ASSIGNMENT-II

ECONOMIC POLICY: AN OVERVIEW

Introduction
The economy of India is one of the fastest growing economies in the world. The post independence period of India
was marked by economic policies which tried to make the country self sufficient.
The year 1991 is considered to be a turning point in India's economic history. In response to the major balance of
payment stimulated by the collapse of Soviet Union (U.S.S.R), Indias major trading partner of the era, and hike in
oil prices due to Gulf War, the Government of India soughted the IMF (International Monetary Fund) to grant a
bailout loan of 1.8 billion US Dollars. IMF agreed to Indias request for this bailout loan but demanded it to absorb
several reforms into its economic policy in return. Government led by Prime Minister, NarasimhaRao, & Finance
Minister, Manmohan Singh, agreed upon this and absorbed some reforms into the economic policy of India. These
reforms are famously referred to as the Economic Liberalization of 1991 in India. Under these reforms, major stress
was laid by the government on three areas, namely Liberalization, Privatization & Globalization. It is for this
reason that the Economic Reforms of 1991 are sometimes also referred as the LPG policy of India.

Below listed are some major areas which were worked upon under the Economic Reforms of 1991 or the LPG
Policy of India:
Abolition of License Raj
Steps to regulate inflation
Initiation of privatization
Industrial Licensing
Foreign Investment
Reforms in Taxation
Globalization
Deregulation
Amendment of MRTP Act, 1969
Foreign Technology Agreements

Impact of the reforms since last 25 years
After nearing 25 years, does India needs reforms once again.
Indias economic performance in the post-reforms period has many positive features. The average growth rate in the
ten year period from 1992-93 to 2001-02 was around 6.0 percent, this growth record is only slightly better than the
annual average of 5.7 percent in the 1980s, but it can be argued that the 1980s growth 1991.
However, the ten-year average growth performance hides the fact that while the economy grew at an impressive 6.7
percent in the first five years after the reforms, it slowed down to 5.4 percent in the next five years. India remained
among the fastest growing developing countries in the second sub-period because other developing countries also
slowed down after the east Asian crisis, but the annual growth of 5.4 percent was much below the target of 7.5
percent which the government had set for the period. Inevitably, this has led to some questioning about the
effectiveness of the reforms.
Opinions on the causes of the growth deceleration vary. World economic growth was slower in the second half of
the 1990s and that would have had some dampening effect, but Indias dependence on the world economy is not
large enough for this to account for the slowdown. Critics of liberalization have blamed the slowdown on the effect
of trade policy reforms on domestic industry. However, the opposite view is that the slowdown is due not to the
effects of reforms, but rather to the failure to implement the reforms effectively. This in turn is often attributed to
Indias gradualist approach to reform, which has meant a frustratingly slow pace of implementation.
The situation in 2013, according to many analysts, is worse than 1991. The free falling rupee tried to touch 70rs/1 $
rate and huge current account deficit of $85 billion i.e. 4% of India's GDP make Indian economy look on the verge
of a black hole. So, the demand for reforms is gaining a lot of attention.
But there are not many, who believe, the current situation is worse than 1991. And 'big bang reforms' of the same
kind of 1991is not the only solution that India has.
First of all one has to understand that the two situations one in 1991 and other in 2013 are completely different.
According to D. Subbarao, ex RBI Governor, fundamentals of the economy have changed over the time.
In 1991, India was a closed economy with 'Red tape mafias'. Now Indian economy follows the principles of LPG. In
1991, India had the foreign exchange reserves that could cover the imports for two months only whereas now we
can provide for eight months import cover.
In 1991, rupee was depreciated by 20% but today exchange rate is largely dependent on market and therefore, able
to absorb shocks. External sector vulnerability indicators of 1991 was much more deteriorated than that of the 2013.
The most important factor which defies any need of reforms is the condition of the western economies. In 1991,
western economies were looking for expansion. They were thriving to catch new markets from Africa and Asia
region. Their economies were healthy. But today, western economies are looking inward. The subprime crisis of
2008 has been severe attack on developed economies. Most of the developed economies have faltered after 2008.
They are not enthusiastic in investing in other countries as they were in 1991. EU, US and Japan are trying to lift
themselves up.
India has to understand that even if India gets financial help from the global economies, it is going to be a double
edged sword. Unless it is used effectively to increase the domestic production and export, the foreign financial help
will be a foreign trap. Government should learn that this trap will become more complex with time. Industrialists
which use the cheaper global finance and scarce resources like spectrum, coal, land, iron should also try to stop
falling into the trap and playing the stock games with the help of political class.
India should work towards insulation, not isolation, from the global financial ups and downs. This could easily be
done with the help of domestic sources. India's coal and iron extraction can easily be increased by $20 billion by
allowing higher coal and iron extraction. Over last five years, India's coal imports swell up by $10 billion. This
unnecessary outflow of dollars can be easily avoided because India has the largest coal reservoir in Asia.
Government should convince the Supreme Court the benefits of allowing coal extraction in Goa and Karnataka.
Under the supervision of the Supreme Court the coal exports can easily fetch India few important foreign exchange.
India should look to make Food Security Bill more rounded. Food Security Bill will make the poor insulated from
rising food inflation. This would make RBI's work easier and less complicated as RBI would get more space to
focus on manufacturing inflation. RBI would, then, take manufacturing inflation as the basis for structuring
monetary policies and ease the interest rates for industry.
Government should also take steps to regulate the import of gold. Curtailing gold imports by $20 billion i.e. to the
level of 2011-import will surely ease the pressure on economy.
There's no need of 1991 like reforms at all. 67% of the economy is covered by service sector which is less, more
stable. Financial markets are more mature, diverse and deep.
The impact of ten years of gradualist economic reforms in India on the policy environment presents a mixed picture.
The industrial and trade policy reforms have gone far, though they need to be supplemented by labor market
reforms which are a critical missing link. The logic of liberalization also needs to be extended to agriculture, where
numerous restrictions remain in place. Reforms aimed at encouraging private investment in infrastructure have
worked in some areas but not in others. The complexity of the problems in this area was underestimated, especially
in the power sector. This has now been recognized and policies are being reshaped accordingly. Progress has been
made in several areas of financial sector reforms, though some of the critical issues relating to government
ownership of the banks remain to be addressed. However, the outcome in the fiscal area shows a worse situation at
the end of ten years than at the start.



GDP growth rate
Since the economic liberalisation of 1991, India's GDP has been growing at a higher rate.
Year Growth (real) (%)
2000 5.6
2001 6.0
2002 4.3
2003 8.3
2004 6.2
2005 8.4
2006 9.2
2007 9.0
2008 7.4
2009 7.4
2010 10.1
2011 6.8
2012 6.5
2013 4.4

Companies
47 Indian companies were listed in the Forbes Global 2000 ranking for 2009. The 10 leading companies were:

World
Rank
Company Logo Industry
Revenue
(billion $)
Profits
(billion
$)
Assets
(billion $)
Market
Value
(billion
$)
121 Reliance Industries
Oil & Gas
Operations
34.03 4.87 43.61 35.95
150 State Bank of India

Banking 22.63 2.23 255.86 12.75
152
Oil and Natural Gas
Corporation

Oil & Gas
Operations
24.04 4.95 35.35 28.91
207 Indian Oil Corporation

Oil & Gas
Operations
51.66 1.97 33.64 10.20
317 NTPC

Utilities 9.63 1.86 24.58 29.70
329 ICICI Bank

Banking 15.06 0.85 120.61 7.14
463 Tata Steel

Materials 32.77 3.08 31.16 2.46
508 BhartiAirtel
Telecommu
nications
Services
6.73 1.59 12.28 23.63
582
Steel Authority of India
Limited
Materials 9.82 1.89 10.54 6.14
689 Reliance Communications

Telecommu
nications
Services
4.26 1.35 19.31 6.27
Source: Forbes Global, 2000
Conclusion:
Since 1991, there have been number of changes done by different government but for the last 10 years due to the
international scenario and inappropriate policy environment the growth achieved was not upto the mark however,
the new government is giving indications of positive policy changes therefore India inc. is looking forward for
better economic growth and development.

Reference:

EconomicLliberalization in India (n.d.),Retrieved
fromhttp://en.wikipedia.org/wiki/Economic_liberalisation_in_India


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