05 Economic Policy of 1991.pdf

Economic Policy of 1991  BoP Crisis: Severe BoP crisis with a widening current account deficit Forex reserves fell to less than $1 billion Fiscal Deficit: Background and...

Economic Policy of 1991  BoP Crisis: Severe BoP crisis with a widening current account deficit Forex reserves fell to less than $1 billion Fiscal Deficit: Background and Growing fiscal deficit due to high government expenditure and subsidies Context - Escalating public debt Economic Crisis in Inflation: India Before 1991 Double-digit inflation rates driven by fiscal imbalances Soaring prices reduced purchasing power Forex Reserves Depletion: Due to high import bills and low export earnings Near default on international debt obligations Political and Global Factors for Economic Crisis Political Instability: Frequent changes in government Lack of consistent economic policy direction Global Context: The collapse of the Soviet Union, Gulf War, etc. Increasing importance of liberalisation and globalisation Pressure from International Institutions: World Bank and IMF insisting on structural reforms as conditions for financial assistance  IMF and World Bank promised assistance on conditions like: Pledging gold reserves with IMF: Solutions to 67 tonnes of India’s gold reserves pledged with IMF the Crisis Structural Adjustment Programme: Initiated various schemes and policies to adjust the economic structure of the country to the requirements of IMF and World Bank  Economic Necessity: Immediate need to stabilise the economy and avert a full-blown financial crisis Restore investor confidence and attract foreign investment Introduction to Goals of the Policy: the Economic Stabilisation: Short-term measures to stabilise the economy, control Policy of 1991 inflation, and improve BoP Structural Adjustment: To shift from a state-controlled economy to a market-driven one Economic Growth: Foster sustainable economic growth by promoting a market-oriented economy 1991 LPG Reforms Liberalisation Reduction of Government Control: Abolishment of the License Raj, reducing the need for businesses to seek government approval for setting up and expanding industries Simplification of regulations and procedures for starting and running businesses Deregulation of Industries: Several industries, previously reserved for the public sector, were opened up to private players Foreign companies were allowed to operate in sectors that were earlier restricted 1991 LPG Reforms (Contd.) Privatisation Disinvestment in Public Sector Enterprises (PSEs): The government began selling stakes in PSEs to private players to raise funds and improve efficiency Encouraged Public-Private Partnerships (PPPs) in various sectors, including infrastructure Encouraging Private Sector Participation: The private sector was incentivised to enter industries like telecommunications, airlines, and banking, leading to increased competition and innovation 1991 LPG Reforms (Contd.) Globalisation Opening Up the Indian Economy to Global Markets: Tariffs on imports were significantly reduced, making it easier for foreign goods to enter the Indian market The export sector was given a boost through incentives and simplified procedures Foreign Direct Investment (FDI) Policies: FDI limits in various sectors were increased, attracting global companies to invest in India Sectors like telecommunications, insurance, and banking were opened up to foreign investors, bringing in much-needed capital and technology Impact of the 1991 Reforms – Economic Growth Acceleration in GDP Growth Pre-1991 Growth Rate: India's GDP growth rate before 1991 averaged around 3.5% per annum, often referred to as the "Hindu rate of growth." Post-1991 Growth Surge: The GDP growth rate increased significantly post-reforms, reaching an average of 6-7% per annum in the 1990s and early 2000s. India's economy became one of the fastest-growing in the world, achieving a GDP growth rate of over 8%. Industrial Growth: Liberalisation led to rapid industrial growth, with sectors such as IT, telecommunications, and automobiles expanding at unprecedented rates. Impact of the 1991 Reforms – Economic Growth Rise in Foreign Investments Increased FDI Inflows: Foreign Direct Investment (FDI) increased from a mere $132 million in 1991 to over $70 billion in recent years, reflecting global confidence in India's economic potential Sectors like telecommunications, IT, pharmaceuticals, and automobiles saw significant foreign investment Portfolio Investments: The opening up of capital markets attracted substantial portfolio investments, contributing to the growth of India's financial markets and stock exchanges Impact of the 1991 Reforms – Manufacturing Sector Revitalisation of Manufacturing: Deregulation and reduction of tariffs boosted the manufacturing sector, leading to increased production capacity and export growth Introduction of modern technologies and management practices improved efficiency and product quality Challenges: Despite the growth, the sector faced challenges like competition from imports, inadequate infrastructure, and labour market rigidities Impact of the 1991 Reforms – Services Sector Boom in IT and Services: The reforms triggered an explosion in the IT and services sector, with India emerging as a global hub for software development, BPOs, and IT services. Contribution of the services sector to GDP rose from about 40 % in 1991 to over 55 % in the 2000s Employment Opportunities: The growth in services created millions of new jobs, particularly for educated youth, contributing to urbanisation and a growing middle class Impact of the 1991 Reforms – Agriculture Sector Mixed Impact on Agriculture: While reforms led to some benefits like increased agricultural exports and modernisation, the sector remained largely untouched by liberalisation Challenges such as inadequate investment, poor infrastructure, and market volatility continued to affect the sector Need for Further Reforms: There was a growing recognition of the need for focused agricultural reforms to ensure sustainable rural development and food security Impact of the 1991 Reforms – Social Impact Changes in Employment Patterns Shift from Agriculture to Industry and Services Jobless Growth Income Distribution and Poverty Reduction Reduction in Poverty Rates Rising Income Inequality Regional Disparities  Make in India Promoting Manufacturing and Global Competitiveness: Launched in 2014, Make Current in India aims to transform India into a global Economic manufacturing hub by encouraging domestic and foreign investment in manufacturing Policies Startup India Influenced Encouraging Innovation and Entrepreneurship: Launched in 2016, by 1991 Startup India focuses on fostering a culture of Reforms innovation and entrepreneurship through financial incentives, tax benefits, and ease of registration for startups  GST Implementation Simplification of the Tax Structure: The GST Current implemented in 2017, replaced multiple indirect taxes with a single unified tax, simplifying the tax regime Economic and promoting ease of business Current FDI Policies Policies Continuation and Expansion of 1991 Policies: The Influenced government continues to liberalise FDI norms, allowing 100% FDI in sectors like retail, insurance, by 1991 and defence Aatmanirbhar Bharat Reforms Push for Self-Reliance in Manufacturing and Production: Launched in 2020, Aatmanirbhar Bharat (Contd.) aims to make India self-reliant by promoting domestic production, reducing dependence on imports, and encouraging local businesses