Indian Economy During Reforms

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

  1. Liberalization

  2. Privatization

  3. 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 Reforms

1. Under which five-year plan was the new Economic Reform introduced?

In 1991, under the leadership of the Manmohan-Rao Government (Narshima Rao the then Prime Minister of India, and Manmohan Singh Finance minister) the new Economic Reforms were introduced. It was the 8th five-year plan in which modernization of industries was the major highlight of the plan. During this period of LPG Reforms, India became a member of the World Trade Organization (WTO) to strengthen its global supply chain.

2. What are the negative consequences of LPG Reforms that India has faced?

Apart from the brighter side of the new Economic Reforms of 1991, there are various challenges with the nation’s economy has faced, some of them are - 

  • The declining impact of socialistic democracy on the participation of private sectors in the Economy

  • Growing inequality and class difference between individuals, the rich get richer and the poor get poorer

  • The agriculture sector was neglected which till now could not make a strong stand in the Economy

  • Development of the secondary sector that is the development of industries was completely ignored and the Economy directly shifted to the territory sector that is the services sector

  • No market to give employment to the unskilled industrial workers, thus resulted in the growth of unemployment 


Thus, it is important to know about the loopholes of the LPG Reforms to make corrections while future Reforms. 

3. Does privation result at the end of the Government’s control over the economic sector?

Though India adopted Privatization in its new Economic Reforms where it allowed the participation of private players in the Economic sector like the Banking sector was open for the private players. However, the Government still had full control over the strategic sectors like defense manufacturing, railways, atomic energy, etc, and partial control over other sectors like Banking, power, coal, etc. The reason behind the move was to strike a balance between innovation and competition through private participation while fulfilling the idea of socialism through the Government’s control. 

4. Has India benefited from the move of globalization?

Globalization simply means the opening of the national market for international business transactions and widening the scope of the market. India with the second-highest population has benefited all the global markets by serving as a consumer market for them. However, India has also enjoyed some benefits, India is one of the largest suppliers of the service sector apart from China. India has the largest number of diasporas working in the global market, thus amounting to the highest collections of remittances. 

 

India is a major exporter of medical supplies and a hub for medical treatment. 

5. What is the key difference between privatization and disinvestment?

Privatization refers to the selling of more than 50% stake of the Government to the private player that means the management of the corporations is handed over to the private players. On the other hand, disinvestment refers to the selling of the stake which is less than 50% which means the managerial decision role remains with the Government. 


Currently, the Government is planning to privatize all the non-strategic sectors to promote innovation and competition.

6. What are the different forms of privatization? 

Different forms of privatization can be - 

  • Strategic Sale - in which complete ownership is transferred from the government to the private sector. It is also called denationalization. 

Eg- the denationalization of the Indian banking sector

  • Partial Sale - in this more than 50% of shares are sold to the private player and the private players have control over the management of the company. 

Eg- the sale of AirIndia to Tata, where the government is now only a minority shareholder. 

  • Token Privatization - in which the government sells 5-10% of the shares only to meet their budget deficit. It is also known as deficit privatization. 

Eg- the sale of a few shares of the Indian post office to support the deficit. 


7. What are some of the failures of the economic reforms of 1991 in India?

There were a few negative effects of the new economic reforms and they are explained below.

  • The public investment in the agriculture sector saw a reduction which in turn affected infrastructure areas.

  • With globalization came free trade which adversely affected domestic industries and reduced employment opportunities in the country.

  • Fiscal Deficit - One of the reasons for the economic crisis of 1991 was the steep rise in government borrowing in the preceding years. It was expected that after economic reforms, the government would curb the fiscal deficit, both the center and the states. However, it did not happen, and in 2000-2001 the combined fiscal deficit, as a percentage of gross domestic product (GDP) had increased more than that of 1991.

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