Economic reforms refer to revise of economic policies to strengthen and re-energize the economy Reforms are usually done when the condition of the economy is very weak or when the governments want to re-establish the economy as a resilient one. Economic Reforms encompass changes in economy-wide policies such as tax and competition policies. These Reforms are centered around bringing economic efficiency and are not geared towards eradicating other issues like unemployment or equity growth.
In India, economic reforms took place in 1991. India's government was on the verge of bankruptcy in 1985, and as a measure to lift the country out of the Balance of Payments disparity, the then finance minister Manmohan Singh introduced the reforms.
India saw a huge shift in economic policies in terms of reforms in 1991. The idea was to improve the condition of the Indian economy and bring it out of the huge inflation that impacted the economy to a large extent. This hit the Indian population very badly as the price of commodities went sky high and the Indian government did not have reserves to meet the condition.
Here are the reasons for the economic crisis of 1991.
The main reason for the crisis in 1991 is attributed to the decline in exports which started in the 1980s. India did not have enough foreign exchanges to meet the payment of imports and its exports were not high enough too. This resulted in a negative Balance of Payment situation, that in turn, resulted in a very high inflationary rate.
The Indian economy was going through a very debilitating phase.
As the foreign currency reserve was not enough, the Balance of payment issue was going out of control.
The revenue generated through tac by the government was low and it did not meet the requirements of the government.
India had no other way but needed to borrow a massive amount of 7 billion USD from International Bank for reconstruction and development (IBRD). The IBRD is the lending arm of the World Bank and the International Monetary Fund (IMF). India had to promise an open economy with liberalization and international trade in India.
India has had numerous Economic Reforms since the late 1970s in the form of liberalization. However, the most influential Economic Reforms came about in 1991, which had a direct impact on the growth rate of the Country. The new Economic Reforms are related to the neo-liberal policies taken by the Indian Government that was introduced in 1991.
The three main pillars on which the reform rested were - Liberalization, Globalisation, and Privatization.
India’s liberalization measures started in the 1980s and focused on stability and structural reforms.
Stabilization measures are short-term measures aimed at reducing the crisis by maintaining foreign exchange reserves. Structural Reform Policies are long-term measures that act at the root of Economic policies. They are used in enhancing international competitiveness and discarding hindrances in the economic path, such as rigid rules and restraining regulations.
The license-raj was a big bottleneck for the economic well-being of India. Breaking the shackles of economic stagnation was the major part of the liberalization of India's Economy.
The major changes were done in the following areas −
Technology import
Import of capital goods in association with an affordable rate of public investment.
Protecting domestic industries when they face foreign competition by imposing quantitative restrictions on imports.
No licensing was required except in a few industries like drugs, cigarettes, harmful chemicals, alcohol, aerospace, industrial explosives, electronics, and pharmaceuticals.
India allowed investment by FII (foreign institutional investors) like mutual funds, merchant Bankers, pension funds, etc. in the Indian financial arena.
Positive effects of liberalization noticed in India were -
Rise in values of the stock markets.
India became the prominent exporters of IT products and services.
The political risk for the investors was reduced.
Privatization refers to the transfer of public sector companies to the private sector.
It can be done in the following three manners −
The Government may withdraw from the ownership and management of the company.
For one-time revenues. public sector companies are sold to private sector companies.
Disinvestment includes selling a portion of the Government companies’ equity to the public.
Government also attained privatization by removing the autonomy of managerial decisions to some private companies in the public sector industries. This was done to improve the efficiency of the companies.
Some highly regarded industries were given the status of -
Maharatnas − The Indian oil corporation Ltd. and SAIL (Steel Authority of India Ltd) are some examples of industries given this status.
Navratnas − This includes Mahanagar Telephone Nigam Ltd (MTNL), Hindustan Aeronautics Ltd (HAL)., National Aluminum Company (NALCO), and
Miniratnas − Some companies in this status are IRCTC (Indian railway catering and tourism corporation) Ltd., BSNL (Bharat Sanchar Nigam Ltd.), and the Airport Authority of India (AAI).
Before the reforms of 1991, foreign companies were restricted from entering the Indian markets. The Indian companies were mostly monopolies of the government. However, the efficiency of the companies was very low due to failure and inactive management.
In 1991, the doors of the Indian economy were opened for foreign companies. Foreign companies could invest in India and operate in the country too. This increased the competition in the Indian markets but also offered Indian companies the chance to get foreign investments. Indian companies could also go to other markets and increase their profits and growth.
For example, ONGC Videsh has branches in 16 different countries, Tata Steel in 26 countries, and HCL in 31 countries.
Economic reforms can work wonders. It has been instrumental in making India a growing economy by increasing foreign investment in the country. As Foreign Institutional Investment (FII) increased up to 100% in some sectors, the technology, and foreign expertise could be obtained in India which helped Indian consumers have an upper hand.
Reforms also increased innovation and the quality of the products. Consumers get more choices in a market due to reforms and this has happened to India as well. As a result of reforms, India has gone through widespread economic growth. Poverty is being eradicated continuously and India is showing the fastest growth in its economy. This is a positive aspect of reforms the base of which was formed in 1991.
Q1. What are the three factors of reforms that impact the economy to a large extent?
Ans. The three factors that impact the economy during reforms are liberalization, privatization, and globalization.
Q2. What was the condition of Indian markets before the major reforms of 1991?
Ans. Before the reforms of 1991, foreign companies were restricted from entering the Indian markets. The Indian companies were mostly monopolies of the government.
However, the efficiency of the companies was very low due to the failure and inactive management.
Q3. How much amount of loans did India have to borrow from the world bank and IMF to counter the problems faced during 1991?
Ans. India had to borrow a massive amount of 7 billion USD from IBRD (International Bank for reconstruction and development). IBRD is the lending arm of the World Bank and the IMF (International monetary fund).
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