The 1991 economic reforms in India were a response to a severe economic crisis caused by fiscal imbalances and a balance of payments deficit. The reforms liberalized trade and the financial sector. Trade restrictions were reduced and foreign direct investment increased, allowing exports to rise. In the financial sector, interest rates were market-oriented, reserve requirements were cut, and banks were given more autonomy. The reforms helped pull India out of the crisis and put it on a path toward greater economic prosperity and integration into the global economy.

1. The 1991 Economic Reform: The nation's
first step to prosperity
Arunima Paul
Avipsha Sengupta
Economics Department, 2nd year
ABSTRACI
By 1985, India had started facing balance of payments problems. By the end of 1990, she was in a serious
economic crisis. She faced severe deficit in her foreign trade balance. Our article focusses on the impact
of this crisis on the Indian economy. It emphasizes on how the 1991 economic reforms, by improving trade
and covering the losses of the financial sector, behaved as the light at the end of the tunnel and showed
the nation the path to its recovery.
Keywords: balance of payments crisis, 1991 economic reforms, financiol sector.
JELCLASSIFICATION:G18
INTRODUCTION
At the end of 1990 and early 1991, when India was struck by an economic crisis, the different sectors of
the economy slowed down. One of the major causes of this crisis was the increasing fiscal imbalances
Over the 1980s. In 1985 the nation was facing serious balance of payment problems. As an effect of the
Gulf War, India's bill on oil expots blew up, exports fell, and credit dried up causing the investors to
Withdraw their money. This was a big blow to the financial sector as well as trade. However, necessary
reforms were taken by the Government to pull the country out of the crisis.
naia's success can be attributed to four important decisions taken during 1991-1997. These
are-devaluation, getting help from the International Monetary Fund (IMF), liberalizing the domestic
nancial sector in a partial manner, and opening up of the external sector gradually.
TRADE
nT 1991, India was intentionally kept aloof from the world market to promote self reliance and to protect
Conomy. Various restrictions were imposed on foreign trade, like heavy import tariffs, export taxes
quantitative restrictions. On the other hand, foreign direct investment (FDI) was restricted by upper-
qUity participation, restrictions on technologytransferandgovernment approval. These restrictions
ea hat annual FDI was around $200 million between 1985 and 1991. India's exports were stagnant
years afterindependencedue to the negligence of the ruling government. However, from 1991,
COnnphasis on globalization grew, India's international frade increased phenomenally, with the
Ufion of total trade in goods and services to the GDP rising from 16% (in 1990-91) to 47%
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in (2008-10). Now India accounts for 1.44% of exports and 2.12% of imports for merchandise trade dln
3.34% of exports and 3.31% of imports for commercial services trade worldwide. wilth
During the period after independence, India's balance of paymenfs on its Curent account was ne
ative.
After the implementation of the LPG model, India's exports have risen consistently (from 66.2% in 1990.91
80.3% in 2002-03). India's reliance on external asistance has decreased and the debt service ratio has nit0
also
decreased from 35.3% in 1990-91 to 4,4% in 2008-09. The Globalized India permitted External Commetcin
Borowing to provide an additional source of funds to the Indian corporates. Since then, India's forein
exchange reserves have risen from $5.8 billion in 1991 to $283.5 bilion in December 2009. In 2012, Unite
Kingdom announced an end to all financial aids to India atter winessing the growth and robustnessof the
Indian economy.
The reforms enabled India to attract foreign direct investment. Despite a surge in Foreign Investment, rigidFI
policies acted as major hurdles. This called for the urgent need of FDI reforms. India now has a large pool of
skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and
represents a growing consumer market. Industrial policy reforms have substantially reduced industrial licensing
requirements, removed restrictions on expansion and facilitated easy access to foreign technology and FDI
The upward sloping growth curve of the real estate sector owes some credit to a booming economy and
liberalized FDI regime.
FINANCIALSECTOR
Another reason for the 1991 economic crisis was curency over-evaluation and curent account deficit. This
led to a fall in investors' confidence, causing sharp exchange rate depreciation. In the mid 1991, India's
exchange rate was subject to a severe adjustment. This event began with a slide in the value of the Indian
rupee. The Reserve Bank of India (RBI) took measures to defend the curency by airifting gold reserves, which
was met with a public Outcry. The monetary policy suggested by the LPG model came to rescue and the R
introduced massive economic reforms. After 1991, the monetary policy was disassociated from the fisca
policy.
The reforms included:
a Reduced Reserve Requirements: After the policy reforms, the Cash Reserve Ratio (CRR) and the StaturOy
Liquidity Ratio(SLR) were reduced from 15% to 4% and from 38.5%to 25%respectively
Group.
b) Increased Micro Finance: Ihe RBI took initiative to improve the rural finance by forming a Self Help
It consisted of farmers, workers, artisans and rural population of the society.
c) Fiscal Monetary Separation: The main target of the reform was to separate the fiscal and moneray
sector.
l was made to sign an agreement where it had to stop financing the deficit in the governmentDuu
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interest rates: The inferest rate structure was changed from the administered rate to the market
ChangedInterest
oriented orliberal rate of
C iberal rate of interest. Interest rate slabs were reduced to 2 and minimum lending rates were
a b o l i s h e d . .
Similarly, lending rates above Rs.2 lakhs were freed.
elExtenal Refo
nnl Reforms: The major changes in the external sector comprised of lifting various controls on imports,
reducing
tarifs
ion tariffs, etc. It showed the impact on domestic money supply due to increased inflow of the foreign
copital.
a icher Market Orientation for Banking: The banking sector was given more autonomy and operational
fexibilit
feribilily. The banks were given more freedom in methods of assessing working funds. This ensured market
orientation.
Other measures concerning the financial sector include eliminating prior approval of the RBI for large loans,
reducing statutory requirements to invest in government securities, increase in financial soundness such as
introducing capital adequacy requirements and other prudential norms for banks, strengthening banking
supervision and increasing compefition by lIberal licensing of private banks and easier expansion by toreign
bonks. These steps have produced positive outcomes. There has been a sharp reduction in the share of non-
performing assets. More than 90% of the banks now meet the new capital adequacy standards.
CONCLUSION
ndia is growingat 6% per annum on a sustained basis. However, if it continuesatthis pace, it will take fourteen
yeors to reach the curent level of per capita income of People's Republic of China, thirty-sik years to reach
aiand's and a hundred and four years to reach that of the United States. Thus, the need for accelerated
Owin can hardly be over emphasized. At the same time, the task of implementing retorms in a democracy is
COmplex. The good news is that the experience of the past decade shows that change can occur. Moreover
UCcess of the reforms in delivering growth and poverty reduction has paved the pathway for more efficient
reforms in the years to come.
REFERENCES
2Aninsight into Indian Economic Reforms- Cambridge University
) Sustainability magazine-2007
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