What are Economic Reforms

Economic reforms refer to a set of economic policies directed to accelerate the pace of ‘growth and development’.

In 1991,  the Government of India initiated a series of economic reforms to pull the economy out of the crisis of the ’90s. These reforms came to be known as New Economic Policy (NEP).

Three broad components of NEP are:

1. The policy of liberalization in place of licensing for the industries and trade.

2. The policy of privatization in place of quotas for the industrialists.

3. The policy of globalization in place of permits for exports and imports.

Elements of NEP (New Economic Policy)

Three main elements of NEP are:-

  • 1. Liberalisation
  • 2. Privatisation
  • 3. Globalisation

1. Liberalisation

Liberalization of the economy means freedom of the producing units from direct or physical controls imposed by the government. Following are some notable observations in this regard :

i. Prior to 1991, the government had imported several types of controls on private enterprises in the domestic economy.

These included industrial licensing system, price control or financial control on goods, import license, foreign exchange control, restrictions on investment by big business houses, etc.

ii. It was experienced by the government that several shortcomings had emerged in the economy on account of these controls.

iii. These controls had given rise to corruption, undue delays, and inefficiency.

iv. Growth rate of GDP had fallen sharply and a high-cost economic system came into being.

Economic Reforms under Liberalisation

  • 1. Industrial Sector Reforms
  • 2. Financial sector Reforms
  • 3. Fiscal Reforms
  • 4. External Sector Reforms

1. Industrial Sector Reforms

Liberalisation virtually implied de-regulation of the industrial sector of the economy. The following observation highlight how it happened :

I. Abolition of Industrial Licensing: In July 1991, a new industrial policy was announced. It abolished the requirement of licensing except for the following five industries: a.liquor, b.cigarette, c. defense equipment, d. industrial explosives, and e.dangerous chemicals.

ii. Contraction of Public Sector: Under the new industrial policy number of industries reserved for the public sector was reduced from 17 to 8. In 2010-11, the number of these Industries was reduced merely to two: i.atomic energy and. ii.Railways.

iii. De -reservation of Production Areas: Many production areas which earlier were reserved for small-scale industries were de-reserved. Forces of the market were allowed to determine the allocation of resources.

iv. Freedom to Import Capital Goods: Liberalisation also implied freedom for the industrialists to import capital goods with a view to upgrading their technology. Permission was no longer required from the government to enter into international agreements for the import of technology.

2. Financial Sector Reforms

The financial sector includes i.banking and non-banking financial Institutions ii. stock exchange market and iii. foreign exchange market.

In India financial sector is regulated and controlled by the Reserve Bank of India.

Liberalization implied a substantial shift in the role of the RBI from a regulator to a facilitator of the financial sector.

As a  regulator, the Reserve Bank of India would fix the interest rate structure for the commercial bank but as a facilitator, the Reserve Bank of India would only facilitate the free play of the market forces and leave it to the commercial banks to decide their interest rate structure. Now competition rules the decision-making process.

3. Fiscal Reforms

Fiscal reforms relate to the revenue and expenditure of the government.

Tax reforms are the principal component of fiscal reforms.

Broadly taxes are classified as: a. Direct taxes and b. Indirect taxes.

Direct taxes are those taxes the burden of which cannot be shifted on to others. example: Income Tax, one who pays such a tax himself bears the burden of it.

Indirect taxes as those taxes, the burden of which can be shifted onto others.

example: Goods and services tax, one who pays such a tax.

4. External Sector Reforms

External sector reforms include i. foreign exchange reforms and ii. foreign trade policy reforms.

Foreign exchange reforms were initiated in 1991 with the devaluation of the Indian rupee against foreign currencies.

Devaluation implies a fall in the value of the rupee vis-à-vis the US dollar or British pound. Implying that a US dollar or British pound can be exchanged for more rupees than before.

Or implying that a US dollar or British pound can buy more goods in the Indian market.

Foreign Trade Policy underwent a substantial change in the wake of liberalization.

Tariff restrictions have been considerably moderated rather than withdrawn from many items of export and import.

Privatisation

Privatization is the process of involving the private sector in the ownership or operation of a state-owned Enterprise.

It implies gradual withdrawal of government ownership from the public sector enterprises. It may happen in two ways :

i. Outright sale of the government enterprises to the private entrepreneurs

ii. Withdrawal of the government ownership and management from the mixed Enterprises.

Need for Privatisation

  • The Process of industrialisation was initiated during second five year plan assigning a key roles to PSUs.
  • The Industrial Policy Resolution 1956 clearly and it categorically stated the significance of the PSUs  in the process of growth and development.
  • It is beyond doubt that it was through the spread of PSUs that India could diversify its industrial base between the period 1951 – 1991.
  • Leakage, inefficiency and corruption had become so rampant in PSUs that their privatisation was considered as the only remedy.

Globalisation

Globalization means integrating the economy of a country with the economics of other countries under conditions of free flow of trade and capital across borders.

Globalization may be defined as a process associated with increasing openness,  growing economic interdependence, and deepening economic integration in the world economy.

Economic reforms aim at integrating the Indian economy with the global economy. As a result, there will be an unrestricted flow of goods and services,  technology, and expertise between India and the rest of the world.

 Particularly, it is expected that capital and Technology will flow from the developed countries of the world towards India.

Policy Strategies Promoting Globalisation of the Indian Economy

1. Partial Convertibility: To achieve the objective of globalization partial convertibility of the Indian rupee has been allowed for the following transactions :

  • Import and export of goods and services.
  • Payment of interest or dividend on investment.
  • Remittances to meet  family expenses.  It is called partial convertibility because it does not cover capital transactions.

2. Long-term Trade Policy: In conformity economic reforms, foreign trade policy is enforced for a longer duration. Implying that it is a liberal Policy.

Under this policy, all restrictions and controls on foreign trade have been removed. Open competition is encouraged. Barring some specific goods, most goods are traded free of restrictions.

3. Reduction in Tariffs: In order to encourage competitiveness, tariff barriers have been withdrawn on most goods traded between India and the rest of the world.

4. Withdrawal of Quantitative Restrictions: Since 2001, the quantitative restrictions on all import items have been totally withdrawn. This is in conformity with India’s commitment to the WTO.


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