12/13/22, 1:10 AM Economic Reforms Since 1991

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Economic Reforms Since 1991

The government took major policy steps to
fundamentally address the balance of payments issues
and structural rigidity.

Table of Content
New Economic Policy
Major Steps in 1991 Reforms
Conclusion

India’s reform strategy launched in July

1991 provided a combination of
macroeconomic stability and structural
adjustment. It is guided by short-term and
long-term goals. In order to restore the
balance of payments and curb inflation,
stability is needed in the short term. At the
same time, changing the structure of the
institution itself through reform is equally
important in the long run. 

The new government took urgent action to

implement a macroeconomic stabilization
plan through fiscal adjustment. In addition,
structural reforms were initiated in the areas

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of trade, industry and the public sector

(public sector contraction). 

Economic reform or structural adjustment is

a multidimensional set of different long-term
policies (liberalization, privatization and
globalization) directed towards rapid
growth, productivity and creating a
competitive environment. 

New Economic Policy

The Indian government implemented
economic reforms in 1991:

Stabilization Measures: These are short-

term measures taken by the government to
curb rising prices, unfavourable balance of
payments and falling foreign exchange
reserves.

Structural Adjustment: This is a long-term

policy aimed at improving the efficiency of
the Indian economy and enhancing its
international competitiveness by removing
rigidities in various sectors of the Indian
economy.

In the New Economic Policy of 1991,

structural reforms can be treated with
respect.

1. Liberalization: Liberalization means

removing all unnecessary controls and
restrictions such as permits, licences,
protectionist rights quotas, etc. In other
words, it can be defined as relaxation of
governmental rules. A country’s
regulations allow private sector
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companies to conduct business

transactions with fewer restrictions.
A by-product of this reform has been an
increase in foreign exchange reserves,
which according to the RBI’s annual report,
were largely the result of earlier foreign
direct investment.

2. Privatization and Contraction of Public

Sector: In the new economic policy
privatization of the economy was given
more emphasis. Privatization is a 
process by which the public sector
undertakings are increasingly brought
under private ownership. It promotes
consumer sovereignty. A high degree of
consumer sovereignty means wider
choice and better quality of goods and
services. Increasing privatization
reduces the role of the public sector in
the economy. 
3. Globalization: Globalization can be
defined as a process that involves
increasing openness, increasing
economic interdependence and
deepening economic integration into the
global economy.
Policies which promoted globalization:

1. Raising the foreign investment limit

2. Partial convertibility
3. Long-term trade policy
4. Tariff reduction

Major Steps in 1991 Reforms

The Government of India has taken the
following major measures:

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Fiscal Reform: An important part of

stabilization efforts is restoring fiscal
discipline. Data show that budget deficit in
1990-1991 was 8.4% of GDP. The 1991-
1992 budget took a bold step toward
correcting fiscal imbalances. It called for a
nearly two percentage point reduction in the
budget deficit as the percentage of GDP 
decreased from 8.4% in 1990-1991 to 6.5%
in 1991-1992.

Financial Sector and Monetary Reforms:

Monetary reforms aimed at removing
interest rate distortions and rationalize the
structure of lending rates. The new policy
attempts a variety of approaches to improve
the efficiency of the banking system.

Capital Market Reform: The Narasimham

Committee recommended reforms to capital
markets aimed at removing direct
government oversight and replacing it with
a regulatory framework based on
transparency and disclosure overseen by
an independent regulator. The Securities
and Exchange Board of India (SEBI) was
established in 1988 and was legally
recognized in 1992 on the recommendation
of the Narasimham Commission.

Industrial Sector Reforms: The industrial

sector reforms include: contraction of public
sector; abolition of licensing; freedom to
import capital goods.

The new economic policy favoured the

contraction of the scope of public sector
industries and simultaneously increasing

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the role of the private sector. The number of

public sector undertakings under the
government of India was reduced from 17
industries to 8, with the current status being
only 3.

Free entry of foreign investment

Many measures have been taken to attract

foreign investment. Some of them are:

1. 51% of foreign investment in 34 high-

priority industries was unsanctioned by
the government in 1991.
1. Non-Resident Indians (NRIs) are allowed
to invest 100% in export houses,
hospitals, hotels, etc.  
1. The establishment of the Foreign
Investment Promotion Board (FIPB) to
rapidly approve foreign investment
proposals.
1. The previous restrictions on the
repatriation of dividends by foreign
investors have been removed. They can
now take home the bonus.
Rationalization of Exchange Rate Policy:
One of the important measures taken to
improve the balance of payments situation
is the depreciation of the rupee. In the first
week of July 1991, the rupee depreciated
by about 20%. Its purpose is to bridge the
gap between real and nominal exchange
rates caused by rising inflation, thereby
making exports competitive.

Conclusion

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The economic reforms of 1991 focused on

the formal sector, so we saw a strong boom
in liberalization. Sectors such as
telecommunications and civil aviation have
benefited greatly from deregulation and
subsequent reforms. However, economic
liberalization and reform still have a long
way to go, especially for the informal sector,
including the urban poor who work as street
vendors or rickshaw drivers, the agricultural
sector, micro, small and medium
enterprises (MSMEs) and indigenous
peoples. The slow growth and stagnation of
these unreformed sectors emphasise the
important role of the 1991 reforms in
helping India’s economy develop into what
it is today.

Frequently
Asked
Questions
Get answers to the most common
queries related to the SSC Examination
Preparation.

What are the major economic

reforms?
Answer. The basic features of economic reforms
– liberalization, privati...Read full

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What were the main effects of

the 1991 economic reforms?
Answer. The reforms have led to more
competition in industries such as banking...Read
full

How has the Indian economy

developed since 1991?
Answer. Since 1991, India’s GDP has
quadrupled, foreign exchange reserve...Read full

What is the LPG model?

Answer.The LPG model, or the liberalization,
privatization and globalization model, has the
objective to make India’s economy the fastest
gro...Read full

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