ECONOMIC REFORMS SINCE 1991

OR Chapter 4
NEW ECONOMIC POLICY
 MEANING OF ECONOMIC
REFORMS
Economic reforms refer to a set of economic policies directed to accelerate the pace
of 'growth and development'.
In 1991, the Government of India initiated a series of economic reforms to pull the
economy out of the crises of 90's. These reforms came to be known as New
Economic Policy (NEP).
Three main Elements of New Economic Policy are
FACTORS RESPONSIBLE FOR
ECONOMIC REFORMS.
 Fall in foreign exchange reserve.
 Adverse balance of payments
 Mounting fiscal deficit.
 Rise in prices
 Failure of public enterprises.
 Gulf crisis.
LIBERALISATION
 Liberalisation of the economy means freedom of the producing units from direct or
physical controls imposed by the government.
 Prior to 1991, government had imposed several types of controls on private
enterprises in the domestic economy. These included industrial licensing system,
price control or financial control on goods, import licence, foreign exchange control,
restrictions on investment by big business houses, etc.
 These controls had given rise to corruption, undue delays and inefficiency.
 Growth rate of GDP had fallen sharply.
 In view of these facts, liberalisation of the economy was considered as a key
component of NEP.
ECONOMIC REFORMS UNDER
LIBERALISATION
Industrial Sector Reforms
 Abolition of Industrial Licensing: In July 1991, a new industrial policy was announced. It abolished the
requirement of licensing except for the industries like (a) liquor, (b) cigarette, (c) defence equipments, (d)
industrial explosives, and (e) dangerous chemicals.
 Contraction of Public Sector: Under the new industrial policy, number of industries reserved for public sector
was reduced from 17 to 8. In 2010-11, the number of these industries was reduced merely to three: (i) Atomic
energy, (ii) Defence and (iii) Railways.
 De-reservation of Production Areas: Many production areas which earlier were reserved for SSI (small-scale
industries) were de-reserved.
 Expansion of Production Capacity: Earlier production capacity was linked with licensing. Now, 'What to
produce and how much to produce' was a matter of producer's choice depending on market conditions.
Monopolies and Restrictive Trade Practices(MRTP) Act: With the introduction of liberalism and expansion
schemes, the requirement for large companies, to seek prior approval for expansion, establishment of new
undertakings, merger, amalgamation, etc were eliminated. MRTP Act has been replaced by Competition Act,
2002, which is more liberal.
 Freedom to Import Capital Goods: Liberalisation also implied freedom for the industrialists to import capital
goods with a view to upgrading their technology.
ECONOMIC REFORMS UNDER
LIBERALISATION
Financial Sector Reforms
 Liberalisation implied a substantial shift in the role of the RBI from 'a regulator' to 'a
facilitator' of the financial sector. As a regulator, the RBI would itself fix interest rate
structure for the commercial banks. But as a facilitator the RBI would only facilitate the free
play of the market forces and leave it to the commercial banks to decide their interest rate
structure.
 Free play of the market forces has led to the emergence of private bankers - both domestic
as well as international-in the Indian banking industry.
 Liberalisation has also allowed FII (Foreign Institutional Investors) to invest in Indian
financial markets.
 Demonetisation - It is a policy action of the government that withdraws the status of 'legal
tender' from the existing currency. On November 8, 2016 the Government of India
announced demonetisation of the currency notes of Rs 500 and Rs 1,000. . The demonetized
notes were replaced by new currency notes of Rs.500 and Rs. 2,000. Basic purpose of
demonetization is to curb illegal transactions and anti-social activities (funded through
illegal transactions).
ECONOMIC REFORMS UNDER
LIBERALISATION
Fiscal Reforms
 Prior to liberalisation, tax structure in the country has been highly complex and
evasive. Fearing a heavy burden of taxation, people would often evade taxes.
Since 1991, there has been a continuous reduction in the taxes on individual
incomes as it was felt that high rates of income tax were an important reason for tax
evasion. Similarly, the rate of corporation tax, which was very high earlier, has been
gradually reduced.
 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 govt.,
reduce tax evasion and create ‘ one nation, one tax and one market’.
ECONOMIC REFORMS UNDER LIBERALISATION
External Sector Reforms
 External sector reforms include: (i) foreign exchange reforms, and (ii) foreign trade
policy reforms.
 Foreign exchange reforms were initiated in 1991 with the devaluation of the
Indian rupee against foreign currencies. This increased the supply of foreign currency
into the Indian economy by way of higher exports of the domestic goods and services.
 Followed by devaluation in 1991, the exchange value of the Indian rupee in the
international money market was left to the free play of the market forces.
 Foreign Trade Policy underwent a substantial change in the wake of liberalisation.
 Tariff restrictions have been considerably moderated, rather withdrawn from many
items of export and import.
 Market competition has replaced the policy of quotas and tariffs. Efficiency is the
benchmark of growth, not simply expansion.
PRIVATISATION
 Privatisation is the process of involving the private sector in the ownership or
operation of a state owned enterprise. It implies gradual withdrawal of government
ownership/management from the public sector enterprises. It may happen in two
ways:
(i) Outright sale of the government enterprises to the private entrepreneurs
(ii) Withdrawal of the government ownership and management from the mixed
enterprises ( the enterprises jointly owned and managed by the government and the
private entrepreneurs).
 Disinvestment: - Disinvestment is a policy instrument to promote privatization. It
occurs when the government sells off its share capital of PSUs (public sector
Undertakings) to the private investors. It is taken as a remedial measure to improve
production and managerial efficiency, as well as to facilitate modernisation.
NEED FOR PRIVATISATION
 The Industrial Policy Resolution (1956) clearly and categorically stated the significance of PSUs
in the process of growth and development.
 It is beyond doubt that it was through the spread of PSUs that India could diversify its industrial
base between the period 1951-1991.
 The Govt. has also made attempt to improve the efficiency of PSUs by giving them autonomy in
tackling managerial decisions. Some PSUs have been granted special status as Maharatnas,
Navaratnas and Miniratnas.
 Gradually, most public sector enterprises turned into as social dead-weight (or a social liability).
Mounting losses of PSUs became unsustainable.
 Leakage, pilferage, inefficiency and corruption had become so rampant in PSUs that their
privatisation was considered as the only remedy.
 Accordingly in 1991, the government decided to phase out public enterprises by selling its equity
to the private entrepreneurs.
 However, in view of their efficient performance, Navratnas were to be retained as public sector
enterprises.
 List of Maharatna and Navaratna as on 10th May 2023
Navratna PSUs
Maharatna PSUs
1. Bharat Electronics Limited
1. Bharat Heavy Electricals Limited
2. Container Corporation of India Limited
2. Bharat Petroleum Corporation Limited
3. Engineers India Limited
3. Coal India Limited
4. Hindustan Aeronautics Limited
4. GAIL India Limited
5. Mahanagar Telephone Nigam Limited
5. Hindustan Petroleum Corporation Limited
6. National Aluminium Company Limited
6. Indian Oil Corporation Limited
7. National Buildings Construction Corporation Limited
7. NTPC Limited
8. Neyveli Lignite Corporation Limited
8. Oil & Natural Gas Corporation Limited
9. NMDC Limited
9. Power Finance Corporation
10. Oil India Limited
10. Power Grid Corporation of India Limited
11. Rail Vikas Nigam Limited
11. Rural Electrification Corporation Limited
12. Rashtriya Ispat Nigam Limited
12. Steel Authority of India Limited
13. Shipping Corporation of India Limited
There are 74 PSUs which got the Miniratna status. Some of
them are listed below
1. Airports Authority of India
2. Antrix Corporation Limited
3. Balmer Lawrie & Co. Limited
4. Bharat Coking Coal Limited
5. Bharat Dynamics Limited
6. BEML Limited
7. Bharat Sanchar Nigam Limited
8. Braithwaite & Company Limited
9. Bridge & Roof Company (India) Limited
10. Central Warehousing Corporation
11. Central Coalfields Limited
12. Central Mine Planning & Design Institute Limited
13. Chennai Petroleum Corporation Limited
14. Cochin Shipyard Limited
15. Cotton Corporation of India Ltd.
16. EdCIL (India) Limited
17. Garden Reach Shipbuilders & Engineers Limited
18. Goa Shipyard Limited
19. Hindustan Copper Limited
20. Hindustan Steelworks Construction Limite
OBVIOUS GAINS AND IMPERATIVE LOSSES OF
PRIVATISATION
Gains
Privatisation implies supremacy of 'self-interest' over 'social interest'. When 'self-interest'
prevails, the entrepreneurs work with 100 per cent commitment, and high productivity is the
obvious result.
 Privatisation expects private enterprises to work in a competitive environment -both domestic
as well as international. Competition induces upgradation and modernisation. These are the
essential conditions of growth and development.
 Privatisation promotes consumers' sovereignty. Higher degree of consumers' sovereignty
implies wider choice and better quality of life.
Losses
Socialistic pattern of the society is left to survive only as theoretical possibility. It loses its
practical relevance once PSUs are sold off to the private entrepreneurs.
Privatisation encourages the free play of market forces. But in the process, goods are produced
only for those who have the means to buy them. When prices rise, weaker sections of the
society suffer deprivation.
GLOBALISATION
 Globalisation may be defined as a process associated with increasing openness, growing
economic interdependence and deepening economic integration in the world economy.
 Economic reforms aim at integrating the Indian economy with the global economy. As a
result, there will be unrestricted flow of goods and services, technology and expertise
between India and rest of the world.
 Outsourcing :This is an important outcome of the process of globalisation. It refers to a
system of hiring business services from the outside world. These services include: call
centres, transcription, clinical advice, teaching/ coaching and the like.
 India is emerging as an important destination of outsourcing because of two important
reasons
(i) Availability of cheap labour in India, or relatively low wage rate for the skilled workers
(ii) A revolutionary growth of IT industry in India.
POLICY STRATEGIES PROMOTING
GLOBALISATION OF THE INDIAN ECONOMY
 Increase in Equity Limit of Foreign Investment: Equity limit of foreign capital investment
has been raised from the initial 40 per cent. It now ranges between 51 to 100 per cent. In 47
high priority industries, foreign direct investment to the extent of 100 per cent has been allowed
without any restriction and red-tapism.
 Long-term Trade Policy: In conformity with economic reforms, foreign trade policy is
enforced for a longer duration (nearly five years). Under this policy, all restrictions and controls
on foreign trade have been removed.
 Reduction in Tariffs: In order to encourage competitiveness, tariff barriers have been
withdrawn on most goods traded between India and rest of the world.
 Withdrawal of Quantitative Restrictions: Since 2001, the quantitative restrictions on all
import items have been totally withdrawn. This is in conformity with India's commitment to the
WTO.
 Partial Convertibility: Partial convertibility refers to the sale and purchase of foreign
currency (for foreign transactions) at the market price. To achieve the objective of globalisation,
partial convertibility of Indian rupee has been allowed for the transactions like Import and
export of goods and services, Payment of interest or dividend on investment and Remittances to
 WORLD TRADE ORGANISATION (WTO)
The WTO was founded in 1995 as the successor organisation to the General Agreement on
Trade and Tariff(GATT). GATT was established in 1948 with 23 countries as the global trade
organisation to administer all multilateral trade agreements by providing equal opportunities to
all countries in the international market for trading purposes.
Objectives of WTO
To enlarge production and trade of services
To ensure optimum utilization of world resources
To protect the environment
Impact of WTO on the INDIAN ECONOMY
(i) It is expected that WTO will offer greater export opportunities to the Indian economy.
(ii) Under Multi-fibre Arrangements (MFA), India’s textile and readymade garment trade was
subject to quota restrictions. As per provisions of the WTO, all these restrictions have been
removed. It has helped India to increase its exports of garments and textile.
(iii) Due to 'agreed' reduction in trade barriers and reduction in subsidies to the domestic
producers of agricultural goods in the developed countries, prices of these goods are
expected to rise in the international market. Accordingly, India's exports of agricultural
products are expected to rise.
“AGRICULTURE SECTOR APPEARS TO
BE ADVERSELY AFFECTED BY THE
ECONOMIC REFORM PROCESS.”
Agriculture was adversely affected by the reform processes in the following manner:
(i) Reduction of public Investment: Public Investment in agriculture sector,
especially in infrastructure, which includes irrigation power road, market linkage and
research and extension has been reduced in the reform period.
(ii) Removal of subsidy: Removal of fertilizer subsidy increased the cost of
production, which adversely affected the small and marginal farmers.
(iii) Reduction in import duties: After the commencement of WTO a number of
policy changes were made, reduction in import duties on agriculture products,
removal of minimum support price, lifting of quantitative restriction on agriculture
products etc. affected Indian farmers as they have to face increased international
competition
3/4 MARKS QUESTIONS
Question: Do you think outsourcing is good for India? Why are developing countries opposing it?
Answer: Yes, outsourcing is good for India. The following points justify this:
(i) Employment: It provides employment to a large number of unemployed Indians.
(ii) Exchange of technical know-how: Outsourcing enables the exchange of ideas and technical
know-how of sophisticated and advanced technology.
(iii) International worthiness: Outsourcing also enhances India's international worthiness
credibility.
(iv) Better standard of living and eradication of poverty: By creating more and higher paying jobs,
outsourcing improves the standard and quality of living of the people.
However, developed countries oppose outsourcing to India because of the following reasons.
(i) Outsourcing leads to outflow of funds from the developed countries to India, which reduces the
income disparities between two countries.
(ii) Outsourcing reduces the employment generation and creates job insecurity in the developed
countries.