Economic reform in India 1991

The economic reforms initiated in 1991 is now into the 27th year. economic reforms denote the process in which a government prescribes declining role for the state and expanding role for the private sector in an economy. So let’s unravel the reform process it is safer to see economic reform as a policy shift in an economy from one to another or ‘alternative development strategies’. Economists attribute the differences in the
performance of economies to the differences in the ‘strategies’ they follow.
The different strategies of development evolved through a long period of trial and error by different countries under the influence of different sets of ideologies. But the process has been like an educational trip. To understand the term ‘economic reform’ and more so to clarify the confusion concerning it in the Indian context, we must see the different ‘alternative development strategies’ which evolved through time.
1. planning model- Till the rise of the Soviet Union, the prevalent development strategy in the
Euro-American countries was the capitalist system of economy, which promoted the principles of laissez-faire and dominant role for private capital in the economy.
Soviet Union went for the planning model most of the developing countries after their independence were influenced by socialism and the governments there took a central role in planned development. these economies were dominated by foreign colonisers, they worried that opening the economy to foreign investment would lead to a new form of domination, the domination by large multinationals. That is why most of these countries went for ‘protectionist’ economic policy with import substitution as one method, side by side. But by the 1970s, the world was having convincing proofs that the socialist as well as the planned economies "Washington consensus"

Washington consensus- state-dominated economy, arguments in favour of the market, the private

sector, was promoted emphatically,Many countries shifted their economic policy just to the other extreme arguing for a minimal role of the government in the economy,the term economic reform got currency around the world during this period. The term was usually seen as a corollary for promoting ‘naked capitalism’, openness in the economy and an open attitude towards foreign investments, etc. The governments of the developing economies were criticised by the political parties in the opposition and the critiques for being soft to the dictates of the IMF and the WB, and becoming a party to promote ‘neo-imperialism’

Economic reform in india-On July 23, 1991, India launched a process of economic reforms in response to a fiscal and balance-of-payment (BoP) crisis. The reforms were historic and were going to change the very face and the nature of the economy in the coming times. The reforms and the related programmes are still going on with changing emphasis and dimensions, but they are criticised as being slow ever since the UPA Government came to power in May 2004. Back in the mid-1980s, the governments had taken its first steps to economic reforms While the reforms of the 1980s witnessed rather limited deregulation and partial liberalisation of only a few aspects of the existing control regime, the reforms started in early 1990s in the fields of industries, trade, investment

and later to include agriculture, were much wider and deeper Though liberal policies were announced by the governments during the reforms of the 1980s itself, with the slogan of ‘economic reforms’, it was only launched with full conviction in the early 1990s. But the reforms of the 1980s, which were under the influence of the famous ‘Washington Consensus’ ideology had a crippling impact on the economy. The whole Seventh Plan (1985–90) promoted further relaxation of market regulations with heavy external borrowings to increase exports,Though the thrust increased the growth rate led by higher industrial growth it also led to a substantial increase in foreign indebtedness that played a major role in the BoP crisis of 1991.The crisis was immediated by the First Gulf War (1991) which had two-pronged negative impact on the Indian foreign exchange reserves. the war led the oil prices to go upward forcing India to use its forex reserves in comparatively shorter period and second, the private remittances from Indians working in the Gulf region fell down fast both the crises were induced by a single cause, i.e., the Gulf War. But the balance of payments crisis also reflected deeper problems of rising foreign debt, a fiscal deficit of over 8 per cent of the GDP and a hyperinflation  situation.The minority government of the time had taken a highly bold and controversial step in the form of economic reforms criticised throughout the 1990s by one and all right from the opposition in the Parliament, to the communist parties, to the industrial houses, the business houses, media,

experts and by the masses also. By now as the benefits of the reforms have accrued to many, the criticism has somewhat calmed down, but still the reform process is considered as anti-poor and pro-rich by at least the masses the people who decide the political mandate for the country to rule.

At least one belief is followed by everybody,the benefits of reforms are not tickling to the masses with the desirable pace.

Obligatory reform - economies since the 1980s were voluntary decisions of the concerned countries. But in the case of India it was an involuntary decision taken by the government of the time in the wake of the BoP crisis. Under the Extended Fund Facility (EFF) programme of the IMF, countries get external currency support from the fund to mitigate their BoP crisis, but such supports have some obligatory conditionalities put on the economy to be fulfilled. There are no set rules of such conditions already available with the IMF, though they are devised and prescribed to the BoP crisis ridden economy at the time of need. A point needs to be referred here is that the conditionalities put upon India were of the nature which required all the economic measures to be formulated by them. It means that the reforms India carried or is carrying out at present were neither formulated by India

nor mandated by the public. Yes, there was a large section of experts inside and outside the government who believed in similar economic measures to bring the economy on the right path. Some of them were arguing the same since the 1970s, while many other experts believed in them since the mid- 1980s but why after all was the Rao-Manmohan Government credited to start the reform process in India? It is because they thought it suitable to follow and make it politically possible in India. Imagine, a government proposing to sell the state-owned companies to the private sector or closing them down in a country which has been convinced that these companies will

be the ‘temples of modern India’. The masses were convinced that the government has bowed down to the dictats of the IMF, the imperialist forces, the multinationals, etc. Even today such feelings are there in several quarters of the economy. The politics of economic reforms damaged India more than

the reform has benefitted the country. It would not be an exaggeration if we conclude that economic reforms had no political consensus. Political parties in India are divided on the issue of reforms—the parties together with the masses lack the level of political maturity required for the success of the

reform programme. It is right, democratic maturity comes to a multi-party political system, but it takes time. It takes even more time where masses are unaware and ignorant. The emotional issues of religion, caste, etc., play their own roles in such situations.

The IMF conditions put forth for India were as under:

(i) Devaluation of the rupee by 22 per cent

(ii) Drastic reduction in the peak import tariff from the prevailing level of 130 per cent to 30 per cent

(iii) Excise duties to be hiked by 20 per cent to neutralise the revenue short falls due to the custom cut

(iv) All government expenditure to be cut down by 10 per cent annually

India was able to pay back its IMF dues in time, the structural reform of the economy was launched to fulfil the above-given conditions of the IMF. The ultimate goal of the IMF was to help India bring about equilibirium in its BoP situation in the short-term and go for macroeconomic and structural adjustments so that in future the economy faces no such crisis.there was enough scope for the critics to criticise India’s economic reforms as prescribed and dictated by the IMF. The process of economic

reforms in India had to face severe criticism from almost every quarter of the economy concerned, although the reforms were aimed to boost growth and deliver competitiveness to the economy.

Macroeconomics- those economic policies which intend to boost the aggregate

demand in the economy—be it domestic or external. For the enhanced domestic demand, the focus has to be on increasing the purchasing power of the masses, which entails an emphasis on the creation of gainful and quality employment opportunities.

structure reform measures-the policy reforms which have been initiated by the government to boost the aggregate supply of goods and services in the economy. It naturally entails unshackling the economy so that it may search for its own potential of enhanced productivity. For the purchasing capacity of the people to be increased, the economy needs increased income, which comes from increased levels of activities. Income so increased is later distributed among the people whose purchasing power has to be increased  this will take place by properly initiating a suitable set of macroeconomic policies. For the income to get distributed among the target population, it

takes time, but the efforts a government initiates to increase the supply, increasing production becomes visible soon.

The process of reforms in India has to be completed via three other processes  liberalisation, privatisation and globalisation,

Generation of economic reforms-

India launched its reforms in 1991, generations of reforms were announced by the governments

First Generation Reforms (1991–2000)-It was in the year 2000–01 that the government, for the first time, announced the need for the Second Generation of economic reforms and it was launched in the same year. The ones which had been initiated by then were called by the government as the reforms of the generation-

(i) Promotion to Private Sector this included various important and liberalising policy decisions, i.e., ‘dereservation’ and ‘de-licencing’ of the industries, abolition of the MRTP limit, abolition of the compulsion of the phased-production and conversion of loans into shares, simplifying environmental laws for the establishment of industries

(ii) Public Sector Reforms the steps taken to make the public sector undertakings profitable and

efficient, their disinvestment (token), their corporatisation, etc., were the major parts of it.

(iii) External Sector Reforms they consisted of policies like, abolishing quantitative restrictions on import, switching to the floating exchange rate, full current account convertibility, reforms in the capital account, permission to foreign investment

(iv) Financial Sector Reforms several reform initiatives were taken up in areas such as banking, capital market, insurance, mutual funds, etc.

(v) Tax Reforms this consisted of all the policy initiatives directed towards simplifying,

broadbasing, modernising, checking evasion 

A major re-direction was ensued by this generation of reforms in the economy—the command type of the economy moved strongly towards a market-driven economy, private sector to have greater participation in the future.

The reform approach-

The process of economic reforms commenced in the world by mid-1980s Once the idea of the washington consensus gained ground, we find similar reforms being followed by different countries cutting across continents. Over the time, experts together with the IMF/WB,India’s reform process which commenced in 1991 has been termed by experts as gradualist in nature with traits of

occasional reversals, and without any big ideological U-turns - coalitions of various political parties at the Centre and different political parties ruling the states lacked a general sense of consensus on reforms.It reflects the compulsions of India’s highly pluralist and participative democratic policy making process Though such an approach helped the country to avoid socio-political upheavals instability, it did not allow the desired economic outcome could have accrue from the reforms. The first generation of economic reforms could not bring the expected results due to lack of some other set of reforms for which India goes after almost over a decad,this created a kind of disillusionment about the prospects of reforms and failed the governments to muster enough public support in

favour of reforms.

this reform is totally need based approach,because one side we need development in new equipment like LPG another side also we have IMF/WB balance of payment crisis, loan repayment's that's why we go beyond the politics and we accept new economic policy for india
Budhi Narayan