IDC-Economics

Unit IV

Elementary concepts of Indian Economics

(1) Economic Reforms in India – background, basic steps of trade, industry and
financial sector reforms.
(2) NITI AYOG – Structure and objectives

Economic Reforms in India

Background

The economic reforms of 1991 in India were triggered by a severe financial crisis,
particularly a Balance of Payments (BoP) crisis, in 1991. This crisis, combined with
mounting external debt, pushed India to implement fundamental changes in its economic
policies. The reforms, often referred to as the New Economic Policy (NEP), aimed to
transition from a closed, controlled economy to a more open, liberalized one, with the
goal of promoting growth, efficiency, and global integration.

1. The 1991 Crisis:

Balance of Payments Crisis:

India faced a serious BoP problem, meaning the country was spending more on
imports than it earned from exports.

Rising External Debt:

The country had accumulated significant debt from international lenders, making it
difficult to meet its debt obligations.
Shortage of Foreign Exchange:
The BoP crisis and rising debt led to a shortage of foreign exchange reserves, further
worsening the situation.
 Government Revenue Insufficient:
The government's revenue was insufficient to cover its expenses, further exacerbating the
economic instability.

2. The Need for Reform:

Stagnation and Inefficiency:

The Indian economy was facing stagnation and inefficiency due to excessive
government regulation and controls, especially in the public sector.

Need for Private Sector Participation:

The reforms aimed to encourage greater participation of the private sector in the country's
economic growth.

Global Integration:
The reforms also aimed to integrate India into the global economy and attract foreign
investment.

Foreign trade policy of India under NEP 1991

Under the New Economic Policy (NEP) of 1991, India adopted a more liberal foreign
trade policy, moving away from import substitution towards a more open, export-oriented
approach. This involved reducing trade barriers, streamlining import-export procedures,
and attracting foreign investment to boost economic growth.

Key aspects of the foreign trade policy under NEP 1991:

Liberalization and Deregulation:
The government reduced import duties (tariffs) and phased out quantitative restrictions
(QRs), which limited the import of certain goods. This allowed for more competitive
pricing and encouraged imports of necessary inputs.

Foreign Investment:
The NEP eased restrictions on foreign investment, including increasing the allowed
foreign equity stake in Indian companies. This attracted foreign capital and technology,
contributing to economic growth.

Export Promotion:
The policy aimed to boost exports by simplifying export procedures, offering incentives,
and promoting diversification of export products.

Rationalization of Tariffs:
The tariff structure was revised to reduce overall tariff rates and create a more uniform
system.

De-control of Imports and Exports:

Many industries were delicensed, allowing for more freedom in imports and exports,
which also encouraged private sector participation in trade.

Currency Convertibility:
The Indian rupee was made partially convertible, allowing for greater freedom in foreign
exchange transactions.

Globalization:
The policy aimed to integrate India into the global economy by encouraging international
trade, foreign investment, and technology transfer.
 Key aspects of industrial policy under NEP 1991

The New Industrial Policy (NIP) of 1991, a key component of the New Economic Policy
(NEP) of 1991, focused on liberalizing and deregulating the Indian industry, shifting
from a highly regulated "licence-permit-quota raj" to a more market-driven approach.
This involved streamlining licensing procedures, encouraging private and foreign
investment, and promoting competition by reducing the role of public sector units.

Key Aspects of the NIP 1991:

Deregulation and Liberalization:

The policy aimed to reduce government control over industry by abolishing licensing
requirements for most industries, except for a few strategic ones. This allowed for greater
flexibility and efficiency in production and distribution.

Privatization and Disinvestment:

The policy encouraged privatization by allowing the government to sell its shares in
public sector units (PSUs) and reduce their role in various sectors. This aimed to improve
efficiency and reduce the financial burden on the government.

Increased Competition:
The policy promoted competition by removing restrictions on monopolies and restrictive
trade practices, encouraging the entry of new players into the market.
Foreign Investment and Technology:
The policy welcomed foreign direct investment (FDI) by allowing up to 51% foreign
equity in some industries and encouraged the import of technology to upgrade the Indian
industrial sector.

Export Promotion:
The policy aimed to boost exports by allowing duty-free imports of raw materials for
export-oriented units and providing incentives for export-oriented activities.

Infrastructure Development:
The policy emphasized the need for developing infrastructure, such as transportation,
communication, and power, to support the growth of industries.

Labour Reforms:
The policy aimed to simplify labour laws and increase hiring and firing flexibility to
enhance the efficiency of the industrial sector.

Financial Sector Reforms in India

What is the Financial Sector?

 The financial sector constitutes the commercial banks, non-banking financial

companies, investment funds, money market, insurance and pension companies,
real estate etc.
 It forms the core of an economy which facilitates the mobilization and
distribution of financial resources.
 It is engaged in providing financial services to the customers of the commercial
and retail segments.
Need for Financial Sector Reforms

 After independence India inherited a colonial legacy that was full of various social
and economic deprivations.
 The planned economic development strategy adopted based on the Mahalanobis
model had its limitations that started showing in the 1980s.
 In order to achieve various economic goals, the government resorted to increased
borrowings at concessional rates which lead to weak and underdeveloped
financial markets in India.
 The nationalization of banks increased government control and decreased the
role of market forces in the financial sector.
 Increased bureaucratic control, issues of red-tapism increased the non-performing
assets.
 Turbulent international events such as the war in the Middle East and the fall of
the USSR increased the pressure on the Foreign Exchange Reserves of India.

Reforms in the Banking Sector

 Reduction in CRR and SLR has given banks more financial resources for
lending to the agriculture, industry and other sectors of the economy.
 The system of administered interest rate structure has been done away with and
RBI no longer decides interest rates on deposits paid by the banks.
 Allowing domestic and international private sector banks to open branches in
India, for example, HDFC Bank, ICICI Bank, Bank of America, Citibank,
American Express, etc.
 Issues pertaining to non-performing assets were resolved through Lok adalats,
civil courts, Tribunals, The Securitisation And Reconstruction of Financial Assets
and the Enforcement of Security Interest (SARFAESI) Act.
  The system of selective credit control that had increased the dominance of RBI
was removed so that banks can provide greater freedom in giving credit to their
customers.

Narasimham Committee report (1991)

 It was established to give reforms pertaining to the financial sector of India

including the capital market and banking sector.
 Some of its major recommendations have been mentioned below:
o It recommended reducing the cash reserve ratio (CRR) to 10% and the
statutory liquidity ratio (SLR) to 25% over the period of time.
o It suggested fixing at least 10% of the credit for priority sector lending
to marginal farmers, small businesses, cottage industries, etc.
o In order to provide required independence to the banks for setting the
interest rates themselves for the customers, it recommended de-regulating
the interest rates.

Reforms in the Debt Market

 The 1997 policy of the government that included automatic monetization of the
fiscal deficit was removed resulting in the government borrowing money from the
market through the auction of government securities.
 Borrowing by the government occurs at market-determined interest rates which
have made the government cautious about its fiscal deficits.
 Introduction of treasury bills by the government for 91 days for ensuring
liquidity and meeting short-term financial needs and for benchmarking.
 To ensure transparency the government introduced a system of delivery versus
payment settlement.
Reforms in the Foreign Exchange Market

 Market-based exchange rates and the current account convertibility was

adopted in 1993.
 The government permitted the commercial banks to undertake operations in
foreign exchange.
 Participation of newer players allowed in rupee foreign currency swap market
to undertake currency swap transactions subject to certain limitations.
 Replacement of foreign exchange regulation act (FERA), 1973 was replaced by
the foreign exchange management act (FEMA), 1999 for providing greater
freedom to the exchange markets.
 Trading in exchange-traded derivatives contracts was permitted for foreign
institutional investors and non-resident Indians subject to certain regulations and
limitations.

Impact of Various Reforms in the Financial Sector

 It increased the resilience, stability and growth rate of the Indian economy from
around 3.5 % to more than 6% per annum.
 A resilient banking system helped the country deal with the Asian economic
crisis of 1977-98 and the Global subprime crisis.
 The emergence of private sector banks and foreign banks increased competition in
the banking sector which has improved its efficiency and capability.
 Better performance by stock exchanges of the country and adoption of
international best practices.
 Better budget management, fiscal deficit, and public debt condition have improved
after the financial sector reforms.
Conclusion

The financial sector forms the backbone of an economy and includes the sore sectors
such as banking, foreign exchange, insurance. In order to break the colonial hegemony of
policies, various reforms in the financial sector were carried out that enabled the
strengthening of the banking sector, better management of foreign reserves, etc enabled
in economic growth and development.

NITI AYOG-STRUCTURE & OBJECTIVES

NITI - National Institution for Transforming India

What is Its Background?

 Planning has been in Indian psyche as our leaders came under influence of the
socialist clime of erstwhile USSR. Planning commission served as the planning
vehicle for close to six decades with a focus on control and command approach.
 Planning Commission was replaced by a new institution – NITI Aayog on January
1, 2015 with emphasis on ‘Bottom –Up’ approach to envisage the vision of
Maximum Governance, Minimum Government, echoing the spirit of ‘Cooperative
Federalism’.

What about the Composition of NITI Aayog?

 Chairperson: Prime Minister

 Vice-Chairperson: To be appointed by Prime-Minister
 Governing Council: Chief Ministers of all states and Lt. Governors of Union
Territories.
  Regional Council: To address specific regional issues, Comprising Chief
Ministers and Lt. Governors Chaired by Prime Minister or his nominee.
 Adhoc Membership: 2 member in ex-officio capacity from leading Research
institutions on rotational basis.
 Ex-Officio membership: Maximum four from Union council of ministers to be
nominated by Prime minister.
 Chief Executive Officer: Appointed by Prime-minister for a fixed tenure, in rank
of Secretary to Government of India.
 Special Invitees: Experts, Specialists with domain knowledge nominated by
Prime-minister.

What are NITI Aayog Hubs?

 Team India Hub acts as interface between States and Centre.

 Knowledge and Innovation Hub builds the think-tank acumen of NITI Aayog.
 The Aayog planned to come out with three documents — 3-year action agenda, 7-
year medium-term strategy paper and 15-year vision document.

What is the Importance of NITI Aayog?

 The 65 year-old Planning Commission had become a redundant organization. It

was relevant in a command economy structure, but not any longer.
 India is a diversified country and its states are in various phases of economic
development along with their own strengths and weaknesses.
 In this context, a ‘one size fits all’ approach to economic planning is obsolete. It
cannot make India competitive in today’s global economy.
What are Its Key Objectives?

 To foster cooperative federalism through structured support initiatives and

mechanisms with the States on a continuous basis, recognizing that strong States
make a strong nation.
 To develop mechanisms to formulate credible plans at the village level and
aggregate these progressively at higher levels of government.
 To ensure, on areas that are specifically referred to it, that the interests of national
security are incorporated in economic strategy and policy.
 To pay special attention to the sections of our society that may be at risk of not
benefitting adequately from economic progress.
 To provide advice and encourage partnerships between key stakeholders and
national and international like-minded Think Tanks, as well as educational and
policy research institutions.
 To create a knowledge, innovation and entrepreneurial support system through a
collaborative community of national and international experts, practitioners and
other partners.
 To offer a platform for resolution of inter-sectoral and inter-departmental issues in
order to accelerate the implementation of the development agenda.
 To maintain a state-of-the-art Resource Centre, be a repository of research on
good governance and best practices in sustainable and equitable development as
well as help their dissemination to stake-holders.

What are the Associated Concerns?

 To prove its mettle in policy formulation, the NITI Aayog needs to prioritize from
the long list of 13 objectives with clear understanding of the difference in policy,
planning and strategy.
 To build the trust, faith and confidence more than the planning commission, NITI
Aayog needs freedom of various kinds with budgetary provisions not in terms of
plan and non-plan expenditures but revenue and capital expenditure as the higher
rate of increase in capital expenditure can remove infrastructural deficits at all
levels of operation in the economy.

12.05.2025.