Economic Reforms in India


‡ The new eco. soon after Rajib Gandhi was prime minister. the basic thrust of which was to expand the scope of private sector. introduced new economic policy.policy attempted to remove unnecessary hurdles in securing licenses. A number of measures were undertaken in this regard. 2 . adjusting output to administered prices and denying industrial licensing to MRTP companies. It was expected that the private sector s investment could bring out modernisation of investment and usher in rapid economic growth.Economic Reforms: A brief Review ‡ In 1985.

The Gulf war not only increased the oil prices but reduced the remittances of Indian workers in Gulf and the Political uncertainty. A number of events coincided with it. 3 . All these forced India to go for a structural reform in the economy.‡ Rationale of Reform: After relatively robust economic performance in 1980s. These included collapse of Soviet Union one of India s major trading partner. Indian economy had faced an un precedented liquidity crisis in 1990-91.

The invisible account decreased drastically during this period and there was serious BOP crisis. The BOP deficit increased from Rs 5930 crores in Sixth plan to Rs10840 crores during seventh plan. They agreed to provide loan to India with a condition that India should overcome the crisis. 4 . India was forced to approach World bank and IMF for huge loan amounting $7 billion.‡ The reform which was introduced in Rajib Gandhi regime did not yield the desired result. decumulation of reserve.Macro economic crisis: budget deficit. .47%). Increased budget deficit with high public expenditure.56%.1991-92:13. budget deficit financed by foreign borrowing. public debtGDP ratio increased. double digit Inflation (199091:11.

2. Internal liberalisation to increase competitive pressure. lowering tariffs and rationalising their structure and substantially 5 . The reform package outlined by Manmohan singh in 1991 had 3 distinct components: 1. Integration with the global economy by removing controls on foreign trade and exchange rates. 3. Fiscal stabilisation to check fiscal deficit to keep it at much lower level.RAO took over as prime minister.‡ India adopted the reform measures soon after Mr.

i. Structural reform policy. Structural reform policies were intended to accelerate economic growth over the medium term. 6 . ii. But structural reform cannot succeed unless a degree of stabilisation has been brought about. The reform measures have two sets of policies. Stabilsation policy. Stabilisation policy intends to correct the lapses in the economy and put the economy in order in the short run.relaxing regulations regarding external capital flows and proactive policy for attracting FDI to encourage growth.

foreign trade and financial sector. Structural reforms were mainly in the area of industrial licensing and regulation.But stabilisation will not be adequate unless structural reforms are undertaken to avoid the recurrence of the problems faced in the recent period. 7 .

Of these 342 textile products. Inspite of the stiff resistance from big industrialists on tariff cut. 147 agri products and 226 manufacturing including automobiles 8 . 2001-02). Removal of Import restrictions: It began in 1991 and completed in a phased manner.‡ Implementation of the Agenda Trade policy reforms: Import licensing policy has been dismantled since 1991. India has also undertaken a major commitment to liberlise its trade under WTO Agreement. tariffs have been substantially done away with. Removal from 715 items (Exim policy.

‡ Exchange rate Reforms: The Rupee was devalued twice in July. 1991 and subsequent ammendments were done. Even the outward investments by Indian Entreprises were liberalised and could get automatic approval. 1991 leading 20 Percent depreciation in its value. FDI was taken liberally. Partial convertibility and subsequently full convertibility of Rupee on current accounts was made by 1994. 9 . The policy considered some industries which are included in the public sector sensitive from national security points of view.‡ Industrial Policy reforms: New Industrial policy was announced in july.

1993 a package of financial sector reforms was announced which allow the new private sector banks and private non banking finance companies and agencies were there for rating their credit worthiness. ‡ The overall measures taken by the reform was to restrict the budget deficit.‡ Capital Markets: The capital issues control Act and the SEBI was set up to regulate the functioning of the capital market. 10 . ‡ Financial sector: In Jan. Foreign Institutional Investors were encouraged in the Indian capital market without any restriction on either volume of trading or lock in period.

less educated. ‡ Safety net for the workers who may likely to lose their job was on the agenda ‡ But the urban sector. elite class and the richer sections took the advantage of reforms. 11 .‡ Strong and supportive and uniform political party is one of the factor for successful implementation of the reform at the state level. rural based workers lost the opportunity in the reform process. The unskilled.

4 % of GDP. ‡ Industrial survival coming out of recession ‡ FDI inflows reveal a dramatic jump since 1991. As against this the fiscal deficit in post reform was 5.3 in early 1980s. 12 .‡ Macro economic impact of reforms: ‡ The post reform growth of GDP was always Higher.2 percent of GDP in second half of 1980s compared to 6. This shows govt has succeeded in managing Fiscal deficit and in 2004-05 it was 4. Fiscal adjustment and stabilisation: Fiscal deficit prior to reform was 8.7 % of GDP.

6 % during the 1980s. ‡ It has been shown that the burden of adjustment has been unequal in that it has led to declining expenditure on social sectors(education and health) 13 .9 % compared to 2. Capital expenditure as proportion of GDP came down from 5. ‡ Fiscal adjustment was achieved by squeezing public investment rather than government consumption.‡ Revenue deficit had increased in the post reform period at 2.5 % in 1990-91 to 2. Capital expenditure had declined in the post reform period.3 % in 1999-2000.

This was due to rise in food prices and other goods of mass consumption at a faster rate than prices of other goods.‡ Prices: An important focus of the stabilisation programme is to check the inflation. The inflation reached the double digit figure in 1991-92(13.19 % in 1995-96 and 199899(13. This affects the poorer/ weaker sections to a great extent.47%) and it declined to 8.Again it reached to 12.1).14% in 1994-95. 14 .

‡ Political resistance to reform: The reform was supported by Professionals with higher education. 15 . Soft ware industry. All these created strong opposition from the political leaders of opposition and trade union leaders. NRIs in soft ware industry etc. The opposition was mainly form the farmers and public sector/organised sector employees. The dominance of private sector employment and competition results to squeeze the public sector and lot of retrenchment took place.

‡ To conclude.e. Over the last few decades. ‡ India though has significant improvement in literacy front i. on these fundamental indicators therefore there is reason to be both disappointment at where the nation stand and optimistic about the changes that have taken place (Kausik Basu) 16 . still 35 % of its population unable to read and write.‡ India unfortunately still has miles to go on matters of basic needs and development of the most disadvantaged. inequality has been rising. regional disparities have been growing and poverty and illiteracy continue to be high. 65% in 2001.

enough strength in the Indian economy for it to be a net beneficiary of globalisation.‡ Next round of reforms: There are. 17 . The economy has gone past that critical level where to open up is to risk being cheated and impoverished. these changes will open up rather than close windows of opportunity for India (Kausik Basu). Globalisation and modern markets bring with them many ills. But on balance. fortunately. Though there are still innumerable important reforms to undertake. the fundamentals of the Indian economy are probably strong enough for it to be able to implement and benefit from another round of market reform and further opening up of the economy. and given the new strengths of the Indian economy.

BALANCE SHEET OF GLOBALISATION GOOD FOR BAD FOR Many developed countries Output People with Asset Profit People with skills The Educated Professionals. managerial and Technical personnel Flexible adjusters Creditors Those in private/self service Bad for developing countries Employment People without Asset Wages People without skills The Un/less educated Workers Rigid adjusters Debtors Those in public service 18 .

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