ECONOMIC REFORMS/POLICY 1991

INTRODUCTION:
India followed mixed economy since independence. India was lacking
behind due to there were no resources or capital with the government and
the public were not ready to contribute in the huge industry for
development as there was no scope of success. In past, after independence
the government had introduced many other policy for solving this problem.
But the policy of 1991 was radically different from the earlier policies. The
need for a policy shift had become evident much earlier, as many
countries in east Asia achieved high growth and poverty reduction

through policies which emphasized greater export orientation and

encouragement of the private sector. India took some steps in this
direction in the 1980s, but it was not until 1991 that the government
signaled a systemic shift to a more open economy with greater
reliance upon market forces, a larger role for the private sector
including foreign investment, and a restructuring of the role of
government.
New Economic Policy of India was launched in the year 1991
under the leadership of P. V. Narasimha Rao. This policy opened
the door of the India Economy for the global exposure for the
first time. In this New Economic Policy P. V. Narasimha Rao
government reduced the import duties, opened reserved sector
for the private players, devalued the Indian currency to increase
the export. This is also known as the LPG Model of growth.
New Economic Policy refers to economic liberalisation or relaxation in
the import tariffs, deregulation of markets or opening the markets for
private and foreign players, and reduction of taxes to expand the
economic wings of the country
Fromer P.M. Manmohan Singh is considered to be the father of New
Economic Policy (NEP) of India.Manmohan Singh introduced the NEP
on July 24,1991.

OBJECTIVES

1. The main objective was to plunge Indian Economy in to the arena

of Globalization and to give it a new thrust on market orientation.
2. The NEP intended to bring down the rate of inflation
3. It intended to move towards higher economic growth rate and to
build sufficient foreign exchange reserves.
4. It wanted to achieve economic stabilization and to convert the
economy into a market economy by removing all kinds of un-
necessary restrictions
5. It wanted to permit the international flow of goods, services, capital,
human resources and technology, without many restrictions.
6. It wanted to increase the participation of private players in the all
sectors of the economy. That is why the reserved numbers of sectors
for government were reduced. As of now this number is just 2.
 CAUSES OF ECONOMICS REFORMS
The following are the reasons for economic reforms:
(i) Rise in Prices:
Price rise continuously in India. The inflation rate increased from 6.7%
to 16.7%.
Due to inflation country’s economic position became worse.
Main reason for inflation was rapid increase in money supply. It was
due to deficit financing Deficit financing means borrowing from
Reserve Bank of India by Government to meet its deficit.
RBI provides this loan by printing new currency notes. Cost of
production increases due to inflation. This affects demand for
products.
(ii)Rise in Fiscal Deficit:
Due to increase in non- development expenditure fiscal deficit of the
Govt. had been increasing. Fiscal deficit means difference between
total expenditure and total receipts minus loans. To cover the fiscal
deficit, the Govt. has to raise loans and pay interest on it. Due to rise
in fiscal deficit there was rise in public debt and interest. In 1991
interest liability became 36.4% of total govt. expenditure. The Govt.
caught in debt trap. So Govt. has to resort to economic reforms.
(iii) Increase in Adverse Balance of Payments:
The difference between total exports and imports of a country in
called Balance of Payments. When total imports obtained from two
sources.

(a) By exports
(b) Remittances by NRI’s (Non resident Indians).
When foreign exchange falls short for payment otherwise total imports
exceed total exports, problem of adverse balance of payments arise.
Though incentives are given for export promotion yet the desired
results cannot be achieved. It is due to the fact that our export goods
could not compete in price and quality.
So deficit of balance of payments had been rising continuously. In
1980-81 it was Rs. 2214 crore and rose in 1990- 91 to Rs. 17,367
crores. To cover this deficit large amount of foreign loans had to be
obtained. So liability of loan and its interest payment goes as
increasing. It made balance of payments adverse.
(iv) Iraq War:

In 1990-91, war in Iraq broke, and this led to rise in petrol prices. The
flow of foreign currency from Gulf countries stopped and this further
aggravated the problem.
(v)Dismal Performance of PSU’s (Public Sector Undertakings):
PSU’s are enterprises wholly owned by Govt. have invested crores of
Rs. in these enterprises. These are no performing well due to political
interference and became big liability for Govt.
(vi)Fall in Foreign Exchange Reserves:
Indians foreign exchange reserve fell to low ebb in 1990-91 and it was
insufficient to pay for an import bill for 2 weeks. In 1986-87 foreign
exchange reserves were Rs. 8151 crores ad in 1989-90, it declined to
Rs. 6252 crores. Then Chandershekhar Govt. had to sell Gold to meet
the import liability. So Govt. had to think about policy of liberalisation.

ROLE OF WORLD BANK AND

IMF(INTERNATIONAL MONETARY FUND)
The Government headed by P. V. Narasimha Rao entered an
agreement with the IMF to borrow from it. In August 1991, the
Government applied for a standby loan of $ 2.3 million for a 20-month
period. For this, a letter of intent was issued. In this letter, India
promised to launch several structural reforms in the coming years. In
other words, conditionality clause was incorporated by the IMF
against such loans. The economic reforms of 1990s in India are said
to have been introduced at the instance of the IMF- World Bank.
India has been receiving benefits from the Fund from time to time.
Quite a large number of time, India got financial accommodation from
the Fund to cover deficits in BOP. As the IMF and the World Bank are
inseparable twins, membership in the former is a prerequisite for
membership in the latter.
This is why India receives various kinds of help for various
development projects from the World Bank. The Fund provides
technical expertise and support to India in various broad areas—
particularly fiscal and monetary policy. Its staff frequently exchange
views on India’s BOP(balance of payement) situation, fiscal situation,
exchange rate problems, etc., and suggest appropriate remedies to
the problems

STEPS TAKEN IN THIS POLICY

1.Reforms in Industrial and Trade Policy
Reforms in industrial and trade policy were a central focus of much of
India’s reform effort in the early stages. Industrial policy prior to the
reforms was characterized by multiple controls over private
investment which limited the areas in which private investors were
allowed to operate, and often also determined the scale of operations,
the location of new investment, and even the technology to be used.
The industrial structure that evolved under this regime was highly
inefficient and needed to be supported by a highly protective trade
policy, often providing tailor-made protection to each sector of
industry. The costs imposed by these policies had been extensively
studied and by 1991 a broad consensus had emerged on the need
for greater liberalization and openness. A great deal has been
achieved at the end of ten years of gradualist reforms.
3.Industrial Policy
Industrial policy has seen the greatest change, with most central
government industrial controls being dismantled. The list of industries
reserved solely for the public sector -- which used to cover 18
industries, including iron and steel, heavy plant and machinery,
telecommunications and telecom equipment, minerals, oil, mining, air
transport services and electricity generation and distribution -- has
been drastically reduced to three: defense air-crafts and warships,
atomic energy generation, and railway transport. Industrial licensing
by the central government has been almost abolished except for a few
hazardous and environmentally sensitive industries. The requirement
that investments by large industrial houses needed a separate
clearance under the Monopolies and Restrictive Trade Practices Act
to discourage the concentration of economic power was abolished
and the act itself is to be replaced by a new competition law which will
attempt to regulate anti-competitive behavior in other ways. The main
steps were taken in industrial policy were:

4.LIBERLIZATION
Liberalization means elimination of state control over economic
activities. It implies greater autonomy to the business enterprises in
decision-making and removal of government interference. It was
believed that the market forces of demand and supply would
automatically operate to bring about greater efficiency and the
economy would recover. This was to be done internally by introducing
reforms in the real and financial sectors of the economy and externally
by relaxing state control on foreign investments and trade. With the
NIP’ 1991 the Indian Government aimed at integrating the country’s
economy with the world economy, improving the efficiency and
productivity of the public sector. For attaining this objective, existing
government regulations and restrictions on industry were removed.
The major aspects of liberalization in India were ;
1.ABOLIZATION OF LICENSING
2.LIBERATION ON FOREIGN INVESTMENTS AND TECHNOLOGY
REFORMS
3.RELAXATION OF LOCAL RESTRICTIONS
5.PRIVATIZATION
Privatization is closely associated with the phenomena of globalization
and liberalization. Privatization is the transfer of control of ownership
of economic resources from the public sector to the private sector. It
means a decline in the role of the public sector as there is a shift in
the property rights from the state to private ownership. The public
sector had been experiencing various problems , since planning, such
as low efficiency and profitability, mounting losses, excessive political
interference, lack of autonomy, lab-our problems and delays in
completion of projects. Hence to remedy this situation with
Introduction of NIP’1991 privatization was also initiated into the Indian
economy. Another term for privatization is Disinvestment. The
objectives of disinvestment were to raise resources through sale of
PSUs to be directed towards social welfare expenditures, raising
efficiency of PSUs through increased competition, increasing
consumer satisfaction with better quality goods and services,
upgrading technology and most importantly removing political
interference. The main aspects of privatization in India are as follows;
1.AUTONOMY TO PUBLIC SECTORS
2.DERESERVATION OF PUBLIC SECTORS
3.DISINVESTMENTS POLICY
6.GLOBALIZATION
Globalization essentially means integration of the national economy
with the world economy. It implies a free flow of information, ideas,
technology, goods and services, capital and even people across
different countries and societies. It increases connectivity between
different markets in the form of trade, investments and cultural
exchanges. The concept of globalization has been explained by the
IMF (International Monetary Fund) as ‘the growing economic
interdependence of countries worldwide through increasing volume
and variety of cross border transactions in goods and services and of
international capital flows and also through the more rapid and
widespread diffusion of technology.’ The phenomenon of globalization
caught momentum in India in 1990s with reforms in all the sectors of
the economy.
There were many more sectors in which development was done like
trading, agriculture,etc.

Rationalization of Exchange Rate Policy

One of the important measures undertaken to improve the
balance of payments situation was the devaluation of rupee.
In the very first week of July 1991, the rupee was devalued
by around 20 percent. The purpose was to bridge the gap
between the real and the nominal exchange rates that had
emerged on account of rising inflation and thereby to make
the exports competitive.

IMPACT ON INDIAN SECTORS

The 1991 economic reforms were focused primarily on the
formal sector, and as a result, we have seen significant boom
in those areas that were liberalized. Sectors such as telecom
and civil aviation have benefited greatly from deregulation
and subsequent reforms. However, liberalisation and
economic reforms still have a long way to go, especially for
the informal sector—including the urban poor who hold jobs
as street vendors or rickshaw pullers, the agricultural sector,
Micro, Small and Medium Enterprises (MSMEs) and tribals.
The slow growth and stagnation in these sectors which have
not seen any reform further highlights the significant role of
the 1991 reforms in helping India’s economy become what it
is today.
1. While the challenges in this area are enormous, it is worth
noting that social sector indicators have continued to improve
during the reforms. The literacy rate increased from 52 percent
in 1991 to 65 percent in 2001, a faster increase in the 1990s
than in the previous decade, and the increase has been
particularly high in the some of the low literacy states such as
Bihar, Madhya Pradesh, Uttar Pradesh and Rajasthan.
2. Poverty reduced from 36 percent in 1993-94 to 26.1
percent in 1999-00. The poverty ratio in rural areas and
in urban areas declined.
3.
4. There was an increase in air travel and expansion in the
civil aviation sector due to reforms. In order to promote
competition, the government adopted the Open Skies
Policy(through which private players were allowed into
aviation sector) in 1991. The results of this policy are
visible today with private players in the domestic
aviation market as well as the international markets.

5. As a result of the reforms that opened the borders to

foreign goods, there was easier access to foreign
technology. A good example of this is cell phone
technology.
6. The post 1991 era also saw an expansion of the
automobile sector, easy availability of motor vehicles,
increased competition in the sector and reduction in
prices of motor vehicles.

7. Once India developed a name in the global markets,

there was also an increase in the number of foreign
tourists.
 8. Reforms led to the achievement of recognizable
increases in international competitiveness in a number
of sectors including auto components,
telecommunications, software, pharmaceuticals,
biotechnology, research and development, and
professional services provided by scientists,
technologists, doctors, nurses, teachers, management
professionals and similar professions.
9. There was a vast expansion of the telecommunication
sector. In fact, this sector has been one of the biggest
beneficiaries of economic reforms. Once heavily
shackled by regulation and government monopoly, the
sector now has several competing service providers.
The telecom policy evolved from the National Telecom
Policy in 1994 to open up all the sectors to private
players.

ADVANTAGES
1. Shift from Import-Substitution to Export-Led Growth Strategy:
The failure of import substitution strategy of industrial growth to
achieve sustained growth forced India and other developing countries
to pursue export-led growth strategy (which is also called outward
looking strategy of development).
It has been argued that by expanding exports to the other countries
and getting required imports from them based on their respective
comparative costs, developing countries will be able to achieve faster
rate of economic growth.
An important argument for trade liberalisation from the viewpoint of
the developing countries is that they will gain from it as they have a
comparative advantage in abundant, low-cost unskilled labor. If they
specialise in the production of those goods which are labor-intensive,
greater integration into global markets would increase their exports
and production. This will help in generating more employment
opportunities for the poor.
The strategy of development focused on export promotion requires

that other countries, especially developed countries should not

prevent the imports to their countries through imposition of tariffs and
non-tariff barriers. This is possible in the framework of a global
economy with free movements of trade, capital and technology among
countries. The setting up of WTO on Jan 1, 1995 was a step towards
that direction. Accordingly, the entry of India in WTO in 1995 was a
step to further globalize its economy.
2.Foreign Capital Inflows:
The globalisation or integration of the Indian economy with the world
economy is also beneficial because it would give a boost to foreign
capital inflows in the form of portfolio investment and foreign direct
investment (FDI). Portfolio investment will bring valuable foreign
exchange currencies in India and free us of balance of payments
difficulties. With sufficient foreign exchange reserves, balance of
payments constraint on accelerating the growth process will be
removed.
In the eighties due to shrinkage of foreign assistance, India had to
resort to external commercial borrowings (ECB) which carried
relatively higher rates of interest and increased the burden of external
public debt. It may be noted that small foreign exchange reserves led
to the economic crisis of 1991.
The roleof foreign direct investment is more important than portfolio
foreign investment as it raises the rate of real investment in the
economy and helps us to achieve a faster rate of economic growth.
Foreign direct investment (FDI), like domestic investment, has a
multiplier effect on output and employment.
3.Globalisation and Transfer of Technology:
Another benefit flowing from globalisation of the Indian economy is
that it acts as a mechanism for the transfer of technology from the
developed countries. Due to financial constraints, Indian companies
are in a position to invest only a small amount of funds on R & D.
Therefore, it is through globalisation of its economy that we will be
able to get advanced technology from the developed countries.
The technological up-gradation of the Indian industries will lead to
higher productivity and help us to achieve a higher rate of industrial
growth. It is worth noting that it is the multinational corporations
(MNCs) that are carriers of technology to the developing countries
through technological and financial collaboration with domestic
enterprises. Globalisation makes faster diffusion of new ideas and
advanced technologies in the world. This will make possible for the
developing countries like India to catch up the developed countries
more quickly.
4.Increased Market Access:
An important benefit of globalisation is increased market access. Long
ago Adam Smith wrote in 1776 that division of labor is limited by the
size of market. Free trade accompanying globalisation widens the
markets for products of industries.

The larger the market in which products can be sold, the greater the
benefit that will accrue as a result of economies of scale and
specialisation. This will lower unit cost of production and increase the
competitiveness of manufactured products. Thus globalisation will
ensure greater gain from trade. In addition, the wider market
increases the incentives for investing in new innovations as the
potential return on investment in them will increase.

5.Faster Economic Growth and Poverty Reduction:

Above all, it has been argued by some prominent economists such as
Jagdish Bhagwati, T.N. Srinivasan, Arvind Panagariya, that
globalisation will help in faster rate of reduction in poverty through
acceleration of economic growth.
To quote professor Arvind Panagariya, “Countries that have achieved
significant povertyreduction are generally those that have grown
rapidly and have, in turn, been open to trade. The most obvious
example are the Newly Industrialized Economies (NIEs) including
Hong Kong, Singapore, Republic of Korea and Taiwan that have
entirely eliminated poverty according to the dollar-a-day poverty line.
On the other hand, countries such as India that remained autarkic and
grew at less than 1.5% in per capita terms until late seventies
experienced little reduction in the trend poverty ratio. Both India and
China achieved poverty reduction after they began to dismantle
autarkic policies and began to grow rapidly”.

DISADVANTAGES
Every decision has benefits and losses. This policy has also some
demerits in it. Some of them are discuss or mention below:
1. 1.The reforms were largely in the formal sector of the economy,
the agriculture, urban informal sector and forest dependent
communities did not see any reforms.
2. This led to uneven growth and unequal distribution of economic
freedom among people.
3. Economic liberalization in the organized manufacturing sector
(subjected to rigid labor laws) has led to growth with very little
additional employment.
4. Market-based economic reforms also often lead to increasing
disparities between the rich and the poor and between
infrastructurally backward and more developed states.
5. Social sectors like health and education have been neglected.
These areas, though very important, were not focused upon and
the result can be seen in the dismally low levels of education
and health indicators today.
 6. Economic reforms have accelerated growth but failed to
generate adequate employment. For example, the rural
7. unemployment rate, after declining to 5.61 percent in 1993-94,
rose to 7.21 percent in 1999-2000 as did the All-India (urban
plus rural) rate of unemployment.

VIEWS/CONCLUSION
In my words this was the main step taken by the government after
independence. To take such kind of step is very hard and has

required great knowledge about the country's condition and

maintaining equality in decision making. Aware of that, the
government had taken the step for the present and future
development of the country. When the public company were not able
to boost the economy they give that sector or can say that company to
private sector is a very good step and this can help for not only in
development in the industrial sector but in other sector also. The idea
of disinvestment in public sector will help the management or
production to increase as private will work upon it and also the power
will be in the hands of government. Also in this policy the foreign
company would come to India for establishment and thus foreign
exchange happened. This all had lead to the -development of the
country from 1991 to present. This policy is considered as the power-
booster in boosting our economy. All the great economics considered
this policy as important in the India's development.
The thrust of the New Economic Policy has been towards creating
amore competitive environmentin the economy as a means to
improving the productivity and efficiencyof the system. This was to be
achieved by removing the barriers to entry and the restrictions on the
growth of firms.

BIBLIOGRAPHY
The above information are taken from various sources stated below:
1.From the 11th-commerece BS textbook
2.From website economic discussion
3.From website topper
4.From the articles of Montek S. Ahluwalia.