Economic Reforms in India

1
 Economic Reforms: A brief Review
• In 1985, soon after Rajib Gandhi was prime
minister, introduced new economic policy, the
basic thrust of which was to expand the scope
of private sector. It was expected that the
private sector’s investment could bring out
modernisation of investment and usher in rapid
economic growth.
• The new eco.policy attempted to remove unnecessary
hurdles in securing licenses, adjusting output to
administered prices and denying industrial licensing to
MRTP companies. A number of measures were
undertaken in this regard.
2
• Rationale of Reform:
After relatively robust economic performance
in 1980s, Indian economy had faced an un
precedented liquidity crisis in 1990-91. A
number of events coincided with it. These
included collapse of Soviet Union – one of
India’s major trading partner, The Gulf war not
only increased the oil prices but reduced the
remittances of Indian workers in Gulf and the
Political uncertainty. All these forced India to
go for a structural reform in the economy.
3
• The reform which was introduced in Rajib Gandhi regime
did not yield the desired result.
The BOP deficit increased from Rs 5930 crores in Sixth
plan to Rs10840 crores during seventh plan. The invisible
account decreased drastically during this period and
there was serious BOP crisis. India was forced to
approach World bank and IMF for huge loan amounting
$7 billion. They agreed to provide loan to India with a
condition that India should overcome the crisis. Increased
budget deficit with high public expenditure, public debt-
GDP ratio increased, double digit Inflation (1990-
91:11.56%,1991-92:13.47%).
- Macro economic crisis: budget deficit, decumulation of
reserve, budget deficit financed by foreign borrowing.
4
• India adopted the reform measures soon after
Mr.RAO took over as prime minister. The
reform package outlined by Manmohan singh in
1991 had 3 distinct components:
1.Fiscal stabilisation to check fiscal deficit to keep
it at much lower level.
2.Internal liberalisation to increase competitive
pressure.
3.Integration with the global economy by
removing controls on foreign trade and
exchange rates, lowering tariffs and
rationalising their structure and substantially 5
relaxing regulations regarding external capital
flows and proactive policy for attracting FDI to
encourage growth.
The reform measures have two sets of policies;
i. Stabilsation policy, ii. Structural reform policy.
Stabilisation policy intends to correct the lapses in
the economy and put the economy in order in the
short run.
Structural reform policies were intended to
accelerate economic growth over the medium term.
But structural reform cannot succeed unless a
degree of stabilisation has been brought about.
6
But stabilisation will not be adequate unless
structural reforms are undertaken to avoid the
recurrence of the problems faced in the recent
period.
Structural reforms were mainly in the area of
industrial licensing and regulation, foreign trade
and financial sector.

7
• Implementation of the Agenda
Trade policy reforms: Import licensing policy has
been dismantled since 1991. Inspite of the
stiff resistance from big industrialists on tariff
cut, tariffs have been substantially done away
with. India has also undertaken a major
commitment to liberlise its trade under WTO
Agreement.
Removal of Import restrictions: It began in 1991
and completed in a phased manner. Removal from
715 items (Exim policy, 2001-02). Of these 342 –
textile products, 147 agri products and 226 –
manufacturing including automobiles 8
• Industrial Policy reforms: New Industrial policy
was announced in july, 1991 and subsequent
ammendments were done. The policy
considered some industries which are
included in the public sector sensitive from
national security points of view. FDI was
taken liberally. Even the outward investments
by Indian Entreprises were liberalised and
could get automatic approval.
• Exchange rate Reforms: The Rupee was devalued twice in
July, 1991 leading 20 Percent depreciation in its value. Partial
convertibility and subsequently full convertibility of Rupee on
current accounts was made by 1994.
9
• Capital Markets: The capital issues control Act
and the SEBI was set up to regulate the
functioning of the capital market. Foreign
Institutional Investors were encouraged in the
Indian capital market without any restriction on
either volume of trading or lock in period.
• Financial sector: In Jan, 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. 10
• Strong and supportive and uniform political
party is one of the factor for successful
implementation of the reform at the state level.
• 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. The
unskilled, less educated, rural based workers
lost the opportunity in the reform process.

11
• Macro economic impact of reforms:
• The post reform growth of GDP was always
Higher.
• Industrial survival coming out of recession
• FDI inflows reveal a dramatic jump since 1991.
Fiscal adjustment and stabilisation:
Fiscal deficit prior to reform was 8.2 percent
of GDP in second half of 1980s compared to
6.3 in early 1980s. As against this the fiscal
deficit in post reform was 5.7 % of GDP. This
shows govt has succeeded in managing Fiscal
deficit and in 2004-05 it was 4.4 % of GDP. 12
• Revenue deficit had increased in the post reform
period at 2.9 % compared to 2.6 % during the 1980s.
• Fiscal adjustment was achieved by squeezing public
investment rather than government consumption.
Capital expenditure had declined in the post reform
period. Capital expenditure as proportion of GDP
came down from 5.5 % in 1990-91 to 2.3 % in 1999-
2000.
• 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
• Prices: An important focus of the
stabilisation programme is to check the
inflation. The inflation reached the double
digit figure in 1991-92(13.47%) and it
declined to 8.14% in 1994-95.Again it
reached to 12.19 % in 1995-96 and 1998-
99(13.1). This was due to rise in food
prices and other goods of mass
consumption at a faster rate than prices
of other goods. This affects the poorer/
weaker sections to a great extent.
14
• Political resistance to reform:
The reform was supported by Professionals with
higher education, Soft ware industry, 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.
All these created strong opposition from the
political leaders of opposition and trade union
leaders.

15
• India unfortunately still has miles to go on
matters of basic needs and development of the
most disadvantaged. Over the last few decades,
inequality has been rising, regional disparities
have been growing and poverty and illiteracy
continue to be high.
• India though has significant improvement in
literacy front i.e. 65% in 2001, still 35 % of its
population unable to read and write.
• To conclude, 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
• Next round of reforms: “There are, fortunately,
enough strength in the Indian economy for it to be a net
beneficiary of globalisation. The economy has gone
past that critical level where to open up is to risk
being cheated and impoverished. 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. Globalisation and
modern markets bring with them many ills. But on
balance, and given the new strengths of the Indian
economy, these changes will open up rather than
close windows of opportunity for India” (Kausik Basu).
17
 BALANCE SHEET OF GLOBALISATION
GOOD FOR BAD FOR
Many developed countries Bad for developing countries
Output Employment
People with Asset People without Asset
Profit Wages
People with skills People without skills
The Educated The Un/less educated
Professionals, managerial and Workers
Technical personnel
Flexible adjusters Rigid adjusters
Creditors Debtors
Those in private/self service Those in public service

18