ECONOMIC REFORMS

IN INDIA - 1991

POLICY
OF
LPG
Learning Outcome
• understand the background of the reform
policies introduced in India
• in 1991
• • understand the mechanism through which
reform policies were
• introduced
• • comprehend the process of globalisation and
its implications for India
• • be aware of the impact of the reform process in
various sectors.
Why Economic Reforms needed in India
• The origin of the financial crisis – inefficient management of the
Indian economy in the 1980s.
• When expenditure is more than income, the government
borrows to finance the deficit from banks and also from people
within the country and from international financial institutions.
• When we import goods like petroleum, we pay in dollars which
we earn from our exports.
• Development policies required that even though the revenues
were very low, the government had to overshoot its revenue to
meet challenges like unemployment, poverty and population
explosion.
• The continued spending on development programmes of the
government did not generate additional revenue. Moreover, the
government was not able to generate resources.
 1
BURDEN OF BORROWING
• 1. Burden of Borrowing: Our external
borrowings were so much that we were not
able to repay it. Infact, India has to borrow
in order to repay the loan. India was in debt
trap situation.
• our foreign exchange, borrowed from other
countries and international financial institutions,
was spent on meeting consumption needs. Neither
was an attempt made to reduce such profligate
spending nor sufficient attention was given to boost
• exports to pay for the growing imports.
 2
SHORTAGE OF FOREIGN EXCHANGE
• Shortage of Foreign exchange reserves:
Foreign exchange reserves came to the
lowest level in India in 1990. The availability
of foreign currency was so low in India that
it was not sufficient to import essential
goods even for 10 days. India was in need of
loans but no country of institution was ready
to give us loan.
• Prices of many essential goods rose sharply. Imports
grew at a very high rate without matching growth of
exports.
 3
LOSS MAKING PSUs
• Loss-making Public- Sector Units:
• PSUs in India were incurring losses, so
Indian government was facing financial
crisis. Crisis was so severe that
government could not revive the units.
 4
ECONOMIC GROWTH NOT AS PER
EXPECTATIONS
• 4. Economic Growth less than
expectations:Economic Growth was not
up to the expectations, so India required
reforms to boost growth. World scenario
was also changing and India was not an
exception.
 5
GULF WAR
• 5. Gulf war: war between Iran and Iraq
led to destruction in the gulf region,
consequently there was rise in oil prices
worldwide. This has increased the oil
import bills and India’s outflow of foreign
currency increased leading to
deteriorating BOP situation.
 6
BOP CRISIS
• In 1991, India met with an economic crisis relating to its
external debt — the government was not able to make
repayments on its borrowings from abroad; foreign
exchange reserves, which we generally maintain to
import petrol and other important items, dropped to
levels that were not sufficient for even a fortnight. The
crisis was further compounded by rising prices
of essential goods.
• India’s outflow of foreign currency increased
leading to deteriorating BOP situation.
• All these led the government to introduce a new set of
policy measures which changed the direction of our
developmental strategies.
• In the midst of financial crisis there was a
pressure from the UN agency IMF and World
Bank that India should follow economic reforms.
IMF agreed to lend to India on the condition of
economic reforms. So the new Cong government
under PM P.V. Narasimha Rao and FM Dr. Man
Mohan Singh ‘New Economic Policy’ of
Liberalisation Privatisation and Globalisation
has been announced in 1991
LIBERALISATION
 MEANING - LIBERALISATION
• Reducing Government regulations
and controls from all fields of the
economy.

Though a few liberalisation measures were

introduced in 1980s in areas of industrial licensing,
export-import policy, technology upgradation, fiscal
policy and foreign investment, reform policies
initiated in 1991 were
more comprehensive.
SOME REGULATIONS BEFORE LPG
• (i) industrial licensing under which every entrepreneur
had to get permission from government officials to
start a firm, close a firm
or decide the amount of goods that could be produced
• (ii) private sector was not allowed in many industries
• (iii) some goods could beproduced only in small-scale
industries, and
• (iv) controls on price fixation and distribution of
selected industrial products.
 MEASURES TAKEN
BY GOVERNMENT TO
LIBERALISE
ECONOMY
 INDUSTRIAL LICENSING –
ABOLISHED UP TO LARGE EXTENT
• Industrial licensing was abolished for almost all
product except for the categories — alcohol,
cigarettes, hazardous chemicals, industrial
explosives, electronics, aerospace and drugs and
pharmaceuticals which were of hazardous nature
and national and strategic industries.
• The only industries which are now reserved for
the public sector are a part of defence
equipment, atomic energy generation and
railway transport, rest were DERESERVED.
 FINANCIAL SECTOR REFORMS
• Role of RBI is changed from regulator to facilitator of
financial sector. This means that the financial sector may
be allowed to take decisions on many matters without
consulting the RBI.
• Private sector and foreign banks were allowed & foreign
investment limit in banks was raised to around 50%. The
banks which fulfill certain conditions have been given
freedom to set up new branches without the approval of
the RBI.
• Banks are permitted to generate resources from India
and abroad, certain managerial aspects have been
retained with the RBI to safeguard the interests of the
account-holders and the nation
• Foreign Institutional Investors (FII), such as merchant
bankers, mutual funds and pension funds, are now
allowed to invest in Indian financial markets.
 Tax Reforms :Fiscal Policy
• Income Tax Rates have been reduced as it was felt that high
rates of income tax were an important reason for tax evasion.
It is now widely accepted that moderate rates of income tax
encourage savings and voluntary disclosure of income.
• The rate of corporation tax, which was very high earlier, has
been gradually reduced.
• Another component of reforms in this area is simplification.
In order to encourage better compliance on the part of
taxpayers many procedures have been simplified and the rates
also substantially lowered.
• Recently, the Parliament passed a law, Goods and Services
Tax Act 2016, to simplify and introduce a unified indirect tax
system in India. This law came into effect from July 2017.
This is expected to generate additional revenue for the
government, reduce tax evasion and create ‘one nation, one
tax and one market’.
 Foreign Exchange Reforms

• Devaluation of Rupee: The rupee was devalued

against foreign currencies.
• This led to an increase in the inflow of foreign
exchange.
• Rupee is made convertible on market rate: free the
determination of rupee valuein the foreign
exchange market from government control. Now,
more often than not, markets determine exchange
rates based on the demand and supply of foreign
exchange.
• FERA is changed to FEMA & role of RBI is now of a
facilitator rather than a regulator.
Trade and Investment Policy
Reforms:
• Liberalisation of foreign trade :
• (i)dismantling of quantitative restrictions on imports and exports
• (ii) reduction of tariff rates and
• (iii) removal of licensing procedures for imports. Import licensing
was abolished except in case of hazardous and environmentally
sensitive industriess.
• (iv) Quantitative restrictions on imports of manufactured consumer
goods and agricultural products were also fully removed from April
2001.
• (v) Export duties have been removed to increase the competitive
position of Indian goods in the international markets.
• Liberalisation of foreign investment: Foreign equity
participation in in Indian industries has been increased from 49% to
51%. In special cases it may be allowed up to 100%.
PRIVATISATION
 PRIVATISATION
• It implies shedding of the ownership or
management of a government owned enterprise.

• Government companies are converted into

private companies in two ways
• (i) DERESERVATION: by withdrawal of the
government from ownership and management
of public sector companies.
• (ii) DISINVESTMENT: by outright sale of
public sector companies.
DERESERVATION
• In IPR 1956 17 industries were reserved for
public sector exclusively. These industries were
not open for investment by private sector, now
out of 17 industries 14 were dereserved and they
were open for private investment escept for the
industries which are of national and strategic
importance.
DISINVESTMENT
• Privatisation of the public sector enterprises by
selling off part of the equity of PSEs to the public
is known as disinvestment.
• Main Purpose: to improve financial discipline
and facilitate modernisation.
• It was also envisaged that private capital and
managerial capabilities could be effectively
utilised to improve the performance of the PSUs.
GLOBALISATION
Globalisation refers to the integration of the domestic economy with the
economies of the world by liberalisation of foreign trade and investment.
There is more exchange of goods, services, expertise, culture and tradition.
Need for Globalisation in India
• 1. Burden of Borrowing: Our external borrowings were so much that we
were not able to repay it. Infact, India has to borrow in order to repay the
loan. India was in debt trap situation.
• 2. Shortage of Foreign exchange reserves: Foreign exchange reserves
came to the lowest level in India in 1990. The availability of foreign
currency was so low in India that it was not sufficient to import essential
goods even for 10 days. India was in need of loans but no country of
institution was ready to give us loan.
• 3. Loss-making Public-SectorUnits:PSUs in India were incurring
losses, so Indian government was facing financial crisis. Crisis was so severe
that government could not revive the units.
• 4. Economic Growth less than expectations:Economic Growth was
not up to the expectations, so India required reforms to boost growth.
World scenario was also changing and India was not an exception.
• 5. Gulf war: war between Iran and Iraq led to destruction in the gulf
region, consequently there was rise in oil prices worldwide. This has
increased the oil import bills and India’s outflow of foreign currency
increased leading to deteriorating BOP situation.
 What steps have been taken by
Indian Government to globalise
Indian economy?
• 1. Liberalisation of foreign Trade:Trade barrier like export import duties, export
import licensing quota etc. have been removed gradually and exports and imports
have been made more free. So, it will increase foreign trade.
• Note: Liberalisation means removing government controls from all fields of the
economy.
• 2. Liberalisation of Foreign Investment: foreign equity participation in Indian
companies have been increased from 49% to 51%. In special cases foreign companies
are allowed up to 100% also.
• 3. Liberalisation of Foreign exchange Rate: Foreign exchange rate was fixed
officially by the RBI, which is now fixed on the basis of demand and supply of foreign
currency in the country. So foreign exchange rate has been fixed by market forces.
• 4. Changed Role of RBI: Earlier RBI was the regulator of foreign exchange, now it
is a facilitator. Foreign Exchange Regulation Rate (FERA) is changed to Foreign
Exchange management Act (FEMA).
• 5. Long Run Export Import Policy: Government has announced EXIM policy for
5 years. This gave stable government policy measures to the foreign companies and
they were attracted to invest in India.
MORE STEPS TAKEN BY GOVT.
• SEZs or Special Economic Zones are industrial zones being set
up by the Central and State Governments in different parts of the
country. SEZs are to have world class facilities such as electricity,
water, roads, transport, storage, recreational and educational
facilities. Companies who set up production units in SEZs are
exempted from taxes for an initial period of five years. SEZs thus
help to attract foreign companies to invest in India.
• Flexibility in labour Laws:Government has also allowed
flexibility in the labour laws to attract foreign investment. The
companies in the organised sector have to obey certain rules that
aim to protect the workers’ rights. In the recent years, the
government has allowed companies to ignore many of these. Instead
of hiring workers on a regular basis, companies hire workers
‘flexibly’ for short periods when there is intense pressure of work.
This is done to reduce the cost of labour for the company. However,
still not satisfied, foreign companies are demanding more flexibility
in labour laws.
World Trade Organization (WTO)
• The WTO’s creation on 1 January 1995 marked
the biggest reform of international trade since
the end of the Second World War. Whereas the
GATT mainly dealt with trade in goods, the WTO
and its agreements also cover trade in services
and intellectual property. The birth of the WTO
also created new procedures for the settlement
of disputes. was started at the initiative of the
developed countries. Its main objective is to
liberalize international trade.
OBJECTIVES OF WTO
• (1) To promote free and fair trade among different countries.
• (2) To set the rules and regulation for international trade and
ensures that these rules are adhered to by all the member
countries.
• (3) to provide a forum for negotiating and monitoring further
trade liberalization,
• (4) To resolve trade disputes. It provides a platform where
countries can raise the issues with other countries.
• (5) To increase the transparency of decision-making
processes.
• (6) To cooperate with other major international economic
institutions involved in global economic management.
• (7) to help developing countries benefit fully from the global
trading system.
IMPACT OF ECONOMIC REFORMS IN
INDIA
• The positive impact of globalisation in India has been tremendous.
1. Increase in Foreign Direct Investment (FDI): Due to globalisation many MNCs
have increased their investments in India. Inflow of foreign exchange increased and
resolving the problem of BOP deficit. Due to lack of foreign exchange reserves in India.
• 2. Increased Growth Rate in GDP & National Income:The growth rate of the
economy has gone up with the increase in foreign investment and foreign technology in
India. GDP and National Income increased. This means thousands of people are getting
highly paid jobs and, enjoy much higher standards of living than was possible earlier.
• 3:Competition improved Quality: Globalisation has improved quality of products and
the productivity and efficiency of Indian companies in the use of resources through the
process of competition.
• 4. Advantage to the Consumers:Greater competition among producers resulting from
Globalisation is a great advantage to consumers as there is greater choice before them.
Consumers now enjoy improved quality and lower prices for several products.
• 5. Indian Companies became MNCs:Top Indian companies have benefit from
increased competition. They have invested in newer technology and production methods
and raised their production standards.Some Indian companies have gained from successful
collaborations with foreign companies. Large Indian companies have emerged as
multinationals like Tata Motors Globalisation has also created new opportunities for Indian
companies providing services, particularly in the IT field. Services such as data entry,
accounting, and administrative tasks, are now being done cheaply in India and exported to
the developed countries. This has generated thousands of jobs.
IMPACT OF ECONOMIC REFORMS IN
INDIA
• Negative Impact:
• 1. Small Producers hit hard: There has also been a negative impact of globalisation in
India. Globalisation has posed major challenges to small producers. Batteries, capacitors,
plastics, toys, tyres, dairy products, and vegetable oil are some examples of industries
where the small manufacturers have been hit hard due to competition. Several of the units
have shut down rendering many workers jobless. The small industries in India employ the
largest number of workers (20 million) in the country, next only to agriculture.
• 2. Exploitation of workers: the lower wages that are given to labourers. In order to
compete in the world market, exporters try and cut labour costs and workers are denied
their fair share of benefits as manufacturers are always on the look out for cheaper labour.
• 3. Agriculture Sector Unaffected: Farmers in India were hardly affected from the
globalisation. Despite being an important and major producer of rice, cotton, rubber, tea,
coffee, jute and spices, our agricultural products are not able to compete with the developed
countries due to the highly subsidised agriculture in other foreign countries.
• 4. Inequality Increased: Globalisation benefitted big producers, manufacturers &
business man, & poor remained unaffected, so gap between rich and poor increased.
• 5. Fair Globalisation: The discriminate policies of developed countries have increased
unrest among developing countries and developing countries started raising voice for need
for fair globalisation.