What are Economic Reforms?
Economic Reforms refer to a set of major policy changes made to improve the health and growth of a country’s economy.
In India, the term almost always refers to the New Economic Policy (NEP) introduced in 1991. This was a radical shift from the country’s previous economic policies.
Why were the Reforms Needed? The 1991 Crisis
By 1991, the Indian economy was in a severe crisis. Think of it as the country’s wallet being almost empty. The main problems were:
- Huge Fiscal Deficit: The government’s expenses were much higher than its income, and it was borrowing heavily.
- Critically Low Foreign Exchange Reserves: India had foreign currency reserves (mainly US dollars) that were only enough to pay for about two weeks of essential imports like petrol.
- Soaring Inflation: Prices of everyday goods were rising very fast, making life difficult for the common person.
- Poor Performance of PSUs: Many public sector undertakings (government-owned companies) were making huge losses.
This crisis forced the Indian government to approach the International Monetary Fund (IMF) for a loan. The IMF agreed to help, but on the condition that India would “reform” or open up its economy.
The Three Pillars of the 1991 Reforms: LPG
The New Economic Policy was built on three main pillars, famously known as LPG.
1. Liberalisation (Ending Controls)
- Simple Meaning: Reducing government control and giving more freedom to businesses and industries.
- Key Actions Taken:
- Abolition of “License Raj”: Before 1991, industries needed a government license to start a new business, expand, or change what they produced. This system, which caused huge delays and corruption, was abolished for most industries.
- Freedom to Import: Businesses were given more freedom to import machinery and raw materials.
- Financial Sector Reforms: Banks were given more freedom to decide their interest rates. The role of the RBI shifted from being a rigid controller to a facilitator of the financial system.
2. Privatisation (Increasing Private Sector Role)
- Simple Meaning: Transferring the ownership or management of government-owned companies to the private sector.
- Key Actions Taken:
- Disinvestment: The government started selling its shares in many Public Sector Undertakings (PSUs) to the public and private companies. For example, selling a part of its ownership in companies like BHEL or ONGC.
- Opening up Reserved Sectors: Many areas that were previously reserved only for government companies (like telecommunications, airlines, and power) were opened up for private companies to enter.
3. Globalisation (Integrating with the World Economy)
- Simple ‘Meaning: Breaking down the walls between the Indian economy and the world economy. (We discussed this in the previous topic).
- Key Actions Taken:
- Reduction in Tariffs: Taxes on imported goods (customs duties) were significantly reduced to encourage foreign trade.
- Encouraging Foreign Investment: The rules for foreign companies wanting to invest in India were made much simpler and more attractive.
Impact of the Reforms
The 1991 reforms completely changed the face of the Indian economy.
- It shifted India from a slow-growing economy to one of the fastest-growing economies in the world.
- It led to the growth of the private sector, especially in services like IT and telecommunications.
- It ended the scarcity of goods and gave Indian consumers access to a wide variety of international products and brands.
Reforms are an Ongoing Process: It’s important to remember that reform isn’t a one-time event. Major changes like the introduction of the Goods and Services Tax (GST) in 2017 are also part of this continuous process of improving the economy.