Economic Reforms in India| Important Facts about 1991 Crisis

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Economic reforms In India

Popularly, economic reforms denote the process in which a government prescribes declining role for the state and expanding role for the private sector in an economy.
Since independence, India followed the mixed economy framework by combining the advantages of the capitalist economic system with those of the socialist economic system. Over the years, this policy resulted in the establishment of a variety of rules and laws, which were aimed at controlling and regulating the economy, ended up instead in hampering the process of growth and development.
In 1991, India met with an economic crisis relating to its external debt — the government was not able to make repayments on its borrowings from abroad; foreign exchange reserves, which we generally maintain to import petrol and other important items, dropped to levels that were not sufficient for even a fortnight.
The crisis was immediated by the First Gulf War (1991) which had two – pronged negative impact on the Indian foreign exchange (forex) reserves.
- First, the war led the oil prices to go upward forcing India to use its forex reserves in comparatively shorter period and second, the private remittances from Indians working in the Gulf region fell down fast (due to their emergency evacuation).

The crisis was further compounded by rising foreign debts and a hyper-inflation situations.
Under the Extended Fund Facility (EFF) programme of the IMF, countries get external currency support from the fund to mitigate their BoP crisis, but such supports have some obligatory conditionalities put on the economy to be fulfilled.

The IMF conditions put forth for India were as under:

Devaluation of the rupee by 22 per cent (which was effected in two phases and the Indian rupee fell down from ₹21 to ₹27 per US Dollar).
Drastic reduction in the peak import tariff from the prevailing level of 130 per cent to 30 per cent (India completed it by 2000–01 itself and now it is voluntarily cut to the level of 15 per cent).
Excise duties (i.e., CENVAT now) to be hiked by 20 per cent to neutralise the revenue short falls due to the custom cut (a major tax reform programme was launched to streamline, simplify and modernise the Indian tax structure which is still going on).
All government expenditure to be cut down by 10 per cent, annually (i.e., cutting the cost of running the government and denotes, interests, pays, pension PF and subsidies. A pressure on the government to consolidate the fiscal deficit and go for fiscal prudence).

Though India was able to pay back its IMF dues in time, the structural reform of the economy was launched to fulfil the above-given conditions of the IMF. The ultimate goal of the IMF was to help India bring about equilibrium in its BoP situation in the short-term and go for macroeconomic and structural adjustments so that in future the economy faces no such crisis.

All these led the government to introduce a new set of policy measures which changed the direction of our developmental strategies. On July 23, 1991, India launched a process of economic reforms in response to a fiscal and balance-of-payment (BoP) crisis.

Reform measures: Economic reforms In India

The economic reform programme, that India launched, consisted of two categories of measures: the stabilisation measures
and the structural reform measures. Stabilisation measures are shortterm measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control. On the other hand, structural reform policiesare long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy.

Macroeconomic Stabilization Measures
- It includes all those economic policies which intend to boost the aggregate demand in the economy—be it domestic or external.
- For the enhanced domestic demand, the focus has to be on increasing the purchasing power of the masses, which entails an emphasis on the creation of gainful and quality employment opportunities.
Structural Reform Measures
- It includes all the policy reforms which have been initiated by the government to boost the aggregate supply of goods and services in the economy.
- It naturally entails unshackling the economy so that it may search for its own potential of enhanced productivity.
- For the purchasing capacity of the people to be increased, the economy needs increased income, which comes from increased levels of activities.
- Income so increased is later distributed among the people whose purchasing power has to be increased
- This will take place by properly initiating a suitable set of macroeconomic policies.

The LPG: Economic reforms In India

The process of reforms in India has to be completed via three other processes namely, liberalization, privatization and globalization, known popularly by their short-form, the LPG.
These three processes specify the characteristics of the reform process India initiated.
Precisely seen, liberalization shows the direction of reform,
Privatization shows the path of reform and globalization shows the ultimate goal of the reform.

Liberalization: Economic reforms In India

The ideology was the product of the breakdown of feudalism and the growth of a market or capitalist society in its place, which became popular in economics via the writings of Adam Smith and got identified as a principle of laissez-faire.
Pro-market or pro-capitalistic inclination in the economic policies of an economy is the process of liberalization.
The most suitable example of this process could be China of the mid-1980s when it announced its ‘open door policy’.
The process of decreasing traits of a state economy and increasing traits of a market economy is liberalization.

In the Indian case the term liberalisation is used to show the direction of the economic reforms—with decreasing influence of the state or the planned or the command economy and increasing influence of free market or the capitalistic economy.
It is a move towards capitalism. India is attempting to strike its own balance of the ‘state-market mix’.
It means, even if the economic reforms have the direction towards market economy it can never be branded a blind run to capitalism.

Privatization: Economic reforms In India

The policies through which the ‘roll back’ of the state was done included deregulation, privatization and introduction of market reforms in public services.
Privatization was used as a process under which the state assets were transferred to the private sector.

The root of the term privatization goes to this period which got more and more currency around the world once the East European nations and later the developing democratic nations went for it.
But during the period several connotations and meanings of the term ‘privatization’ have developed. Some of them are described below:
- Privatization in its purest sense and lexically means de-nationalization, i.e., transfer of the state ownership of the assets to the private sector to the tune of 100 per cent. This route of privatization has been avoided by almost all democratic systems.
- The sense in which privatization has been used is the process of disinvestment all over the world. This process includes selling of the shares of the state owned enterprises to the private sector. Disinvestment is de-nationalization of less than 100 per cent ownership transfer from the state to the private sector. If an asset has been sold out by the government to the tune of only 49 per cent the ownership remains with the state though it is considered privatization. If the sale of shares of the state-owned assets has been to the tune of 51 per cent, the ownership is really transferred to the private sector even then it is termed as privatization.
- The third and the last sense in which the term privatization has been used around the world, is very wide. Basically, all the economic policies which directly or indirectly seem to promote the expansion of the private sector or the market (economy) have been termed by experts and the governments as the process of privatization.

Globalization: Economic reforms In India

The process of Globalization has always been used in economic terms though it has always taken the political and cultural dimensions.
Globalization is generally termed as ‘an increase in economic integration among nations’.
The concept was popularised by the Organisation of Economic Cooperation and Development (OECD) in the mid-1980s.

In its earlier deliberalization, the organisation had defined globalisation in a very narrow and business-like sense—‘any crossborder investment by an OECD company outside its country of origin for its benefit is globalisation’.
The official meaning of globalisation for the WTO is movement of the economies of the world towards “unrestricted cross border movements of goods and services, capital and the labour force”.
It simply means that the economies who are signatories to the process of globalization (i.e., signatories to the WTO) for them there will be nothing like foreign or indigenous goods and services, capital and labour. The world becoming a flat and level-playing field emerging in the due process of time
For many political scientists, globalization is the emergence of a situation when our lives are increasingly shaped by the events that occur at a great distance from us about which the decisions are not taken by our conscious self.
India became one of the founding members of the WTO and was obliged to promote the process of globalization, though its economic reforms started with no such obligations.
It is a different thing that India started the process of globalization right after the reforms 1991.
It should be noted here that the Indian idea of globalization is deeply and frequently inclined towards the concept of welfare state, which keeps coming in the day to day public policy as an emphatic reference.

Generations of Economic Reforms

Though there were no such announcements or proposals while India launched its reforms in 1991, in the coming times, many ‘generations’ of reforms were announced by the governments.A total of three generations of reforms have been announced till date, while experts have gone to suggest the fourth generation, too.

First Generation Economic reforms (1991–2000)

The reforms initiated during 1991 to 2000 were termed as First Generation Reforms. The broad coordinates of the First Generation of reforms may be seen as under:

Promotion to Private Sector
- This included various important and liberalising policy decisions, i.e., ‘de-reservation’ and ‘delicencing’ of the industries, abolition of the MRTP limit, abolition of the compulsion of the phased-production and conversion of loans into shares, simplifying environmental laws for the establishment of industries, etc.
Public Sector Reforms
- The steps taken to make the public sector undertakings profitable and efficient, their disinvestment (token), their corporatization, etc., were the major parts of it.
External Sector Reforms
- They consisted of policies like, abolishing quantitative restrictions on import, switching to the floating exchange rate, full current account convertibility, reforms in the capital account, permission to foreign investment (direct as well as indirect), promulgation of a liberal Foreign Exchange Management Act (the FEMA replacing the FERA), etc.

Financial Sector Reforms
- Several reform initiatives were taken up in areas such as banking, capital market, insurance, mutual funds, etc.
Tax Reforms
- This consisted of all the policy initiatives directed towards simplifying, broadbasing, modernising, checking evasion,etc.
- A major re-direction was ensued by this generation of reforms in the economy—the ‘command’ type of the economy moved strongly towards a market-driven economy, private sector (domestic as well as foreign) to have greater participation in the future.

Second Generation Economic reforms (2000–01 onwards)

The government launched the second generation of reforms in 2000-01. Basically, the reforms India launched in the early 1990s were not taking place as desired and a need for another set of reforms was felt by the governments, which were initiated with the title of the Second Generation of economic reforms. These reforms were not only deeper and delicate, but required a higher political will power from the governments. The major components of the reform are as given below:

Factor Market Reforms
- Considered as the ‘backbone’ for the success of the reform process in India, it consists of dismantling of the Administered Price Mechanism (APM).
- There were many products in the economy whose prices were fixed /regulated by the government, viz., petroleum, sugar, fertilizers, drugs, etc.
- Though a major section of the products under the APM were produced by the private sector, they were not sold on market principles which hindered the profitability of the manufacturers as well as the sellers and ultimately the expansion of the concerned industries leading to a demand supply gap.
- Under market reforms these products were to be brought into the market fold.
- But we cannot say that the Factor Market Reforms (FMRs) are complete in India. It is still going on.
- Cutting down subsidies on essential goods is a socio-political question in India.
- Till market-based purchasing power is not delivered to all the consumers, it would not be possible to complete the FMRs.
Public Sector Reforms
- The second generation of reforms in the public sector especially emphasizes on areas like greater functional autonomy, freer leverage to the capital market, international tie-ups and Greenfield ventures, disinvestment.
Reforms in Government and Public Institutions
- This involves all those moves which really go to convert the role of the government from the ‘controller’ to the ‘facilitator’ or the administrative reform, as it may be called.
Legal Sector Reforms
- Though reforms in the legal sector were started in the first generation itself, now it was to be deepened and newer areas were to be included, such as, abolishing outdated and contradictory laws, reforms in the Indian Penal Code (IPC) and Code of Criminal Procedure (CrPC), Labour Laws, Company Laws and enacting suitable legal provisions for new areas like Cyber Law, etc.
Reforms in Critical Areas
- The second generation reforms also commit to suitable reforms in the infrastructure sector (i.e., power, roads, especially as the telecom sector has been encouraging), agriculture, agricultural extension, education and healthcare, etc. These areas have been called by the government as ‘critical areas’.

Third Generation Economic reforms

Announcement of the third generation of reforms were made on the margins of the launching of the Tenth Plan (2002–07).
This generation of reforms commits to the cause of a fully functional Panchayati Raj Institution (PRIs), so that the benefits of economic reforms, in general, can reach to the grassroots.

Though the constitutional arrangements for a decentralized developmental process were already effected in the early 1990s, it was in the early 2000s that the government gets convinced of the need of ‘inclusive growth and development’.
Till the masses are not involved in the process of development, the development will lack the ‘inclusion’ factor; it was concluded by the government of the time.

Fourth Generation Economic reforms

This is not an official ‘generation’ of reform in India. Basically, in early 2002, some experts coined this generation of reforms which entail a fully ‘information technology-enabled’
They hypothesized a ‘two-way’ connection between the economic reforms and the information technology (IT), with each one reinforcing the other.

India’s reform process which commenced in 1991 has been termed by experts as gradualist in nature with traits of occasional reversals, and without any big ideological U-turns. It reflects the compulsions of India’s highly pluralist and participative democratic policy-making process. Though such an approach helped the country to avoid sociopolitical upheavals/instability, it did not allow the desired economic outcome could have accrue from the reforms.

The first generation of economic reforms could not bring the expected results due to lack of some other set of reforms for which India goes after almost over a decade—the second generation of economic reforms. Similarly, the economic benefits (whatever accrued) remained non-inclusive, in absence of an active public policy aimed at inclusion (commencing via the third generation of economic reforms). This created a kind of disillusionment about the prospects of reforms and failed the governments to muster enough public support in favour of reforms.

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