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Overview of Indian Economy

Economic Reforms

The year 1991, is an important year in the economic history of India. As soon as the new government resumed office on June 21, 1991, it adopted a number of stabilization measures to restore internal and external confidence in India’s economy. Today, we will talk about the economic reforms in India.

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In 1991, the government made some radical changes in its policies regarding foreign investment, trade, exchange rate, industries, banking, and fiscal affairs, etc. It also announced several new policies under the name – New Economic Reforms of India, which gave a new direction and dimension to the Indian economy.

economic reforms in India

Nature of Economic Reforms in India

The nature of the new economic reforms in India are as follows:

Liberalization

The fundamental feature of the new economic reforms in India was that it offered freedom to the entrepreneurs to establish any trade or industry or business venture. Economic liberalization means freedom to make economic decisions.

In other words, the producers, owners or consumers of the factors of production are free to take their decisions in order to promote their interests. The Government of India announced the liberalization policy in the:

  • Industrial sector
  • Foreign trade
  • Exchange rate
  • Banking and financial sector
  • The fiscal sector, etc.

Further, the government also freed the capital markets and opened them to private enterprises. Also, it permitted foreign equity participation of up to 51 percent or more.

Additionally, the government de-licensed the industrial sector and abolished the Monopolies and Restrictive Trade Practices (MRTP) Act.

Further, the government also allowed foreign investments to enter the infrastructure sector. Finally, the policy amended the Foreign Exchange Regulation Act (FERA) and enacted the Foreign Exchange Management Act (FEMA).

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Extension of Privatization

Another important feature of the new economic reforms in India was the extension of privatization in the country. In simple words, privatization is a process which helps to reduce the role of the State or the public sector in the economic activity of a country.

The primary objective of privatization is improving the overall performance of the public sector undertakings. This is especially beneficial to the taxpayers as it reduces the financial burden on them.

As a part of privatization, the government gave 11 industries to the private sector. These were out of the 17 industries reserved for the public sector. Further, the government offered better opportunities for investment to the foreign private investors and extended the scope of privatization.

Globalization of the Economy

The new economic reforms in India made our country’s economy outwardly oriented. Globalization is basically a process of increasing the economic integration and growing economic interdependence between different countries in the world economy.

The processes of economic liberalization and privatization of the public sector enterprises eventually led to the globalization of the Indian economy. Globalization is the flow of capital, commodities, technology, and labor across national boundaries. As a result of globalization, both domestic and world markets started governing the economic activities in India.

The paradigm of Economic Reforms in India since 1991

Pre-Reform Period Post-Reform Period
Quantitative licensing on trade and industry Abolition of industrial and trade licensing
State-regulated monopolies of utilities and trade Removal of state monopolies, privatization and
disinvestment
Restriction of foreign investment and technology A liberal regime for FDI, portfolio investment, foreign
technology
Government control on finance and capital markets Liberalization of financial and capital markets
Foreign exchange control, no convertibility of rupee Abolition of exchange control, full convertibility on
current account
Import substitution and export of primary goods Export promotion and export diversification, no
import bias
Closed economy Open economy
High duties and taxes with multiple rates and large dispersion Reduction and rationalization of taxes and duties
Self-reliance Integration with the world markets
Explicit subsidies on food, fertilizers, and some essential items No change budget subsidies on LPG, Kerosene
Frequent state interventions Selective and effective state interventions
Sector-specific monetary, fiscal and tariff policies Sector-neutral monetary, fiscal and tariff policies
Not much concern for a deficit Contain all kinds of deficit
Hidden subsidies on power, urban transport, public goods, etc. No change, but user charges are being rationalized and subsidies targeted
PSUs as the engine of growth Private investment as the engine of growth
End-use and sector-specific multiple and controlled interest rates Flexible interest rates without any end use or sector specifications
Restrictions on Foreign Direct Investment (FDI) and Multi-national corporations (MNCs) An inducement to FDI and MNC’s
Tax concessions on exports and savings Rationalized and being phased out
Underdeveloped capital market Reforms in the capital market
State-controlled credit Credit policy reforms

Solved Question

Q1. What are the three main aspects of the nature of economic reforms in India?

Answer:

The three main aspects of the economic reforms in India are:

  • Liberalization – where the government changed several economic policies to create an environment of freedom for economic decision-making.
  • Privatization – the government had reserved 17 industries for the public sector. It gave 11 out of these to the private sector.
  • Globalization – Both liberalization and privatization of the public sector enterprises led to the globalization of the Indian economy.
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