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Economic Reforms

Since 1991, India has undergone significant economic reforms due to a severe economic crisis characterized by high external debt and inflation. The reforms, known as Liberalisation, Privatisation, and Globalisation (LPG), aimed to liberalize industrial policies, invite foreign investment, and establish a market economy. While these reforms have led to economic growth and increased foreign investment, they have also resulted in challenges such as jobless growth and environmental degradation.

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14 views4 pages

Economic Reforms

Since 1991, India has undergone significant economic reforms due to a severe economic crisis characterized by high external debt and inflation. The reforms, known as Liberalisation, Privatisation, and Globalisation (LPG), aimed to liberalize industrial policies, invite foreign investment, and establish a market economy. While these reforms have led to economic growth and increased foreign investment, they have also resulted in challenges such as jobless growth and environmental degradation.

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insvikrant2011
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CHAPTER-3

ECONOMIC REFORMS SINCE 1991

Need for Economic Reforms


In the year 1991, India was facing an economic crisis relating of its external debt.
The government was not able to repay the moncy it had borrowed from abroad.
India was facing serious deficiency in hcr foreign trade balance and it was
increasing
Since 1987-88 till 1990-91 it was increasing in such a rapid scale that by, the
end of 1990-91 the amount ofhis deficit balance became 10,644crores ofrupces.
At the same time the foreign cxchange stock was also decreasing.
In 1990 and 1991 the government of India had to take huge amount of loan from
the IMF as compensatory financial facility.
Even by mortgaging 47 tons of gold it had taken short term foreign loan from
the Bank of England.
At the same time, India was also suffering from inflation, the rate of which was
12% by 1991.

The rcasons of that inflation were the incrcase in the procurcment price of the
agricultural products for distribution, the increase in the amount of monetized
deficit in the budget, increase of import cost and decrease in the rate of currency
exchange and Administered price like.
Thus India was facing trade deficit as well Fiscal Deficit. Hence the government
of India had only two ways before it
1. To take foreign debt and to create favorable conditions within the country for
increasing the flow offoreign exchange and also to increase the volume of export.
2. The other was to establish fiscal discipline within the country and to make
structural adjustment for the purpose.
Main Features of Economic Reforms
To gct relicf from sucha grave problem the government of India had to introduce a
package of reforms which included:
To liberalise the industrial policy of the government.
To invite foreign investment by privatization of industries.
Abolishing the license system as a part of that liberalisation.
To make the import-cxport policy of the country more liberal and so that the
cxport of goods may become
me more casy and the necessary raw materials and
instruments for both industrial development and production of exportable
commodities may be imported and also to facilitate free trade by reducing the
import duty.
To decrecase the value of domestic currency rupces in terms of dollar i.c.
devaluation.

To take huge amount of foreign debt from the IMF and the World Bank of
rejuvenating hehe ceconomicccondition of thecountry and to intruduce the structural
adjustment in the cconomic condition of the country as a pre-condition of that
dcbt.

To reform the banking system and the tax structure of the country and
To establish market cconomy by withdrawing and restricting government
inteference on investment.

Liberalisation, Privatisation and Globalisation (LPG) Policics


The new model of economic reforms is commonly known as the LPG or
Liberalisation, Privatisation and Globalisation model. The primary objcctive of this
model was to make the economy of India the fastest developing economy in the
globe with capabilities that helps it match up with the biggest cconomies of the
world.

1. Liberalisation: Liberalisation refers to a relaxation of government policy. The


cconomic liberalisation in India denotcs the continuing financial reforms which
began since July 24, 1991.
2. Privatisation: Privatisation refers to the participation ofprivate ownershipip ffrom
the public sector (or government) to the privatc sector as well entitics in busincss
and services and transfer of ownership from the public sector (or government)
to the private scctor as well.
3. Globalisation: Globalisation stands for the integration and consolidation of the
various economies of the world.
Given below are thc salicnt highlights of the Liberalisation, Privatisation and
Globalisation Policy in India:
Foreign Tcchnology Agreements
Foreign Investment
MRTP Act, 1969 (Amended)
Industrial Licensing Deregulation
Beginning of privatization and disinvestment
Opportunities for overseas trade
Steps to regulate inflation
Tax reforms

Financial sector reforms


Banking reforms

Abolition of License-Permit Raj


An Appraisal of LPG Policies
The concepts of liberalisation, privatisation and globalisation are actually closely
related to onc anothcr. The advent of globalisation as a result of liberalisation,
privatisation and globalisation has both positive and negative impacts on our cconomy.
While one group of people argue that globalisation provides greater opportunities,
opens up new markets, promotcs the usc of better technology and incrcascs the
efficiency of production.
Another group of people feel it does not protect the domestic industries particularty
in developing nations. From India's perspective, globalisation has improved our
conditions of living and opened up employment in fields like entertainment,
Information Tochnology (T), Telecomaunication, Travel and Hospitality.
Demonetisation

Demonctisation is a process of stripping a currency unit of its status as a legal tender


demonetised currency notes no longer remain valid as legal curency. For example,
Govt. India, demonetised rupees 500 and Rs.1000 currency notes on 8th November,
2016. The demonetization was mainly to curb black money.
Goods and Services Tax (GST)
GST is aunified indirect tax system in India that came into effect from July 2017.
GST is a comprchensive tax levy on manufacture, sale and consumption of goods
and services at national level under which no distinction is made between goods and
services for levying tax. Most of the indirect taxes have been submerged into GST.
GST is expected to generate additional revenue for the goverment, reduce tax evasion
and create 'one nation, one tax and one market.
Positive Impacts of Economie Negative impacts of Economie
Reforms Reforms

1. High economic growh rate 1. Marginalization of agriculture


2. Increase in Foreign investment 2. Jobless economic growth
3. Increase in forex reserve 3. Unequal income distribution
4. Controlled inflation 4. Profit oriented society
s. Changes in export structure s. Negative impacts of privatization
6. Changes in export direction 6. Over exploitation of natural resources
7. Establishment of consumer 7. Environmental degradation.
sovereignty

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