Economic Reforms Since 1990

Stabilization and Structural Adjustment Program

Introduction: The Government of India undertook economic reform consisting of two distinct
standard – micro economic stabilization and structural reforms to overcome from the economic
crisis of 1991.

Stabilization

Micro Economic Stabilization: It involves returning to low and stable inflation and a sustainable fiscal
and balance of payment position

i) Control of Inflation: The rate of inflation which was very high during 1991-93, was
brought down by introducing monetary and fiscal discipline in the economy as well as by
improving the output and supply positions. As a result the inflation came down to
5.5%in 2000-01.
ii) Fiscal Adjustment: The fiscal deficit was less than 6% of GDP in 1970. But it rose to
11.2% in 1990-91. The government of India took several measures to increase tax
revenue and to control public expenditure.
iii) Balance of Payment Adjustment: The authority took several to correct deficit in BOP
and earn surplus. The foreign exchange reserve rose from $2.2 billion to $79.2 billion on
May 16, 2003.
Structural Reforms
Since July 1991, comprehensive liberalization measures have been undertaken by the
government to improve supply side of the economy. Among these the most important
measure includes:
i) Fiscal Reforms: In order to reduce fiscal deficit the government introduced
various controls over public expenditure and took initiatives to raise tax and
nontax revenue. The other measures includes, imposition of fiscal discipline by
reducing subsidies, developing more effective economic expenditure system,
encouraging state governments to streamline the working of state enterprises
etc.
ii) Industrial Sector Reforms: The government introduced its new industrial policy
on 24th July 1991, the various reforms under new industrial policy includes:
a) Abolition of the scheme of industrial licensing for all the industrial projects,
excluding 18 industries related to the security, strategy and environmental
concern.
b) Diversification of the area of public sector from 17 to 8 industries in order to
open up the area of investment for private sector.
c) Elimination of the system of pre-entry scrutiny of the investment decisions
of the MRTP companies
d) Liberalization of location policies.

iii) Financial Sector Reforms: The authority has appointed a committee on the
financial system in n1991. Under the chairmanship of Shree H Narasimham, this
submitted its report in November 1996, with several recommendations.

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iv) Public Sector Reforms: Considering the huge losses incurred by the public sector
enterprises, the authority took various measures. They are:
a) Reduction in the industries reserved for public sector to 8 as against 17
reserved earlier.
b) Review of those public sector investment in order to avoid those areas
where social considerations are not so important and where private sector
investment would be more efficient.
c) Giving higher degree management autonomy to those public sector
enterprises which are earning higher profit.
d) Progressive reduction in the budgetary support to public sector enterprises.
e) Inviting private sector participation to increase market discipline and
competitive capacity of those public sector enterprises through
disinvestment of the part of the equity capital of selected enterprise.
f) Referring the chronically sick enterprises to the Board for Industrial and
Financial Reconstruction (BIFR) for their rehabilitation and reconstruction.

v) External sector Reforms:

a) Trade Policy: The trade policy of 1991 freed import export trade from the
shackles of control and license.
b) On September 4, 1991, export of 63 items mostly chemicals and metal
products were deregulated and 17 items were shifted from banned and
restrictive category to the open general license category.
c) The trade policy of 1992 furthered liberalized the trade regime. Import of
capital goods, raw materials, intermediate goods and components were
more or less freed from import licensing.
d) The Foreign Investment Policy:
i) Effective from May 14, 1992, foreign companies were permitted to
use their brand name or trade mark on goods sold in domestic
market.
ii) Effective from 15th September 1992, the foreign investors were
permitted to repatriate their capital
iii) Again the govt. opened the Indian capital market for foreign
institutional investors such as mutual funds, pension funds,
investment trust, and asset management companies.
iv) The financial investors were permitted to invest in the shares of
Indian companies up to 25% of equity.
v) Some more concession have been given to these investors to attract
foreign investment in Indian shares.

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Liberalization

Reasons and Effects of Liberalization Policy on Indian Economy

Reasons: Several Legislative measures for the regime of licensing and control were undertaken such
as Industries Export and Import Control Act 1947, Industries (Development and Regulation) Act
1951, Capital Issues (Control) Act 1956, Monopolies Restrictive Trade Practice Act (MRTP) 1969,
Foreign Exchange Regulation Act 1973 etc. All these measure made the licensing and control regime
more rigorous and pervasive during the days of radical socialism in 1970’s. As a result, Indian
economy was transformed into highly controlled economy, popularly known as “License-Permit
Subsidy Raj”

The consequence of license permit subsidy raj have been very sever and serious and
quite undesirable. Such as delays, inflexibility, wastage and inefficiency in public enterprises, parallel
economy, distorted pattern of industrial growth, corruption, underutilization of productive capacity,
high cost of production, low quality of product and services, exploitation of consumers indifferent
attitude of the bureaucrats in managing the affairs etc. It ultimately resulted in the economic crisis
in 1991.

Effects of Liberalization

Followings are the effects of the economic liberalization on India

1) Liberalization and Economic Growth: Over the year India has gradually become one of the
fastest growing economies in the world. It has become the fourth largest economy in the
world in terms of Purchasing Power Parity (PPP). It has been expected that average yearly
economic growth will ranged between 6% to 7%. Due to high economic growth there has
been rapid progress in the civil amenities.
2) Liberalization and Employment: Over the year India has become consumer oriented market
where the changes are brought by the demand and supply forces. Due to the high demand
and supply there has been significant growth in the market. As such, more and more job
opportunities are being created in different sectors.
Some of the well-known industries that have recently become very
popular in the country are Personal and beauty care, agro products, health care, information
technology.
3) Growth of Agriculture: Due to the globalization and introduction of better equipment, there
has been considerable improvement in the techniques of agriculture. Today farmers are
using gadgets like Rowers, tractors, electronic pipeline and lots more for the cultivation of
the crops; this has increased the produce in terms of quality as well as quantity.
4) Improvement in the Health Care: Due to the LPG more and more medical innovations are
coming and it improving the health situation in India. The infant mortality rate the
malnutrition rate has significantly come down since the last decade.
5) Liberalization and Mergers in India: The extent to which cross border mergers and
acquisitions are growing due to the globalization process. Liberalization and mergers have
helped in improving the economic status. The automobile sector, steel, cement,

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 pharmaceutical and many more sectors have only experienced successful mergers with over
six companies in India.
6) Effect of Liberalization on Indian Industry: Globalization of Indian industries took place in
the various sectors such as steel, pharmaceutical, chemical, textile, cement, retail and BPO.
The various beneficial effects of globalization of Indian industry is that it brought huge
amount of foreign investment into the industry especially in the BPO, Pharmaceutical,
petroleum and manufacturing industry. The huge amount of FDI boosted the Indian
economy quite significantly.
Important Questions
5 marks
1) Describe the effect of liberalization on the Indian Economy.
2) Describe the various reasons for liberalization in India
15 Marks
1) Explain the reasons for and effects of liberalization policies in the Indian Economy

Case let: (2016)

For a long period, almost for 4 decades of economic planning Indian remained content with
Hindu rate of growth about 3.5% per year. For a decade later India moves into Neo-hindu
rate of growth of 5.7% per year.
Economic liberalization contributed to the higher growth rate between
2000-10. India witnessed annual growth rate of 7.2% per year. This period is known as the
enriching higher growth rate. The main factors responsible for EHG are rapid expansion of
the service sector, public consumption pattern and changes in the compression of Indian
population etc.

Questions:
1) What is the extent of neo hindu rate of growth?
a) 5.7% per year
2) What is enriching Hindu Growth rate?
a) Between 2000-10 India witnessed annual growth rate of 7.2% per year. This period
is known as the enriching higher growth rate.
3) Expand EHG
a) Enriching Higher Growth
4) What are the factors responsible for EHG
a) (note on LPG Reforms)