Economic Reforms:

Introduction: The Indian economy has experienced unprecedented economic crisis during early 1990. The balance of payment situation was worse. There were sharp decline in foreign exchange reserves and capital inflows through commercial borrowings and non residents deposits. The country was facing large and persistent macro economic imbalances , low productivity and a low rate of investment. The fiscal deficit of central and state government reached alarming level. there was steep increase in external and internal debt .the country begin to experience double dip inflation. this was the context when the congress government implemented the structural adjustment reforms in 1991.the trust of the reform process was to increase the efficiency and international competitiveness of industrial production , and to utilize for its purpose foreign investment and foreign technology to a greater degree than in past .the stress was in increasing the productivity ,modernizing the financial sector and attaining a technological and competitive edge in the past changing global economy . In the 1980s, Prime Minister Rajiv Gandhi initiated some reforms. In 1991, after India faced a balance of payments crisis, it had to sell 67 tons of gold to the International Monetary Fund (IMF) as part of a bailout deal, and promise economic restructuring. The government of P. V. Narasimha Rao and his finance minister Manmohan Singh (the present Prime Minister of India) started breakthrough reforms. The new neo-liberal policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.The main objective of the government was to transform the economic system from socialism to capitalism so as to achieve high economic growth and industrialize the nation for the well-being of Indian citizens. Today India is mainly characterized as a market economy.

Pre-reforms policies
Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialization under state monitoring, state intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, and central planning. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s. Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990. In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries

The Vishwanath Pratap Singh government (19891990) and Chandra Shekhar Singh government (19901991) did not add any significant reforms.

Impact:
The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%.At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and in Taiwan by 12%. Only four or five licences would be given for steel, electrical power and communications. License owners built up huge powerful empires. A huge public sector emerged. State-owned enterprises made large losses Infrastructure investment was poor because of the public sector monopoly. Licence Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country" and corruption flourished under this system.

1991 India economic Crises:

The assassination of prime minister Indira Gandhi in 1984, and later of her son Rajiv Gandhi in 1991, crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s. The crisis was caused by currency overvaluation; the current account deficit and investor confidence played significant role in the sharp exchange rate depreciation. In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a slide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve Bank of India took partial action, defending the currency by expending international reserves and slowing the decline in value.However, in mid-1991 ,with foreign reserves nearly depleted, the Indian government permitted a sharp depreciation that took place in two steps within three days (July 1 and July 3, 1991) against major currencies. The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having balance of payments problems. Precipitated by the Gulf War, Indias oil import bill swelled, exports slumped, credit dried up and investors took their money out. Large fiscal deficits, over time, had a spill over effect on the trade deficit culminating in an external payments crisis. By the end of 1990, India was in serious economic trouble. The gross fiscal deficit of the government (center and states) rose from 9.0 percent of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the center alone, the gross fiscal deficit rose from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to 8.4 percent in 1990-91. Since these deficits had to be met by borrowings, the internal debt of the government accumulated rapidly, rising from 35 percent of GDP at the end of 1980-81 to 53 percent of GDP at the end of 1990-91. The foreign exchange reserves had dried up to the point that India could barely finance three weeks worth of imports.

Major reforms in India's capital markets led to an influx of foreign portfolio investment. The major economic policies include:
1. Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue. 2. Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries. 3. Opening up in 1992 of India's equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts (GDRs). 4. Starting in 1994 of the National Stock Exchange as a computer-based trading system which served as an instrument to leverage reforms of India's other stock exchanges. The NSE emerged as India's largest exchange by 1996. 5. Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative controls. (The rupee was made convertible on trade account.) 6. Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors. 7. Streamlining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation.

INDIA'S ECONOMIC REFORMS The economic reforms initiated in 1991 introduced far-reaching measures, which changed the working and machinery of the economy. These changes were pertinent to the following: Dominance of the public sector in the industrial activity Discretionary controls on industrial investment and capacity expansion Trade and exchange controls Limited access to foreign investment Public ownership and regulation of the financial sector The reforms have unlocked India's enormous growth potential and unleashed powerful entrepreneurial forces. Since 1991, successive governments, across political parties, have successfully carried forward the country's economic reform agenda. Reforms in Industrial Policy Industrial policy was restructured to a great extent and most of the central government industrial controls were dismantled. Massive deregulation of the industrial sector was done in order to bring in the element of competition and increase efficiency. Industrial licensing by the central government was almost abolished except for a few hazardous and environmentally sensitive industries. The list of industries reserved solely for the public sector -- which used to cover 18 industries, including iron and steel, heavy plant and machinery, telecommunications and telecom equipment, minerals, oil, mining,

air transport services and electricity generation and distribution was drastically reduced to three: defense aircrafts and warships, atomic energy generation, and railway transport. Further, restrictions that existed on the import of foreign technology were withdrawn. Reforms in Trade Policy It was realized that the import substituting inward looking development policy was no longer suitable in the modern globalising world. Before the reforms, trade policy was characterized by high tariffs and pervasive import restrictions. Imports of manufactured consumer goods were completely banned. For capital goods, raw materials and intermediates, certain lists of goods were freely importable, but for most items where domestic substitutes were being produced, imports were only possible with import licenses. The criteria for issue of licenses were non-transparent, delays were endemic and corruption unavoidable. The economic reforms sought to phase out import licensing and also to reduce import duties. Import licensing was abolished relatively early for capital goods and intermediates which became freely importable in 1993, simultaneously with the switch to a flexible exchange rate regime. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were finally removed on April 1, 2001, almost exactly ten years after the reforms began, and that in part because of a ruling by a World Trade Organization dispute panel on a complaint brought by the United States. Financial sector reforms Financial sector reforms have long been regarded as an integral part of the overall policy reforms in India. India has recognized that these reforms are imperative for increasing the efficiency of resource mobilization and allocation in the real economy and for the overall macroeconomic stability. The reforms have been driven by a thrust towards liberalization and several initiatives such as liberalization in the interest rate and reserve requirements have been taken on this front. At the same time, the government has emphasized on stronger regulation aimed at strengthening prudential norms, transparency and supervision to mitigate the prospects of systemic risks. Today the Indian financial structure is inherently strong, functionally diverse, efficient and globally competitive. During the last fifteen years, the Indian financial system has been incrementally deregulated and exposed to international financial markets along with the introduction of new instruments and product. Results of economic reforms: The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment, portfolio investment, and investment raised on international capital markets) in India grew from a minuscule US $132 million in 1991-92 to $5.3 billion in 1995-96.Rao

began industrial policy reforms with the manufacturing sector. He slashed industrial licensing, leaving only 18 industries subject to licensing. Industrial regulation was rationalized. As of 2009, about 300 million peopleequivalent to the entire population of the United Stateshave escaped extreme poverty.The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate of 9%.With this, India became the second fastest growing major economy in the world, next only to China. An Organisation for Economic Co-operation and Development (OECD) report states that the average growth rate 7.5% will double the average income in a decade, and more reforms would speed up the pace.

Ongoing economic challenges: 1. 2. 3. 4. 5. 6. 7. 8. 9. Economy of India Problems in the agricultural sector. Highly restrictive and complex labour laws. Inadequate infrastructure, which is often government monopoly. Failing education. Inefficient public sector. Inflation in basic consumable goods. Corruption High fiscal deficit