1. at the start of the 1990s. The


1.    Economic Reforms and Liberalization

The Background

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Macroeconomic Crisis


Economy Since Reforms

Reforms and Vulnerable sections

Next Round of Reforms

The Background

Traditionally the role of the government administration was
confined to certain essential services like defence, law and order, etc. With
independence, the Indian government has Launched a process of planned economic
and social development towards improvement of living standards. In this process
private sector activities in many areas were Regulated, and the government
itself became one of the economic agents by establishing many commercial and
industrial enterprises. The enormous pressure on the system and the change in
the global economic environment has led to economic reforms.

The economic policy reforms focussed at redefining the role
of government administration through dismantling the regulatory framework in
many economic sectors. The aim is to integrate the Indian economy with the
global economy for efficient use of available natural and human resources.

The ‘reform’ of India’s foreign policy, and thereby our
popular worldview, has gone on simultaneously with economic reform.

The Macroeconomic Crisis

Although the Indian economy grew more swiftly during the
1980s than it had during previous decades, the proportion of the central government’s
fiscal deficit grew over the decade as well. By the mid-1980s, the fiscal
deficit was approximately 8 per cent of GDP, and it continued at that volume
through the remainder of the 1980s. Inflation also grew over the course of the
1980s, and stood at 10 per cent at the start of the 1990s.

The public sector continued to absorb much of the country’s
investment capital without contributing to the economy proportionately. Iraq’s
invasion of Kuwait in August 1990 and the ensuing Gulf War strained. The World
Bank pronounced that India, along with several other South Asian and East Asian
countries, was among the most adversely affected due to the escalation in oil
prices, loss of foreign exchange earnings of workers in the Gulf region,
displaced workers, and reductions in export profits.

In the culmination of these dynamics, India found itself
with foreign exchange reserves adequate to finance only two weeks of necessary
imports, a lowered investment rating that made additional loans more costly,
and the prospect of defaulting on its international debt payments. The
immediate task of the government was to re-establish macroeconomic stability,
prevent a default on debt payments, and bring down inflation, all of which the
government accomplished despite being one of the most fragile governments since


Macroeconomic Reforms

In response to the internal economic crisis of 1990–91 and
the changing international situation, the Narasimha Rao government decided to
introduce economic reforms or the New Economic Policy (NEP). The NEP clearly
reflected certain global trends, like the collapse of the socialist economy and
growing acceptance of economic globalization across the world. Although the
reforms as a part of the process of liberalization and globalization were
revolutionary in nature, these were launched within the democratic framework of
the country. They marked a shift from the Nehruvian consensus of the 1950s to a
new consensus around reforms. While the national goals set out at Independence remained
unaltered, the change came only in the strategy to achieve these goals—from
Nehru- Mahalanobis development strategy to the new development strategy of
liberalization and economic reforms.


The reforms programme consisted of macroeconomic
stabilization (regulating the total demand in the economy) and structural
reforms. While structural reform was a medium- and long-term programme, it
dealt with sectoral adjustments and the problems on the supply side of the economy
by bringing in dynamism and competitiveness to the economy. Crisis management
measures included use of gold to acquire foreign currency to meet payment obligations,
devaluation of the rupee, reduction of imports and seeking finances from
multilateral financial institutions and bilateral donors. Structural reforms
included liberalized trade and investment policies with emphasis on exports,
industrial deregulation, disinvestment and public sector reforms, and reform of
the capital markets and the financial sector. In this way, an attempt was made
to achieve a progressive economy by removing the internal controls.

Indian Economy Since Reforms

The economic reforms, have led to considerable
liberalization and freeing of international trade, and to some replacement of
what used to be called the ‘licence Raj ‘ (with pervasive bureaucratic control
over private economic initiatives). This has greatly added to business
opportunities in India and has also helped to consolidate India’s faster
economic growth.

Liberalization, has helped to free Indian entrepreneurs to
seek global trade, and the success has been especially large in specific
sectors such as information technology.

The telecom sector is a successful story of India’s economic
reforms. The telecom sector underwent a revolution in the Indian-growth story.
‘The rate of growth of GDP from telecom accelerated from an average of 6.3 per cent
per annum during 1980–81 to 1991–92 to 18 per cent per annum during 1992–3 to

In the case of ports, private operators have been introduced
and then the Tariff Authority of Major Ports was formed; in the civil-aviation sectors,
new private airlines, new private airports and the beginning of an open skies
policy are in evidence.

Agricultural Growth Rate declined in the Reform Period

The agricultural growth
decelerated in the economic reform period (commencing in 1991). As is clear,
the rate of growth of production of foodgrains fell from 2.9 per cent per annum
in 1980s to 2.0 per cent per annum in 1990s and stood at 2.1 per cent per annum
in first decade of the present century.

Redefining the Role of the State

The adoption of the NEP (New Economic Policy) based on
liberalization and privatization has given rise to a debate on the nature of
the link between state and market. The NEP does not imply a retreat of the
state. The state and the market are not substitutes for one another but they complement
each other further these two actors provide mutual checks and balances in such
a way that one can correct the failures of the other. The state needs to
formulate policies to bring about improved transparency and greater
accountability, which form the basic pillars of good governance.

India Vs China

The overall performance of the economy may not have matched
that of post-reform China (with its sustained growth rate of 8 to 10 per cent a
year), but India’s move from the rigid box of a 3 per cent growth rate to the 5
to 8 per cent arena is certainly not a negligible development.

India’s reduction of poverty has been far less rapid than
what has occurred in China since the economic reforms.

Economic Reforms and Vulnerable sections

The proportions of the Indian population with incomes below
the standard poverty lines have fallen over the 1980s and 1990s.

The Next Round of Reforms

1991 reforms have been good but not enough. It needs to be
realized that the benefit of reforms already taken up strongly depends on the
amount and pace of future reforms. So there is a need to push up these reforms.
The most important agenda of reform could be agricultural-sector reforms,
power-sector and infrastructure reforms, tax reforms, reconsideration of
reservation policy to small- scale industry and further simplification of the
bureaucratic process.

Apart from economic reforms, large reforms in the legal
system and governance are also needed. If we want to achieve something big,
then it requires big and fundamental changes in the policy; and the reforms
process should not be confined only to the economic sector, but should look
beyond it.