Economic Reforms in India

Meaning of Economic Reforms

Economic Reforms refer to the fundamental changes that were launched in 1991 with the plan of
liberalising the economy and to quicken its rate of economic growth. The Narasimha Rao
Government, in 1991, started the economic reforms in order to rebuild internal and external faith
in the Indian economy.

The reforms intended at bringing in larger cooperation of the private sector in the growth method
of the Indian economy. Policy changes were proposed with regard to technology up gradation,
industrial licensing, removal of restrictions on the private sector, foreign investments and foreign
trade. The essential features of the economic reforms are – Liberalisation, Privatisation and
Globalisation, commonly known as LPG.

To put it in other words, “Economic reforms” normally indicates to deregulation or at times to

decrease in the size of government, to eliminate deformities caused by management or the
presence of administration, rather than current or raised regulations or government plans to
lessen perversions created by market failure.
Need for Economic Reforms

 Poor Performance of the Industrial Sector

 Adverse Balance of Payments

 Rise in Fiscal Deficit

 Inflation

 The Gulf War

Examples of Economic Reforms

 Liberalisation

 Privatisation

 Globalisation
Why were Economic reforms introduced in India?

Economic reforms were introduced in India because of the following reasons:

Poor performance of the public sector

 Public sector was given a role important in development policies during 1951-1990.

 However the performance of the majority of public enterprises was disappointing.

 They were incurring huge losses because of inefficient management.

Adverse Balance of payments Or Imports exceeded exports

 Imports grew at a very high rate without matching the growth of exports.

 Government could not restrict imports even after imposing heavy tariffs and fixing
quotas.

 On the other hand, Exports was very less due to the low quality and high prices of our
goods as compared to foreign goods.

Fall in foreign exchange reserves

 Foreign exchange (foreign currencies) reserves, which government generally maintains to

import petrol and other important items, dropped to levels that were not sufficient for
even a fortnight.

 The government was not able to repay its borrowings from abroad.

Huge debts on government

 Government expenditure on various developmental works was more than its revenue
from taxation etc.

 As a result, the government borrowed money from banks, public and international
financial institutions like IMF etc.

Inflationary pressure

 There was a consistent rise in the general price level of essential goods in the economy.
  To control inflation, a new set of policies were required.

Terms and conditions of world bank and IMF

 India received financial help of $7 billion from the World Bank and IMF on an
agreement to announce its New Economic Policy

The Crisis of 1991 and the Reforms

The crisis of 1991 happened largely due to inefficient management of the economy of India in the
1980s. The revenues that government was generating were not enough to meet the ever increasing
expenses. Thus, the government had to borrow to pay for the debts and thus was caught in a term
called debt-trap. Debt-trap is the deficit that occurs due to an increase in government expenses in
comparison to the government’s revenue.

Due to the failure of earlier economic policies till 1990 there was a need for need for new economic
policies. The situation was worsening as India had foreign reserves which could last only for the
next two weeks. There was a shortage of new loans and Indian people living abroad (NRIs) were
withdrawing money in large amounts.

There was a little confidence for international investors towards the Indian economy. These points
will highlight the need for a new economic policy in India. Crisis in Gulf countries, increase in
fiscal deficit, prices rising, the worse balance of payments, public sector units (PSUs) performing
badly, and many more.

The Emergence of New Reforms

India approached the world and international monetary fund for loan and received $7 million to
manage their crisis. As a result to this, international firms and agencies expected that India will open
up the door in the country by removing various restrictions majorly on private sector and thereby
removing the trade restrictions between India and the other foreign countries.
India agreed to the terms and conditions and as a result, new reforms were introduced. These
economic reforms in India are structurally classified as liberalization, globalization, and
privatization.

Liberalization

Liberalization was brought up with the fact that any restrictions which became a hindrance to
development and growth will be put to an end. Largely, this reforms made government regulations
and policies lose. It allowed for opening up of economic borders for foreign investment as well as
multinationals.

There were many economic reforms introduced under liberalization. These included expansion of
production capacity, abolishing industrial licensing by the government, de-reserving producing
areas, and freedom to import goods.

Privatization

Privatization largely refers to giving more opportunities to the private sector, such that the role of
the public sector is reduced. The main objectives of privatization are reducing the workload of the
public sector, providing better goods and services to the end users, improving the government’s
financial condition, and many more. Privatization is a way to allow the entry of foreign direct
investments and bringing healthy competition into the economy.

Globalization

Globalization in simpler terms is to connect with the world. In this context, globalization means the
integration of the economy of India with that of the world. Thus, it encourages private and foreign
investment and also foreign trade. Globalization attempts to establish the links in such a way that
the Indian happenings can be met by the world or vice versa.

Major Highlights on the Economic Reforms in India

  During the reform period, the growth in service was increasing, while the agriculture
sector saw a decline, and the industrial sector was fluctuating.

 The opening up of the Indian economy led to a sharp increase in the FDIs and foreign
exchange reserve.

 This foreign investment includes foreign institutional investment and direct investment.

 India is one of the successful exporters of engineering goods, auto parts, IT software,
textiles during the time of the reforms.

 The price rise during the reforms was also kept under control.

Failures of the Economic Reforms in India

 The agriculture sector was neglected and the public investment in this sector was reduced
and hence the infrastructure areas were affected.

 The subsidies on the fertilizers were removed and hence it led to an increase in the cost of
production which affected many marginal and small farmers.

 Further, many policies were introduced which reduce the import duties on agriculture
products, reduce the minimum support price increased the threat of international
organizations competing with th3 the local farmers.

 The industrial sector saw uneven growth.

 The imports were made cheaper as a result of which the demand for the industrial goods
reduced.

 The globalization which allowed for free trade between the countries affected adversely
on the local industries and thus affected employment opportunities.

 The reforms led to an increase in economic colonialism.

 It also led to the erosion of culture.

 The investments in many infrastructural facilities like power supply were inadequate.