Steep fall in foreign exchange reserves: Not sufficient for even a fortnight of imports
Unfavorable Balance of Payments (BOP): Imports grew at a high rate without matching export growth
Huge burden of external debt: Government unable to make repayments on borrowings from abroad
High rate of price inflation: Prices of essential goods rose sharply
Huge burden of fiscal deficit in the government budget: Expenditure exceeded income, leading to borrowing to finance the deficit
India received a $7 billion loan from the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) to manage the crisis
To avail the loan, India had to:
Liberalize and open up the economy by removing restrictions on the private sector
Reduce the role of the government in many areas
Remove trade restrictions between India and other countries
Dr. Manmohan Singh was the Finance Minister of India in 1991
India announced the New Economic Policy (NEP) after agreeing to the conditionalities of the World Bank and IMF
The NEP includes stabilization measures and structural reform measures
Stabilization measures are short-term measures to correct weaknesses in the balance of payments and control inflation
The aim of stabilization measures is to maintain sufficient foreign exchange reserves and control rising prices
Structural reform policies are long-term measures to improve the efficiency of the economy and increase international competitiveness
Structural reform policies aim to remove rigidities in various segments of the Indian economy
The government initiated policies under three heads: liberalization, privatization, and globalization
Liberalization was introduced to put an end to restrictions and open various sectors of the economy
A few liberalization measures were introduced in the 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy, and foreign investment
Reform policies initiated in 1991 were more comprehensive
Deregulation of the Industrial Sector:
Industrial licensing was abolished for almost all product categories except for alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals
Industries reserved for the public sector are a part of atomic energy generation and some core activities in railway transport
Many goods produced by small-scale industries have been de-reserved
In most industries, the market determines the prices
Financial Sector Reforms:
Role of RBI changed from regulator to facilitator of the financial sector
Foreign investment limit in banks raised to around 74%
Banks fulfilling certain conditions can set up new branches without RBI approval and rationalize existing branch networks
Foreign Institutional Investors (FII) like merchant bankers, mutual funds, and pension funds can invest in Indian financial markets
Tax Reforms:
Direct taxes:
Continuous reduction in taxes on individual incomes since 1991
Gradual reduction in the rate of corporation tax
Indirect taxes:
Goods and Services Tax Act 2016 introduced to simplify and unify indirect tax system in India
GST subsumed value-added tax, service tax, excise duty, and sales tax
Procedures simplified and rates lowered to encourage taxpayer compliance
Foreign Exchange Reforms:
In 1991, rupee was devalued against foreign currencies to resolve balance of payments crisis
Devaluation led to an increase in foreign exchange inflow
Rupee value determination in the foreign exchange market freed from government control
Trade and Investment Policy Reforms:
Import licensing abolished except for hazardous and environmentally sensitive industries
Quantitative restrictions on imports of manufactured consumer goods and agricultural products fully removed from April 2001
Export duties removed to increase competitive position of Indian goods in international markets
Privatization implies shedding the ownership or management of a government-owned enterprise
Government companies are converted into private companies in two ways:
By the withdrawal of the government from ownership and management of public sector companies
By the outright sale of public sector companies
Disinvestment: Privatization of public sector enterprises by selling off part of the equity of PSEs to the public
The purpose of the sale was mainly to improve financial discipline and facilitate modernization
Envisaged that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs
Government envisaged that privatization could provide a strong impetus to the inflow of FDI
Maharatnas, Navratnas, and Miniratnas are identified by the government to improve efficiency, infuse professionalism, and enable them to compete more effectively in the liberalized global environment
Given greater managerial and operational autonomy to take various decisions to run the company efficiently and increase profits
Examples of public enterprises with their status:
Maharatnas:
Indian Oil Corporation Limited
Steel Authority of India Limited
Navratnas:
Hindustan Aeronautics Limited
Mahanagar Telephone Nigam Limited
Miniratnas:
Bharat Sanchar Nigam Limited
Airport Authority of India
Indian Railway Catering and Tourism Corporation Limited
Globalization:
Integration of the economy of a country with the world economy
Transforming the world towards greater interdependence and integration
Turning the world into one whole or creating a borderless world
Outsourcing:
Company hires regular services from external sources, mostly from other countries
Services like legal advice, computer service, advertisement, and security are outsourced
Many services such as BPO, record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice, and teaching are outsourced to India
Modern telecommunication links, including the Internet, are used to digitize and transmit data in real time across continents and national boundaries
India is a destination for global outsourcing due to low wage rates and availability of skilled manpower
WTO agreements cover trade in goods and services to facilitate international trade through the removal of tariff and non-tariff barriers, providing greater market access to all member countries
World Trade Organisation (WTO):
Founded in 1995 as the successor organization to GATT
Administers all multilateral trade agreements
Provides equal opportunities to all countries in the international market for trading purposes
Expected to establish a rule-based trading regime to prevent arbitrary trade restrictions
Aims to enlarge production and trade of services, ensure optimum utilization of world resources, and protect the environment