2. The Rationale (or Need) of economic Reformscrisis of 1991
Origin of Economic Crisis:
• In 1970s, Indian economy was strong enough to bear large oil stock.
• But by 1990 a minor oil shock could damage the stability of the economy.
Major factors responsible for economic crisis of 1990s were:
• The fiscal situation had worsened during the 1980s due to growing burden of nondevelopmental expenditure.
• All the indicators of fiscal imbalance showed that throughout the 1980s the
imbalance was on a rise.
• Indicators which are normally used to measure fiscal imbalance are:
a) revenue deficit
b) gross fiscal deficit
In 1991, both measures of fiscal imbalance indicated that there was a serious fiscal
Revenue deficit had risen from 0.2% of GDP 1981-82 to 3.3% in 1990-91.
Gross fiscal deficit had increased from 5.9% of GDP in 1980-81 to 6.6% in 199091.
3. The Rationale (or Need) of economic
Reforms-crisis of 1991
Worsening Balance of Payments situation:
The current account deficit was $9.7 billion or 3.69% of GDP in 1990-91.
As a consequence, India’s external debt rose to 23% of GDP at the end of 1990-91.
The mounting strains during the 1980s peaked to crisis in 1990 due to the Gulf
There was Political Instability in the country.
As a result, country’s credit rating in the international capital market declined
Slow and Unsatisfactory Economic Growth
Over the three decades of planning (1950-51 to 1980-81), the average annual
growth rate was 3.5%. It was painfully low rate of growth.
The main reasons were :
Excessive government controls
loss making inefficient public enterprises, etc.
4. The Rationale (or Need) of economic
Reforms-crisis of 1991
Successful Experiences of other Countries
Many development countries launched the model of free market
mechanism and liberal controls.
Success stories of countries like Malaysia, Thailand, South Korea, China,
etc. made India rethink and change its policy of excessive government
The inflationary pressure was quite high in 1980s due to excessive government
Inflation rate peaked to 10.3% in 1990-91.
In term of consumer Price Index (CPI) inflation rate was 11.2% pa in 1990-91.
5. The Rationale (or Need) of economic
Reforms-crisis of 1991
Inefficiency and high cost Economy:
Prior to 1991, government was enforcing regulation in many ways:
• Industrial licensing, that is, every entrepreneur had to get permission from
government to start a firm, expand a firm, or to start production of a new
• Private sector was not allowed in many industries.
• Some goods could be produced only in small scale industrial products.
• Import license (in this, licence had to be taken to import).
• Existence of foreign exchange control.
• Restrictions on investment by big business houses, etc.
These controls resulted in consumption delays, inefficiency, losses and high
6. 1991-The Year of crisis:
1991 was the year of crisis for the Indian economy. It is clear from the following
National income was growing at the rate of 0.8%.
Inflation reached the height of 10.3%.
Balance of Payment crisis was to the extent of 10,000 crores.
India was highly indebted country. It was paying 30,000 crores interest charges per year.
Foreign exchange reserves were only US $5.8 billion dollars which were sufficient for three
India sold large amount of gold to Bank of England.
India applied for loan from IMF to the extent of 5 billion dollars.
Fiscal deficit was 11.2% of GDP.
Prices of petroleum products were very high.
For availing the loan, IMF and World Bank expected India to:
• Liberalize and open up the economy by removing restrictions on the private sector.
• Reduce the role of the government in many areas.
India agreed to the conditions of World Bank and IMF and adopted Economic Reforms in 1991.
7. ECONOMIC REFORMS SINCE 1991- NEW
Economic reforms is a long-term multi-dimensional package of
various policies and programmes for further economic
development. It includes reforms in agricultural sector,
Industrial sector, financial stocks, Fiscal sector, International
Objective of New Economic Policy are:
To reduce fiscal deficit and to ensure an era of relative price stability.
To reduce the are of operation of the public sector and to open up more areas for
the private sector.
To liberalize industrial policy and abolish industrial licensing for most of the
private sector industries.
To encourage inflow of foreign capital by granting more concessions to foreign
To liberalize foreign trade by reducing tariff duties and abolishing quota
restrictions in case of many imports.
8. Components of NEP 1991:
Macroeconomic Stabilisatim : Demand side management:
These Policies are short-run measures to return to low and stable inflation and a
sustainable fiscal and balance of payments position.
• Fiscal correction
• Reforms in tax structure
• Improvement in balance of payment situation
• Control of inflation
Structural Adjustment : Supply side Management:
These Policies are long- run measures to remove the bottlenecks and obstacles in the growth path of
Trade and capital flow reforms
Public sector reforms and disinvestment
Financial sector reforms.
NEP- Policy of Liberalization, Privatization and
In the NEP 1991, Structural reforms can be seen with respect to:
Liberalization means removing all unnecessary controls and
restrictions like permits, licenses, quantitative restriction,
Prior 1991, Government was enforcing regulation in many
Private sector was not allowed in many industries.
Some goods could be produced only in small scale industries.
Price controls and control on distribution of selected industrial products.
Foreign exchange control
Restrictions on investment by big business houses, etc.
These control resulted in:
High cost economy.
Objective of Liberalization:
To raise internal competitiveness of industrial production.
To raise foreign investment and technology.
To reduce debt burden of the country.
To get an opportunity to export to developed countries and to import capital goods
and machinery from them.
Liberalization was introduced in many areas in July 1991. These were:
1) Industrial sector reforms
Abolition of industrial licensing
• Industrial licensing was abolished for all projects except for 6 industries related to
security and strategic concerns, social reasons, hazardous chemicals and overriding
environmental reasons .
-Drugs and pharmaceuticals, and
11. Contraction of Public sector
The number of industries reserved for the public sector has been reduced from 17 to 3.
The only industries reserved for the public sector are:
• Defence equipment,
• Atomic energy generation,
• Railway transport.
Reforms in small scale sector:
Investment limit of small scale industries has been increased to one crore with a view to
Concessions in the MRTP act:
The MRTP Act gives more emphasis to the prevention and
• control of monopolistic,
• restrictive and
• unfair trade practices.
12. 2) Tax reforms:
Before 1991, both direct and indirect taxes were high. This encouraged tax evasion and
provided disincentives to honest tax payers.
After liberalization policy of 1991:
• Both direct and indirect taxes were reduced.
• The procedure for paying taxes was simplified.
• Non-planned expenditure by government was reduced.
3) Foreign exchange reforms:
After Liberalization policy of 1991:
• Approval was given for direct foreign investment up to 51% foreign equity in high
• Automatic permission was given for foreign technology agreements in high priority
industries up to a lump sum payment of Rs. 1 crore.
13. 4) Trade policy reforms:
The trade policy reforms aimed at:
• Abolition of import licensing system except in case of hazardous and
environmentally sensitive industries;
• Removal of quantitative restriction on import;
• Reduction in tariff rates;
• Strengthening of export promotion structure.
5) Finance sector reforms:
Liberalization in finance sector implied:
• There was a substantial shift in role of RBI from “a regulator” to “a facilitator” of the
• Both Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio (SLR) have been
reduced to increase availability of funds with commercial banks to advance more
• Bank rate has been reduce. It lowered the interest rate charged by the commercial
banks, thus, encouraging credit formation.
• There was establishment of private sector banks, Indian as well as foreign. Foreign
investment limit in banks was raised to around 50%
Privatization is defined as the transfer of a function, activity
or organization from the public to the private sector.
Privatization of Industries means opening the gates of Public Sector
to Private sector
The term privatization is used in two sense
Transferring the ownership of public sector to private sector
Management and controlling of public sector by private sector
without transferring the ownership
Disinvestment is sale of a part of equity holdings held by the
government in any public sector undertaking to private
Disinvestment is done for two main reasons:
• To provide fiscal support to the government.
• To improve the efficiency of public enterprise.
15. CAUSES OF PRIVATISATION
Disintegration of Socialist Economies
Inefficient public sector
Burden on the Government
Inefficient management control
OBJECTIVE OF PRIVATISATION
To increase the efficiency and competitive power.
To reduce deficit financing and public deficit
To strengthen industrial management
To earn more and more foreign currency
To make optimum use of economic resources
To achieve rapid industrial development
Globalization refers to growing economic interdependence
among countries in the world with regard to technology,
capital, information, goods, services, etc.
• Globalization is the process by which a firms activity become worldwide
• Doing, or planning to expand , business globally
• Giving distinction between the domestic market & foreign market
• Locating the production and other physical facilities of global business
• Basing product development and production planning on the global
• Global sourcing of factors of production
• Global orientation of organizational structure and management culture
17. The exim poly 1992 seeks to achieve globalization through:
Liberalization in import licensing
• Abolition of most of the licensing regulations.
• Most imports have been put under open General License (OGL)
where automatic permission is granted to import goods.
Rationalization of tariff structure
• Tariff reduction will improve the quality of our goods.
• Our goods will be able to compete in the world market. it will
drastically increase exports.
Foreign exchange management reforms
Under the liberalized foreign exchange management system:
• Rupee value is determined by the market forces of demand and
• Free convertibility of rupee was allowed in the current account of
balance of payments.
18. FACTORS LEADS TO
Growing Domestic Market
19. OBSTACLES TO GLOBALISATION
Government Policy and Procedures
Resistance to change
Lack of Experience
Limited R&D and marketing research
20. Achievements of Economic Reforms
Rise in GDP growth:
Since the introduction of economic reforms in 1991, country has shown rise
in GDP growth rate.
9th five year plan : 5.5%
10th five year plan : 7.2%
Rise in foreign exchange reserves:
In 1991 - US $ 5.8 billion
In 2009 - US $ 283.5 billion
Control of inflation:
The plus point of economic reforms is that it has controlled inflation from
16.8% in 1991 to 4.8% in 2000.
21. Achievements of Economic Reforms
Rise in flow of foreign capital:
9th five year plan : US $ 3.7 billion
10th five year plan: US $ 5.7 billion
: US $ 14.1 billion
Rise in integration with the world economy:
• India is now much more integrated with the world economy and has
benefited from this integration in many ways.
• The outstanding success of IT has shown what Indian skill and enterprise
can do-given the right environment.
Rise in competitiveness of Industrial sector:
Sectors such as auto components, textiles and pharmaceuticals are the
pillars which show the strength of the industrial sector.
22. Challenges of Economic Reforms
Economic reforms have not been able to benefit the agricultural sector
Public investment in agriculture sector especially in infrastructure which
includes irrigation, power, roads, market linkages and research has been
reduced in the reform period
Liberalization has forced the small farmers to compete in a global market
where prices of goods have fallen while removal of subsidies has led to
increase in the cost of production. It has made farming more expensive.
Various policy changes like reduction in import duties on agriculture
products, removal of minimum support price and lifting of quantitative
restrictions have increased the threat of international competition to the
23. Challenges of Economic Reforms
Changing employment pattern
There is inadequacy of widely dispersed and sustainable off-farm
productive employment opportunities.
Growth without jobs can neither be inclusive nor can it bridge divides.
Providing essential public services to the poor
We cannot be satisfied with only universal primary education-the challenge
is to provide universal secondary education as soon as possible.
In the area of health, there continues to be large gaps in basic services such
as clean drinking water.
Inadequacy of physical infrastructure
Our roads, railways, ports, airports, power supply, communication are not
comparable to the standards prevailing in competitor countries.
Quality infrastructure is still a challenge facing our country today.
Protecting the environment
Our concern for environment issues is growing along the lines of global
The threat of climate changes pose a real challenge to future generations.
24. Challenges of Economic Reforms
Slowdown in industrial growth
The post- reform period shows that industrial growth has slowed down. This
was due to:
Globalization created conditions for free movement of goods and services
from foreign countries. It adversely affected the local industries and
employment in developing countries.
Globalization led to decrease in demand for domestic industrial products
due to cheaper imports.
There was inadequate investment in infrastructural facilities such as power
Fall in tax revenue
In the post-reform period, there has been fall in tax revenue. This was due to:
The tax reductions in the reform period have not resulted in increase in tax
revenue for the government.
The reform policies involving tariff reduction have reduced the scope for
raising revenue through customs duties.
To attract foreign investment, tax incentives were provided to foreign
investors which further reduced the scope for raising tax revenues.
25. Tenth f ive year
26. Tenth Five year plan(2002-2007): objective,
targets & strategy.
Planning for development continues to play a vital role in the Indian economy.
The tenth five year plan addresses to some of chronic problem of the economy,
namely, mass poverty, unemployment, regional and interpersonal inequalities in
the distribution of income continue to persist.
It covers the period beginning with April 2002 and ending in March 2007.
One of the important objectives of the Tenth Five Year Plan is a discernible rise in
the target growth rate for the economy.
• The plan aims at achieving an average growth-rate of 8% in the GDP over the
• The plan also seeks to create conditions conducive for a further acceleration in
the rate of economic growth in the succeeding plan period (i.e. 2007-12).
• The overall objective is to double per capita income over a period of ten years i.e.
2002 to 2012.
Growth rate has improved since fourth five year plan but setback in ninth five year
27. Tenth Five year plan(2002-2007): objective, targets
Developmental Objective/ Targets:
Improvement in quality of life of an average Indian is the prime mover of growth &
development planning over the years.
▫ Reduction of poverty ratio by 5 percentage points by 2007; and by 15 % points by
▫ Providing gainful and high-quality employment at least to the addition to the labour
▫ All children in India in school by 2003; all children to complete 5 years of schooling
▫ Reduction in gender gaps in literacy and wage rates by at least 50% by 2007;
▫ Increase in Literacy Rates to 75 per cent within the Tenth Plan period (2002 to 2007);
▫ Reduction in the decadal rate of population growth between 2001 and 2011 to
▫ Reduction of Infant mortality rate (IMR) to 45 per 1000 live births by 2007 and to 28
▫ Reduction of Maternal Mortality Ratio (MMR) to 2 per 1000 live births by 2007 and to
1 by 2012;
▫ Increase in forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012;
▫ All villages to have sustained access to potable drinking water within the Plan period;
▫ Cleaning of all major polluted rivers by 2007 and other notified stretches by 2012;
28. Tenth Five year plan(2002-2007): objective, targets
The strategy of development during the tenth plan period emphasises the need to learn
from the past experiences.
The strategy is to strengthen what has worked well in the past and at the same time
avoid the mistakes of the past.
Main elements of the strategy are detailed under the following heads:
Redefining the role of Government:
• There were too many responsibilities with Government. So, it is necessary where
Private sector capabilities were undeveloped but situation changed.
• Strategy of development is to create an environment conducive to the growth of
private sector in the economy.
• The role of the government will substantial in the social sectors, areas of
infrastructure development, the role of the government may have to be expanded and
Reformulating Fiscal management:
Greater flexibility in Fiscal & Monetary policies needed with growing importance of
29. Tenth Five year plan(2002-2007): objective, targets
Integrating State-wise Growth with national Targets:
• The strategy emphasizes balanced development for all the states.
• The tenth plan includes a state-wise break-up of the broad development targets,
including targets for growth rates and social developments, which are consistent with
the national targets.
• To reinvigorate the planning and development process at and the state level.
Strategy for Ensuring Equity and Social Justice :
The plan suggests a three-pronged strategy:
• Agricultural Development and benefits to rural poor.
• Growth strategy emphasized rapid growth of those sectors which have highest
employment-potential such as construction, tourism, transport, small scale
• Continuation of the special programmes aimed at special target-groups which may
not benefited from the normal growth-process.
Improved Efficiency- Capacity Utilisation:
• The strategy aim to raise investment level as well as efficiency & tapping potential.
• The plan identified public infrastructural investment, public sector enterprises and
private-sector enterprises as area with significant idle capacity.
30. Tenth Five year plan(2002-2007): objective, targets
Strategy for External Sector:
• During tenth year plan, high rate of growth associated with increased imports
because of growing imports of energy and liberalisation of imports as required by
• In such a situation sustained high rates of growth of exports will be essential for
keeping the current –account deficit with in manageable limits.
• GDP decline and need to reverse these trends. And also need to ensure greater
integration with the international economy.
Strategy in Respect of Financial Sector:
• Importance of financial sector is to increase growth and diversification of the
• There is shortage of long term risk capital in India.
• Mix of policies relating to interest and incomes from capital gains will be necessary
element of the strategy to balance the needs of savers as well investors.
Strategy for Agriculture and Rural Development:
Agricultural production needs to be increased. This can be achieved by raising the
productivity of land and water resources.
31. Tenth Five year plan(2002-2007): objective, targets
This strategy of agriculture stress on:
• The tenth plan aims at major revival of public investment in irrigation capacity and
water management, besides increasing the efficiency of existing irrigation
• Development of rural infrastructure that supports not only agriculture but all rural
economic activities is another priority.
• There is a need to strengthen agricultural research and dissemination of technologies
for improvement in agricultural productivity.
• For such diversification to gain momentum during the tenth plan, the requisite
science and technology inputs will be provided along with appropriate support price
Strengthening and Improvement of Social Infrastructure:
• Qualitative improvement in the fields of education, health and shelter.
• “Education for all” is one of the primary objective.
• There is need to improvement the infrastructure so as to raise the actual attendance
in schools, improve the syllabus both at the schools and higher education levels.
• There is a considerable need to strengthen the health infrastructure and improve its
• Action plans will have to be put in place for overcoming the shortages in housing and
provide shelter to the shelter less.
32. Tenth Five year plan(2002-2007): objective, targets
Improvement in the Quality of Governance:
• Quality of governance at all levels has a massive scope for improvement.
• Reforms of governance has been highlighted in the tenth plan document assigning
accountability whether in bureaucracy or corporate bodies as well as improvement in
efficiency has to be developed as essential input for accelerated rate of growth and