Here we present to you Notes on Economic Reforms in India since 1991. The economic reforms process of 1991 had Liberralisation, Privatisation and Globalisation as three pillars. Notes presented here are concise, however, they cover every aspect of the chapter. These Notes are in four parts. First part consists of brief notes while the second part consists of important concepts related to the chapter. Third part consists of Frequently Asked Questions (FAQs) while fourth part shows some important links.
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Although, India’s economy grew only 4% per annum during 1950-90, it was able to develop a diversified industrial sector, increase saving rates and achieve food security. However, poor performance of public sector, inflation, burden of debts, deficit in balance of payment, large scale corruption and mismanagement of resources hampered the development process. Ultimately this led to Foreign Exchange Crisis ( Foreign Exchange adequate for payment of two weeks’ import only) in 1990-91. India went to IMF and World Bank for loans which granted loans of USD 7 billion on condition that India would liberlise its economy. At last, in July 1991, the then Finance Minister Dr. Manmohan Singh (PM between 2004-14) announced New Economic Policy and started the process of expensive liberalisation reforms.
Under New Economy Policy, India took Stabilization Measures (correcting balance of payment crisis and controlling inflation) and Structural Measures (increasing efficiency and removing rigidities of the economy through liberalization and privatization)
Three Pillars of New Economy Policy are: (i) Liberalization (ii) Privatization and (iii) Globalization.
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LIBERALISATION
Under Liberalization process, reforms were initiated in various sectors like industrial sector, Financial Sector, Foreign Sector etc.
INDUSTRIAL SECTOR REFORMS
Industrial License: Except 6 industries (1. Distillation and brewing of alcoholic drinks 2. Cigars and Cigarettes of tobacco and manufactured tobacco substitutes 3. Electronics 4. Aerospace and Defence Equipment 5. Industrial Explosives 6. Specified Hazardous Chemicals), compulsory industrial license has been abolished. Moreover, there is no need of license to set up new units and expansion & diversification of existing production.
Most of the industries were also opened for private sector. Now only Atomic Energy and some railway operations are reserved exclusively for Public Sector.
Many items earlier reserved for Small Scale Industries were de-reserved and MRTP Act-1969 (Monopoly and Restrictive Trade Practices Act) was replaced by Competition Act-2002 to enhance competition in the market.
FINANCIAL SECTOR REFORMS
RBI role was changed from a regulator to a facilitator. Now, financial institutions could make many decisions on their own. Reforms paved way for private banks and foreign banks. Limit of foreign investment in banks was increased to 74%. Banks could set up new branches without approval of RBI under certain conditions.
TAX REFORMS
Direct Tax rates were gradually reduced while many indirect taxes were merged in Goods and Services Tax (GST).
FOREIGN EXCHANGE REFORMS
To increase exports and attract foreign investment to make conditions of Balance of Payment better, India devalued its currency at the start of reforms. Later on, it adopted market determination of foreign exchange rate with RBI’s intervention to keep the FER within limits (Managed Floating System of FER determination).
TRADE AND INVESTMENT POLICY REFORMS
Quantitative restrictions on import and export of many goods were reduced while for manufactured consumer goods and agriculture products, it was fully removed in 2001. Import duties were also reduced while export duties have been removed. Import licenses were abolished except for specified hazardous and environmentally sensitive products.
PRIVATISATION
It means transferring of ownership, management and control of public sector enterprises to the private sector. Privatisation can be done in two ways: outright sale of Public Sector Undertakings (PSUs) and sale of shares of PSU to private sector (Disinvestment). Moreover, to increase effectiveness of PSUs, they were given some autonomy and categorized as Maharatna, Navratna and Miniratna based on profit and some other criteria.
GLOBALISATION
It means integration of economies of the world with each other. The integration can happen mainly through international trade and foreign investment.
To further integrate Indian Economy with rest of the world, India has removed many restrictions on foreign trade and investment. Moreover, Rupee has been made fully convertible in current account transaction and partial convertible for capital account transactions to increase volume of trade and investment.
EFFECT OF GLOBALISATION
Globalisation provides better technology, more competition and opportunities to earn more. However, Globalisation has been criticized for increasing consumerism, benefiting developed nations more while compromising welfare of poor nations.
OUTSOURCING
It means hiring services from external sources especially from other countries. Growth in information technology has increased the level of outsourcing services.
India has become favourable destination for outsourcing due to availability of cheap & skilled workforce.
WORLD TRADE ORGANISATION
WTO was established in 1995 as a successor to GATT (General Agreement on Trade and Tariff-1948). It has more than 160 countries as its member. Its function is to liberalize international trade with rule based trading. However, it is alleged that WTO works in favour of developed nations as markets of developed nations are not as accessible to developing nations as their markets are for developed nations.
DEMONETISATION
Central Government demonitised currency notes of Rs. 500 and Rs. 1000 on Nov. 8, 2016. It was targeted to weed out black money, terror financing, promoting cashless economy and channelizing savings into formal finance system, increasing tax compliance.
Demonitisation helped in digitalizing the economy transactions, increasing tax compliance. However, it is debatable whether it reduced black money as most of the money was deposited with banking system. Moreover, people had to suffer greatly as they had to queue in line for many hours. Small businesses which dealt in cash were also suffered.
GOODS AND SERVICES TAX
Implementation of GST from July 2017 was a step towards ‘One Nation and One Tax’. 17 indirect taxes and 23 cess were merged in GST. It is charged on each stage of value added. The final burden is borne by the consumer. Producers/sellers of the product can get input credit at each stage of value chain to avoid tax on tax.
There are three types of GST – 1. Central GST (within the state supply) 2. State GST (within the state supply) 3. Integrated GST (inter-state supply)-equivalent to sum of CGST and SGST and collected by the Centre.
AN APPRAISAL OF LPG POLICIES
Arguments in Favour:
India has witnessed increased GDP growth especially post 2000. Its foreign reserves have touched USD 600 billion marks while it has inflow of billions of dollars as FDI. India has become a destination for outsourcing services and also considerably increased its exports. India has been able reduce inflation from 17% in 1991 to around 6% in 2015-16. Private sector has expanded at exponential rate and people now have variety of goods to consume.
Criticism of Economic Reforms:
Economics reforms did not generate sufficient employment opportunities leading to growing unemployment.
Economic Reforms neglected agriculture and it did not grow as expected. It suffered due to reduction of public investment & subsidies and cheap agro-imports.
Moreover, Industrial growth also remained low due to lack of infrastructure facilities, non-tariff barriers by developed countries and cheaper imports affecting domestic producers.
It spread the evil of consumerism which has resulted in production of more luxurious goods neglecting the production of goods demanded by the poorer section of the society.
Reforms have mainly helped growth in service sector especially of telecommunication, IT services, Finance etc. Moreover, it has not been able to absorb extra workforce of primary sector.
PART-2
Some Important Concepts
Public Sector
Public Sector is such sector of an economy in which production units (enterprises) are owned and controlled by the state/government.
Private Sector
Private Sector is such sector of an economy in which production units (enterprises) are owned and controlled by individuals or non-government entities.
Liberalisation
Liberalisation is a process in which restrictions on economic activities placed by the government are reduced or removed.
Privitisation
It means to hand over control of public sector to private sector through outright sale or sale of PSU’s share.
Globalisation
It is a process in which economy of a country increasingly interacts with economies of the rest of the world through trade & investment and other factors.
Financial Sector
The financial sector refers to such businesses and institutions which manage money and provide intermediary services to transfer and allocate financial capital (Money). Examples: Banks, Non-Banking Financial Institutions (NBFCs) etc.
Tax Incidence
Final burden of a tax is known as tax incidence.
Tax Impact
Initial burden of a tax is known as tax impact.
Direct Tax
Under this tax, tax impact and tax incidence fall upon the same person on which the tax is levied. Tax burden of such tax cannot be transfer upon someone else. For example-Income tax, Corporate Tax, Gift Tax.
Indirect Tax
Under this tax, tax impact and tax incidence fall upon different person. Tax burden of such tax can be shifted upon someone else. Such taxes are generally levied on production/supply/sales of goods and services. Seller of the product is able to transfer the tax burden to the consumer by adding tax in the price of goods & services. So, tax impact falls on seller/producer while tax incidence falls upon the final user of the product. For Example- VAT, GST, Sales tax, Custom Duty etc.
Foreign Exchange Rate
FER means price of domestic currency with respect to foreign currency: For example if USD 1 can be purchase by paying Rs. 80/- then FER would be UDS 1: Rs.80.
Devaluation of Currency
It means reduction of value of domestic currency with respect to foreign currency by the government/state. For example if government fixes FER as USD 1:Rs.90 that the earlier FER of USD 1:Rs.90, then we have to pay Rs. 90 for purchase of USD 1 than the earlier Rs. 80. It means value of domestic currency has decreased or it has been devalued by the government.
Export Duty
Tariff (tax) on goods for export is called Export Duty.
Import Duty
Tariff (Tax) on imported goods.
Outsourcing
It means hiring services outside the company. In context of globalization, it refers to hiring services from other countries.
PART-3
Frequently Asked Questions:
Q.1 What were Prime Minister and Finance Minister of India when New Economic Policy-1991 was adopted?
Ans: Prime Minister was P V Narsima Rao and Finance Minister was Dr. Manmohan Singh.
Q.2 Which were the main reason for economic reforms in 1991?
Ans: poor performance of public sector, Inflation, burden of debts, deficit in balance of payment, large scale corruption and mismanagement of resources.
Q.3 What was immediate reason of economic reforms-1991.
Ans: Balance of Payment Crisis/Foreign Exchange Crisis was the immediate reason for economic reforms as India had foreign exchange for import of only two weeks.
Q. 4 What was the amount of loan provided by the world bank and International Monetary Fund to India to avoid foreign exchange crisis in 1991?
Ans: USD 7 Billion.
Q.5 What is the full name of World Bank?
Ans: International Bank for Reconstruction and Development (IBRD)
Q.6 When World Bank and International Monetary Fund were established?
Ans: They both were established in 1944 at Bretton Woods, USA.
Q.7 What is an industrial license in India?
Ans: An Industrial License is written permission by the government to an industrial unit to produce specific goods and services.
Q.8 What is MRTP Act?
Ans: Monopolistic and Restrictive Trade Practice (MRTP) Act was implemented in 1969 to remove the possibility of concentration of economic power in the hands of few people.
Q.9 What is aim and objectives of Competition Act- 2002?
Ans: The act focusses on to promote and sustain competition in Indian markets while protecting consumers’ interest the interests of consumers. It also ensures freedom of trade carried on various participants in the market.
Q. 10 Which act replaced MRTP Act-1969?
Ans: Competition Act -2002.
Q.11 What is the full form of RBI?
Ans: Reserve Bank of India.
Q.12 When was RBI established?
Ans: RBI was established in April 1935 under RBI Act-1934.
Q.13 Which foreign exchange system is called Dirty Float?
Ans: Managed Floating System. In this system, foreign exchange rate in determined by the market forces of demand and supply. However, the government/central bank of a country intervenes in the market to keep the exchange rate within limits. It does so by selling and buying foreign currency in the market.
Q.14 When was World Trade Organisation established?
