Indian Economy During Reforms

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Features of New Economic Reforms in India

We come across the term “Economic reforms” quite often, and it is important to know what is economic reforms? 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 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.

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. 

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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.

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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 liberalisation ofIndia’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 totally 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.

FAQ (Frequently Asked Questions)

1. 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.

2. What are the different forms of privatization?

Privatization happens mainly in the following 3 ways.

  • Strategic sale - This is also called denationalization which means that complete ownership is transferred from the government to the private sector players.

  • Partial Sale - When a public sector company gives more than 50% of its shares to the private sector, it is termed as partial privatization. The private sectors have the majority of shares in this case and possess a lot of control in the management of the company.

  • Token privatization - Also known as deficit privatization, it happens when the government disinvests 5 to 10% of its share capital to meet the deficit in the budget.