarm and non-farm employment, livestock and infrastructure development in agriculture, fodder andanimal feed, agricultural subsidy, village panchayats, local governments an institutions, watersupply, irrigation and rural energy. The Institute has provided valuable policy recommendations tothe state government on local issues such as rural health service, population stabilization measures,status of gender and lower castes n Karnataka, economics of coal royalty, implications of WTO osmall and medium sized industries in Karnataka, demand studies on telecom particularly in ruralareas, sales tax and other fiscal instruments etc. Many of these recommendations were transformedinto policy by the State government (ISEC 2000 and 2004).

The long-term projects of the institute include rural health schemes and fertility studies, studies onPanchayat Raj institutions in Karnataka, Kerala, Madhya Pradesh and Uttaranchal, and the Swissgovernment funded study on Rural Livelihood Schemes. Most of these projects are funded byvarious national and international agencies. Some of the projects are also being conducted for thecentral government ministries for Agriculture, Health and Family Planning. In financial terms,externally projects contributed as much as 45 per cent of the total expenditures of the institute,besides providing liberal faculty time, uncharged to these projects.

ISEC has maintained several avenues of Outreach activities. A series of Contact and Outreachactivities were organized by the institute for the benefit of stakeholders involved in good governancein local bodies and state government departments. Multi-disciplinary meetings/ seminars/ workshopsare organized at regular intervals with all stakeholders on issues related to agricultural and ruraldevelopment, small industries, and Panchayat Raj. It publishes books, newsletters, working papersand monographs on major research studies and activities of the institute. It also publishes a bi-annual research journal entitled Journal of Social and Economic Development. Until December2004 ISEC has produced 153 Working Papers, seven monographs and several books ondevelopment economics.

It published 7 books during 2003-04 on diverse subjects such as a Macro-econometric Model of theIndian Economy, Environment Economics, Common Property Resource Management, PovertyAlleviation Strategy of NGOs, Interface Between People, Government And NGOs, Structure andManagement of Education in Karnataka, Social Designs of Tank Irrigation and AgrarianTransformation in Karnataka. Studies concluded that state level reforms and liberalization processhave encourages various reluctant partners to come together in the development process. This wasfacilitated by various multi-disciplinary workshops and seminars organized by the ISEC.

ISEC has established networking activities in a number of ways. It has exchange of scholars andcollaborations on research studies with Indian and foreign institutes such as National Institute forRural Development, Indian Institute for Financial Management, National Institute for PublicFinance and Policy in India and ADB, UNDP, World Bank, and Universities of Laud and Belgium.

It has close interactions with the government. Many of its staff members are recruited from the stategovernment on deputation. ISEC faculty members serve as members on various government


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committees and commissions. This has enabled public bodies and government to have policyoriented inputs based on ISEC research studies.

Demands on academic and research inputs have been on he rise, partly because of emergingchallenges from the economic reforms process and partly because of growing social articulation interms of transparency, accountability, governance and demand for efficiency in management. The

role of social sciences is to respond to all such demands on social and economic performance at alllevels, be it local, regional, national or international. The institute has tacked these challengeseffectively and has emerged as an important think tank on policy issues for the state government. Ithas improved academic capabilities over he years, modernized the infrastructure and included freshfaculty with experience in the institute.

As is evidenced from the above discussion, ISEC has been able and highly successful in bridgingresearch and policy at the state level. The main reason for its success lies in its approach of researchand the institutional structure. As the governor, the political head of the State, chairs the governingcouncil and many faculty members come from the state civil service on deputation, the institute isfully aware of the political economy constraints in the state. It is involved in policy studies from thevery beginning. Besides, the institute deals with issues mostly related to agriculture, ruraldevelopment and Panchayat Raj institutes, where organized trade unions do not exist. Therefore,there is practically no resistance from labour unions, which are the stumbling block for labourreforms at the Centre and states.

2.6 Strengths and weaknesses in the inter linkages

2.6.1 Communications within the governments

Research divisions of individual government departments concentrate on research, which tries toprotect their narrow sectoral interests. For example, the basic purpose of the labour ministry is toprotect the interests of labour, that of agriculture to protect interest of farmers, that of civil supply toprotect the interests of consumers, that of industry to protect interests of large and heavy industries,that of small scale industries to protect interests of small and medium enterprises, that of commerceto protect interests of exporters etc. The Planning Commission tries to deal with issues relating togrowth, poverty, inter-sectoral, inter-regional and inter-generational equity, whereas the Departmentof Economic Affairs concentrate on macro economic issues relating to price stability, viability inexternal sector and fiscal sustainability.

Major channels of communications within the government include publications of research reports,putting up major developments and major documents on the website in the internet for publicdebate, setting up inter-governmental working groups and committees, and conducting occasionalworkshops and conferences. Government research officers are also sent for training in governmentsown training institutes or in private training institutes within the country and training institutes runby the multilateral institutes. These channels of communications within the government have beenvery useful for refreshing and upgrading academic knowledge on policy planning and internationalbest practices.

2.6.2 Network among the research institutions

There are too many research institutes in the same fields and there is no proper arrangement ofnetworking among them. As a result, there is duplication of research and lack of focus by many


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research institutes. Although in a democratic set-up like India it may be useful to have alternativepolicy prescriptions for effective policy planning, but at times completely diverse views lead toconfusions and create islands of vested interest groups. There is considerable scope for betternetworking and co-coordinating among the research institutes to enhance specialization andminimize research costs.

2.6.3 Interactions between government departments and research institutes

Mechanisms for interrelations between government departments and research institutes basicallyinclude conducting meetings, holding press conferences by senior government officers andministers, setting up expert or advisory committees with government officers and private experts,and organizing workshops and conferences with all stakeholders.

Various industry and trade associations and chambers of commerce and business also hold regularmeetings with the concerned government departments and put forward their suggestions on trade,tariff, price, investment and other budgetary issues. Such meetings and working groups andcommittees have made significant contribution to the policy planning and formulation of economicreforms.

Lateral entry of experts from outside at the higher level of government has also been very useful asthey bring up to date knowledge and international experiences and help in research uptake.

2.6.4 Transparency, publicity and dissemination of research

Private research is transparent, published widely and disseminated to the public. However, due tosecrecy act in the government, many of the research studies in the government are not published anddisseminated to the people. It is observed that in most of the areas, a linear model of research existsin the sense that researches influence policy in a uni-directional way without feedback on eachother.

As government advisers are generally guided by their political bosses with rigid political ideology,the two communities model also exists to some extent in the sense that there is a clear dividebetween private researchers and government policy advisers. They do not supplement andcomplement each other.

Government advisers in most cases are guided by the positivistic model in the sense that theproduction of knowledge and uptake of research are confined only to the positive effects of policies.


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3 Bridging Research and Policy in External sector

3.1 External Sector reforms

During 1990-1991 India faced an unprecedented foreign exchange crisis due to loss of exportsmarkets in the Middle East and substantial rise of oil imports bill (Das 2003). Indias foreign

exchange reserves dwindled to US$1 billion in July 1991, which was sufficient to finance only twoweeks level of imports. India was on the verge of external default. International credit ratingorganisations downgraded Indian scrips and put them in the no investment grade. Non-residentIndians started withdrawing their deposits at a faster speed as they lost confidence in the Indianbanking system. The window of external commercial borrowing was closed to the Indian banks,financial institutions and the corporate bodies. Rate of inflation reached 16 per cent hurtingeverybody, particularly the poor. There was also widespread unemployment and loss of industrialoutput.

Indian government has to lift physically gold from the chest of the Reserve Bank of India anddeposit it with the Bank of England and the Bank of Tokyo to create international confidence onIndia. Recognizing that there was no time to lose, the new government led by the then PrimeMinister Narasimha Rao and the Finance Minister Manmohan Singh adopted a number ofstabilisation measures in June 1991 to restore internal and external confidence. The governmentalso announced comprehensive reforms in industry, trade, financial and fiscal sectors to improvecompetitiveness of Indian economy. The reforms program was supported by quick-disbursingfinance from the International Monetary Fund (IMF), World Bank and the Asian Development Bankand some individual donor countries, particularly Japan.

An account of external sector reforms and their impact are given in Annex-3. Economic reformsstarted in a slow, fragmented and limited way in the 1980s. A new approach to economicdevelopment policy was initiated by the new government in July 1991. It recognised that thecomplete replacement of the oppressive system of controls by the market competition could

overcome the balance of payments (BOP) crisis. The new Finance Minister and his chosen team ofadvisors were aware that in many countries the classical macro solution for a BOP crisis had led to aslowing of private investment and growth. They were also aware of the remarkable growth rates andpoverty reduction achieved by the more open economies of East & South Asia in the previous twodecades. They recognised that the best way to put the BOP on a long-term sustainable path wasthrough comprehensive liberalisation of external trade, finance/capital inflows and the exchangeregime. Phasing and timing of liberalisation was however determined not only by the exigencies ofthe economic situation but also by the problem of calming genuine fears, convincing ideologicaldiehards and overcoming vested interests, both within and outside the government.

Today Indian economy is more open and more globalised. All quantitative restrictions on trade,

production and investment have been abolished with rationalisation and successive reduction ofduties and taxes.


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3.2 Policy Initiatives by the Government

Given the width and depth of market distorting policies (external sector, financial sector, taxation,industry, infrastructure) the primary focus of the 1990s reforms was on reversing (correcting) thesedistorting policies (for a detailed review of reforms see Virmani 1999a and 2004a). Knowledgeableprofessionals within the government played a critical role in adapting policy prescriptions. They

often found it easier to sell policies to colleagues and bosses if the policy prescriptions were backedby international best practices. This was so even when specialist knowledge (e.g. on regulatory rulesand systems) had to be obtained from outside the government.

External reforms were the most successful reforms in the 1990s. Though the primary focus was onreversing market-distorting policies, some attention was also paid to market supporting institutionalevolution (Virmani 2003). The existence of well-developed markets for tradable goods and theexistence of one of the best regulatory institutions in India, the Reserve Bank of India, meant thatthe degree of institutional reform required for success was not very large. Most of the policydecisions came within the purview of the Department of Economic Affairs (DEA), Ministry ofFinance (MOF), so an integrated view could be taken of the entire external sector. New institutions(committees) were created to ensure information exchange and co-ordination between DEA andRBI, DEA & other departments and between MOF and Department of Commerce.

The co-ordination was however far from perfect in the case of import duties, which came under thepurview of the Department of Revenue and its subsidiary organisation, the Central Board ofCustoms and Excise (CBEC). Similarly the extent of co-ordination with the Ministry of Commerce,which was in charge of export duties and import-export controls/restrictions was more varied andless complete, despite existing mechanisms for institutional co-ordination between them.

Two aspects of the reform process played an important role. The first was the clear understanding atthe professional level of the medium term and final goals of the external reform. The fact that thefinance minister (Manmohan Singh) and the Finance Secretary (Montek Singh) were professionalswas invaluable not only did they appreciate the value of inducting professionals into the ministrybut also understood clearly new reform ideas. Although political exigencies and bureaucraticresistance (e.g. on import de-control) did lead to a variation in the pace and nature of specific policyreforms to some extent, the final goal post was clear and occasional resistance did not cause anyreversal in the broad policy directions. The motivation and confidence of the professionals andunusually high degree of continuity in key personnel also contributed to the success of reforms.

The second aspect was the parallel and co-ordinated movement on different aspects of externalreform. Policy reforms went on in parallel on the current account (import control, tariffs, and othercurrent acct), the capital account (foreign direct and portfolio investment and external commercialborrowing) and the exchange rate system. As a consequence not only was the BOP crises dealt withexpeditiously but the current account and balance of payments was put on a much sounder footingthan it had been before the crises originated in the mid-eighties.

3.2.1 Committees and Working Groups

As a part of the conventional Plan process a Working Group on Balance of Payments was set up in1989 for the next (eighth) Plan. This working group was as usual chaired by the Chief EconomicAdvisor in DEA, MOF with Advisor (IE), Planning Commission as member secretary of theworking group. The report of the Eighth Plan Working Group on BOP noted the above facts and


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The first status report on External Debt was produced in October 1993. This unit evolved into theExternal Debt Management Unit (EDMU), which helped improve debt monitoring & management.

3.2.2 Capacity Building for External Debt Management

The World Bank IDF Grant yielded rich dividends and involved all stakeholders in the policy of

policymaking and helped in bridging research and policy. The IDF Grant helped to computerise thedatabase and disbursements and payments system for external public debt on real time basis andreduced transactions cost significantly. Under the IDF grant the Ministry of Finance organized threeinternational seminars and one workshop with active participation by the World Bank, RBI,academicians and all stakeholders concerned with external debt and non-debt creating financialflows. The executive agencies published three Books on papers and proceedings (CRISIL 1999 and2001 and RBI 1999). These seminars recommended various reforms for external sectors. Most ofthe policy recommendations were accepted by the government.

Ministry of Finance also set up various working groups comprising members from the government,RBI, financial institutions, private and public corporate bodies and professionals having expertiseand the experience on the selected subjects. Members visited foreign countries to understandinternational best practices for management of external debt. These countries included Australia,Ireland, New Zealand, UK and USA.

Based on general consensus, India adopted a cautious and step-by-step approach towards capitalaccount convertibility. Initially non-debt creating financial flows (such as FDI and portfolio equity)were liberalized followed by liberalization of long-term debt flows and partial liberalization ofmedium term external commercial borrowing. There was tight control on short-term external debtand close watch on the size of the current account deficit. Capital account restrictions for residentsand short-term debt helped India to insulate from the East Asian economic crisis during 1997-2000.There was high share (80% at the end of March 2000) of concessional debt in governmentaccounting and there no government borrowing from external commercial sources and no short-termexternal debt on government account. Maturity of government debt concentrated towards long-endfor the debt portfolio (GOI-MOF 2005).

3.3 Backward Looking: Episode Study on

Foreign Exchange Liberalisation

In the background of the all encompassing nature of reforms in the external sector for a traditionallycontrolled economy, like India, it becomes useful to focus on the pertinent policy changes and trackthe intellectual efforts that were the driving force to better handling of the key issues. The Exchangemarket reform was an example of the most surprising (to the public and outside observers) yet mostthoroughly prepared and carefully executed reform.

A number of development policy research papers done at the Planning commission between 1989and 1991 had suggested the possibility of introducing a dual exchange rate system to ease thetransition from a heavily controlled trade regime to a free market system encompassing both tradeand payments. The last paper in this series, Trade Policy Reform: De-Licensing, Tariff Reform &Exchange Rates, prepared by Arvind Virmani, Adviser (Development Policy), PlanningCommission, New Delhi, in September 1991 spelt this out more explicitly. This paper followed theintroduction of Exim Scrips by the commerce ministry in August 1991. The paper envisaged acomplete de-licensing of intermediate & capital goods imports and inclusion of these along with,


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all currently permitted service trade, technology and labour payments (including remittances) inthe full fledged Market determined Dual exchange rate. It was noted that the most importantreason for switching over to this system was its self-equilibrating property, which wouldautomatically ensure BOP balancing.

This system was administratively tied to what was called a Foreign exchange certificate (FEC), a

comprehensive cousin of the Exim Scrip applicable to services and with proportions of 85% to90% (instead of 30%). It was suggested that the system could be operated through FEC accountswith authorised banks. Based on these initial thoughts a comprehensive concept paper onliberalising the foreign exchange market using a dual exchange rate, entitled Toward RupeeConvertibility: The Convertible Rupee Account. was prepared by Arvind Virmani in November1991, who had then moved to the Finance Ministry as Advisor (Policy Planning) to the FinanceMinister. After taking into accounts the comments given by all concerned departments such asMinistry of Commerce, Reserve Bank of India, Planning Commission, the paper was revised andrenamed as Towards Rupee Convertibility; A Free Market Exchange Rate Channel in January1992. On the basis of this paper, RBI prepared a draft paper titled Liberalised Exchange Rate Arrangement (LERA) in mid-February 1992, which spelled out the details of how the marketchannel of the exchange rate could be operated through the banking system.

As the RBI plays a major role for the Exchange rate policy and is responsible for its management,its views and support for the reform were most critical. In fact, the Governor (RBI) wholeheartedlyadopted the reforms and ensured that bureaucratic red tape did not tie up the reform proposal inknots. Without this, the paper prepared in DEA would have met the same fate as so many otherpapers prepared before June 1991. Finally with the approval of the Finance Minister and the PrimeMinister, a liberalised exchange rate and management system called LERMS was introduced in thebudget of 1992-93.

According to the LERMS system effective from March 1, 1992, exporters and remittance earnerswere required to surrender 40% of exchange at the official rate (which was left unchanged at Rupees25.89 per US$), while the rest would be converted at the free market rate. This effectively meantthat export proceeds were taxed at 40% of the difference between the market and official exchangerate. 100% Export oriented units and Export Processing Zones could sell the entire amount at themarket rate and were not taxed in this way. All capital account transactions (except IMF,multilateral flow against rupee expenditure) were made at the market rate. Exporters were allowedto retain up to 15% of earnings in a foreign currency account with an authorised bank. Theexchange surrendered at the official rate was used by the government for official transactions, thuseffectively subsidising these uses by the difference between the market and official rate. Thus thesystem represented a cross tax subsidy scheme in which exporters subsidised certain types ofgovernment transactions. This was explicitly designed to minimise the immediate impact on thefiscal situation at a time when a reduction of the fiscal deficit was thought to be essential forreducing the macro-economic imbalances.

The announcement of this system in the budget for 1992-93 (18 months after the crisis) took theforeign observers as well as entire country completely by surprise. Even the common person, whomight never have the opportunity to undertake foreign exchange transactions, welcomed thefreedom that it implied and the confidence that it denoted on the part of the government. Manyintellectuals and economists predicted that there would be huge capital outflows and the rupeewould depreciate to Rs.50 per USD on the market channel. On the contrary, the market exchangerate opened around Rs. 31.27 per US$ in March 1992 and rose to Rs.30.87 per US$ in January 1993.


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The DEA and RBI set up a committee with representation from RBI and Ministries of Finance andCommerce to monitor and manage the system after it was announced. Several difficult issues suchas how to deal with rupee trade arrangements and the alleged adverse effect on exporters werehammered out in the year. Subsequently, the dual exchange rate system was abolished and a marketdetermined single exchange rate system was introduced with effect from March 1, 1993. As the RBI

retained the right to intervene to even out excessive volatility in the exchange rate, in internationalterminology this system is classified as a managed float.

Above analysis clearly indicates that an active role by the concerned Ministry supported by soundanalytical research helps in bridging research and policy.


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Table-3.2 ranks the articles in terms of various parameters such as information content, topicalconcordance, specificity of observations, policy relevance, comprehensibility of analysis withrespect to clarity, focus, scope and methodology.

Parameter 1.1: Information Content is judged in terms of facts- both qualitative and quantitative,statements, figures and data pertaining either to the external sector which might be relevant for

Indian policy advisors. Nearly 85% of all the articles were evaluated as having High informationcontent, i.e. these papers contain information that has significant relevance to policy making.

Parameter 1.2:Topical Concordance is context free and is based on fixed assumptions about therelationship between a topic of a document and search questions such as whether the Title used inthe paper is justified by the contents and whether the professed objectives of the paper are inharmony with the actual coverage of the paper. 82.5% of the papers display significantly hightopical concordance.

Parameter 1.3: Specificity of Observation: 77.5% of the papers contained highly specificobservation relating to the external sector of India.

Table-3.2: Analysis of Journal and Other Articles

Ranking of All

Published Articles

Ranking of Policy

Oriented Articles

High Medium Low High Mediu

m

Low

1 Content

1.1 Information Content 85% 13% 3% 81% 16% 3%

1.2 Topical Concordance 83% 18% 0% 81% 19% 0%

1.3 Specificity of observations 78% 20% 3% 80% 20% 0%

2 Overall Evaluation2.1 Policy (reform) Usefulness 65% 30% 5% 65% 29% 7%

2.2 Comprehensibility of Analysis 58% 33% 10% 58% 32% 10%

3 Component wise Evaluation

3.1 Identification & Analysis ofproblem

80% 20% 0% 81% 19% 0%

3.2 Policy analysis & suggestion 60% 35% 5% 61% 32% 6%

3.3 Implementation Regulation issues 53% 38% 10% 52% 39% 10%

3.4 Policy Impact Evaluation 48% 38% 15% 52% 39% 10%


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3.4.3 Impact of research on policy

A further analysis of the policy oriented papers reveals that only 6 major papers belonged to the pre-reform period (1988-1995) and suggested reforms agenda long before the initiation of reforms in1991. Suggested reforms pertained to the external sector and related to removal of quantitativerestrictions (QRs), licenses and other controls on external trade, rationalisation and reductions of

customs duties, liberalisation of exchange rate and foreign investment policies. These papers havebeen categorised as Pro-Reforms, Neutral or Anti-Reforms. Pro-reform papers are furtherdistinguished on the basis of the nature of the recommendations, i.e. whether the recommendationsare General or Specific. It is observed that most of the suggestions are specific while somesuggestions pertaining to FDI and FII are broad and general.

Table-3.3: Forward Looking Articles Suggesting Policy Change

Article No./

JournalExport

Restricti

on

and

Taxes

Import

QRs,

Control

s

Tariffs

Reducti

on

Exchan

ge Rate

FDI FII

and

Equity

Policy

Suggestion

s*

1.DevelopmentPolicy Division,PlanningCommission, 1998

S S S N N N 1,2,3,4,5,6,8,

12,13

2. EPW, Vol. XXIV,Feb, 1991

G S G N G N 1,15,14,3,6

3. DevelopmentPolicy Division,PlanningCommission, 1991

S S S S G G 1,2,3,4,5,9,11,12,15

4. Dept. of Econ.Affairs, Ministry ofFinance, 1994

S N N S N N 12,5,6,7,10,17,18, 19

5.IEJ,Vol.41\No.4\1994

G G N S S G 13,6,4,3,1,8,7,15

6. Finance andDevelopment, 1995

S S A S S N 2,4,9,8,11,18

Total 6P (2G,4S)

5P (1G,4S), 1N

3P (1G,2S), 2N,

1A

4P (4S),2N

2N, 4P(2G,2S)

4N, 2P(2G)

19

Notes: G-General Suggestions, S-Specific Suggestions,N-Neutral to Reforms,A-Anti-Reforms,P-Pro-Reform

* Policy suggestions are indicated in Table-3.5.


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Table 3.4: Important policy suggestions extracted from the papersPolicy Prescriptions

1 Use variable QRs as a means of price targeting and keep domestic prices at par with internationalrelative prices. The gap between international and domestic prices differs due to the high level oftariffs. Lowering tariffs reduces this variance. This recommendation was adopted in 1991-92.

2 Implement a Simple Tariff Structure with as few rates as possible with a view to minimize evasion,fraud and corruption, by removing the complexity created by multiple tariff rates and slabs. The

recommendation to reduce the peak rate was implemented in 1992-1993.3 Tariff rationalization should be complemented by de-licensing (for all intermediate and capital goods)process. Both tariff rationalization and de-licensing were carried out in 1991-93.

4 Free the import of gold if bought with own foreign exchange and duty paid in foreign exchange sothat there is no adverse impact on foreign exchange reserves. Import of Gold was made free primarilyfor NRIs in 1991-93.

5 Import of disembodied technology may be completely de-linked from controls on foreign investment.Free import of technology and technicians with no prior permission under the Foreign ExchangeRegulation Act (FERA) is required. A negative list of consumer goods for which prior permission fortechnology imports is required could be maintained. It was partially implemented in 1994-95.

6 Reduce the average tariff level accompanied by offsetting exchange rate adjustments. Exchange rateadjustments were done simultaneously with re-structuring of tariff rates in 1991-92.

7 Regulation of exchange rate to prevent imports competing with manufactures and providing sufficient

incentives to exporters. The chief objective of the exchange rate policy would be to attain self-sufficiency in foreign exchange requirements. It was done successfully in 1992.

8 Elimination of licensing for all intermediate and capital goods is essential to increase thecompetitiveness and the flexibility of Indian industries. It was done to a large extent in 1992-93.However, consumer goods were de-licensed much later in 1999.

9 Shift towards a full-fledged market determined dual exchange rate system. This recommendation wasadopted and a move towards dual exchange rate regimes was done in 1992.

10 Decontrol the flow of FDI and FII. Liberalisation of FDI started in 1991, and further liberalisationwas done in phases over a span of 10-15 years. FII was liberalized in 1992-94.

11 Promote Venture Capital through Limited Partnership Act and rationalization and simplification oftax incentives. The recommendation on limited partnership was rejected, but that on venture capitalwas implemented in 1998.

12 Reduce import duties and extend MODVAT (Modified Value Added Tax) credit to taxes paid on

inputs with a view to improving efficiency of tax structure. It was introduced in 1992-93.13 Eliminate exports controls. It was implemented immediately in 1992-93.

14 Impose export duty on inferior food grains to ensure that domestic prices remain stable due todisincentive on exports.

15 Allow individuals, businesses and corporations to make capital transfers abroad, including openingcurrent accounts. The current account was made fully convertible in 1994, after Indias commitmentat the IMF convention.

16 Restructure and recapitalize domestic financial institutions. Financial Sector reforms were carried outon a massive scale since 1991-92.

17 As the issue of ADRs and GDRs is the least risky form of equity issue, it should be completely de-controlled. Both ADRs and GDRs were decontrolled in 1993. Indian companies are now permitted tolist in foreign stock exchanges by sponsoring ADR/GDR issues against block share holding. This

facility is offered to all categories of shareholders.18 Tight control on short-term borrowing and a cap on total External Commercial Borrowing (ECB)with a view to increase the scrutiny of borrowing by public sector companies and increase the shareof private sector in ECB. Though it was done in 1991, it is more backward looking in nature.

19 Permit Indian companies to issue ESOPs to foreign employees on the same basis as the FDI policyapplicable to the sector in which they are operating. Indian companies were allowed to issue ESOPsin 1998.


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3.5 Concluding remarks

From the above analysis, it can be concluded that although a good quantum of studies were done bythe professional economists on the external sector reforms and capital account convertibility, veryfew of these were research oriented and had an impact on policy making. Most of the policyoriented research works that were either in-house research done by the government advisers or by

the prominent research institutes funded by the government and government related organizationslike the Reserve Bank of India.

Another lesson is that policies, which do not require setting up new institutions, have higherprobability for implementation. The existence of well developed markets for tradable goods and theefficient regulatory authority like the Reserve Bank of India helped in smooth transition from acontrolled to liberalized economy.

Two aspects of the reform process played an important role. First, a clear understanding at theprofessional level about the scope, sequencing and phasing of reforms. Second, a co-ordinated andcomprehensive package of reforms covering all aspects of external sector such as export-importpolicy, tariff rationalization, and liberalisation of foreign investment and transfer of foreigntechnology.

In general, crisis period is not an opportune time to initiate wide-ranging reforms as the associatedcosts and hardships are likely to be higher. But, in the case of India, the adverse impact of the Gulfwar on Indias balance of payments provided an opportunity to initiate significant reforms in tradeand industry, which were not possible in tranquil economic situations due to political constraints.Conditionalities imposed by the international agencies to have access to foreign capital also helpedin utilising research results of various studies done by the government itself. This is what the thenFinance Minister concluded in the general review of the economy in the first Economic Survey(GOI, MOF 1992) presented to the Parliament after initiation of reforms in June 1991:

When a country is in such a grave crisis, it is tempting for the government to stave off collapse, totake short cuts, to live through the present and let the future take care of itself. The economicpolicies of the government have been designed to tackle the immediate crisis, but they emanate froma vision of a future, from the promise of a better life for our people. The crisis has involved hardshipto people. The government has tried to ameliorate it. But the immediate options are limited. It isimportant to broaden them, and that is where the vision comes in.

The basis of this vision is self-reliance. Even if anyone wished to abandon self-reliance, India is toolarge a country for the rest of the world to look after. There is thus no alternative to self-reliance.But self-reliance does not mean isolation. We live in a world of great variety of people, resources,knowledge and behaviour. It is there for us to co-operate with, trade with, learn from and contributeto. To it we must contribute care- care for the weak and the unfortunate.

These words clearly indicated aims and objectives of reforms. It was understood by the governmentthat no reforms could succeed unless the government is able to take the people along with them.Thats why Indian reforms have a human face and are biased in favour of poverty reduction strategy.

Political context played an important role for bridging research and policy and initiating reforms.There was less resistance by the left parties and trade unions for major part of external sectorreforms (such as liberalisation of exchange rate and exchange control regime, removal of import


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controls and successive reduction of import duties), as the working class was not affected adverselyby these policies. On the contrary they enjoyed the fruits of external sector reforms in the form ofeasy availability, lower prices and higher quality of essential goods and services.

However, there was some resistance for allowing foreign direct investment in some sensitive sectorssuch as real estate and retail trade, although many studies indicated substantial benefits in terms of

higher growth and employment from these reforms. For ideological reasons, the left parties did notallow majority holding by foreign investors in insurance and natural resource based sectors such asmining and plantations.

Although FDI regime was significantly liberalized and foreign equity up to 100% was allowed inmany sectors, governments intention for increasing FDI limits in some sectors faced severe protestsfrom the left parities. The Finance Minister announced in the Budget for 2004-05 that FDI limitswill be raised in civil aviation up to 49%, telecom up to 74%, banking up to 74% and insurance upto 49%. FDI limit was raised from 40% to 49% in civil aviation, from 49% to 74% in telecom andbanking, but FDI limit could not be raised from 26% to 49% in insurance due to opposition by theleft parties, which provide political support to the present coalition government. The Pension Bill2004, which proposed the entry of foreign players in domestic pension and provident funds, couldnot be passed and the ordinance on the proposed changes in the sector was allowed to lapse simplybecause of the reservations expressed by the left parties.


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4 Bridging Research and Policy in Privatisation and Labour Reforms

4.1 Introduction

Privatisation and labour policies are closely interrelated. In broad sense of the term, privatisation

means either capital restructuring or labour restructuring or a combination of both, which reducesthe involvement of the state or the public sector in economic activities in keeping with the spirit ofliberalization, deregulation and globalisation of the economy (Das 1996). Due to ideologicalreasons, left political parties in India rejected any form of privatisation of the profit-making publicenterprises, and allowed privatisation of only loss making units. Although various studies concludedthat privatisation and labour reforms are good prescriptions for tackling high inflation, lowproductivity, low growth, low employment generation and lost opportunities for exportcompetitiveness (see Das 1996, Das 1998a and Debroy and Kaushik 2005), labour unions opposedprivatisation of public enterprises, particularly of pr

linkages between research, policy analysis and outcome, bytarun das published in gdn monitor

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