Economic Reforms Since 1991
The government took major policy steps to fundamentally address the balance of payments issues and structural rigidity.
India’s reform strategy launched in July 1991 provided a combination of macroeconomic stability and structural adjustment. It is guided by short-term and long-term goals. In order to restore the balance of payments and curb inflation, stability is needed in the short term. At the same time, changing the structure of the institution itself through reform is equally important in the long run.
The new government took urgent action to implement a macroeconomic stabilization plan through fiscal adjustment. In addition, structural reforms were initiated in the areas of trade, industry and the public sector (public sector contraction).
Economic reform or structural adjustment is a multidimensional set of different long-term policies (liberalization, privatization and globalization) directed towards rapid growth, productivity and creating a competitive environment.
New Economic Policy
The Indian government implemented economic reforms in 1991:
Stabilization Measures: These are short-term measures taken by the government to curb rising prices, unfavourable balance of payments and falling foreign exchange reserves.
Structural Adjustment: This is a long-term policy aimed at improving the efficiency of the Indian economy and enhancing its international competitiveness by removing rigidities in various sectors of the Indian economy.
In the New Economic Policy of 1991, structural reforms can be treated with respect.
Liberalization: Liberalization means removing all unnecessary controls and restrictions such as permits, licences, protectionist rights quotas, etc. In other words, it can be defined as relaxation of governmental rules. A country’s regulations allow private sector companies to conduct business transactions with fewer restrictions.
A by-product of this reform has been an increase in foreign exchange reserves, which according to the RBI’s annual report, were largely the result of earlier foreign direct investment.
Privatization and Contraction of Public Sector: In the new economic policy privatization of the economy was given more emphasis. Privatization is a process by which the public sector undertakings are increasingly brought under private ownership. It promotes consumer sovereignty. A high degree of consumer sovereignty means wider choice and better quality of goods and services. Increasing privatization reduces the role of the public sector in the economy.
Globalization: Globalization can be defined as a process that involves increasing openness, increasing economic interdependence and deepening economic integration into the global economy.
Policies which promoted globalization:
Raising the foreign investment limit
Partial convertibility
Long-term trade policy
Tariff reduction
Major Steps in 1991 Reforms
The Government of India has taken the following major measures:
Fiscal Reform: An important part of stabilization efforts is restoring fiscal discipline. Data show that budget deficit in 1990-1991 was 8.4% of GDP. The 1991-1992 budget took a bold step toward correcting fiscal imbalances. It called for a nearly two percentage point reduction in the budget deficit as the percentage of GDP decreased from 8.4% in 1990-1991 to 6.5% in 1991-1992.
Financial Sector and Monetary Reforms: Monetary reforms aimed at removing interest rate distortions and rationalize the structure of lending rates. The new policy attempts a variety of approaches to improve the efficiency of the banking system.
Capital Market Reform: The Narasimham Committee recommended reforms to capital markets aimed at removing direct government oversight and replacing it with a regulatory framework based on transparency and disclosure overseen by an independent regulator. The Securities and Exchange Board of India (SEBI) was established in 1988 and was legally recognized in 1992 on the recommendation of the Narasimham Commission.
Industrial Sector Reforms: The industrial sector reforms include: contraction of public sector; abolition of licensing; freedom to import capital goods.
The new economic policy favoured the contraction of the scope of public sector industries and simultaneously increasing the role of the private sector. The number of public sector undertakings under the government of India was reduced from 17 industries to 8, with the current status being only 3.
Free entry of foreign investment
Many measures have been taken to attract foreign investment. Some of them are:
51% of foreign investment in 34 high-priority industries was unsanctioned by the government in 1991.
Non-Resident Indians (NRIs) are allowed to invest 100% in export houses, hospitals, hotels, etc.
The establishment of the Foreign Investment Promotion Board (FIPB) to rapidly approve foreign investment proposals.
The previous restrictions on the repatriation of dividends by foreign investors have been removed. They can now take home the bonus.
Rationalization of Exchange Rate Policy: One of the important measures taken to improve the balance of payments situation is the depreciation of the rupee. In the first week of July 1991, the rupee depreciated by about 20%. Its purpose is to bridge the gap between real and nominal exchange rates caused by rising inflation, thereby making exports competitive.
Conclusion
The economic reforms of 1991 focused on the formal sector, so we saw a strong boom in liberalization. Sectors such as telecommunications and civil aviation have benefited greatly from deregulation and subsequent reforms. However, economic liberalization and reform still have a long way to go, especially for the informal sector, including the urban poor who work as street vendors or rickshaw drivers, the agricultural sector, micro, small and medium enterprises (MSMEs) and indigenous peoples. The slow growth and stagnation of these unreformed sectors emphasise the important role of the 1991 reforms in helping India’s economy develop into what it is today.