Economic Reforms Since 1991 or New Economic Policy Notes

Economic reforms refer to a set of economic policies directed to accelerate the pace of ‘growth and development’. Here are the Economic Reforms Since 1991 notes.

In 1991, the government of India initiated a series of economic reforms to pull the economy out of the crisis of the 90s. These reforms came to be known as the New Economy Policy (NEP).

Three broad components of the New Economic Policy are:

• Liberalisation
• Privatization
• Globalization

Reasons for Making Economic Reforms

The main reasons for economic reforms were:

1. Poor performance of the public sector
2. Deficit in the balance of payments
3. Inflationary pressure
4. Fall in foreign exchange reserves
5. Huge burden of debts
6. Inefficient management

1) Poor Performance of the Public Sector

In the 40 years (1951-90), the public sector was assigned an important role to work for the economic development of India. However, except for a few public industries, the overall performance was very disappointing.

Due to huge losses incurred by a good number of the public sector enterprises, the government recognized the need to make necessary reforms.

2) Deficit in Balance of Payments (BOP)

It arises when foreign payments for imports exceed foreign receipts from exports. Even after imposing heavy tariffs and fixing quotas, there was a sharp rise in imports.

On the other hand, there was slow growth of exports due to the low quality and high prices of Indian goods in the international market.

3) Inflationary Pressure

There was a consistent rise in the general price level in the economy due to an increase in the money supply and a shortage of essential goods.

4) Fall in Foreign Exchange Reserves

In 1991, foreign exchange reserves fell to the lowest level and it led to the foreign exchange crisis in the country.

Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks and pay the interest that needs to be paid to international lenders.

5) Huge Burden of Debts

The expenditure of the government was much higher than the revenue. As a result, the government had to borrow money from banks, the public, and international financial institutions.

6) Inefficient Management

The government was not able to generate sufficient revenue from internal sources such as taxation, running of public sector enterprises, etc.

Government expenditure began to exceed its revenue by such large margins that it became unsustainable.

Also, the foreign exchange borrowed from other countries and international financial institutions was spent on meeting consumption needs.

New Economic Policy

The New Economic Policy (NEP) was announced in July 1991. It consisted of a wide range of economic reforms. The main aim of the policy was to create a more competitive environment in the economy and remove the barriers to entry and growth of firms.

Elements of the New Economy Policy (NEP)

• Liberalization
• Globalization
• Privatization

Liberalization

Liberalization of the economy means freedom of the producing units from direct or physical controls imposed by the government.

Following are some notable observations in this regard:

• Before 1991, the government had imposed several types of controls on private enterprises in the domestic economy.
• These include industrial licensing systems, price control or financial control on goods, import licenses, foreign exchange control, restrictions on investment by big business houses, etc.
• It was experienced by the government that several shortcomings had emerged in the economy on account of these controls.
• These controls had given rise to corruption, undue delays, and inefficiency.
• The growth rate of GDP had fallen sharply and a high-cost economic system (rather than a low-cost competitive economic system) came into being.

Purpose of Liberalization: It was done to unlock the economic potential of the country by encouraging the private sector and multinational corporations to invest and expand.

To introduce much more competition into the economy and create incentives for increasing the efficiency of operations.

Economic reforms included in the Liberalization

1) Industrial Sector Reforms:

Industrial licensing was abolished except for liquor, cigarettes, etc. The number of industries reserved for the public sector was reduced from 17 to 8 and currently, it’s only 2 which are Atomic energy and railways.

Similarly, de-reservation was done for small-scale industries, expanded production capacity, and freedom to import capital goods was granted.

2) Financial Sector Reforms

A substantial shift in the role of the RBI from ‘a regulator’ to ‘a facilitator’ in the financial sector was done. As a regulator, RBI used to fix the interest rate structure for commercial banks.

Still, after 1991, as a facilitator, RBI would only facilitate the free play of the market forces and leave it to the commercial banks to decide their interest rate structure.

Liberalization also allowed FII (Foreign Institutional Investors) to invest in Indian Financial Markets like Mutual Funds, Pension Funds, Merchant Bankers, etc.

3) Fiscal Reforms

Fiscal reforms relate to the revenue and expenditure of the government. Under this, the tax structure was simplified and moderated. Before liberalization, the country’s tax structure was highly complex, leading to tax evasion.

4) External Sector Reforms

External sector reforms include foreign exchange reforms and foreign trade policy reforms. Foreign exchange reforms were initiated in 1991 with the devaluation of the Indian Rupee against foreign currencies.

Foreign Trade Policy underwent a substantial change in the wake of liberalization. Tariff restrictions have been considerably moderated, rather withdrawn for many items of export and import.

Instead of a policy of protection for the domestic industry, now there was the policy of ‘survival of the fittest’.

Privatization

Privatization is the process of involving the private sector in the ownership or operation of a state-owned enterprise. It implies the gradual withdrawal of government ownership from public sector enterprises.

It may happen in two ways:

1. Outright sale of government enterprises to private entrepreneurs.
2. Withdrawal of the government ownership and management from the mixed enterprises (the enterprises jointly owned and managed by the government and the private entrepreneurs).

Disinvestment

Disinvestment is a policy instrument to promote privatization. It occurs when the government sells off its share capital of PSUs (public sector undertakings) to private investors.

Need for Privatization

The need for privatization was felt mainly because of the poor performance of PSUs.

• It is beyond doubt that it was through the spread of PSUs that India could diversify its industrial base between the period 1951 and 1991.
• It was on account of the spread of PSUs that the Indian economy underwent a structural transformation: people started shifting from agriculture to industry as their source of livelihood, and there was a gradual increase in the percentage contribution of industry to GDP.
• Accordingly, in 1991, the government decided to phase out public enterprises by selling its equity to private entrepreneurs.

Globalization

Globalization means integrating the economy of a country with the economics of other countries under conditions of free flow of trade and capital across borders.

Globalization may be defined as a process associated with increasing openness, growing economic interdependence, and deepening economic integration in the world economy.

Aim of Globalization

• It aims to create a borderless world and it is generally understood to mean integration of the economy of the country with the world economy.
• It is a complex phenomenon. It is an outcome of the set of various policies that aim to transform the world towards greater interdependence & integration.
• It involves the creation of networks and activities transcending economic, social, and geographical boundaries.

Merits and Demerits of Globalization

Outsourcing

It refers to a system of hiring business services from the outside world. These services include call centers, transcription, clinical advice, teaching/coaching, etc.

India is emerging as an important destination for outsourcing particularly, BPO (business process outsourcing, also called call centers). This is because of two important reasons:

• Availability of cheap labor in India, or relatively low wage rate for skilled workers.
• A revolutionary growth of the IT industry in India.

Five-Year Plans Indian Economy Class 12 Notes

WTO (World Trade Organization)

Before WTO, GATT (General Agreement on Trade and Tariff) was established as a global trade organization, in 1948 with 23 countries. WTO was founded in 1995 as the successor organization to the GATT.

At present, there are 164 member countries of WTO and all the members are required to abide by laws and policies intended to supervise and frame under WTO rules.

As an important member of WTO, India has been at the forefront of framing fair rules, and regulations and advocating the interests of the developing world.

Major Functions of WTO

• Facilitate international trade through the removal of tariff and non-tariff barriers.
• To establish a rule-based trading regime, in which nations cannot place arbitrary restrictions on trade.
• To enlarge production and trade of service.
• To ensure optimum utilization of world resources.
• To protect the environment.

Merits of LPG Policies

1. Vibrant Economy: After the LPG policies, the growth of GDP shot up to as high as 8 percent per annum.
2. Stimulant to Industrial Production: LPG policies have worked as a great stimulant to industrial production in the Indian economy.
3. Consumer’s Sovereignty: Consumer sovereignty has expanded over time as a large variety of goods and services from diverse global markets are now within the easy reach of buyers.
4. A Substantial Increase in Foreign Exchange Reserves: Thanks to these policies, the forex reserves of the country have now reached a comfortable level.
5. The Flow of Private Foreign Investment: It is observed that innovative techniques of production often accompany private foreign investment.

Demerits of LPG Policies

1. Neglect of Agriculture: Agricultural growth was not considered as important as the growth of industries and services.
2. Urban Concentration of Growth Process: MNCs focus only on urban areas, where they find conducive infrastructural facilities. This has further widened the ‘rural-urban gulf’.
3. Economic Colonialism A/c: Due to global competition with Indian domestic producers, India suffers from Economic Colonialism.
4. Spread of Consumerism: The spread of MNCs in the country as a consequence of LPG policies has resulted in a large-scale spread of consumerism as Indian society is adopting Western culture very rapidly.
5. Cultural Erosion: Globalization has also led to cultural erosion in Indian society.

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