28-10-2024

• 1991: India faced an economic/BOP crisis owing to its

external debt. Government was unable to make
repayments on its borrowings from abroad.
• Forex reserves became extremely low along with high
prices of essential goods.
• The origin of this crisis can be traced back to inefficient
Economic management of the economy in 1980s.
reforms in • Although, government revenues were low, spending on
development programmes and areas such as defence and
India: social sector was high. Forex reserves were spent to meet
government consumption expenditure leading to wastage.
background

• In the late 1980s, government expenditure highly

exceeded its revenue and meeting this expenditure
through borrowings became unsustainable.
• India approached International bank for Reconstruction
and development (known as World Bank) and IMF and
received $7 billion as loans to meet the crisis.
Economic • In return, India was required to liberalise and open up the
reforms in economy by removing restrictions on private sector;
reduce the role of government; and remove trade
India: restrictions.
• India agreed to these conditionalities and announced the
background New Economic Policy.
• This included a set of policies which were aimed at creating
a competitive environment in the economy and removing
barriers to entry and growth of firms.

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Stabilisation Structural reform

measures measures
• Short-term • Long-term
Economic measures intended measures aimed at
reforms in to correct BOP improving the
imbalances and efficiency of the
India: control inflation. economy and
background increasing
international
competitiveness by
removing rigidities

• Liberalization: Liberalization refers to removal of

governmental restrictions in all stages in industry.
• Delicensing, decontrol, deregulation, subsidies (incentives)
and greater role for financial institutions are the various
Meaning of facets of liberalization.

liberalizatio • Privatization: Privatization means transfer of ownership

and management of enterprises from public sector to
n, private sector.
• Denationalization, disinvestment and opening exclusive
privatizatio public sector enterprises to private sector are the gateways
to privatization.
n and • Globalization: Globalization refers to the integration of the
globalisatio domestic (Indian) economy with the rest of the world.

n • Import liberalization through reduction of tariff and non-

tariff barriers, opening the doors to FDI and FPI are some
of the measures towards globalization.

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Favour of LPG Against LPG

Liberalization was necessitated Liberalization effectively enforced,
because various licensing policies favour an unrestricted entry of
were said to be deterring the growth foreign companies in the domestic
of the economy. economy. Such an entry prevents the
Arguments growth of the local manufacturers.
Privatization was necessitated Privatization measures favour the
in favour of because of the belief that the private
sector was not given enough
continuance of the monopoly power.
The disparities tend to widen among
and against opportunities to earn more money.
Globalization was necessitated so
people and among regions.
Globalization results in redistribution
LPG that a developed country can grow
without the exploitation of natural
of economic power at the world
level. But, only the already well-
and human resources of under developed countries are favoured in
developed countries. this process and the welfare of the
less- developed countries will be
neglected.

• Positives
• Foreign exchange reserves started rising.
• There was a rapid industrialization.
• The pattern of consumption started improving.
• Infrastructure facilities such as express highways, metro
rails, flyovers and airports started expanding.
Major • Negatives
• The benefits of this growth in some sectors have not
changes reached the marginalized sections of the community.
after 1991 • The process of development has generated serious social,
economic, political, demographic and ecological issues and
challenges.
• Basic economic problems such as poverty, unemployment,
discrimination, social exclusion, deprivation, poor
healthcare, rising inflation, food insecurity still persist.

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• Major objectives:
• 1. Free enterprises from public sector control.
• 2. To abolish restrictions on foreign direct investment.
• 3. To liberate the indigenous enterprise from the
restrictions of MRTP Act
• 4. To maintain a sustained growth in productivity and
employment
Industrial • 5. To achieve international competitiveness.
Sector
Reforms

• Industrial de-licensing policy

End of industrial licensing or license raj.
Earlier, private sector firms had to obtain licenses to start a
firm.
Industrial licensing removed from all industries except 8–
alcohol, cigarettes, hazardous chemicals, industrial
explosives, electronics, aerospace, drugs and pharma.
Industrial • Controls on price fixation have been removed and market
Sector is allowed to determine prices.

Reforms

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• De-reservation of the industrial sector

Most of the industrial sectors (capital goods and key
industries) were opened up for the private sector.
• Now only atomic energy and some core activities of
railways are reserved.
• Many goods produced by small scale industries have been
Industrial de-reserved.
Sector • Reforms related to PSUs

Reforms Aimed at enhancing the efficiency and competitiveness of

PSUs.
The government identified strategic and priority areas for
the public sector to concentrate.
Loss making PSUs were sold to the private sector.

• Abolition of Monopolies and Restrictive Trade Practices

(MRTP) Act
In 2010, the Competition Commission has emerged as the
watchdog in monitoring competitive practices in the
economy.
The policy caused big changes including emergence of a
strong and competitive private sector and a sizable
Industrial number of foreign companies in India.
Note on MRTP Act, 1969: It was aimed at
Sector Controlling and regulating the centralization of economic
Reforms power.
Controlling monopolies, restrictive, unfair trade practices.
Prohibit monopolistic activities
MRTP Act was revoked and replaced by Competition Act,
2022.

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MRTP Act Competition Act

The first competition law made in Implemented to promote and keep
India, which covers rules and up competition in the economy and
regulations relating to unfair trade ensure freedom of business.
practices.
To control monopolies. To promote competition.
Industrial No penalty for offense. Offenses were penalized.

Sector
Reforms

• Foreign investment policy

Allow foreign investment and inflow of foreign technology.
This has enhanced industrial competition and improved
business environment in the economy.
In 1991, the government announced a specified list of
high-technology and high- investment priority industries
wherein automatic permission was granted for foreign
Industrial direct investment (FDI) upto 51 percent foreign equity.
Sector The limit was raised to 74 percent and subsequently to 100
percent for many of these industries.
Reforms

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• Since the inception of economic reforms, growth in service

sector has increased.
• However, this growth process has bypassed the agriculture
sector which has shown sharp deceleration in growth rate.
• Wide variations in agricultural yield have been recorded
Impact of and there was a shift towards cash crop cultivation.
• Agricultural indebtedness pushed several farmers into
LPG on poverty and led to farmer suicides.
agriculture
sector
reforms

Cutback in
Reduction of Paucity of
High input costs agricultural
subsidies import duties credit facilities
• Before • Farmers were • To open up • Post-1991, the
liberalisation, encouraged to India’s lending pattern
seeds were shift from markets, of commercial
provided to the growing liberalisation banks
farmers by traditional policies underwent a
state crops to cash remove tariffs change.
Agrarian governments.
• However, post
crops.
• Liberalisation
and quotas on
imports.
• Hence farmers
had to rely on

crisis after liberalisation,

India’s seed
market was
policies
reduced the
subsidies on
• As a result
cheap food
imports
moneylenders
who charge
exorbitant
reforms opened up to
global agri-
businesses.
fertilisers and
pesticides.
flooded the
markets.
rates of
interest.
• Therefore,
• As a result input costs
seed prices increased but
shot up and prices of
fake seeds agricultural
came into the products have
market. not increased
to that extent.

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• Liberalisation of trade and investment increases

international competitiveness of industrial production and
also inflow of foreign investment and technology into the
economy.
• Its aim is to promote efficiency of local industries and
adoption of modern technologies.
Trade and • Major trade policy reforms were:
• 1. Dismantling of quantitative restrictions on imports and
investment exports. Quantitative restrictions on imports of
manufactured consumers goods and agricultural products
policy were removed.
reforms • 2. Reduction of tariff rates.
• 3. Removal of licensing procedures for imports. Import
licensing was abolished except for hazardous and
environmentally sensitive industries.
• 4. Removal of export duties to increase the competitive
position of Indian goods in the international markets.

• Aim: promote efficiency of local industries and adoption of

modern technology
• Free imports and exports
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.
Trade and This would affect the domestic industries.
investment • Rationalization of tariff structure and removal of
quantitative restrictions
policy Chelliah Committee Report: drastic reduction in import
duties.
reforms Affected the domestic industries.
Import licensing was abolished except for hazardous and
environmentally sensitive industries.
Export duties have been removed to increase the
competitive position of Indian goods in international
markets.

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• Special Economic Zones

To overcome the shortcomings experienced on account of
the multiplicity of controls and clearances, absence of
world-class infrastructure, and an unstable fiscal regime
and to attract larger foreign investments in India, the
Special Economic Zones (SEZs) Policy was announced in
April 2000.
Trade and India was one of the first in Asia to recognize the
investment effectiveness of the Export Processing Zone (EPZ) model in
promoting exports, with Asia’s first EPZ set up in Kandla in
policy 1965.
The broad range of SEZ covers free trade zones, export
reforms processing zones, industrial parks, economic and
technology development zones, high-tech zones, science
and innovation parks, free ports, enterprise zones, and
others.

• Major objectives of SEZ

To attract foreign direct investment and thereby increasing
GDP.
To increase share in Global Export (International Business).
To create employment opportunities.
 To develop infrastructure facilities.
To exchange technology in the global market.
Trade
reforms

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• Concerned with reforms in government’s taxation and

public expenditure policies collectively known as fiscal
policy.
• Fiscal policy – all planned actions of a government in
mobilizing financial resources for meeting its expenditure
and regulating economic activities of a country.
• In 1991, there was a continuous reduction in direct tax
rates as higher rates lead to tax evasion.
Fiscal • Restore fiscal discipline: It means reduction of fiscal deficit
to the extent of just 3% of GDP.
reforms • Containing government expenditure and augmenting
revenues; increase the share of direct taxes to total tax
revenues and curbing conspicuous consumption.

• Some of the important policy initiatives introduced for

correcting the fiscal imbalance were: reduction in fertilizer
subsidy, abolition of subsidy on sugar and disinvestment of
a part of the government’s equity holdings in select public
sector undertakings.
• 2017: GST: introduced with the aim to generate additional
revenue for the government, reduce tax evasion and create
one nation, one tax and one market, simplification,
encourage better compliance.
Fiscal
reforms

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• 1991: rupee devaluation was undertaken. This was aimed

at increasing the inflow of foreign exchange.
• Reforms aimed at freeing the determination of rupee value
in the forex market from government control. Exchange
rate should be market determined i.e. based on demand
and supply of foreign exchange.

Foreign
exchange
reforms

• Includes financial institutions such as commercial banks,

investment banks, stock market operations and forex
market.
• The financial sector in India is regulated by RBI.
• RBI decides the amount of money that banks can keep
with themselves, nature of lending to various sectors etc
• Aim of reforms: reduce the role of RBI from a regulator to
Financial a facilitator of financial sector.
sector • Establishment of private sector banks (both Indian and
foreign).
reforms • Foreign investment limit in banks was increased.
• Freedom was given to banks to set up new branches
without RBI approval and rationalize existing branch
networks.

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• Foreign institutional investors such as merchant banks,

mutual funds and pension funds were allowed to invest in
Indian financial markets.
• FDI: investment of foreign assets into domestic structures,
equipment and organisations. It does not include
investment in stock markets. It involves durable
investment.
Financial • Foreign direct investments may involve mergers,
acquisitions, or partnerships in retail, services, logistics, or
sector manufacturing.
• Example:
reforms • FDI: An Australian company acquiring a smaller Indian
company for diversification.
• A U.S.-based cellphone provider buying a chain of phone
stores in China.

• Foreign portfolio investment: Foreign portfolio investment

(FPI) consists of securities and other financial assets held
by investors in another country.
• It does not provide the investor with direct ownership of a
company's assets and is relatively liquid depending on the
volatility of the market.
• Along with foreign direct investment (FDI), FPI is one of the
Financial common ways to invest in an overseas economy.
• FPI holdings can include stocks, bonds, mutual funds, and
sector exchange traded funds.
reforms • Example: US investors buy Indonesian government bonds
or shares on the Indonesia Stock Exchange.

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• FII: An important type of Foreign Portfolio Investors is the

Foreign Institutional Investors or FIIs. They are a part of
the broad FPI category.
• Foreign investment which comes in the form of stocks,
bonds or other financial assets. It does not entail control
over firms.
• Foreign institutional investors include hedge funds,
Financial insurance companies, mutual funds, pension funds and
investment banks.
sector • It is an important source of capital.
reforms • FII’s uniqueness is their size – they are big entities and are
well-regulated. FPI is the superset as it includes FII.

Financial
sector
reforms

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• Reduction in reserve requirements: Reduction in statutory

liquidity ratio (SLR) and the cash reserve ratio (CRR) were
recommended by the Narasimham Committee Report,
1991.
• Interest Rate Liberalisation: Earlier, RBI controlled (i) the
interest rates payable on deposits, (ii) the interest rates
which could be charged for bank loans.
Financial
sector
reforms

• It implies shedding of ownership or management of

government owned enterprise.
• It involves conversion of government companies into
private companies via withdrawal of government from
ownership and management of PSUs through outright sale
of PSUs
• Disinvestment: it is a method of privatization of PSUs by
selling of a part of equity of PSUs to the public.
Privatisatio • The purpose of sale is to improve financial discipline and
facilitate modernization. Private capital and managerial
n capabilities could be effectively utilized to improve the
performance of PSUs.
• Privatisation could provide strong impetus to the inflow of
FDI.

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• It refers to integration of the Indian economy with the

world economy.
• It involves creation of networks and activities transcending
economic, social and geographical boundaries.
• Factors responsible for facilitating globalization:
• 1. Rapid improvements in technology
• 2. Liberalisation of trade and investment
Globalisatio • 3. Pressure from WTO

• Initially countries were connected to each other through

trade.
• But now, MNCs play a bigger role. MNCs produces goods
globally and sells them globally . It owns and controls
production in more than 1 nation.
• Conditions for MNCs to set up production in particular
location:
Production • 1. Cheap skilled and unskilled manpower
across • 2. Availability of factors of production
• 3. Favourable government policies
countries • Money spent by MNCs on buying assets is called as foreign
investment.
• MNCs also set up production jointly with local companies.
Through this MNCs provide money for additional
investment to these local companies for buying new
machines and latest technology.

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• Foreign trade provides an opportunity to producers to

reach beyond domestic markets.
• For the consumers, foreign trade increases the choice of
goods.
• It equalizes the prices of similar commodities in different
countries.
Foreign • Foreign trade leads to market integration.

trade and
integration
of markets

• Outsourcing: It is an important outcome of the

globalization process. It involves hiring regular service from
external sources which was previously provided internally
or within the country. For example legal advice, computer
services.
• IT, BPO, record-keeping, teaching etc are outsourced by
foreign countries to India.
• Low wage rates and skilled manpower have made India a
destination for global outsourcing in the post-reform
Outsourcing period.

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• Rapid improvements in technology stimulate the

globalization process. For example: improvement in
transportation results in faster delivery of goods and
services at lower costs.
• Development in ICT, telecom, internet have resulted in
improvements in information transfer.
Factors
enabling
globalizatio
n:
technology

• Reduction of trade barriers by the government result in

increasing foreign trade and facilitate globalization.
• Post-1991, the government reduced the barriers to trade
so that Indian producers could compete with the foreign
producers. Such competition would improve the
Factors performance of Indian producers.
enabling
globalization:
liberalization
of foreign
trade and
investment

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• WTO promotes free trade and states that all countries

should liberalise their trade policy.
• It aims to liberalise international trade by establishing rules
regarding the same.
• It was established in 1995 as a successor organization to
General Agreement on Trade and Tariff.
Factors • GATT was established in 1948 with 23 countries as member
nations. It administered all multilateral trade agreements
enabling by providing equal opportunities to all countries in the
international market for trading purposes.
globalizatio • WTO introduced a rule-based trading regime in which
n: WTO nations cannot place arbitrary restrictions on trade.
• It aims to enlarge production, trade of goods and services,
ensure optimum utilization and of world resources and
protect the environment.

• WTO agreements cover trade in goods and services to

facilitate international trade through removal of tariff and
nontariff barriers and provide greater market access to all
members.

Factors
enabling
globalizatio
n: WTO

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• Impact on consumers:
Since globalization promoted greater competition among
producers, it provided greater choice of goods and services
for consumers with improved quality and lower prices.
It resulted in improvement in standard of living of well-off
sections in urban areas.
• Impact on producers
Impact of MNCs have increased their investment in India. Industries
globalizatio such as cell phones, automobiles, electronics, banking have
benefited.
n in India Since these products have a large number of well-off
buyers, new jobs have been created and local industries
supplying raw materials to them have also benefited.
Benefits of increased competition: investment in new
technology and production methods; games from
successful collaboration with foreign companies.

It has enabled Indian companies to emerge as MNCs.

Globalisation has created new opportunities for
companies providing services such as IT, accounting,
administrative tasks, engineering etc.

Impact of
globalizatio
n in India

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Rising competition: globalization has created a challenging

situation for small producers. They have been forced to
shut down units due to competition and workers have
faced joblessness.
Competition and uncertain employment: due to
increasing competition, employees have been hired on a
contractual basis with no job security, low wages and
Challenges overtime work. This has denied the benefits of
globalization to workers.
posed by
globalisatio
n

• Benefits of globalization have been restricted mainly to

educated, skilled and wealthy class.
• Fair globalization would create opportunities for all and
share benefits more equally.
• Government can play a major role in this:
Implementing labour laws in a way that workers get their
Struggle for rights.

a fair Provide support to small producers till the time they

become strong enough to compete.
globalisatio Negotiate at WTO for fairer rules. Align with other
developing nations with similar interests to fight against
n the domination of developed nations at WTO.

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• During the reform period, GDP growth has increased,

growth of agriculture sector has decreased, industrial
sector as reported fluctuations, growth of services has
gone up.
• Opening up of the economy led to a rapid increase in FDI,
FPI and forex reserves.
Indian • From 1991 onwards, India has become a successful
economy exporter of auto parts, pharma goods, engineering goods,
IT software and textiles.
during • Drawbacks of the reform process
reforms: an Growth and employment: GDP growth has increased but
reforms have not created sufficient employment
assessment opportunities.
Reforms in agriculture: reforms have not been able to
benefit agriculture where growth rate has been
decelerating. Public investment in agriculture sector
specially infrastructure has fallen.

Partial removal of fertilizer subsidy: this led to an increase

in cost of production and severely affected small and
marginal farmers.
Reduction of import duty on agricultural products, low
MSP, lifting of quantitative restrictions on imports of
agricultural products have adversely affected Indian
Indian farmers who have faced increased international
competition.
economy Due to export oriented strategy, there has been a shift
during from production for domestic markets towards production
for export markets focusing on cash crops.
reforms: an
assessment

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Reforms in industry: industrial growth recorded a slow

down. There has been a decrease in demand for domestic
industrial products due to cheap imports, inadequate
investment in infrastructure etc.
Developing countries like India do not have access to
developed markets because of high nontariff barriers.
Indian Disinvestment: Assets of PSUs have been undervalued and
economy sold to the private sector. This has resulted in substantial
loss to the government and outright sale of public assets.
during Proceeds of disinvestment has been used to offset
shortage of government revenues rather than used for
reforms: an development of PSUs and building social infrastructure in
assessment the country.

Fiscal Policy reforms: economic reforms placed limits on

growth of public expenditure especially in the social sector.
Tax reduction in the reform period have not resulted in
increase in tax revenues.
Reform policies involving tariff reduction have curtailed the
Indian scope for raising revenue through custom duties.
To attract foreign investment, tax incentives have been
economy given to foreign players which has reduced the scope for
raising tax revenues.
during
reforms: an
assessment

22