Economic Reforms in India 1991

Economic Reforms in India

• India gained independence in 1947 and adopted its constitution in 1950. Economic freedom was achieved in 1991 with economic reforms.
• Pre-1991 policies caused low economic growth, slow GDP growth, rising unemployment, stagnant domestic savings/investments, weak public sector performance, and inadequate infrastructure.
• A severe 1991 foreign exchange crisis, with reserves for only two weeks of imports, was exacerbated by the Gulf War's higher oil prices, rising external debt, and withdrawals of NRI deposits.
• IMF and World Bank loan conditions required cutting fiscal deficits, controlling money supply, liberalizing the domestic economy, and allowing international trade.
• The collapse of the USSR in 1991 necessitated India's opening to international trade and competing globally.

Liberalization

• Liberalization eased regulations for domestic and international trade.

• Key features include:

  • De-licensing: Eliminating most business license requirements, except for specific sectors like alcohol, cigarettes, hazardous chemicals, defense, and explosives.
  • Relaxed Monopoly Controls: The 1950 Monopolies and Restrictive Trade Practices (MRTP) Act, designed to prevent monopolies, was relaxed. Pre-reform regulations required government approval for firms with assets above 100 crore. Post-1991, this requirement was removed.
  • Liberalized Industrial Location Policy: Removed restrictions on business locations and government approvals.
  • Relaxed Mergers/Acquisitions: Allowed mergers, acquisitions, and separation of industrial units, facilitating mergers like Zomato acquiring Grofers and Byju's purchasing Kashi.
  • Liberalized Capital Market: Opened share trading, requiring the establishment of SEBI to protect investors.

• Significance: Overcoming the "control raj," encouraging entrepreneurs, promoting competition, and benefiting consumers.

Privatization

• Privatization transferred previously government-owned businesses to private ownership.
• Disinvestment: Selling government-owned public sector units to private companies to boost government revenue. Often involves "sick units" (struggling businesses).
• Significance: Ideological reasons (public sector focuses on essential services), improved managerial efficiency, competitive environments, and greater decision-making flexibility.
• Features:
  • Reduced Public Sector Reservation: The number of industries reserved for the public sector was reduced. Currently, three industries remain reserved: atomic energy, railways, and specific minerals.
  • Sick Public Sector Unit Support: The Board for Industrial and Financial Reconstruction (BIFR) established in 1987 assisted struggling public sector units.
  • Navratnas, Mini Ratnas, and Maharatnas: Government recognition encouraging certain public sector companies towards global scale through schemes like Navratna (1997), culminating in 8 Maharatna, 16 Navratna, and 73 Mini Ratna companies by March 31, 2019.
  • Memorandum of Understanding (MoU): Agreements improving public sector/private sector business performance with greater autonomy and accountability.
  • Voluntary Retirement Scheme (VRS): Introduced to address public sector overstaffing.

Retirement Schemes

• Public sector undertakings often faced overstaffing.
• The Voluntary Retirement Scheme (VRS) reduced the workforce in these enterprises.

Disinvestment Policy

• Disinvestment is the sale of government-owned stocks/equity in public sector units to private buyers. Essentially, a method for transferring businesses to private ownership.

Globalization

• Globalization integrated India's economy with the global community, allowing for foreign involvement and local expansion into international markets.
• It is about integrating economies via trade, capital flows, and technology.

Impact of Globalization

• Increased world trade, international capital flow, country interdependence, access to advanced technologies, a global market, and greater information exchange.

Features of Globalization

• Exchange Rate Reforms: India shifted from a fixed to a flexible exchange rate system (determined by supply and demand).
• Import Liberalization: India reduced restrictions on import licensing, quantities, and duties which facilitated trade.
• Foreign Direct Investment (FDI): India encouraged foreign direct investment (FDI) for increased participation in Indian businesses.
• Foreign Technology: Promoted the inflow of foreign technology to support domestic companies' advancements.