BIJU P M PGT ECONOMICS KV

2 KOCHI
 In 1991 economic reforms were
introduced in india because 1991 was the
year of crisis for the Indian economy .It is
clear from the following facts :
 1. National Income was growing at the
rate of 0.8%
 2. Balance of payment crisis was to the
extent of 10000 crores.
 3. India sold large amount of gold to Bank
of England.
In the late 1980s, government expenditure began to
exceed its revenue by such large margins that it
became unsustainable. Prices of many essential
goods rose sharply. Imports grew at a very high rate
without matching growth of exports. As pointed out
earlier, foreign exchange reserves declined to a
level that was not adequate to finance imports for
more than two weeks. There was also not sufficient
foreign exchange to pay the interest that needs to be
paid to international lenders.
India approached the International Bank for
Reconstruction and Development (IBRD),
popularly known as World Bank and the
International Monetary Fund (IMF), and received
$7 billion as loan to manage the crisis. For
availing the loan, these international agencies
expected India to liberalise and open up the
economy by removing restrictions on the private
sector, reduce the role of the government in many
areas and remove trade restrictions.
1. A continuing & increasing fiscal
Deficit -
2. High rate of Inflation-
3. Increasing Trade Deficit & BOP crisis-
4. A level & high growth rate in external
debt leading to debt trap -
1. Open door to foreign private investment –

2. Liberalization of the Economy –

(Industrial licensing, Import Licensing, Foreign
Exchange Control)

3. Integration of the Economy with the world

economy -Globalisation
Liberalization

Privatization

Globalization
 [Link] –
 An economic policy
which gives relaxations:
Open freedom to economic activities at
all level.
Removing unnecessary trade
restrictions & making the economy
more competitive.
 Deregulation of Industrial Sector:
In India, regulatory mechanisms were enforced
in various ways
(i)industrial licensing under which every entrepreneur had
to get permission from government officials to start a
firm, close a firm or to decide the amount of goods that
could be produced
(ii) private sector was not allowed in many industries
(iii) some goods could be produced only in small scale
industries and
(iv) controls on price fixation and distribution of selected
industrial products.
( I)Industrial Sector Reforms –

(1) Abolition of Industrial Licensing –

(2) Freedom of Production –

(3) Expansion of Industries –

(4) Free Import of Machinery & raw material

from abroad -
 1. The reform policies led to the establishment of
 private sector banks, Indian as well as foreign.
 2. Foreign investment limit in banks was raised to
 around 50 per cent.
 3. Those banks which fulfil certain conditions have been
 given freedom to set up new branches without the
 approval of the RBI and rationalise their existing
 branch networks.
 4. Though banks have been given permission to generate
 resources from India and abroad, certain aspects have
 been retained with the RBI to safeguard the interests
 of the account-holders and the nation.
 5. Foreign Institutional Investors (FII) such as merchant
 bankers, mutual funds and pension funds are now
allowed
 to invest in Indian financial markets.
 (II)Financial Sector Reforms –
Financial sector in India –controlled
by RBI – rate of Interest for
commercial banks as Liberal
(III) Fiscal Reforms –
relate to Revenue & Expenditure
Tax Reforms –Direct tax, Indirect
Tax ,Tax
Structure has been simplified,
moderated.
This has raised Tax Compliance of the
govt.
Slashing custom duty – Slashing
Subsidies -
  Tax Reforms:
 Tax reforms are concerned with the reforms in
government’s taxation and public expenditure policies
which are collectively known as its fiscal policy. There are
two types of taxes: direct and indirect. Direct taxes
consist of taxes on incomes of individuals as well as
profits of business enterprises. Since 1991, there has
been a continuous reduction in the taxes on individual
incomes as it was felt that high rates of income tax were
an important reason for tax evasion. It is now widely
accepted that moderate rates of income tax encourage
savings and voluntary disclosure of income. The rate of
corporation tax, which was very high earlier, has been
gradually reduced. Efforts have also been made to reform
the indirect taxes, taxes levied on commodities, in order
to facilitate the establishment of a common national
market for goods and commodities. Another component
of reforms in this area is simplification. In order to
encourage better compliance on the part of taxpayers
many procedures have been simplified and the rates also
 (IV) External Sector reforms-
(i) Foreign exchange reforms
(ii) Foreign trade policy reforms
-Reduction in tariff rates

- Removal of licensing procedure

for imports.

-Removal of exports duty on goods

exported from India.
 Foreign Exchange Reforms: The first
important reform in the external sector
was made in the foreign exchange
market. In 1991, as an immediate
measure to resolve the balance of
payments crisis, the rupee was devalued
against foreign currencies. This led to an
increase in the inflow of foreign
exchange. It also set the tone to free the
determination of rupee value in the
foreign exchange market from
government control. Now, more often
than not, markets determine exchange
rates based on the demand and supply of
foreign exchange.
 The trade policy reforms aimed at (i)
dismantling of quantitative restrictions on
imports and exports (ii) reduction of tariff
rates and (iii) removal of licensing
procedures for imports. Import licensing
was abolished except in case of
hazardous and environmentally sensitive
industries. Quantitative restrictions on
imports of manufactured consumer goods
and agricultural products were also fully
removed from April 2001. Export duties
have been removed to increase the
competitive position of Indian goods in
the international markets.
  Privatization
(Privatization of the economy)
Removing strict control over private sector
and making them free to take necessary
decisions.
* Privatization is the general process of
involving the private sector in the
ownership of a state owned enterprise.
 It implies shedding of the
ownership or management
of a government owned
enterprise. Government
companies can be converted
into private companies in
two ways (i) by withdrawal of
the government from
ownership and management
of public sector companies
and or (ii) by outright sale of
public sector companies.
 The first set of navaratna companies
included Indian Oil Corporation Ltd (IOC),
Bharat Petroleum Corporation Ltd (BPCL),
Hindustan Petroleum Corporation Ltd
(HPCL), Oil and Natural Gas Corporation Ltd
(ONGC), Steel Authority of India Ltd (SAIL),
Indian Petrochemicals Corporation Ltd
(IPCL), Bharat Heavy Electricals Ltd (BHEL),
National Thermal Power Corporation (NTPC)
and Videsh Sanchar Nigam Ltd (VSNL).
Later, two more PSUs—Gas Authority of
India Limited (GAIL) and Mahanagar
Telephone Nigam Ltd (MTNL)—were also
given the same status.
 Many of these profitable PSUs
were originally formed during the
1950s and 1960s when self-
reliance was an important
element of public policy. They
were set up with the intention of
providing infrastructure and direct
employment to the public so that
quality end-product reaches the
masses at a nominal cost and the
companies themselves were made
accountable to all stakeholders.
1. Reduced the no. of public
sector Industries –

[Link] the share of Private

sector investment –

[Link] the Share of Public

enterprises –

[Link] of outsourcing
  Globalization
Means- free interaction among

economies of the world in the field of

trade,finance,production,technologies

& investment .
 Policy Strategies Promoting
Globalisation of The Indian Economy
[Link] foreign equity participation-
2. Partial Convertibility of rupee –
Means-to buy or sell foreign currency like –
dollar.
[Link] partial convertibility –
through budget-1992-93 to encourage
Exports.
3. Long term trade policy – i.e. up to 05 years.

4. Reduction in custom duties and Tariffs

 Outsourcing:
 This is one of the important outcomes of the
globalisation process. In outsourcing, a
company hires regular service from external
sources, mostly from other countries, which
was previously provided internally or from
within the country (like legal advice, computer
service, advertisement, security — each
provided by respective departments of the
company). As a form of economic activity,
outsourcing has intensified, in recent times,
because of the growth of fast modes of
communication, particularly the growth of
Information Technology (IT). Many of the
services such as voice-based business
processes (popularly known as BPO or call
  World Trade Organisation (WTO):
 The WTO was founded in 1995 as the
successor organisation to the General
Agreement on Trade and Tariff (GATT). GATT
was established in 1948 with 23 countries as
the global trade organisation to administer all
multilateral trade agreements by providing
equal opportunities to all countries in the
international market for trading purposes.
WTO is expected to establish a rule based
trading regime in which nations cannot place
arbitrary restrictions on trade. In addition, its
purpose is also to enlarge production and
trade of services, to ensure optimum
utilisation of world resources and to protect
the environment. The WTO agreements cover
trade in goods as well as services to facilitate
international trade (bilateral and multilateral)
through removal of tariff as well as non-tariff
barriers and providing greater market access
 The growth of GDP increased from 5.6
per cent during 1980-91 to 6.4 per cent
during 1992-2001. This shows that there
has been an increase in the overall GDP
growth in the reform period. During the
reform period, the growth of agriculture
and industrial sectors has declined
whereas the growth of service sector has
gone up. This indicates that the growth is
mainly driven by the growth in the
service sector
 The foreign investment, which
includes foreign direct
investment and foreign
institutional investment, has
increased from about US $ 100
million in 1990-91 to US $ 150
billion in 2003-04. There has
been an increase in the foreign
exchange reserves from about
US $ 6 billion in 1990-91 to US $
125 billion in 2004-05. At
present, India is the sixth largest
foreign exchange reserve holder
 Reforms in Agriculture:
 Reforms have not been able to benefit
agriculture, where the growth rate has
been decelerating. Public investment in
agriculture sector especially in
infrastructure, which includes irrigation,
power, roads, market linkages and
research and extension (which played a
crucial role in the Green Revolution), has
been reduced in the reform period.
Further, the removal of fertiliser subsidy
has led to increase in the cost of
production, which has severely affected
the small and marginal farmers.
 Reforms in Industry:
 Industrial growth has also recorded a
slowdown. This is because of decreasing
demand of industrial products due to
various reasons such as cheaper imports,
inadequate investment in infrastructure
etc. In a globalised world, developing
countries are compelled to open up their
economies to greater flow of goods and
capital from developed countries and
rendering their industries vulnerable to
imported goods. Cheaper imports have,
thus, replaced the demand for domestic
goods. Domestic manufacturers are
facing competition from imports.
 The government fixes a target for
disinvestment of PSUs. For instance, in
1991-92, it was targeted to mobilise Rs
2,500 crore through disinvestment. The
government was able to mobilise Rs
3,040 crore more than the target. In
1998-99, the target was Rs 5,000 crore
whereas the achievement was Rs 5,400
crore. Critics point out that the assets of
PSUs have been undervalued and sold to
the private sector. This means that there
has been a substantial loss to the
government.
 Economic reforms have placed limits on the
growth of public expenditure especially in
social sectors. The tax reductions in the
reform period, aimed at yielding larger
revenue and to curb tax evasion, have not
resulted in increase in tax revenue for the
government. Also, the reform policies
involving tariff reduction have curtailed the
scope for raising revenue through customs
duties. In order to attract foreign
investment, tax incentives were provided to
foreign investors which further reduced the
scope for raising tax revenues. This has a
negative impact on developmental and
welfare expenditures.
[Link] of Agriculture-

2. Urban concentration of growth

Process –

3. Cultural Erosion -