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Economic Reform in India : Economics Notes for SSC Exam

In this post, we are providing notes on Economic reform in India since 1991. This is an important topic for the upcoming SSC CGL Exam as well as other competitive exam. Question from this topic are frequently asked.

Economic Reforms in India

Economic Reforms denote the process in which a government prescribes declining role for the state and its instruments and expanding role for the private sector in an economy, especially in the context of a developing nation such as India.
The first such major reform took place in 1991 and following are some points regarding the same.
There were a large number of events that accumulated simultaneously that led to economic crises of 1991. In 1991, major factors which led to the downfall of the Indian Economy were as follows:
Collapse of Soviet Union-The Soviet Union was critical in India’s economic calculations. India was a major arm’s buyer from the former Soviet in the 1980s. India’s protected and regulated economy fitted well with Soviet’s command economy. The rupee-rubel trade seemed dead and hence India had to follow the path of liberalization to boost-up the ‘dead-economy’.
 The Gulf War- First and foremost, it raised the price of oil and fed an inflationary spiral in India as in the rest of the world. Fears of instability arising from the Gulf crisis also led to volatility of forex flows. NRI deposits, which had then been the mainstay of India's balance of payments, started flowing out. The remittances from Indians employed overseas also declined, consequent on the war-like situation. Particularly, it impacted economies of remittance-dependent States and regions such as Kerala. The Forex reserves started getting depleted. India had to go to the IMF, besides pledging gold to foreign central banks, and initiate a traumatic onrush into economic reforms — essential, but speeded by the crisis.
 Political Uncertainty- From 1989 to 1991 India had had three PMs and change in Lok Sabha hence resulting in grave political uncertainty and lack of powerful decision-making. Only after P.M Narasimha Rao came situations improved, albeit after some tough decision such as privatization and liberalization etc.
 External Macro Imbalance- The crisis of 1990-91 was unprecedented both in terms of its intensity and duration. The level of foreign currency assets came down to $1.2 billion at the end of April 1991. India had to experience a further threat of decline in reserves because the low level of reserves was itself both the cause and effect of a reduced inflow of FCNR deposits.
 Grave External Payment Crises- India's balance of payments started flowing out.
Iraq’s annexation of Kuwait- could be considered as THE GULF-CRISES which affected India’s foreign trade as has been explained above as well.
 Problem with Public Finance-Then followed the inevitable application to IMF, IBRD and ADB for assistance. There was also resort to exceptional financing in the form of bridge finance by pledging gold with international money centers as well as with the Bank of England and Bank of Japan. Those were nightmarish times, which hopefully India will never have to go through again.
 We must remember that inflation was in double digits and our foreign exchange reserves had reached their lowest levels, the export market to Iraq and USSR had disappeared. In order to deal with the immediate crises, the following steps were taken:-
The government leased 20 tonnes of gold to the State bank of India, which in turn entered into the sale transaction with a re-purchase option in the International market. This transaction was worth 200 million $.
Gold was sent in four installments to the Bank of England. Total gold sent was 47 tonnes. A total amount of 405 million $ was raised from the Bank of England.
The government entered into a loan agreement with the World Bank and Asian Development Bank.
The Indian government devalued/ depreciated the rupee by nearly 18% on July 1 and July 3, 1991 in two instalments. The immediate impact of devaluation was to improve incentives to export and an increased disincentive towards imports.
A fiscal monetary policy was put in place to control inflation. Cash margins on imports were increased from 50% to 133% and further to 200% by April 1991. The Reserve Bank of India (RBI) imposed a surcharge of 25% on bank credit for imports. Import of capital goods was only allowed against foreign lines of credit. This was done to discourage to imports as imports became more expensive.
Economic Reforms, “After pushing an inward-looking development strategy with the state assuming an important role, for more than four decades, India decided to take a historic step of changing tracks in 1991.” In 1991, the Congress government came into power under the leadership of the then P.M Shri P.V. Narasimha Rao and the then Finance Minister Dr. Manmohan Singh. A 3 level strategy was introduced to deal with the short term and long term objectives to be attained by the economy.

Outline reforms were undertaken since 1991:-

Immediate management for crises:-

  • Sale of gold
  • Borrowing from Indian Monetary Fund (IMF)

Macro-Economic Stabilization:-

  • Control of Inflation
  • Fiscal Adjustment
  • Balance of Payment (BOP) adjustment

Structural Reforms:-

  • Industrial Policy Reforms:-
  • Industrial licensing
  • Foreign investment
  • Foreign technique agreement
  • Public sector reforms
  • Trade Policy Reforms
  • Financial Sector Reforms

The process of economic reforms was started by the government of India in 1991 for taking the country out of economic difficulty and speeding up the development of the country. The center of economic reforms has been liberalization, privatization and globalization these three terms are explained as follows:

Liberalization

Liberalization means to unshackle the economy from bureaucratic cobweb to make it more competitive. Following are its chief features:
Capable of embracing a broad-range of rival values and beliefs.
The term has its origin form the political ideology ‘liberalism’ which took its form by early nineteenth century.
It is a product of break-down of feudalism and growth of a market or capitalist society in its place which became popular via the writings of Adam Smith- the father of modern economics.

Privatization:

In brief, privatization means such an economic process through which some public sector undertaking is brought either partially or completely under private ownership even to the tune of 100%. It refers to the denationalization of state-ownership and factors of production.

Globalization:

Globalization means integrating the economy with the rest of the world. Following are its chief features:
Globalization is a ‘shift from a world of distinct national economies to a global economy in which production is internationalized and financial capital flows freely and instantly between the countries.’
There’s an increase in the economic integration among-st the nations.
Territorial borders do not impact the trade barriers as a result of globalization.

SOME QUESTIONS-CUM-POINTS ON THE TOPIC

  1. On which date India launched a process of economic reforms in response to fiscal and Balance of Payment (BOP) crises – 23rd July 1991.
  2. Liberalization shows the direction of reform, privatization shows the path of reform and globalization shows the ultimate goal of reform.
  3. Which institution defined Globalization is a ‘shift from a world of distinct national economies to a global economy in which production is internationalized and financial capital flows freely and instantly between the countries.’ – OECD
  4. The W.T.O was founded in which year – 1st January 1995
  5. The Great Depression affected in which year – 1930 – first affected the U.S and other major capitalist nations of those times.
  6. The W.T.O is a result of - The Marrakesh Agreement, manifested by the Marrakesh Declaration, was an agreement signed in Marrakesh, Morocco, by 124 nations on 15 April 1994, marking the culmination of the 12-year-long Uruguay Round and establishing the World Trade Organization, which officially came into being on January 1, 1995.
  7. The predecessor of W.T.O could be considered – GATT
  8. How many members are there in W.T.O presently - 164
All the best for exams

Team AIMSUCCESS
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