Features of New Economic Reforms in India
We come across the term “Economic Reforms” quite often, and it is important to know what Economic Reforms are? Economic Reforms are defined as changes in policies that aim at improving the economic efficiency of a Country. The need for Economic Reforms essentially arises from distortions that are caused either due to international regulations or by the Government. Economic Reforms occur when there is deregulation or a reduction in the size of the Government. It is also done by eliminating or decreasing the market distortion in specific sectors of the Economy.
The Economic Reforms encompass changes in Economy-wide policies such as tax and competition policies. These Reforms are centered around bringing Economic efficiency and not geared towards eradicating other issues like unemployment or equity growth.
Table of Content -
Economic Reforms - Introduction
Indian Economy During Reforms
Reasons and Effects of Economic Crisis of 1991
New Economic Reforms in India
Liberalization
Privatization
Globalization
Key points from the Chapter
Frequently asked questions
Introduction of Indian Economy During Reforms
In the year 1991, India saw a tectonic shift in its economic policies, making it a landmark year in the history of the Indian Economy. The humongous Economic crisis suffered by India in 1991 was uncontrollable with the situation getting bleak gradually. The result was that inflation reached its peak with daily use commodities becoming extremely expensive, striking people.
Reasons and Effects of Economic Crisis of 1991
The primary reason for the crisis in 1991 can be attributed to a decline in exports which started in the 1980s. India had to pay in dollars for importing any commodity such as petroleum and the Country’s earnings in dollars from export were not meeting this need.
The debilitating effects of the Economic crisis had a cascading effect on India’s failing Economy.
The foreign currency reserves kept going down, which posed a significant crisis of balance of payment in front of the Country.
Government income was not enough to resolve these issues as the revenue generated through income tax was quite inadequate.
India had to borrow a massive amount of 7 billion USD from IBRD (International Bank for reconstruction and development). It is the lending arm of the World Bank and the IMF (International monetary fund). India got this loan on the condition that it would liberalize its Economic policy and make way for international trade in India.
New Economic Reforms in India
India has seen many Economic Reforms since the late 1970s in the form of liberalization. However, a whole battery of Economic Reforms came about in 1991, which had a direct effect on the growth rate of the Country. The new Economic Reforms refer to the neo-liberal policies that the Indian Government introduced in 1991.
The three main pillars of this Reform were: Liberalization, Globalisation, and Privatization.
1. Liberalization
Right from the 1980s India has witnessed significant Reforms which fall under the following two groups.
Stabilization Measures - These are short-term measures that are aimed at reducing the crisis by maintaining foreign exchange reserves.
Structural Reform Policies - These are long-term measures that work at the root of Economic policies. They are geared towards enhancing international competitiveness and discarding hindrances like rigid rules and restraining regulations.
The license-raj was a bottleneck for the Economic growth of India.
Breaking these shackles was the major part of the liberalization of India's Economy. Many changes were done in the following areas.
Import of technology.
Protection of domestic industries from foreign competition by imposing quantitative restrictions on imports.
Import of capital goods along with an affordable rate of public investment.
The industrial licensing system was eradicated barring a few industries like alcohol, drugs, cigarettes, harmful chemicals, industrial explosives, aerospace, electronics, and pharmaceuticals.
India allowed investment by FII (foreign institutional investors) like mutual funds, merchant Bankers, pension funds, etc. in the Indian financial arena.
The following are some of the beneficial effects of liberalization of the Economy in India.
Rise in stock market values.
India is now one of the prominent exporters of IT products and services.
There was a reduced political risk for the investors.
2. Privatization
Privatization means giving private players a chance into segments that were earlier monopolized by the Government. This included transforming Government companies into private companies by the following three means.
The Government withdrew from the management and ownership of the company.
Public sector companies were sold to private sector companies.
Disinvestment, i.e., selling a portion of the Government companies’ equity to the public.
The Government also vested the autonomy of managerial decisions to some
private companies in the public sector industries to improve their efficiency. Some of the highly regarded industries were given the status of:
Maharatnas - The Indian oil corporation Ltd. and Steel Authority of India Ltd. are some of the industries given this status.
Navratnas - This includes Hindustan Aeronautics Ltd., National Aluminum Company (NALCO), and Mahanagar Telephone Nigam Ltd.
Miniratnas - Some of the industries given this status are BSNL (Bharat Sanchar Nigam Ltd.), IRCTC (Indian railway catering and tourism corporation) Ltd., and the Airport Authority of India.
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3. Globalization
Before 1991, there were no foreign players in the Indian Economy, and Indian companies competed only with one another. After 1991 the Indian domestic market opened up for foreign companies and was integrated with the global market. It raised competition for Indian companies, but at the same time, it brought a flow of foreign money to India in the form of investments. Globalization worked two ways, i.e., now Indian companies could also get into foreign business and invest in other countries. For example, ONGC Videsh has branches in 16 different countries, HCL in 31 countries, and Tata Steel in 26 countries.
Key points from the Chapter -
India was a closed economy until 1991 which means it doesn't engage in trade activity with other countries
The 1991 BOP crisis made India go for new Economic Reforms on the recommendation of the International Monetary Fund (IMF)
Liberalization resulted in an inflow of foreign investments in the Country
Privatization allowed competition and ended the Government’s monopoly
Globalization resulted in the expansion of the global supply chain
LPG Reforms improved the financial status of the nation's Economy
The services sector grew many folds after the Reforms.
FAQs on Indian Economy During the Reform Period
1. What were the three main components of the New Economic Policy (NEP) introduced in India in 1991?
The New Economic Policy of 1991 was structured around three core components, often referred to as the LPG reforms:
- Liberalisation: This involved reducing or eliminating government control and regulations over economic activities. It aimed to end the 'Licence Raj', allowing businesses more freedom to operate and expand without extensive government permissions.
- Privatisation: This refers to the transfer of ownership, management, and control of public sector enterprises (PSUs) to the private sector. The goal was to improve efficiency, promote competition, and reduce the financial burden on the government.
- Globalisation: This involved integrating the Indian economy with the global economy. It included lowering tariffs and removing import restrictions to facilitate free trade and encourage foreign investment and technology flow into India.
2. What were the primary reasons that forced India to adopt economic reforms in 1991?
The economic reforms of 1991 were not a choice but a response to a severe economic crisis. The primary reasons were:
- Balance of Payments (BoP) Crisis: India's foreign exchange reserves fell to critically low levels, barely enough to cover a few weeks of essential imports like petroleum.
- High Fiscal Deficit: Government expenditure consistently exceeded its revenue, leading to large-scale borrowing and increasing national debt.
- Rising Inflation: The prices of essential goods were rising rapidly, causing significant hardship for the population.
- Poor Performance of PSUs: Many public sector undertakings were incurring heavy losses, becoming a major drain on government resources.
- External Pressure: To secure an emergency loan of $7 billion, India had to agree to conditions set by the International Monetary Fund (IMF) and the World Bank, which included structural reforms to liberalise the economy.
3. What is the key difference between privatisation and disinvestment?
While both terms involve selling government stakes in public sector enterprises (PSUs), they differ in the extent of ownership transfer and control.
- Privatisation typically means the sale of more than 50% of the government's stake to a private entity. This results in a transfer of management and control from the government to the private sector.
- Disinvestment, on the other hand, refers to the sale of a minority stake (less than 50%) of a PSU to the public or private entities. In this case, the government retains ownership and ultimate control over the company's management.
4. How did liberalisation specifically impact the Indian industrial and financial sectors?
Liberalisation brought significant changes to India's industrial and financial landscape:
- Industrial Sector: The 'Licence Raj' was abolished for most industries, allowing businesses to start, scale up, or diversify without needing government approval. This fostered competition and efficiency. Only a few strategic sectors like defence, atomic energy, and railways remained under strict regulation.
- Financial Sector: The reforms reduced the role of the Reserve Bank of India (RBI) from a regulator to a facilitator. Private banks, both Indian and foreign, were allowed to operate, leading to increased competition and better services. Foreign Institutional Investors (FIIs) were permitted to invest in Indian financial markets, increasing the availability of capital.
5. What are some major criticisms or negative consequences of the 1991 economic reforms?
Despite their success in boosting GDP growth, the 1991 reforms have faced several criticisms:
- Neglect of Agriculture: The reforms focused primarily on the industrial and service sectors. Public investment in agriculture, especially in infrastructure like irrigation and power, declined, leading to slower growth in this sector which employs a large part of the population.
- Growing Inequality: The benefits of globalisation and liberalisation were not evenly distributed. This led to a widening gap between the rich and the poor, and between urban and rural areas.
- Jobless Growth: While the economy grew, the growth was not accompanied by a proportional increase in employment opportunities, particularly for the unskilled workforce.
- Adverse Impact on Domestic Industries: Increased competition from large multinational corporations (MNCs) made it difficult for smaller domestic industries to survive without protection.
6. How did globalisation change the nature of the Indian market for both consumers and producers?
Globalisation fundamentally transformed the Indian market. For consumers, it meant access to a wider variety of goods and services of international quality at competitive prices. For producers, the impact was twofold. On one hand, they faced stiff competition from global brands, forcing them to improve quality and efficiency. On the other hand, it opened up access to global markets for Indian companies, allowing them to expand their operations and become multinational entities themselves, like Tata and Infosys.
7. Why did the service sector in India grow much faster than the manufacturing and agricultural sectors after the 1991 reforms?
The disproportionate growth of the service sector was due to several factors. The reforms, especially in technology and finance, created a favourable environment for service-based industries like IT, BPO, and telecommunications, which were less capital-intensive and could leverage India's skilled, English-speaking workforce. In contrast, the manufacturing sector required massive, long-term investment in infrastructure and faced rigid labour laws, which were not adequately addressed. The agricultural sector was largely neglected in the reform package, suffering from reduced public investment and a lack of structural changes, thus it stagnated while the service sector boomed.
8. Who were the key political figures responsible for implementing the 1991 economic reforms in India?
The implementation of the 1991 economic reforms is primarily credited to the duo of Prime Minister P.V. Narasimha Rao and his Finance Minister, Dr. Manmohan Singh. Their political will and economic expertise were crucial in navigating the severe economic crisis and pushing through the landmark policy changes. These reforms were initiated at the start of the Eighth Five-Year Plan (1992-1997).
