Economic Reforms Since 1991

It was only P.V.Narsimha Rao and Dr. Manmohan

Singh, that full package of stabilisation plus
structural reforms was put back on the rails in
1991
 Meaning of Economic reforms

• Economic reforms or Structural adjustment is a long term multi dimensional package of

various policies (Liberalisation, privatisation and globalisation) and program for the
speedy growth, efficiency in production and make a competitive environment.
Economic reforms were adopted by Indian Govt. in 1991.
 Need for Economic reforms
• Mounting fiscal deficit: Fiscal deficit of the government had been mounting year
after year on continuous increase in non-development expenditure. Due to
persistent rise in fiscal deficit there was corresponding rise in public debt and
interest payment liability there was possibility that the economy might lead to debt-
trap situation. Thus it becomes essential for the government to reduce its non-
development expenditure and restore fiscal discipline in the economy.
• Adverse balance of payment: When receipts of foreign exchange fall short of their
payments, the problem of adverse balance of payment arises. Despite the restrictive policy
adopted by the government till 1990 import substitution and export promotion the desired
result could not be meet. Our export could not compete in terms of price and quality in the
international market. As a result there was slow growth of export and rapid increase in
imports. Accordingly the burden of foreign debt services increased tremendously and
leading to depletion of foreign exchange reserves.
• Poor performances of PSU’s: Due to poor performances of public sector undertakings
degenerated in to a liability. Most of public sector undertakings were incurring loss and
their performance was quiet satisfactory. On account of these factors, it becomes
imperative for the government to adopt new economic policy or to initiate economic
reforms.
• Rise in price: Due to rise in prices of food grains there was pressure of inflation Prior to
1991. Which deepen the economic crisis from bad to worse
• Gulf Crises: On account of Iraq war in 1990-91 prices of petrol shot-up . Besides India used
to receive huge amount of remittances from gulf countries in terms of foreign exchange
• Fall in foreign exchange reserves: In 1990-91 India’s foreign exchange reserves fall to such
a low level that there was not enough to pay for an import bill of even10 days. In such
situation the government had to helplessly resort to policy of liberalization as suggested by
the World Bank.
• It refers to economic reforms introduced since 1991 to improve the productivity
and profitability of economy and to make it globally competitive.
 Measures of New Economic policy

• Stabilisation measures: These are short run measures introduced by Govt to control rise
in price, adverse balance of payment and fall in foreign ex-change reserve.

• Structural adjustment: These are long run policies, aimed at improving the efficiency of
the economy and increasing its international competiveness by removing the rigidity in
various segment of the Indian economy
In the new economic policy 1991, Structural reforms can be seen with
respect to.
 Liberalisation.
 Privatisation
 Globalisation.
 Liberalisation
It means to free the economy from the direct and physical control
imposed by the government.
 Measures adopted for Liberalization

Industrial sector reforms

 Abolition of Industrial Licensing
 Contraction off Public Sector
 Freedom to Import capital goods
Financial sector reforms.
 Reducing various Ratios(SLR, CRR)
 Change in role of RBI from regulator to facilitator
 De-regulation of interest rates
Fiscal reforms/Tax reforms
 Rationalisation of direct taxes.
 Reforms in indirect taxes.
 Simplification of tax process.
Foreign exchange reforms
 Devaluation of rupee.
 Market determination of exchange rate .
Trade and investment reforms
 Removal of quantitative restrictions on imports and
exports. Export duties were removed.
 Relaxation in import licensing system .
 Reduction in import duties
 Privatisation

• Privatisation is the general process of involving the private sector in

the ownership or operation of a state owned enterprises.
 Policies adopted for privatisation
 Contraction of public sector.
 Abolish the ownership of Govt. in the
management of public enterprises.
 Sale of shares of public enterprises.
• The purpose of privatisation was mainly to improve financial discipline
and facilitate modernisation. It was believed that private capital and
managerial capabilities will help in improving performance of the
PSU’S.
• Globalisation may be defined as a process associated with increasing
openness, growing economic interdependence and deepening economic
integration in the world economy.
• It is a process in which domestic economy integrates with world economy .
 Policies promoting Globalisation

 Increase in equity limit of foreign investment.

 Devaluation of rupees
 Long term trade policy.
 Reduction in tariff.
 Positive impacts of Globalisation

• Greater access to world market .

• Advanced technology .
• Better future prospects for large industries of developing countries to become
important players in the international market .
• Better prospects for skilled people across the Globe .
 Negative impact of globalisation

• Benefits of globalisation accrue more to developed countries as they are

able to expand their markets in other countries.
• Market driven globalisation increases the economic disparities among
nations and people .
• MNC’S have gained strong position due to which domestic companies are
forced to face stiff competition.
Outsourcing is the business practice of hiring a party outside a company to
perform services or create goods that were traditionally performed in-house by
the company's own employees and staff. Outsourcing is a practice usually
undertaken by companies as a cost-cutting measure.
 Few realities of outsourcing

• It is one of the important outcome of globalisation process. Outsourcing is

emerging as a major player for industrial and service sector .
• It has intensified in recent times because of growth of fast modes of
communication , particularly the growth of IT sector.
• Modern telecommunication links (text, voice and visual data) in respect of
these services is digitized and transmitted in real time over continents and
countries .
 India-A favorable destination for outsourcing
• Availability of skilled manpower
• Favorable govt. policies.
• Availability of cheap labour / low wage rate .
• Considerable growth of IT industry
 World Trade Organization
• World Trade Organisation, as an institution was established in 1995. It replaced General
Agreement on Trade and Tariffs (GATT) which was in place since 1946.
• At present , there are 164 member countries of WTO and all the members are required to
abide by laws and policies framed under W.T.O rules .
 Criticisms of Economic Reforms
 Neglect of agriculture
 Jobless growth.
 Increase income inequalities
 Adverse effect of disinvestment policy.
 Spread of consumerism.
 Cultural erosion.
 Encourages economic colonialism
 Functions of W.T.O
• Administering W.T.O Trade Agreements.
• Acting as a Forum for trade negotiations.
• Settling and Handling Trade disputes
• Monitoring and reviewing national trade policies,
• Assisting the member in trade policies through technical assistance and training
programs.
• Technical assistance and training for developing countries.
• Co-operation with other International Organisation.
 An appraisal of LPG policies

Arguments in favour of Economic Reforms.

 Increase in foreign investment.
 Increase in foreign exchange reserves.
 A check of inflation.
 Increase in national income.
 Increase in exports.
 Consumer sovereignty.