DELHI TECHNOLOGICAL

UNIVERSITY

29 YEARS OF

LIBERALISATION: A

GLIMPSE OF INDIA’S

GROWTH
ENGINEERING ECONOMICS
PROJECT REPORT

SUBMITTED BY:
LAKSHAY CHANDNA 2K19/EE/146
MALLIKA SINGH 2K19/EE/150
ACKNOWLEDGMENT
Firstly we would like to express our sincere
gratitude towards our faculty advisor, whose
guidance and encouragement throughout the
course curriculum helped us develop an in-
depth understanding of reasoning
fundamentals. Without her consistent
guidance and support, this project would not
have been possible.
We would also like to take this opportunity to
thank our parents for supporting us in our daily
lives, both socially and mentally. We gratefully
acclaim them for their continuous love and
prosperity towards us in all the stages of our
lives. To our dean, Prof Madhusudan Singh for
reminding us of our professional ethics which
make us a better and fairly competitive
individual.
INDEX
Sr. No. Particulars Page No.

1.
Abstract 3

2.
Introduction: Liberalisation 3-4

3.
Need for Liberalisation 4-5

4.
India Before 1991 5-7

5.
Indian Reforms 8-10

5.
Advantages of Liberalisation A 11-13

6.
glimpse of India’s Growth 14-22

7.
Drawbacks of Liberalisation 22-24

8.
Conclusions 24-25

9.
Suggestions 26

10. Bibliography 27
ABSTRACT
“No power on earth can stop an idea whose time has come,”

said then finance minister Manmohan Singh quoting Victor Hugo while presenting the
Union Budget on 24 July 1991. And with these words started the long process of
economic liberalization in India. In the Pre-Liberalization Period: The central pillar of the
policy was import substitution, the belief that India needed to rely on internal markets for
development, not international trade.

Need for Liberalization: A Balance of Payments crisis in 1991which pushed the country to
near bankruptcy was the major deciding factor.

Post Liberalization Period: The major effect of Liberalization is in the opening of the
economy, making it more competitive, getting the government out of the huge morass of
regulation, empowering the states to take more responsibility for economic management
and thereby creating a kind of competition among the states for foreign investors. Once a
poor economic laggard, India now has the third-largest GDP ($10.51 trillion) in the world
in purchasing power parity terms after China and the United States.

WHAT IS
LIBERALISATION?
Liberalisation is the process or means of the elimination of the control of the state over
economic activities. It provides greater autonomy to the business enterprises in
decision-making and eliminates government interference. Or simply to free it from direct
or physical controls imposed by the government.
Economic liberalisation refers to a situation where inessential restrictions and control
from a country’s economy to ensure that businesses and enterprises can maximise their
contribution.
Liberalisation was begun to put an end to these limitations and open multiple areas of
the economy. Though some liberalisation proposals were prefaced in the 1980s in areas
of export-import policy, technology up-gradation, fiscal policy and foreign investment,
industrial licensing, economic reform policies launched in 1991 were more general.
There are a few significant areas, namely, the financial sector, industrial sector, foreign
exchange markets, tax reforms and investment and trade sectors which gained
recognition in and after 1991.
The liberalisation was aimed at ending the licence-permit raj by decreasing the
government intervention in the business, thereby pushing economic growth through
reforms. The policy opened up the country to the global economy. It discouraged the
public sector monopoly and paved the way for competition in the market.

NEED FOR LIBERALISATION?

Pre-Liberalization Period: In the Indian context economic reforms were based on
the assumption that market forces could guide the economy in a more effective manner
than government control. Examples of one of the other undeveloped countries like Korea,
Thailand, Singapore, etc. that had achieved rapid economic development as a result of
liberalization were kept in consideration. After Independence, India adhered to socialist
policies. The extensive regulation was sarcastically dubbed as the “License Raj”. The slow
growth rate was named the “Hindu rate of growth”. The Indian currency, the rupee, was
inconvertible and high tariffs and import licensing prevented foreign goods reaching the
market. The central pillar of the policy was import substitution, the belief that India
needed to rely on internal markets for development, not international trade.

Need for Liberalization: It was triggered by an increase in world crude oil prices,
following Iraq’s invasion of Kuwait in August 1990. The balance of payments
situation became almost unmanageable. The fear of acceleration in the rate of inflation
loomed large. The underlying fiscal crisis was acute. In November 1990, India was
close to default on its international payment obligations and that the IMF was needed
not simply as a lender of last resort but also for its imprimatur, essential to restore
international confidence.

A Balance of Payments crisis in 1991 which pushed the country to near bankruptcy
was the major deciding factor, to rescue the Indian economy of that crisis, IMF bailout
was secured for which gold was transferred to London as collateral. Indian central
bank had refused new credit and foreign exchange reserves had reduced to the point
that India could barely finance three weeks’ worth of imports. The International
bailout package came when India promised for the much-needed economic reforms.
Post Liberalization Period: The major effect of Liberalization is in the opening of
the economy, making it more competitive, getting the government out of the huge
morass of regulation, empowering the states to take more responsibility for economic
management and thereby creating a kind of competition among the states for foreign
investors. The GDP growth rate, which had collapsed to 0.8% in 1991-92 rebounded
to a near-normal 5.3% in 1992-93 and then accelerated to 6.2% in 1993-94.
Subsequently, the GDP grew at an average rate of 7.5% in the 3 years 1994-95 to
1996-97.
The policy now allows 100% foreign ownership in a large number of industries and

majority ownership in all except banks, insurance, telecommunications and airlines.

Procedures for obtaining permissions were greatly simplified by listing industries that

are eligible for automatic approval up to specified levels of foreign equity (100%,

74% and 51%).

The simplified view can be better shown as below-

INDIA BEFORE 1991, WHAT WAS PRE-

REFORM INDIA LIKE?

The historic 1991 reforms ushered in liberalization transforming India into a growth
engine that it is today. Prior to that, India suffered greatly under the sanctions of the

‘License Raj’
On 15 August 1947, when India achieved independence, the country was grappling with

problems of widespread poverty and crises in agriculture as well as industries. The First

Five Year Plan was launched in 1951 which mainly focused on the development of the

primary sector.
Five years later, on 14 May 1956, the Second Five Year Plan, famously known as the
Mahalanobis Model, was announced. The emphasis of this plan was on government-
led industrialization. Mr Nehru outlined the central role of government when he said,
“The public sector must grow not only absolutely but also relative to the private
sector.” Thus started the License-Permit-Quota Raj in India, wherein government
control was so strong that it not only decided which company would produce what but
also the amount of production, as well as the price of commodities. With the
nationalization of banks in 1969 and the Monopolies and Restrictive Trade Practices
(MRTP) Act of 1970, the License Raj was further strengthened.
Life under license raj was characterized by scarcity of resources. The choices people
had available to them in their day-to-day life were very limited. For example, cars
were available in one colour, and only two to three brands of cars or scooters existed
in the market to choose from. The speciality of License Raj was that licenses were
themselves made a commodity, and a scarce one, at that. Hence, if a company
wanted to expand production, it needed a license to do so, which was not easily
available. A ‘market’ for licenses developed; licenses had a price. Business
competition under the License Raj meant getting licenses before your competitors.
Often businesses acquired licenses, not to produce, but to stop the other from
expanding. As Dhirubhai Ambani said, the art of managing government relationships
was most critical to business success.
The License Raj created a ‘scarcity economy’, and this scarcity also applied to foreign
reserves since we practised ‘swadeshi’. The Balance of Payment crisis arose in the
1970s and worsened towards the end of 1980s. The balance of payments situation
came to the verge of collapse in 1991, mainly because the current account deficits were
financed by borrowings from abroad. The economic situation of India was critical; the

government was close to default. With India’s foreign exchange reserves at USD 1.2

billion in January 1991 and depleted by half by June, an amount barely enough to cover

roughly three weeks of essential imports, India was only weeks away from defaulting

on its external balance of payment obligations.

India was in the need of an International Monetary Fund (IMF) bailout. The price of the

bailout was the License Raj.

5:30 PM, 24 July 1991: The finance minister of India, Dr Manmohan Singh presented

the budget. He ended his speech with the historic lines: “But as Victor Hugo once said,
‘no power on earth can stop an idea whose time has come.’ I suggest… that the

emergence of India as a major economic power in the world happens to be one such
idea. Let the whole world hear it loud and clear. India is now wide awake. We shall
prevail. We shall overcome.”
The Indian economy started on a path of economic liberalization, which has eventually

impacted each and every sector of the country, and the life of every Indian citizen. The

Balance of Payment (BoP) crisis was over by the end of March 1994 and foreign

exchange reserves rose to USD 15.7 billion. Inflows of both Foreign Direct Investment

(FDI) and Foreign Institutional Investment (FII) into India increased massively.
REFORMS
The major policy initiatives taken by the Government to fundamentally address the
balance of payments problem and the structural rigidities were as follows:

• Fiscal Reforms: A key element in the stabilization effort was to restore fiscal
discipline. The data reveals that fiscal deficit during 1990-91 was as large as 8.4
percent of GDP. The budget for 1991-92 took a bold step in the direction of
correcting fiscal imbalance.
The budget aimed at containing government expenditure and augmenting
revenues; reversing the downtrend in the share of direct taxes to total tax
revenues and curbing conspicuous consumption. Some of the important policy
initiatives introduced in the budget for the year 1991-92 for correcting the fiscal
imbalance were: reduction in fertilizer subsidy, abolition of subsidy on sugar,
disinvestment of a part of the government’s equity holdings in select public
sector undertakings. These recommendations aimed to raise revenue through
better compliance in case of income tax and excise and customs duties, and make
the tax structure stable and transparent.

• Monetary and Financial Sector Reforms: Monetary reforms aimed at

doing away with interest rate distortions and rationalizing the structure of lending
rates.

The new policy tried in many ways to make the banking system more efficient.
Some of the measures undertaken were:
o Reserve Requirements: reduction in statutory liquidity ratio (SLR) and
the cash reserve ratio (CRR) in line with the recommendations of the
Narasimham Committee Report, 1991. In mid-1991, SLR and CRR were
very high. It was proposed to cut down the SLR from 38.5 percent to 25
percent within a time span of three years. Similarly, it was proposed that
the CRR be brought down to 10 percent (from the earlier 25 percent) over
a period of four years
o Interest Rate Liberalisation: Earlier, RBI controlled the rates payable on
deposits of different maturities and also the rates which could be charged
for bank loans which varied according to the sector of use and also the
size of the loan. Interest rates on time deposits were decontrolled in a
sequence of steps beginning with longer term deposits, and liberalisation
was progressively extended to deposits of shorter maturity
o Greater competition among public sector, private sector and foreign banks
and elimination of administrative constraints
o Liberalisation of bank branch licensing policy in order to rationalize the
existing branch network
o Banks were given freedom to relocate branches and open specialized
branches
o New accounting norms regarding classification of assets and provisions
of bad debt were introduced in tune with the Narasimham Committee
Report
• Reforms in Capital Markets: Recommendations of the Narasimham
Committee were initiated in order to reform capital markets, aimed at removing
direct government control and replacing it with a regulatory framework based on
transparency and disclosure supervised by an independent regulator. The Securities
& Exchange Board of India (SEBI) which was set up in 1988 was given statutory
recognition in 1992 on the basis of recommendations of the Narasimham
Committee. SEBI has been mandated to create an environment which would
facilitate mobilization of adequate resources through the securities
market and its efficient allocation.
• Industrial Policy Reforms: In order to consolidate the gains already achieved
during the 1980s, and to provide greater competitive stimulus to the domestic
industry, a series of reforms were introduced in the Industrial Policy. The
government announced a New Industrial Policy on 24 July 1991. The New
Industrial Policy established in 1991 sought substantially to deregulate industry
so as to promote growth of a more efficient and competitive industrial economy.
The central elements of industrial policy reforms were as follows:
o Industrial licensing was abolished for all projects except in 18 industries.
With this, 80 percent of the industry was taken out of the licensing
framework.
o The Monopolies & Restrictive Trade Practices (MRTP) Act was repealed
to eliminate the need for prior approval by large companies for capacity
expansion or diversification.
o Areas reserved for the public sector were narrowed down and greater participation
by private sector was permitted in core and basic industries.
The new policy reduced the number of areas reserved from 17 to 8. These
eight are mainly those involving strategic and security concerns.
(Example, railways, atomic energy etc.)
o The policy encouraged disinvestment of government holdings of equity
share capital of public sector enterprises.
• Trade Policy Reforms: Under trade policy reforms, the main focus was on
greater openness. Hence, the policy package was essentially an outward-oriented
one. New initiatives were taken in trade policy to create an environment which would
provide a stimulus to export while at the same time reducing the degree
of regulation and licensing control on foreign trade.
The main feature of the new trade policy as it has evolved over the years since
1991 are as follows:
o Freer imports and exports: Prior to 1991, in India imports were regulated
by means of a positive list of freely importable items. From 1992, imports
were regulated by a limited negative list. For instance, the trade policy of
1 April 1992, freed imports of almost all intermediate and capital goods.
Only 71 items remained restricted.
o Trading Houses: The 1991 policy allowed export houses and trading houses to import a
wide range of items. The Government also permitted the setting up of trading houses with
51 percent foreign equity for the purpose of promoting exports. For instance, under the
1992-97 trade policy, export houses and trading houses were provided the benefit of self-
certification under the advance license system, which permits duty free imports for
exports.
• Promoting Foreign Investment: The government took several measures to
promote foreign investment in India in the post-reform period. Some of the
important measures are:
o In 1991, the government announced a specified list of high technology and high-
investment priority industries wherein automatic permission was granted for foreign direct
investment (FDI) up to 51 percent foreign equity. The limit was raised to 74 percent and
subsequently to 100 percent for many of these industries. Moreover, many new industries
have been added to the list over the years.
o Foreign Investment Promotion Board (FIPB) has been set up to negotiate
with international firms and approve direct foreign investment in select
areas.
o Steps were also taken from time to time to promote foreign institutional
investment (FII) in India.
• Rationalization of Exchange Rate Policy: One of the important measures
undertaken to improve the balance of payments situation was the devaluation of
rupee. In the very first week of July 1991, the rupee was devalued by around 20
percent. The purpose was to bridge the gap between the real and the nominal
exchange rates that had emerged on account of rising inflation and thereby to
make the exports competitive.
ADVANTAGES
1. Improve the Balance of Payment position
FDI may bring about structural adjustments and improvements in Balance of
Payments of Indian Economy. When India faced serious international liquidity
problems in payment of IMF Loan, augmentation of enough forex reserves were
felt. Due to negative trade balance increased during the eighties and affected the
balance of payments position, it had become essential to restore international
confidence. In that direction, a new balance of payment strategy was put in place
emphasizing on exchange rate adjustment, fiscal correction and suitable structural
reforms in industrial and trade policy. In 1992, the institution of the Liberalised
Exchange Rate Management System (LERMS) marked a period of transition
from a controlled exchange rate regime to a market-based system.

Net inflow in capital account has increased from Rs. 95.1 bn in 91-92 to Rs. 118.8

bn in 92-92 and Rs. 304.2 bn in 93-94. It has decreased in 94-95 and 95-96.

However, it has increased to Rs. 375.4 bn in 97-98 and marginally decreased to

Rs. 350.3 bn in 98-99. The capital account of the BOP underwent a major

compositional change after 1992-93 with non -debt creating inflows, FDI, Fils,

Portfolio Investors - NRIs, GDR, ADR etc. There are distinct improvements in

the current a\c and capital a\c of inflow. Overall balance of payment position has

improved from negative Rs. 44.7 bn in 90-91 to positive Rs. 72.7 bn in 91-92. It
has increased to Rs. 181.6 bn in 94-95, Rs. 242.2 bn in 96-97. However, it has

decreased to Rs.166.5 bn in 97-98 and again increased to Rs. 182.5 bn in 1998-

99.

2.Improve the foreign exchange reserve position

The forex reserve position of the country has decreased to two weeks of import in May,

1991. The forex reserve position was Rs. 4388 crores in 1990-91, which has decreased

from Rs. 7645 crore in 1986-87. The reserve position was badly affected due to increase
in trade deficits, net current and capital inflow and balance of payment. After the

liberalization of economic policy and structural reform in industrial and trade policy,

there is a remarkable increase in exports, FDI, invisible inflow and external commercial

borrowing. This has improved the balance of payment position and forex reserve

The foreign exchange reserve was Rs. 3355 crores in 81-82 which has increased to Rs.
7384 crores in 1986-87. The index of forex has increased to 220. Forex reserve has
decreased to Rs. 4388 crores in 1990-91. However, the base year index has increased to
130. Impact of globalisation and FDI inflow has witnessed by increasing the forex
reserve to Rs.80368 crore in 96-97 and further to Rs. 152924 crores in 99-00 and Rs.
184482 crores in 00-01. Index of Forex has increased by 30 % during 1981-1991,
whereas it has increased from 130 index in 1990-91 to 5498 index in 00-01. India’s
forex reserve crossed the US $ 50 billion level on 15-2-2002. This was the totally
different situation a decade ago when India had to ship a part of its gold reserves as
collateral to avoid debt default and forex had dipped to less than two weeks’ import
about US $ 975 million in 1990.

3.Increase in transparency and corporate governance

The investment has been increased in the capital market through primary and

secondary route from FII, venture capital funds, mutual fund and institutional

investors. The institutional investors are playing a major role in disinvestment of

public sector undertaking, investment in Greenfield & infrastructure projects,
corporate investment, portfolio investment of NRI and high net worth investors.

As the share of investment and turnover as % of the financial market has increased
during 1991-2000, the importance of institutional players in the market has gone

up. The direct benefits of increased participation of institutional players in the

market is best insurance against manipulation, disclosure of financial information

and 205 reduce volatility. The indirect benefits is that Indian companies become

more transparent and improvement of corporate governance records. This has

witnessed the several disclosures norms for companies and bodies who are raising
funds from the market.

4.Reduction in Poverty
India's poverty ratio did not improve at all between independence in 1947 and 1983; it

remained a bit under 60 percent. Meanwhile, the population virtually doubled,

meaning the absolute number of poor people doubled. That was a cruel reflection of

the failure of the socialist slogan Garibi Hatao (Abolish Poverty). Poverty started

declining gradually after 1983, but the big decline came after economic liberalization.

In the seven years between 2004-5 and 2011-12, no fewer than 138 million Indians

rose above the poverty line.

India's poverty decline was 0.7 percentage points per year between 1993-94 and 2004-
5, when GDP growth averaged about 6 percent per year. The annual rate of decline
accelerated to 2.2 percent between 2004-5 and 2011-12, when GDP growth accelerated
to over 8 percent per year. The link between fast growth and poverty reduction is
striking.9
Between 2004-5 and 2011-12, the all-India poverty ratio fell by 15.7 percent. The
decline was much higher at 21.5 percent for Dalits (the lowest Indian caste group) and
17.0 percent for scheduled tribes, traditionally the two poorest groups in India. The
decline in the poverty ratio of the upper castes was much lower, at 10.5 percent.
Muslims are another historically disadvantaged group. Their poverty ratio declined in
that seven-year period by 18.2 percent, faster than the 15.6 percent for Hindus. In as
many as seven states, Muslims are less poor than Hindus.10
 A GLIMPSE OF INDIA’S GROWTH IN 13 CHARTS

The liberalisation was aimed at ending the licence-permit raj by decreasing the

government intervention in the business, thereby pushing economic growth through

reforms. The policy opened up the country to the global economy. It discouraged public

sector monopoly and paved the way for competition in the market.
The policy was seen as the only way out for India after the balance of payments crisis

that brought the country to its knees.

As the nation marks the 29th anniversary of the economic reforms this month, here are

13 charts that will help you find out how the country moved.

Nominal GDP growth

The size of the economy can often give the first impression of the might of a country.
GDP gives the total worth of the goods and services produced in a country in one
particular year. India’s GDP stood at Rs 5,86,212 crore in 1991. About 29 years later,
it stands at Rs 1,35,76,086 crore, up 2216 percent. In dollar terms, India’s GDP crossed
the $2 trillion mark in 2015-16. Currently, the country is ranked ninth in the world in
terms of nominal GDP. India is tipped to be the second largest economy in the world
by 2050.

Real GDP growth, YoY in %

Once admonished for its “Hindu rate of growth” – cliché for low rate of economic
growth – post-reforms, India remained the second fastest growing economy in the
world, behind China until 2015. Especially, between 2005 and 2008, the economy
clocked the 9% mark annually. With the NDA government revising the GDP growth
figures and China slowing down, India is now being billed as the fastest growing
major economy in the world, with a growth rate of 7.6% in 2015-16.

Foreign direct investment

Before 1991, foreign investment was negligible. The first year of reform saw a total
foreign investment of only $74 million. However, investments have steadily risen
since then, except for occasional blips between 1997 and 2000 and 2008 and 2012 –
owing to the global economic slowdown. As of 31 March 2016, the country has
received a total FDI of $371 billion, since 1991. The year 2008 recorded the highest
FDI inflow of $43.40 billion. The biggest spurt in inflow was between 2005 and 2006
– 175.54%. As of March 2016, India has attracted $10.55 billion worth of FDI. In
2015, India received $63 billion (nearly Rs 4.19 lakh crore) and replaced China as the

top FDI destination, according to The Financial Times.

Foreign exchange reserves:

It was India’s dismal state of forex reserves that forced the government to bring in
economic reforms. Now, 29 years later, forex reserves are at a record high. In 1991, it
stood at just $5.8 billion. As of 24 June, the country’s forex reserves are at $360.8
billion. Usually, import coverage of 7-8 months is considered sufficient. The biggest
jump in reserves was witnessed between 2007 and 2008 when the kitty bulged 55% to
hit $309.2 billion.

External debt:

As the economy expanded so did the country’s external debt as companies started
borrowing from the overseas markets to fund their growth. In 1991, the country’s
external debt stood at $83.8 billion. The rise has been steady with the figure in

December 2015 hitting $480.2 billion. Though the figure looks huge, as a percentage

of GDP the external debt has declined. In 1991-92, external debt as a percentage of

GDP stood at 38%. The corresponding figure in 2015 is just about 24%. Between

2007 and 2008, external debt rose by more than 30% which is the steepest rise in the

last 29 years.

Foreign institutional investment:

Unlike FDI, FII investment is not for long term and is sensitive to domestic and
international volatility. FII inflows and outflows may often reflect a nation’s economic
and political stability. In 1992-93, FII inflow stood at a meagre $4.2 million. By 1994-
95, the figure had risen to $2.43 billion. However, there was a net outflow of $386
million for the first time in 1998-99. The reason for this may be the political instability
and the Kargil War. Another major outflow was recorded in 2008-09 – $9.83 billion –
during the global financial crisis.

Sensex:
Though only around a small fraction of the Indian population plays in the share
market, the ups and downs in the Sensex reflect the prevalent economic and political
scenario in the country. The 30-share index was lingering around the 1000-level in
1991 before crossing the 4,000 mark the next year. However, the Harshad Mehta scam
brought about a downturn, with markets ending 1992-93 below the 4,000 mark. The
Sensex reached the high point of 15,644 by the end of 2007-08, but fell 38 percent to
9,708.50 points by the end of 2008-09. Since then, the Sensex has risen steadily to
reach 29,341.86 points by the end of FY 16.

Per capita income:

Per capita income is the average income of every citizen arrived at by dividing the

GDP by the country’s population. Though purely a statistical exercise which may not

necessarily show the true picture of a country’s development, nevertheless the data
makes for an interesting read. Between 1991 and 2016, per capita income rose from

Rs 6,270 to Rs 93,293. This is a whopping 1388 percent jump. However, there’s

nothing to be euphoric about the number. As RBI governor Raghuram Rajan says,

with this number we are nowhere near ending poverty. “...We are still a $1,500 per

capita economy. All the way from $1,500 per capita to $50,000, which is where

Singapore is, there is a lot of things to do. We are still a relatively poor economy and

to wipe the tear from every eye, one would at least want to be middle-income around

$6,000-7,000 which, if reasonably distributed, will have dealt with extreme poverty.

And that is two decades worth of work to be even moderately satisfied,” he said in a

recent interview to The Times of India.

Purchasing power parity:

Purchasing power parity (PPP) gives a comprehensive idea on the standard of living
and the cost of living in a particular country. When per capita income of Indians is
calculated in terms of PPP, the standard of living has improved for sure. However, the
cost of living has risen too. In 1991, per capita PPP was $1,173. In 2014, it rose nearly
five-fold to $5,701. Nevertheless, when compared with developed countries, India’s
standard of living as well as cost of living is quite low.

Share of agriculture, industry and services in GDP

The post-reform period shows the gradual decline in the agriculture sector’s

contribution to the Indian economy. India’s traditional occupation, agriculture now

contributes only about 15% to the GDP, down from 29 percent in 1991. The services

sector has taken the lead role in propelling the economy at the global stage. The IT

sector has been the torchbearer of the service sector in India. Currently, it contributes

around 53 percent to the national economy. In the meanwhile, the industrial sector has

undergone marginal growth in the last 29 years.

Power generation and consumption:

Electricity consumption is a proxy for growth. As a country prospers economically, its

power consumption increases too. This has been the case with developed countries

such as the US. Post-reforms, per-capita power consumption in India has increased
Labour force and employment:

The labour force in India currently stands at 49.7 crores. In 1991, it stood at 33.7
crores. More or less two-fifth of population is part of the labour force. The most
important fact is that the decline in unemployment rate over the last 29 years is only
marginal – from 4.3% in 1991 to 3.6% in 2014. The sectoral composition of labour
has witnessed a notable change. The agriculture sector, which is considered India’s
backbone, now employs less than 50% of the labour force, while industrial and service
sectors have marginally surged ahead.

Telecommunication:
The telecom revolution in India can be called the biggest legacy of the post-1991

economy. Telephone, especially wireless, subscription has witnessed exponential

growth since the dawn of this century. Telephone connections steadily rose in the
initial few years, but could never match the rapid rise of SIM-based mobile

subscriptions. In the last eight years, the number of telephone connections has been

dipping marginally.
Mobile phones have revolutionised the way Indians communicate. In the last 15 years,

wireless subscription has grown by a whopping 28,611 percent. As of March 2016,

there are more than 103 crore mobile subscribers in the country. Currently, India is the

second largest mobile subscribers in the world after China.

DRAWBACKS OF LIBERALISATION
Share of manufacturing in GDP%
One would have expected that the New Industrial Policy, unveiled in 1991, would

have been just what the doctor ordered for the manufacturing sector and India

would soon take its place among the manufacturing powers of East Asia. But chart

1 shows that in 1989-90, the share of manufacturing in the gross domestic product

was 16.4%; in 2015-16, after myriad new manufacturing policies, its share was at

16.2%. True, this doesn’t mean the sector hasn’t grown. But since manufacturing

holds out the promise of jobs for the masses and its productivity is also relatively

higher, it was hoped that its share in the economy would increase. That hasn’t

happened.
Combined fiscal deficit of centre and states
One underlying reason for the crisis of 1991 was the indiscriminate rise in

government borrowing in earlier years. It was only to be expected therefore that

after the crisis, the government would do all it could to curb its fiscal deficit and

that of the states. Unfortunately, as chart 2 indicates, that didn’t happen. By 2000-

01, the combined fiscal deficit of the centre plus the states, as a percentage of
GDP, had risen beyond the 1991 level. In 2014-15, the combined fiscal deficit, as a
percentage of GDP, was higher than it was in 1995-96.

Mergers and Acquisitions:

Acquisitions and mergers are increasing day-by-day. In cases where small companies

are being merged by big companies, the employees of the small companies may

require exhaustive re-skilling. Re-skilling duration will lead to non-productivity and

would cast a burden on the capital of the company.

Minimum Transfer of Technology

It has been observed that MNC generally do not transfer their advanced technology to

the host country. They bring in products and technology which are phased out in the

home country of MNC. Certain products can’t be manufactured in the home country

due to environmental restrictions. Further they made little investment in R & D for

technology up gradation. Technology supplied by MNC is capital intensive and

import oriented which may not suit our country. Extracting excessive profits and fees
based on monopolistic advantage and price-fixing Most firms take advantage of fact

that the technology they possess cannot be availed of easily.

Interference in State’s Sovereignty

There was a package programme from IMF and World Bank to globalise Indian

Economy. The steps given by them were to reduce trade barriers, permit FDI

investment in consumer, healthcare, core, infrastructure industry, abolish licence

systems, relax forex norms, quality standard and quantitative restriction etc. There

were several international Organisation like World Trade Organisation (WTO), IMF

and World Bank has put pressure on Indian Govt, for implementing the measures for

removal of import quantitative restriction, liberalise forex & FDI norms and sign

GATT agreement etc.

Exploitation
Rich agricultural land is used by foreign industries for their industries. we have lost

10000 hectares of agricultural land since 1991.Foreign companies in collaboration

with Indian companies are allowed to mine. It affects our tribals and forest dwellers.

And finally all our resources are outsourced whereas we bear the cost of pollution.

CONCLUSION
How can we sum up 25 years of economic reform? Three major trends are visible.

First, the vast majority of successes have been private‐sector successes, whereas the

vast majority of failures have been government failures, mainly in service delivery.

Second, wherever markets have become competitive and globalized, the outcomes

have been excellent. But many areas remain unreformed, a few areas have been
marked by backsliding, and those along with new forms of regulation are combining
to create what can be called neo‐illiberalism. Third, the weak quality of Indian

institutions is increasingly a problem, and without better institutions, India will be

unable to sustain high growth.

Consider each of those three trends in further detail. The private sector has performed

outstandingly in the past 25 years, taking advantage of new opportunities created by

liberalization and globalization. Indian companies more than held their own against

foreign newcomers, and the vast majority of big Indian companies have become

multinationals, making acquisitions globally.

India has also witnessed several private‐sector failures, notably of companies in

public‐private partnerships in infrastructure. Crony capitalism has become a problem

in many areas where political discretion flourishes. However, both cronyism and

public‐private partnerships could be called examples of government failure rather than

private‐sector failure. On balance, India’s private sector has done a world‐class job of

transforming India.
The second area of concern is the emergence of neo‐illiberalism. Wherever the

government has created competitive, globalized markets, the outcomes have been

outstanding. In the 1990s, the government gradually opened up the economy,

abolishing industrial and import licensing, freeing foreign exchange regulations,

gradually reducing import tariffs and direct tax rates, reforming capital and financial

markets, and generally cutting red tape. Those changes enabled India to boom and

become a potential economic superpower. But some areas were never liberalized, such

as land and natural resources, and those areas have been marked by massive scams
and crony capitalism that have created widespread public outrage. The resulting
uproar has hugely slowed decision making. New rules, however, are making it

mandatory to auction some natural resources rather than to allot them by ministerial

discretion. That is a major improvement, but the reduction of ministerial discretion

needs to be extended much further.

India is among the biggest users of anti-dumping measures permitted by the World

Trade Organization. As with the old controls, the new controls are issued in the name

of the public good and are then used by politicians and inspectors to line their pockets.

The courts are so angry with corruption that they have increasingly intervened in
many of these areas and have started issuing detailed new regulations (especially

regarding natural resources), adding to controls and uncertainty. Instead of a million

regulations badly enforced and wracked by corruption, India needs fewer regulations

well enforced.
The third concern is the quality of India’s institutions. The police‐judicial system is
pathetic, court cases go on forever, few criminals are convicted beyond all appeals,
and contracts are very difficult to enforce. This situation favours lawbreakers at the
expense of law abiders and now taints every walk of life from politics (which is full of
criminals) to business, the bureaucracy, professions, and almost everything else.
The bureaucracy is notoriously corrupt and slow-moving, marked by widespread

absenteeism. Staff positions fall vacant and remain unfilled, leading to huge backlogs

of work. Major reforms are needed to make the civil service accountable to citizens,

with penalties (including firing) for nonperformers and wrongdoers. The bureaucracy

lacks skills in almost every sector — from education and health to transport and

electricity.
Educational and regulatory institutions need to be strong and independent. But in
India, their quality is increasingly eroded by political interference and the appointment

of political favourites rather than independent experts

The 25 years from Narasimha Rao to Narendra Modi have moved India from low‐

income to middle‐income status. To reach high‐income status, India must become a

much better governed country that opens markets much further, improves
competitiveness, empowers citizens, vastly improves the quality of government

services and all other institutions, jails political and business criminals quickly, and

provides speedy redress for citizen grievances. That is a long and difficult agenda.

Economic reform is a continuing process and not a one-time action. The present NDA

government – which recently opened the defence and aviation sector for 100 percent

foreign investment – is carrying forward the legacy of the 1991 reforms. With China

slowing down, the US slowly losing its clout, and the EU weakening, the Indian

economy seems better placed to reach new heights.

SUGGESTIONS
India should change their policy towards foreign direct investment and joint ventures

from time to time depending on the amount of benefit derived from foreign
investment and to provide direction of growth. This will provide freedom to grow

multinational companies in their home country without injustice to Indian firms and

economic growth. The control is essential to regulate the FDI and structural

development in the economy.

Some of the measures can be considered for FDI policy are as follows:
• Requiring that foreign firms share ownership with nationals and also set limits on

equity in the joint venture.

• Requiring that a specified proportion of key positions in the executive ranks and on

the board of directors be manned by nationals with a gradual complete phasing out of

expatriates.
• Not encouraging foreign participation in non-priority industries or industries which

could be developed locally and encouraging joint ventures only in high technology or

export-oriented industries.
• Placing ceiling rates on royalties and fees paid for technology and percentage that

can be repatriated.
• Insisting that foreign firms raise more of their debt financing outside of the local

capital market to raise equity capital in order to contribute to the development of local

financial institutions and markets.

• Pressuring foreign firms to engage in better training programmes for locals.
• Increasing local content requirements such as use of local raw materials and
services even if higher priced in a phased manner.
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