CHAPTER- 4

ECONOMIC REFORMS SINCE 1991

(NEW ECONOMIC POLICY)

• 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 LPG
Crisis of 1991 forced to India for Financial help from IMF and World Bank
To manage the economic crisis of 1991, Indian government approached the International
Bank for Reconstruction and Development (IBRD), popularly know as World Bank (WB)
and the International Monetary Fund (IMF) as received $ 7 billion as loan .
For availing the loan, these international agencies expected India to liberalize and open the economy by:
 Removing restriction on the private sector
 Reducing the role of the government in many areas and
 Removing the trade resections.
India agreed to the conditions of world Bank and IMF and announced the New Economic policy .
Therefore,
 In order to overcomes the economic crisis and accelerate the economic growth new
economic policy was introduced in July 1991.
 It is called “New” because its measures were just opposite to the economic policy prior
to 1991.
 The set of policies can be classified
1. Stabilization Measures: ( Short Term Measures)
 Correct the weakness that developed in balance of payments by maintaining sufficient
foreign exchange reserves
 By keeping the rising prices under control.

2. Structural reforms Measures: (Long Terms Measures)

 Improving the efficiency if the economy
 Increasing the international competitiveness by removing the barriers ( Taxes and Quotas)
 The government initiated a variety of policies also as element of New Economic policy

a. Liberalization
b. Privatization
c. Globalization
 A. Liberalization
 The removal of entry and growth restrictions on private sector enterprises or the removal of
trade barriers is known as liberalization.

 Before 1991, government imposed many restrictions on private enterprises which restricts
them to take risk or to get indulge in a big project.

 According to the policy of 1991, the government tries to remove such barriers so that the
private sector of the economy shall grow.
 1. Industrial sector reforms

 Under industrial sector, government provides liberalization in the following ways.

A. Reducing industrial licensing:- The new economic policy abolished the requirement of
licensing except for the following five industries, i.e. liquor, cigarette, defence
equipment, industrial explosive and dangerous chemicals.

B. Decreasing the role of public sector:- The number of industries reserved for public
sector is now reduced for 17 to 3 i.e. Defence equipment, Atomic Energy generation
and Railways.

C. Making MRTP act (Monopoly restrictive trade practice act, 1970) more liberal: Now
big industrialist is no longer required to seek prior government approval for
expansion and establishment of new industries.
D. Freedom to import capital goods:- Indian industrialist will be free to import machinery
or raw material for rest of the world in order to expand and to modernize their industries.

E. De-reservation of Production Areas: Many production areas which earlier were reserved
for SSI (small-scale industries) were de-reserved.

F. 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.
 2. Financial sector reforms

It includes: Banking and non banking financial institution, Stock exchange

market & foreign exchange Market
A. Establishment of private sector bank:- According to this policy private sector
will now be able to open up a bank in India as well as in rest of the world. The
basic purpose of adoption this policy is to increase competition which ultimately
leads to lower rate of interest and good quality of services.

B. Changing the role of Reserve Bank of India:- The role of RBI is now
changed from regulator to facilitator of financial sector. It means that
the financial sector can take decision on many matters without consulting from
RBI.
C. Foreign investment limit:- In banks was increased up to 74% percent i.e. foreign investors are
allowed to invest in Indian financial markets.

D. Ease of expansion:- After fulfilling certain conditions, banks were given freedom to set up new
branches and rationalize existing branches without any approval of RBI.
Demonetization –
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).
Advantages of Demonetization Disadvantages of Demonetization
 Improves Currency Circulation  Causes Panic Among the Public
 Helps in Contouring Counterfeit  Halt in the Economic Development
Currency  Causes Liquidity Crunch
 Helpful in Tracing Black Money  Short-term Downfall in the GDP
 Downside Movement of Lending  Payment Crisis
Rates
 Helps in Countering Illegal
Activities
 3. Fiscal reforms or tax reforms

 It refers to the reforms in government taxes and public expenditure policies.

Reduction in Direct tax:- The rate of direct tax is reduced so that it encourages the citizen to promote saving and
voluntary disclosure of income. The government also regulates and reduces the rate of indirect tax, so that a
common national market for goods services can be established. The process of taxation is also simplified so that
a common man can easily understand and accept the structure.
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’.
 4. Foreign exchange reforms

 It refers to the rate at which the currency of one country is exchanged with the currency of other country.
 Foreign exchange rate measures the number of units of one currency required to exchange with one unit
of other currency.
Example 1$ = 70 rupees.

 The above rate means that 70 rupees are required to exchange with 1 dollar.
The foreign exchange reform was introduced in order to bring stability in import and export and to stabilize
the crises of balance of payment.

1. Devaluation of Rupees:- Devaluation refers to decrease in the value of domestic currency by the
government. In order to attract foreign investors and to increase the amount of foreign exchange the
government reduces the value of domestic currency.

2. Adopting flexible exchange rate system:- It refers to a system in which the exchange rate is determined
by the forces of demand and supply of different currencies in the foreign exchange market. i.e. the
currency which is in demand, has higher exchange rate and the currency whose supply is more, is less
valuable and hence it is exchanged at a lower rate. The value of currency is allowed to fluctuate freely.
 5. Trade and investment reforms

Before 1991, heavy tariff and quota system was implemented by the government to protect
domestic industries. But this policies results in reduction of efficiency and slow growth of
the economy. So in order to boost up the competition and to foreign investments,
government of India implemented trade and investment reforms which are as follows.

 Reduction in quota (up to maximum possible limit)

 Removal of Export duty
 Reduction in import duty
 Import licensing was abolished(removed)
 B. Privatization

 Privatization means transfer of ownership, management and control of public sector

enterprise to the entrepreneurs in the private sector.
Privatization can be done two ways:
1. by withdrawal of the government from ownership and management of public sector
companies and or
2. by outright sale of public sector companies. The process is called disinvestment.

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 modernization.
 Need for Privatization
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 in 2024
Maharatna CPSEs Navratna CPSEs 14. Rashtriya Chemicals &
1. Bharat Heavy Electricals Limited 1. Bharat Electronics Limited Fertilizers Limited
2. Bharat Petroleum Corporation Limited 2. Container Corporation of India Limited 15. IRCON
3. Coal India Limited 3. Engineers India Limited 16. RITES
4. GAIL India Limited 4. Hindustan Aeronautics Limited 17. National Fertilizers Limited
5. Hindustan Petroleum Corporation Limited 5. Mahanagar Telephone Nigam Limited 18.Central Warehousing
6. Indian Oil Corporation Limited 6. National Aluminium Company Limited Corporation
7. NTPC Limited 7. National Buildings Construction 19. Housing & Urban
8. Oil & Natural Gas Corporation Limited, Corporation Limited Development Corporation
9. Power Finance Corporation 8. Neyveli Lignite Corporation Limited Limited
10. Power Grid Corporation of India Limited 9. NMDC Limited 20. Indian Renewable Energy
11. Steel Authority of India Limited 10. Rashtriya Ispat Nigam Limited Development Agency
12. Rural Electrification Corporation Limited 11. Shipping Corporation of India Limited Limited
13. Oil India Ltd 12. Rail Vikas Nigam Limited
13. ONGC Videsh Ltd
 Obvious Gains and Imperative Losses of Privatization
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.
 C. Globalization
GLOBALOZATION means integrating the national
economy with the world economy through removal of
barriers on international trade and capital movement.

 Integration of the economy of the country with the

world economy

 It is an outcome of the set of various policies that

aim to transfer world towers greater
interdependence and integration.

 Globalization aims to create a borderless world .

 Outsourcing
Outsourcing refers to the business services from
external sources, mostly from other countries, which
were previously provided internally or from within
the country like legal advice, computer services,
advertisements etc. Contracting out some of its
activities to third party which were earlier
performed by the organization.

 Outsourcing is emerging as a major activities in industrial and

services sector

 It has intensified in recent time due to the growth of ICT

 With the help of ICT test, voice and visual data in respect of
these services is digitized and transmitted in the real time over
countries and national boundaries.
 India has become a favourable destination of outsourcing
for most of the MNCs because:
 Availibility of skill manpower
 Favourable government policies
 Low wage rate and availability of cheap labour in Indian
for skilled work
 Considerable growth of Indian IT industry, which has
provided its competitive strength in the world.

 Developed countries opposed outsourcing to India

Because:
 Outsourcing leads to outflow of funds from the developed
countries to India, which reduce the income disparities
between two countries.
 Outsourcing reduces the employment generation and
creates job insecurity in the developed countries.
 Policy Strategies Promoting Globalization 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 meet family expenses.
 The WTO was founded in 1995 as the successor
organization to the General Agreement on Trade and
Tariff(GATT). GATT was established in 1948 with 23
countries as the global trade organization to administer
all multilateral trade agreements by providing equal
opportunities to all countries in the international market
for trading purposes.

Functions of WTO
 To facilitate international trade ( both bilateral and multilateral trade)through removal of
tariff as well as non tariff barriers.
 To establish a rule based trading regime, in which nations cannot place arbitrary restriction
on trade.
 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.
Should India be member of WTO?

Some scholars are of the view that there is no use for developing countries like India to be member of WTO
because:
 Major volume of international trade occurs among the developed nations
 Developing countries are being cheated as they are forced to open up their market for developed countries
and are not allowed the markets of developed countries.
“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