CHAPTER – 3
ECONOMIC REFORMS IN INDIA SINCE 1991
PART - 1
(Reasons for Adopting NEP / Basics of NEP)
Since independence India had followed mixed economic system. But, in reality, the public sector dominated the control and regulation of our economy and private sector ignored. From 1947 to 1991 India have adopted protectionism or inward looking strategies / policy of import substitution.
In early 1991, the Indian economy suffered a major economic crisis – the worst crisis that the country had faced since independence. The economic condition of India in the year 1991 was very miserable. It was due to cumulative effect of number of reasons.
REASONS / NEED FOR ECONOMIC REFORMS
The need for the economic reforms felt due to the following reasons:
1. HIGH FISCAL DEFICIT – ‘Fiscal deficit means a situation where government revenues from all sources fall short of government expenditure.’ In 9081-82, fiscal deficit was 5.4% of GDP which rose to 8.4 percent of GDP in 1991. To meets governments expenditure obligations in the wake of inadequate revenue sources, the government had to take resources to large-scale borrowings.
High fiscal deficit indicates poor financial health of the economy, triggers inflation and lowers faith of international institutions like I.M.F., I.B.R.D, I.D.A. etc. in the government with regards to management of the country.
2. HUGE BURDEN OF DEBT – Large scale borrowings increases the burden of debt repayment considerably. India’s external debts rose from 12 percent of GDP in 1980-81 to as high as 23 percent of GDP in 1990-91. Interest payments on loan taken by the government ate up as much as 39 percent of total revenue collections of the central government. It almost led to ‘debt trap’ for the government.
3. BALANCE OF PAYMENT CRISIS - For most of the period of planning, India suffered from a balance of payments crisis as import expenditures for exceeded export earnings. Balance of payments deficit has been constantly rising particularly since 1980-81. The crude oil prices shot up considerably, due to Gulf War in 1990-91, pushing up India’s import expenditure to a very high level (as India is depended on oil imports).
Remittances from workers employed in gulf countries dropped drastically. Moreover, NRI deposits, which had been the mainstay of India’s balance of payments, started flowing outs. Current Account Deficit was mounting up and it was as high as rupees 2,214 crore in 1980-81 and shot up to rupees 17,367 crore in 1990-91.
4. FALL IN THE FOREIGN EXCHANGE RESERVES – As a result of decrease in inflow of foreign exchange, the foreign exchange reserves started depleting and in 1991, India’s foreign exchange reserves fell to such a low level that these were not enough to pay for an import bill of two weeks.
The foreign exchange reserves, that were rupees 8,151 crore in 1986-87, declined sharply to rupees 6252 crore in 1989-90. Due to the serious situation, the government had to mortgage country’s gold reserves with Bank of England (47 ton), Bank of Switzerland (20 tons) and World bank to discharge its debt obligation.
5. POOR PERFORMANCE OF PUBLIC SECTOR – After independence, during the initial 15 years, PSUs performed satisfactorily but there after most of them start incurring losses. The government was not able to generate sufficient revenue from internal sources such as taxation, running of public sector enterprises, etc. Government expenditure began to exceed its revenue by such large margins that it became unsustainable.
6. INFLATIONARY SPIRAL – There was a persistent rise in prices during the period 1956-1991. Increase in Gulf crude oil prices also had an inflationary impact on domestic fuel prices rose considerably. Rapid increase in money supply (owing to borrowings by the government to cope with fiscal deficit) is also an important reason for high inflation. The rate of inflation reached an all time high level above to 17 percent. The wholesale price inflation was also very high i.e. 10.3 percent in 1990-91.
To manage the crisis of 1991, Indian government approached to I.M.F. and World Bank (I.B.R.D.) and received $ 7 billion as loan. For availing the loan, these international agencies expected India to liberalized and open up the economy by –
(i) Removing restrictions on the private sector;
(ii) Reducing the role of government in many areas; and
(iii) Removing trade restrictions.
India agreed to the condition of World Bank and IMF and announced the New Economic Policy (NEP) or New Economic Reforms.
MEANING OF ECONOMIC REFORMS
New Economic Policy (NEP) refers to the efforts made through different policy decisions and changes that were made to create competitive environment and increase in productivity and efficiency. The broad components of NEP are LPG in place of LPQ –
(i) The policy of liberalization (L) in place of licensing (L) for the industries and trade.
(ii) The policy of privatization (P) in place of quotas (Q) for the industrialist; and
(iii) The policy of globalization (G) in place of permits (P) for exports and imports.
The NEP consisted of two kinds of measures:
1. Stabilisation Measures – They refers to short-term measures which aim at –
* Correcting weakness of the Balance of Payments by maintaining sufficient foreign exchange reserves;
* Controlling inflation by keeping the rising prices under control.
2. Structural Reforms Measures – They refers to long-term measures which aim at-
* Improving the efficiency of the economy; and
* Increasing international competitiveness by removing the rigidities in various segment of the Indian economy.
ELEMENTS OF NEW ECONOMIC POLICY
The government initiated a variety of policies which fall under three heads:
(1) Liberlisation - It refers to removal of entry and growth restrictions on the private sector.
(2) Privatisation – It refers to transfer of ownership, management and control of public sector to private sector.
(3) Globalisation – It refers to integrating the domestic economy with world economy.
Reference Videos
(Reasons for Adopting NEP / Basics of NEP)
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Regards
Dr. Asad Ahmad
KV IIM, Lucknow
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