Impact of 1991 Economic Reforms in the Performance of Indian Economy

Normally the word ‘reform‘ means to ‘form again’. It also means ‘to make better by making necessary changes’. For instance, we say that a very good teacher can reform the delinquent and truant students in a school. Applied to the society or economy, it means much the same thing.

Thus we know that certain religious and social reforms took place in Indian society in the 19^th century. When we talk of (necessary) economic reforms, in a similar vein we mean that certain changes are necessary to improve the performance of the economy and given a new fillip. Very often, the difference between these necessary changes and the earlier situation is of kind rather than of degree. A mere tinkering with existing instruments and policies will not do; what is required is to give the economy a new path, steer a new course, and provide a new framework.

Now, reforms can be of many types, and there is no reason to think that the kind seen in India and elsewhere is the only one possible. But for historical reasons, it so happened that since the 1950s when several developing nations embarked on their journey of development, a great faith was placed on the state in most of these nations for steering the economy.

Some nations, like China and Cuba, were outright Socialist, with the machinery and productive resources almost entirely owned and controlled by the state. Others, like India, were ‘mixed economies’, with a large private sector, but with pervasive state presence in the economy, and a host of controls and regulations.

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In all of these nations, it began to be felt by the late 1970s, that the performance was not matching the promise. So, in almost all countries, the state began to lessen its control over the economy and open more areas of economic activity to the private sector. In some cases, the process of privatisation was imitated with selling part, or sometimes all, of ownership of state-owned companies.

Another important feature of these reforms has been increased integration of the nation with the international economy. One of the earliest to carry out such reforms was China, which started reforms in 1978.

There could be other types of reforms. Policy-makers in some country might feel that the presence of the private sector is too high. Hence, some industries ought to be taken over by the state. Also, that the state ought to increase its presence in the economy. Indeed such events have taken place in many countries in the 1940s, 1950s and 1960s.

These policy steps could also be called ‘reforms’ but this term was not in vogue then. Thus, reforms came to acquire a specific connotation, and synonymously have come to be called ‘liberalisation’. It means greater faith in individualism, in individual enterprise, and individual liberty. The role of the state is lessened.

The suffixation suggests that it is a process, an intensification of a trend. Thus liberalisation, simply put, is increasing the process of making the economy more liberal. This entails a two-fold process. First, the private sector and private enterprise is given greater play in the economy, and the role of the state is reduced.

The role of ‘the market’ is enlarged. Secondly, the economy is integrated more with the global or international economy, with increased foreign trade and investment.

Globalisation means:

i. Greater integration of the world through increased flows of goods and services across national borders;

ii. Greater investment, capital and financial flows among countries; and

iii. Faster and quicker information and communication channels.

We often hear the term ‘global economy’ or ‘global village’ or the statement ‘the world is becoming smaller’. No doubt, globalisation is related to liberalisation. Some even consider globalisation and liberalisation both to be part of reforms. There is a slight difference in the operation of the two processes. Although liberalisation implies a lesser role for the state, it still is a policy put into operation by the state.

The state takes a policy to lessen its own role particularly of regulation and ownership. Globalisation on the other hand, is a partly autonomous process. For example, forces in communications and information technology, such as the Internet, can arise spontaneously, and without design by governments, which intensify globalisation.

There was some disenchantment with the industrial licensing system as well as with the controls in industry and some other areas such as financial markets and institutions. There were some piecemeal attempts at domestic reforms since the 1970s. In 1973, large industrial houses and foreign companies were allowed to set up capacity in some basic and core industries.

The Report of the Narasimham Committee (1985) suggested that physical controls should be replaced by indirect controls in the form of fiscal incentives and disincentives. Some measures were taken to lower barriers to entry in industrial markets, limit the role of licensing, and giving some flexibility in using existing capacities. However, very little attention was given to the policy of allowing closure of industry, the so called ‘exit policy’, and policy towards ‘sick’ industries.

In June 1991, foreign exchange balance was down to $ 1 billion, which was just enough to pay for six weeks’ imports. The economy was in a severe balance-of- payments crisis. At the same time, there was a severe fiscal crisis.

Although the economy had grown by over 5 per cent per annum in the second half of the 1980s – this rate of growth was higher than in previous time-periods this growth was achieved at the cost of considerable fiscal extravagance and wastefulness.

In order to tackle the crisis, India had to approach the International Monetary Fund (IMF) and the World Bank for loans. In return, the IMF and the World Bank suggested certain structural adjustments such as reduction in fiscal deficit, devaluation of currency and opening up of the economy.

Under the Structural Adjustment Programme, the World Bank suggested reforms which called for changes in the basic structure of the economy. It necessitated replacement of quantitative restrictions and resource allocation processes with market-based price signals and incentives.

The overall objective conditionality’s was of IMF to bring in Macro- economic Stabilisation, which required reduction in fiscal deficits (broadly, the difference between government expenditure and revenues) and balance of payments deficit (the difference between payments made to foreign countries and earnings from foreign countries).

In July and August 1991, the government announced a new Trade Policy (here ‘trade’ means foreign trade). On 24^th July, 1991, the government made a statement on Industrial Policy. The 1991 reforms did away with industrial licensing, except for a few industries for location-related reasons or for environmental considerations.

The reforms also removed the require­ment of import licenses, except for most consumer goods. Restrictions were eased for foreign direct investment and portfolio investment (investment in financial markets). Sectors where private (both domestic and foreign) investments were earlier prohibited, such as power, saw private investments being allowed. Steps were taken for disinvestment of equity in public sector enterprises (called pri­vatisation). What are still required are reforms of labour laws and the Industrial Disputes Act. The problem of industrial sickness has to be tackled.

Other areas of reforms included easing restrictions in financial markets, and going from a fixed to flexible exchange-rate regime. The regulatory framework has also undergone substantial changes, particularly in telecom sector and financial markets.

Economic reforms have also entailed severe changes for the reform of public enterprises, and even privatisation of public enterprises. Some other policy measures have included exploring private participation in infrastructure like power and roads as well as giving thought on adoption of user charges in social sectors like health.