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DPSM QUESTION 1
Critically examine the major factors that led to the economic reforms in the 1990s.
Outline the principal causes of introducing the economic reforms and highlight its impact on
the organized sector in India.
Highlight the chief characteristics of globalization with special reference to the industrial
policies in India.
Critically examine the argument that "The globalization process has led to informalization of
workers in India."
Assess the impact of post-1990s economic reforms on the unorganized labour force in India.
Evaluate the impact of privatization on the organized and unorganized labour.
“The interests of the labour are not being adequately addressed in the emerging development
policies of India.” Examine.
Discuss the impact of privatization and liberalization policies on the agricultural sector in
India

ANSWER:

Introduction

John F Kennedy once said- “When written in Chinese, the word ‘crisis’ is composed of two
characters. One represents danger and the other represents opportunity.” History is dotted with
various seminal events that justify this statement. One of these events transpired on the Indian
subcontinent in the years 1990 and 1991. During those fateful years, India found itself on the
verge of economic collapse. However, it didn’t just recover from this near-catastrophe but also
adopted some key reforms that would define its astounding economic ascent in the 2000s. The
economic reforms of 1991 converted this crisis into an opportunity.

The term economic reform broadly indicates necessary structural adjustments to external
events. It includes the function of country’s spending to the level parallel to its income and
thereby reducing fiscal deficits. This requires gradual reduction in import and increase in
export. These adjustments also require market change in order to make economy flexible.
The first phase of economic reforms in India were started by Rajiv Gandhi in 1985 soon after
he took over as Prime Minister. The recipe suggested by him was: improvement in
productivity, absorption of modern technology and full utilisation of capacities. The basic
thrust was on a greater role for the private sector. However, measures introduced during his
regime did not yield the desired results. In fact, the balance of trade deficit considerably
increased and the country was faced wide a serious balance of payment crisis.
As a result, when P. V. Narasimha Rao took over as the Prime Minister, the Government came
up with adjustments to the economy by bringing new reforms. The reforms introduced were
called ‘structural reforms’ and launched under the ‘New Economic Policy (NEP)’. 
 

NEW ECONOMIC POLICY 1991

The New Economic Policy was introduced in 1991 under the leadership of P. V. Narasimha

Rao. It refers to the economic activities of the government and includes various policy and
structural perform methods undertaken, In an instant, the primary policy changes known as
economic reforms are:

A. Macroeconomic stabilization measures, which comprise:

1. Controlling inflation by keeping the prices of goods under control, and

2. Maintaining a sufficient foreign exchange reserve to correct the weakness of
BoP (Balance of Payment).

B. Major sectoral structural adjustment reforms, which consist of:

1. Improving the efficiency of th/e economy, and

2. Removing rigidity from various segments of the Indian Economy to increase
international competitiveness.
 Components of Economic Reforms

The New Economic Policy has been divided into three broad concepts that are:
Liberalisation, Privatisation, and Globalisation, or the LPG Model.

The LPG Model was introduced to replace the LQP Model, i.e., Licensing, Quotas,
and Permits. The main aim of introducing the reforms was to attain a high rate of economic
growth, reduce the rate of inflation, reduce the fiscal deficit, and overcome the BoP (Balance
of Payment) crisis.

Liberalisation

Liberalisation of an economy is considered a key component of NEP. Before the New

Economic Policy of 1991, the private sector was in control of the government. Because of
this, the domestic industries were not allowed to take any decisions regarding the industry’s
work without the government’s interference. This resulted in a fall in professionalism and
inefficiency of work within the industry. With the introduction of the liberalisation policy,
this sector gained the freedom of decision-making without any interference from the
government.

In India, we developed a system of "Licence-permit Raj' over the years which applied
unnecessary restrictions on investments that can be made by the private sector in different
areas. It also caused excessive delays in undertaking investments because an investor was
required to obtain clearance from a number of authorities.

The aim of liberalization has been to save the prospective investors from unnecessary
harassment by the bureaucrats so as to accelerate and facilitate the process of investment.

Under the Liberalisation Policy, the government of India introduced various economic
reforms. These reforms are:

 Industrial Sector Reforms: This reform included policies like Reduction in

Industrial Licensing, Decrease in the Role of the Public Sector, De-reservation under Small-
Scale Industries, and the Monopolies and Restrictive Trade Practices (MRTP) Act.
  Financial Sector Reforms: This reform included policies like Change in the
Role of RBI, Origin of Private Banks, Increase in limit of Foreign Investment, and Ease in
the Expansion Process.
 Tax Reforms: There are generally two types of taxes, Direct and Indirect
Taxes. This reform included policies like the Rationalisation of Direct Taxes, Reform in
Indirect Taxes, and Simplification of Process.
 Foreign Exchange Reforms: This reform included policies like the
Devaluation of Rupee and Market Determination of Exchange Rate.
 Trade and Investment Policy Reforms: This reform included policies like the
Removal of Quantitative Restrictions on Import and Export, Removal of Export Duties,
Restriction in Import Duties, and Relaxation in Import Licensing System. 

Privatisation

Privatisation refers to the partial or full ownership and operation of public sector

enterprises by the private sector. It implies the withdrawal of government ownership from the
public sector. It can be done in two ways:
1. Outright sale of part of the equity of Public Sector Undertakings (PSUs) to
private entrepreneurs (also known as Disinvestment), or
2. Withdrawal of ownership and management of the public sector companies from
the government to the private sector.
 
The need for privatisation was felt mainly because of the poor performance of the
Public Sector Undertakings. As a result, the consumers were facing a major loss, as they did
not receive quality products, and other services, such as poor delivery systems, etc. With the
introduction of the privatisation policy, this factor was eliminated.

Globalisation
 Globalisation refers to the integration of the economy of a country with the
economies of other countries. The process of globalisation is associated with the free flow of
trade, capital across borders, increasing openness, growing economic independence, and
deepening economic integration in the world. The Globalisation of the economy is
considered to be a complex phenomenon as it is a result of a set of various policies that aim
at integrating an economy with the world and transforming it towards greater
interdependence.
The main aim of globalisation was to integrate the Indian economy with the global
economy. As a result, there will be an unrestricted flow of information, goods and services,
technologies, and even people within countries, which will eventually enhance the
development of the country. The government allowed foreign companies to hold 51 percent
or more shares of the Indian companies in the case of collaboration so that they can function
freely and as the owner. This also promoted the transfer of the latest technologies into Indian
territory due to collaboration with MNCs. The reduction of the tariff and non-tariff barriers,
adoption of policies to promote exports, increase in Foreign Investments, increase of foreign
currency in the country (Forex), growth of the IT industry in India, and several other features
came under the globalisation policy.

CAUSES OF REFORMS OF 1991

A. ECONOMIC CAUSES

1. Imprudent public spending patterns:

-Under the Nehru-Mahalanobis planning model, the government was expected to make
significant expenditure into key long-term industries in which the private sector was either
unable or unwilling to invest.

-The burden of driving economic growth was almost entirely on the shoulders of
government who was expected to incur a significant degree of public investment.

-The 70s saw a staggering rise in non-development and wasteful expenditure.

 Fertilizer and export subsidies increased tenfold under the Janata government from 1977
to 1980.

There was also a rise in food-grain procurement prices during this period.

-The government, out of political expediency, resorted to economically irresponsible

populist measures such as farm loan waivers.

2. Poor Performance of the Public Sector:

In the period 1951-1990, the majority of the industries were owned by the public
sector. They were assigned the responsibility of the growth and development of an economy.
Nevertheless, the performance of these enterprises was very depressing. The employees were
neither competitive nor effective because of job security.

Many of the PSUs were overstaffed, badly managed, located in politically-determined

places and focused more on social imperatives than on maximising profits.

As a result, red tapism and corruption increased and marred any hopes of development
and the growth was stagnant.

2. Lack of revenue

India’s tax revenue didn’t grow as rapidly as required to meet the government’s
expenditure. The direct tax rates were quite high and grew at a rapid pace thereby encouraging
tax evasion.

When it came to indirect taxes, the procedure of levying and recovering them was quite
cumbersome and complex which affected tax collections.

3. A Deficit in Balance of Payment:

It was one of the most significant factors in bringing economic reforms to the country.
The deficit in BoP arises when the foreign payments are more than foreign receipts. There
was an increase in imports besides heavy tariffs and quotas.

However, the exports were low since domestic goods were not in the international
market.

4. Fall in foreign exchange reserves

 Foreign exchange (foreign currencies) reserves, which the government generally
maintains to import petrol and other important items, dropped to the levels that were not
sufficient for even a fortnight.

The government was not able to repay its borrowings from abroad.

The crisis was so serious that Chandra Shekhar government had to mortgage gold
reserves with other countries to pay off interest and foreign debts.

5. Increasing debt burden

Due to High Fiscal Deficit, Debt Trap and Low Foreign Exchange Reserves
Government expenditure exceeded the revenue, from various sources such as taxation, earning
from public sector enterprises etc due to high spending on social sector, infrastructure and
defence.

The government borrowed funds to finance the deficit from banks, people of the country
and international financial institutions. Due to faulty policies, government was not able to
make repayments on its external borrowings and starting taking fresh loans to repay the
previous loans thus getting caught in a debt trap.

6. External pressures:

There were two external events in particular that pushed a badly-run Indian economy to
its breaking point.

-First was the Iraq-Kuwait war in 1990. The Middle East region was a frequent
destination of Indian exports which were severely disrupted due to the war. But the main point
of concern was our import bill. India imported most of its oil from Iraq and Kuwait. Looking
for alternative sources of oil led to an increase of 60 percent in our oil import bill.

-The second external event was the predicament of the Soviet Union. While it did not
collapse until December 1991, the instability in the region had already affected India’s
economic interests. Our rupee trade with Russia declined massively due to the policies of
perestroika and glasnost. Furthermore, our exports to East European countries decreased from
22% of total exports to 10.9% in 1990-91.
 B. POLITICAL COMPLUSIONS

1. The gulf-war eliminated inward remittances from emigrant Indian workers in West
Asia and besides resulted in expenditures on bringing them.

2. With an unstable coalition government at the centre, political uncertainties

adversely affected the confidence of external creditors.

3. Pressure from IMF and WB:

India received $7 billion in financial assistance from the World Bank and the
International Monetary Fund (IMF) to tackle its crisis. These organizations expected India to
liberate its economy for availing loans by lifting restrictions on the private sector, reducing
the role of the public sector in various areas, and removing trade barriers with other nations.
4. Other perspectives claim that the dominant interest group, the urban industrial
elite, believed that they were ready to compete globally and wanted access to foreign markets
as well as capital. They were the ones who pressurized the government to open up the Indian
economy.

NEW INDUSTRIAL POLICIES

Industrial development in India started with the implementation of Industrial Policy in

1948, and took off with the Policy in 1991, with the liberalization of the economy.

The Industrial Policy of 1991 opened up India’s economy to the world, in the backdrop
of a severe economic crisis. It was this policy that led to an acceleration of economic growth in
our country

The following were the features of NIP 1991:

 The End of Red Tapism via Industrial Delicensing Policy:

The red tapism ended in India as the GOI launched the industrial delicensing policy in
1991. Now anyone could easily start their industry without any license if that industry didnt
come u/nder the 15 sectors for which a license is required. With the ease of licensing the
growth of industries began at a rapid pace. At present, there are only 13 sectors left for which
industrial licensing is required.

 Reform in Foreign Investment Policy:

One of the most important features of NIP, in 1991 was the foreign investment policy.
Under which GOI provided ease in foreign trade and investment.

The government allowed Domestic firms to import better technology to improve

efficiency and to have access to better technology. The Foreign Direct Investment ceiling was
increased from 40% to 51% in selected sectors.

The maximum FDI limit is 100% in selected sectors like infrastructure sectors. Foreign
Investment promotion board was established. It is a single-window FDI clearance agency. The
technology transfer agreement was allowed under the automatic route.

This resulted in increased competition among industries and attracted more FDI in
India.

 Dereservation Policy:

Before the launch of NIP, 1991 the public sector held reservations in some of the key
industries and capital goods. However, after the launch of NIP, in 1991 the reservation policy
was abolished that providing equal opportunity to the private sector to invest in these key
industries. However, still, three sectors are reserved for the PSUs and they are mining, atomic
energy, and railways.

 Abolition of MRTP Act:

In 1991 the MRTP (Monopoly and Restricted Trade) act was abolished under the NIP.
Thus from 2010, the competition commission jumped into the monitoring and supervision of
competitive practices.

 Reforms related to PSUs:

 The NIP, 1991 aimed to enhance the productivity and efficiency of the PSUs.
Government identifies new strategies and priority areas for PSUs.

Sick PSUs were referred to the Board for Industrial and financial restructuring (BIFR).

Also, the Public Sectors Undertaking that were in incurring loss were sold to private
sectors.

Impact of the economic reforms on organised and unorganised sector

While macroeconomic statistics indicate a significant acceleration in per capita GDP growth,
some commentators perceive that the postreform growth process in India has been inequitable.

If we examine the structure of employment, Indian economy is characterised by the

existence of high level of informal or unorganised labour employment. The workers in
the organised sector constitute less than 20 per cent of the country’s total work force
whereas not only does the informal sector employ over 90 percent of India's workforce,
but also contributes more than 50 percent to GDP (gross domestic product) and over 70%
to exports.

In fact, the term ‘unorganised labour’ has been defined as those workers who have not
been able to organise themselves to pursuit of their common interests due to certain
constraints like casual nature of employment, ignorance and illiteracy, small and
scattered size of establishments, etc.

unorganised workers are observed to be large in numbers, suffering from cycles of

excessive seasonality of employment, scattered and fragmented work place, poor in
working conditions, and lack of attention from the trade unions.

The liberalization also allowed the development of an informal sector. The informal
sector, which had existed for centuries before the liberalization of India’s economy, has
become more and more significant in the Indian economy following the economic
reforms.
Foreign direct investment (FDI) has increased substantially over the last decade. The
increase in FDI has resulted in many small-scale industries being replaced by large-scale
industries, the latter operating with the latest technology. However, this has also resulted
in an increase in non-employment opportunities for the unskilled workers.

The growth in the unorganized sector is a consequence of lack of development in micro

and small enterprises, which led to the establishment of an informal economy. It also
follows from the lack of a social safety network, which allows for the development of a
multi-sectoral approach to economic development.

The continuing economic development and globalization have increased demand for
cheap goods from developing countries such as India. The low labour cost in India also
makes it attractive for foreign investors when compared to other countries such as the
USA and China.

The huge number of workers employed in this informal sector, along with the demand
for cheap goods/services from foreign countries has resulted in a massive expansion of
the informal sector. This informal sector expansion, together with the increase in foreign
businesses, has created an opportunity for employment generation.

However, it has also resulted in the exploitation of cheap labour, unemployment and an
unequal income distribution. The workers of this informal sector are mostly unskilled or
semi-skilled labourers, factory/shop floor workers, construction workers, home-based
workers, street vendors and hawkers. Hence, informal sector workers are often
underpaid, overworked and have little chance of advancement.

Many workers in the unorganized sector are not registered thus denying them any
benefits such as government subsidies and social security contributions. The working
hours are long and often extend to 12+ hours per day. There is no legal limit set on the
number of working hours in India. The employers are not bound by law to provide any
benefits such as insurance, pension plans, bonuses, etc. thus making the workers' lives
miserable.
The government has been pushing for digitisation and formalisation of the economy on
the plea that this will curb tax evasion and as more taxes are collected, better services
can be provided to the marginalised.

But the unorganised sector cannot cope with these changes which increase their costs,
compared to the organised sector which is already largely digitised and formalised. No
wonder, demand has been shifting from the unorganised and small units to the larger
ones, spurring their rapid growth.

The GST was designed to formalise the economy. But that does not mean the
promotion of the small and unorganised sector; instead, it has led to their displacement
by the organised sector. The market of the former is being captured by the latter. This
is the colonisation of the unorganised sector by the organised sector.

The rules of economic gains enable the organised sector to corner most of the gains of
development. The marginalised sections are expected to be satisfied with their meagre
material gains. Rising disparities are justified on grounds of merit while glossing over
the impact of skewed social development at the expense of the marginalised sections.

The GST, digitisation and formalisation are setting the rules of the gains in favour of
the organised sector at the expense of the unorganised sector. As the production of the
latter declines, the produce of the organised sector finds new markets for its expansion.

Not only is the unorganised sector ignored in data, policies also ignore it even though
it employs 94% of the workers and produces 45% of the output. This is the
invisibilisation of this sector and quietly making its market available to the organised
sector.

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WAY FORWARD

1. Increase state expenditure

With privatisation, the state eventually loses ownership and control, making the
question of public interest non-existent.

In case of basic rights like education, healthcare, and food security, and given the
current disparities, the state needs to strengthen its control and simultaneously
recalibrate its relation with the private players to integrate social goals. This can
be achieved by introducing more regulations so that these services are not
delivered for profits alone.

2. A more balanced private-public role in service provision

Following the recommendation made above, the argument remains that for
universal and mass literacy state-funded educational facilities need to continue in
India. At the same time, the private players can certainly complement the public
school system (as in Bangladesh, Chile, and Colombia ) in different ways to not
just attain literacy but also an education and skill set that improves employability.
The agenda of private education or healthcare can work in tandem with or bolster
public services to recast their developmental purpose.

3. Progressive taxation

The government needs to change the tax regime such that the incessantly growing
rich of the country pay taxes progressively. Progressive taxation ensures that the
tax burden is higher for the wealthy. Through taxes and strong state provisioning,
a basic standard of living for lower-income families can be ensured, which will
take care of fundamental needs such as shelter, food, health, education, and
transportation.

4. Review and update existing schemes

The case for public provisioning can be strengthened by reviewing the status of
schemes where access needs to be improved. The flagship, Pradhan Mantri Jan
Arogya Yojana – dubbed the world’s largest health insurance plan  offering
financial risk protection against catastrophic health expenditure to approximately
40% of the population – hasn’t provided effectively improved access  to health
care.

Similarly, the debate on living wages needs to be revisited to improve human

capital rather than support bare sustenance and increase demand-driven growth.

5. Measure inequality

India needs a more rigorous database to measure incomes and consumptions

levels as well as continuous data collection by the income tax department  on
taxpayers and gross and returned income. This transparency will then facilitate a
more democratic dialogue on tax structures for the super-rich, such as a wealth
tax, instead of burdening the population with indirect taxes such as GST.