Economic Reforms
Economic Reforms
Since independence, India has followed a mixed economic system in which the
advantages of both capitalist (market) and socialist (planned) economies are
combined. Under this system, the government and private sector play an
equivalent role in the economy. Although there is some economic freedom in
the use of capital, the government also interferes in economic activities to
promote social welfare. India started its development from stagnation to an
economy that achieved growth in savings and experienced expansion of
agricultural output, which ensured food security. Moreover, there was a
diversification of the industrial sector that helped in producing goods and
services.
In 1991, the economic crisis hit India related to external debt. The government
was unable to make payments of the borrowings abroad. The foreign reserves
used to manage imports declined to a level that was not even enough for two
weeks. It further leads to a rise in the prices of essential goods.
3. Rising Inflation:
There was a persistent rise in the price level of goods and services in the
economy. The rate of inflation was tremendous, poor people were not able to
afford essential foods. Besides, there was a need to inject liquidity into the
economy, which caused a need for economic reforms in India.
4. Massive Debt Burden:
The government expenditure on developmental activities was more than its
revenue from taxation. As a result, the government borrowed from banks, the
public, and financial institutions like IMF.
6. Inefficient Management:
The roots of the economic crisis can be traced to the inefficient management of
funds. The government was not able to generate sufficient funds from the
revenues such as taxation. On the other hand, government expenditure was
rising, which increased the gap between revenues and expenditures. Moreover,
the government borrowed foreign exchange from international markets and
financial institutions used to purchase consumer goods. It ultimately results in
inefficient management of funds.
For these reasons, the Government announced New Economic Policy (NEP) on
July 1991. This policy aims to create a competitive environment and remove
barriers to entry and growth of firms. But numerous complaints have been made
by critics related to the New Economic Reforms in the areas like agriculture,
employment, infrastructure development, and budgetary control, which are
discussed below:
Criticism of Economic Reforms
1. Growing Agriculture:
Despite the fact that the GDP growth rate has grown during the reform period,
the country has not witnessed enough job opportunities created as a result of
this expansion.
2. Neglect of Agriculture:
The agriculture sector has been overlooked by the new economic policy in
favour of industry, trade, and services.
(ii) Liberalisation and Reduction in Import Duties: There have been several
policy changes influencing this sector, which include (a) lowering of import
taxes on agricultural goods (b) Elimination of minimum and fair support prices
(c) removing quantitative constraints on agricultural products. Due to growing
international competition, all of these policies had a negative impact on Indian
farmers.
(iv) Shift towards Cash Crops: Agricultural production has switched from food
crops to export crops as a result of export-oriented policy measures.
(i) Cheaper Imported Goods: There was a great flow of goods and capital from
developed countries like the USA, and as a result, domestic industries were
exposed to imported goods because of globalisation. The demand for domestic
products was replaced by cheaper imports, and domestic producers started to
face import competition.
6. Spread of Consumerism:
An unfavourable trend has been driven by the new economic policy by
encouraging the production of luxuries and items of superior consumption.
7. Unbalanced Growth:
Growth has been limited to limited areas of the service sector like
telecommunication, information technology, finance, entertainment, real estate,
trade, and hospitality rather than essential sectors such as agriculture and
industry, which employ millions of people in the country.
Economic reforms simply denote the process in which a government prescribes
less role for the state and expanding role for the private sector.
Due to the fiscal and balance of payment (BoP) crisis, India launched a process
of Economic Reforms on July 23, 1991, During the Narasimha Rao
government. The economic crisis of 1991 was the simultaneous accumulation of
a large number of events. Though liberal policies were announced by the
government during the 1980s with the slogan of economic reforms it didn’t
materialize much, thus economic reforms were launched with full conviction in
the early 1990s.
Tax Reforms:
1. It is concerned with the reforms in the government’s taxation and public
expenditure policies which are collectively known as its fiscal policy.
2. The rate of corporation tax, which was very high earlier, has been gradually
reduced. Efforts have also been made to reform the indirect taxes.
3. In order to encourage better compliance on the part of taxpayers many
procedures have been simplified and the rates also substantially lowered.
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