The major economic reforms in India were initiated in 1991 which intends the policy shift of government from state domination in economy to declining role of state and expanding role of private sector in economy. The reform process was started in response to fiscal and balance of payment (BoP) crisis. Originally reforms were initiated in 1980s in the form of limited deregulation and partial liberalisation of some regulations but the reforms initiated in 1990s were broad and more rooted. The economic reforms in 1991 were initiated in the field of industry, trade, investment and later to agriculture sector. There reforms are broadly known as new economic policy 1991.
Why economic reforms in India were required?
During 1980s government gave thrust to increase export which led to heavy external borrowing. This ushered higher industrial growth with substantial increase in foreign debt due to costlier import. Gulf war of 1991 added fuel to fire by impacting India’s foreign exchange reserves in two ways:
- The war led to increase in oil prices which led India to use larger portion of foreign exchange in shorter period of time.
- Private remittances by Indians working in gulf fell down due to their immediate evacuation.
Apart from war, the fiscal deficit of over 8% and hyper-inflation situation forced the government to take highly bold and controversial stride in the form of economic reforms in India of 1991.
To tackle the BoP crisis, IMF offered support to India under its Extended Fund Facility (EFF) but put forth some obligatory conditions to be fulfilled by economy. These conditions were:
- Immoderate reduction in import tariff from 130% to 30%.
- Devaluation of Indian Rupee by 22%.
- All government expenditure to be reduced by 10% annually.
- Hike in excise duty by 20%.
Reform measures taken by government
The reform measure taken by government can be categorised into two groups:
- Macroeconomic stabilisation measures which include all the policies which intend to boost aggregate demand in the economy. The emphasis was given on increased employment opportunities which lead to high purchasing power of masses ultimately leading to increase in demand.
- Structural reform measures which include all policies pursued by government to boost the aggregate supply of goods and services in the economy. It calls for high productivity and production in economy.
The economic reform process in India was completed by three processes namely, liberalisation, privatisation and globalisation. We will discuss these three processes in a separate article.
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