Economic Reforms in India

Meaning of Economic Reforms

Economic reforms refer to the fundamental changes that were launched in 1991 with the plan of liberalising the economy and quickening its rate of economic growth. The Narasimha Rao Government, in 1991, started the economic reforms in order to rebuild internal and external faith in the Indian economy.

The reforms intended at bringing in larger cooperation of the private sector in the growth method of the Indian economy. Policy changes were proposed with regard to technology up-gradation, industrial licensing, removal of restrictions on the private sector, foreign investments, and foreign trade. The essential features of the economic reforms are – Liberalisation, Privatisation, and Globalisation, commonly known as LPG.

Quick link: Economic challenges in India

In other words, ‘“economic reforms’” normally indicate deregulation or at times, decrease in the size of government, to eliminate deformities caused by the management or the presence of administration, rather than current or raised regulations or government plans to lessen the perversions created by market failure.

Need for Economic Reforms

• Poor performance of the industrial sector
• Adverse balance of payments
• Rise in fiscal deficit
• Inflation
• The Gulf War

Examples of Economic Reforms

• Liberalisation
• Privatisation
• Globalisation

Why were Economic reforms introduced in India?

Economic reforms were introduced in India because of the following reasons:

Poor performance of the public sector

• Public sector was given an important role in development policies during 1951–1990.
• However, the performance of the majority of public enterprises was disappointing.
• They were incurring huge losses because of inefficient management.

Adverse BoP or imports exceed exports

• Imports grew at a very high rate without matching the growth of exports.
• Government could not restrict imports even after imposing heavy tariffs and fixing quotas.
• On the other hand, exports were very less due to the low quality and high prices of our goods as compared to that of foreign goods.

Fall in foreign exchange reserves

• Foreign exchange (foreign currencies) reserves, which the government generally maintains to import petrol and other important items, dropped to the levels that were not sufficient for even a fortnight.
• The government was not able to repay its borrowings from abroad.

Huge debts on government

• Government expenditure on various developmental works was more than its revenue from taxation.
• As a result, the government borrowed money from banks, public and international financial institutions like the IMF, etc.

Inflationary pressure

• There was a consistent rise in the general price level of essential goods in the economy.
• To control inflation, a new set of policies were required.

Terms and conditions of the World Bank and the IMF

India received financial help of $7 billion from the World Bank and the IMF on an agreement to announce its New Economic Policy.

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