UPSC GS 3 Notes: Economic Reforms Of 1991

The year 1991 saw India face an unprecedented financial crisis. The crisis was triggered by a major Balance of Payments situation. The crisis was converted into a golden opportunity to reform the country’s economic situation and make-up and introduce fundamental changes in economic policy.

The government brought in structural reforms and stabilization policies. While the former was aimed at removing the rigidities in the various sectors of the Indian economy, the latter was aimed at correcting the weaknesses that had emerged on the fiscal and BoP fronts.

India’s Prime Minister, when the New Economic Policy (NEP) was introduced was P V Narasimha Rao and the Finance Minister was Dr. Manmohan Singh.

Objectives of New Economic Policy 1991

• Enter into the field of ‘globalization’ and make the economy more market-oriented.
• Reduce the inflation rate and rectify imbalances in payment.
• Increase the growth rate of the economy and create enough foreign exchange reserves.
• Stabilize the economy and convert the economy into a market economy by the removal of unwanted restrictions.
• Allow the international flow of goods, capital, services, technology, human resources, etc. without too many restrictions.
• Enhance the participation of private players in all sectors of the economy. For this, the reserved sectors for the government were reduced to just 3.

Steps under economic reforms of 1991

The branches of the new economic policy are threefold:

1. Liberalization
2. Privatization
3. Globalization

The government sought to open up the Indian economy through these measures and gear India from a Soviet-model economy to a market economy. This is an ongoing process and the initiation was done in 1991.

Steps taken under Liberalisation

1. Commercial banks were given the freedom to determine interest rates. Previously, the Reserve Bank of India used to decide this.
2. The investment limit for small scale industries was raised to Rs. 1 crore.
3. Indian industries were given the freedom to import capital goods like machinery and raw materials from foreign countries.
4. Previously, the government used to fix the maximum production capacity of industries. Now, the industries could diversify their production capacities and reduce production costs. Industries are now free to decide this based on market requirements.
5. Abolition of restrictive trade practices: Previously, companies with assets worth more than Rs.100 crore were classified as MRTP firms (as per Monopolies and Restrictive Trade Practices (MRTP) Act 1969), and were subject to severe restrictions. These were lifted.
6. Industrial licensing and registration were removed: as per this, the private sector is free to start a new venture of business without obtaining licenses except for the following sectors (which still need licenses):
   1. Cigarette
   2. Liquor
   3. Industrial explosives
   4. Defence equipment
   5. Hazardous chemicals
   6. Drugs

Steps taken under Privatisation

Privatization refers to opening up the private sector to industries that were previously reserved for the government sector. This chiefly involved selling the PSUs (private sector undertakings) to private players. This was meant to remove the political interference in PSUs which was making them models of inefficiencies.

The following steps were taken under the privatization reforms:

1. Selling shares of PSUs to the public and financial institutions. For example, shares of Maruti Udyog Ltd. were sold to private parties.
2. Disinvestment in PSUs. This means selling PSUs to the private sector.
3. The number of industries that were reserved for the public sector was decreased from 17 to only 3. These are:
   1. Transport and railway
   2. Atomic energy
   3. Mining of atomic minerals

Steps taken under Globalisation

Globalization refers to opening up the economy more towards foreign investment and global trade.

1. Reduction in tariffs: a gradual reduction in the customs duties and tariffs on exports and imports to make India attractive to global investment.
2. Long term trade policy: trade policy was enforced for a longer duration. The main features of the trade policy are:
   1. Liberal policy
   2. Encouragement of open competition
   3. Controls on foreign trade were removed
3. Before 1991, imports to India were regulated by a positive list of freely importable items. From 1992 onwards, the list was replaced by a limited negative list. Almost all intermediate and capital goods were freed from the list for import restrictions.
4. The Indian currency was made partially convertible.
5. The equity limit of foreign capital investment was raised from 40% to 100%. The Foreign Exchange Management Act (FEMA) was enacted replacing the draconian Foreign Exchange Regulation Act (FERA).

The economic reforms of 1991 led to widespread economic development in the country. Many sectors such as civil aviation and telecom saw great leaps from deregulation and surged ahead. India is also home to many start-ups and mushrooming businesses because of the end of the dreaded License Raj. The process is, however, far from complete and many areas need improvement.

The economic reforms of 1991 are a milestone in Indian economic history and hence, are of utmost importance as far as the IAS exam is concerned. The economy itself is an important subject, especially for General Studies III in the UPSC syllabus. Candidates should read a lot about the economic reforms initiated in 1991 and make notes on the timeline and events. This will help in understanding the concept better and also help recall better in the UPSC exam.

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