Factor leading to adopting economic reforms in

1991, key features of reforms

Introduction
With a glorious vision of a growing India, India, after independence accepted the regime of
economic planning. Its goal was to march steadfastly forward while assuring a fair division of
the nation’s resources by various policies like Licensing policies, import substitution policies,
trade barriers, and other restrictions.
Due to which Inefficient resource usage, over-protection, mismanagement of enterprises and the
economy, significant revenue deficits, foreign exchange shortages, and poor technical growth
resulted from these policies. As a result of the stress and pressures that resulted, the
administration was obligated to rethink its policy framework. The result was a set of adjustments
in economic policy that became known as economic reforms in a broad sense.
In 1991, the Indian government began a significant economic reform programmed with the goal
of transitioning the Indian economy from a planned to a market-oriented framework. In order to
achieve this, the administration made a number of policy initiatives aimed at reassuring fiscal
discipline, financial market liberalization and deregulation, privatization of public sector
enterprises (PSEs), and foreign investment. These economic reforms can be characterized into
three categories: liberalization, privatization, and globalization.

Problems Faced by the Economy in 1990

There was a huge Macroeconomic imbalance of high current account deficit and high fiscal
deficit. The causes of Balance of Payment Crisis are listed below.
1. The Government Expenditure was more than the earnings. Hence the Fiscal Deficit was
high. The Gross Fiscal deficit rose from 9 % of GDP in 1980-81 to 12.7 % of GDP in
1990-91.
2. The Internal Debt of the Government rose due to the above reason. It rose from 35 % of
GDP in 1985-86 to 53 % of GDP in 1990-91.
3. In addition the country was importing more than exporting. Hence the Current Account
Deficit was high.
4. The current account deficit was triggered by the rise in crude oil prices because of the
Gulf War. Due to this, the Forex Reserves of India depleted massively. Despite
substantial borrowings from the International Monetary Fund (IMF) earlier in the year.
5. By June 1991, India had less than $ 1 billion forex reserves, just sufficient to meet import
requirements for a period of 3 weeks.
6. India did not have enough Forex reserves to conduct business with the world.
7. India was on the verge of defaulting on its International Debt Obligations.
8. Investors pulled out their money.
9. Short term credit dried up, as exporters were apprehensive that they would not be paid.
10. There was a massive rise in inflation rates.
Due to all these reasons new economic policy was adopted in 1991

New economic policy:

New Economic Policy refers to economic liberalization or relaxation in the import tariffs,
deregulation of markets or opening the markets for private and foreign players, and reduction of
taxes to expand the economic wings of the country. Former Prime Minister Manmohan Singh is
considered to be the father of New Economic Policy (NEP) of India. Manmohan Singh
introduced the NEP on July 24,1991.

Main Objectives of New Economic Policy – 1991, July 24

1. The main objective was to plunge the Indian Economy into the arena of ‘Globalization and to
give it a new thrust on market orientation.
2. The NEP intended to bring down the rate of inflation.
3. It intended to move towards a higher economic growth rate and to build sufficient foreign
exchange reserves.
4. It wanted to achieve economic stabilization and to convert the economy into a market
economy by removing all kinds of unnecessary restrictions.
5. It wanted to permit the international flow of goods, services, capital, human resources and
technology, without many restrictions
6. It wanted to increase the participation of private players in all sectors of the economy. That is
why the reserved numbers of sectors for the government were reduced.

Economic reforms can be characterized into three categories: liberalization, privatization, and
globalization.

Liberalization;

refers to slackening of Government regulations. It is a process where inessential controls and

restrictions of government are removed to ensure that businesses and enterprises can maximise
their contributions. It implies greater autonomy to business enterprises in decision making and
removal of government interference. It was done with a belief that market forces of demand and
supply would bring greater efficiency that will recover the economy.

Following steps were taken under the Liberalization measure:

(i) Free determination of interest rate by the commercial Banks: Under the policy of
liberalization the interest rate of the banking system will not be determined by RBI; rather all
commercial Banks are independent to determine the rate of interest.
(ii) Increase in the investment limit for the Small-Scale Industries (SSIs): Investment limit of the
small-scale industries has been raised to Rs. 1 crore. So, these companies can upgrade their
machinery and improve their efficiency.
(iii) Freedom to import capital goods: Indian industries will be free to buy machines and raw
materials from foreign countries to do their holistic development.
 (iv) Freedom for expansion and production to Industries: In this new liberalized era now,
industries are free to diversify their production capacities and reduce the cost of production.
Earlier governments used to fix the maximum limit of production capacity. No industry could
produce beyond that limit. Now the industries are free to decide their production on their own on
the basis of the requirements of the markets.
(v) Abolition of Restrictive Trade Practices: According to Monopolies and Restrictive Trade
Practices (MRTP) Act 1969, all those companies having assets worth Rs. 100 crore or more were
called MRTP firms and were subjected to several restrictions. Now these firms have not obtained
prior approval of the Govt. for taking investment decisions. Now the MRTP Act has been
replaced by the Competition Act, 2002.
(vi) Removal of Industrial Licensing and Registration: Previously the private sector had to obtain
a license from the Govt. for starting a new venture. In this policy the private sector has been
freed from licensing and other restrictions.
● Industries licensing is necessary for following industries: (I) Liquor (ii) Cigarette (iii) Defence
equipment (iv) Industrial explosives (v) Drugs (vi) Hazardous chemicals

2. Privatization:
Privatization means permitting the private sector to set up industries which were previously
reserved for the public sector. Under this policy many PSUs were sold to the private sector. The
main reason for privatization was that PSU’s are running in losses due to political interference.
The managers cannot work independently. Production capacity remained under-utilized. To
increase competition and efficiency privatization of PSUs was inevitable.

Step taken for Privatization:

1. Sale of shares of PSUs: Indian Govt. started selling shares of PSU’s to public and financial
institutions e.g. Govt. sold shares of Maruti Udyog Ltd. Now the private sector will acquire
ownership of these PSU’s. The share of the private sector has increased from 45% to 55%.
2. Disinvestment in PSUs: The Govt. has started the process of disinvestment in those PSUs
which had been running into loss. It means that Govt. has been selling out these industries to the
private sector. Govt. has sold enterprises worth Rs. 30,000 crores to the private sector.
3. Minimization of Public Sector: Previously the Public sector was given importance with a view
to help in industrialization and removal of poverty. But these PSUs were not able to achieve this
objective and the policy of contraction of PSU’s was followed under new economic reforms. The
number of industries reserved for the public sector was reduced from 17 to 2. (a) Railway
operations (b) Atomic energy only

3. Globalization:
Globalization means the interaction of the domestic economy with the rest of the world with
regard to foreign investment, trade, production and financial matters.

Following steps are taken for Globalization:

(i) Reduction in tariffs: Custom duties and tariffs imposed on imports and exports are reduced
gradually just to make the Indian economy attractive to the global
investors.
(ii) Long term Trade Policy: Forcing trade policy was enforced for a longer duration. Main
features of the policy are: (a) Liberal
policy (b) All controls
on foreign trade have been removed (c) Open competition
has been encouraged. (iii) Partial Convertibility of
Indian currency: Partial convertibility can be defined as to convert Indian currency (up to
specific extent) in the currency of other countries. Equity limit of foreign capital investment has
been raised from 40% to 100% percent. In 47 high priority industries foreign direct investment
(FDI) to the extent of 100% will be allowed without any restriction. In this regard Foreign
Exchange Management Act (FEMA) will be enforced