Back in 1991, when India was facing an unprecedented internal economic crisis along with changing international scenario, the then government in power, led by Narasimha Rao, came up with economic reforms or the New Economic Policy (NEP) to tackle all the issues.
Significance of Economic Reforms in 1991
Structural Reforms and Stabilisation Policies were brought by the government in 1991. The idea was to pace the economic growth of the country, which was halted due to external/internal factors. The Structural Reforms were ushered in to tide over the rigidities in the various sectors of the Indian economy. Stabilisation policies were brought to correct the weaknesses on the fiscal and Balance of Payments fronts.
The Branches that come under Economic Reforms in 1991 are threefold :
Understanding the Objectives of Liberalisation
- Earlier, the Reserve Bank of India was the authorised bank to determine the interest rates. After NEP, a commercial bank can determine the interest rates.
- ₹1 Crore was set up as the investment limit for small-scale industries.
- After NEP, Indian industries get the freedom to import capital goods like machinery and raw materials from foreign countries.
- Earlier, it was the government that fixed the maximum production capacity of industries. After NEP, industries were given the freedom to diversify their production capacities and lessen production costs. Industries were able to decide this based on market requirements.
- Some of the restrictive trade practices were lifted. Earlier, companies that have assets of more than Rs. 100 crore were under MRTP firms (as per Monopolies and Restrictive Trade Practices (MRTP) Act 1969). These were subjected to severe restrictions which were lifted after NEP.
- Industrial licensing and registration were lifted. Accordingly, the private sector was set free to start a new venture without obtaining any licenses. Only a few sectors are exceptions that still need licenses such as cigarettes, liquor, industrial explosives, defence equipment, hazardous chemicals and drugs.
Understanding the Objectives of Privatisation
The idea of Privatisation is to open up the private sector to industries that were earlier reserved just for the government sector. This involves selling the PSUs to private players. The objective of Privatisation was to remove the political interference in PSUs.
- Shares of PSUs were sold to public and financial institutions. For example, Maruti Udyog shares were sold to private players.
- PSUs are sold to private players which means disinvestment in PSUs.
- The number of reserved public sectors decreased from 17 to 3. The three reserved public sectors were transport and railway, atomic energy and mining of atomic minerals.
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Understanding the Objectives of Globalisation
Opening up the economy more toward foreign investors and global trade is called globalisation.
- Reduction in customs duties and tariffs on exports and imports were appreciated to make our country attractive to investors globally.
- Enforcement of trade policy for a longer duration was done. The basic features of the trade policy were liberal policy, encouragement of open competition and controls on foreign trade were removed.
- Earlier, imports were regulated by a positive list of freely importable items. After, the list was replaced with a negative list where almost all intermediate and capital goods were freed from the list of important restrictions.
- The currency of India, i.e., Rupees was made partially convertible.
- The draconian Foreign Exchange Regulation Act (FERA) had been replaced by Foreign Exchange Management Act (FEMA).
Using a gradualist approach, India showed dramatic results. The growth of GDP can be seen clearly. It also lowered import tariffs. however, it has been reversed over the past few years. Some of the reforms are yet to be accomplished such as more focus on health, education, and environmental concerns. In the economy, India has come a long way and has to go a long way as well.
FAQs on Economic Reforms in 1991
Q.1 What were the three scopes of Economic Reforms in 1991?
The three scopes of Economic Reforms in 1991 were Liberalisation, Privatisation and Globalisation.
Q.2 Who was the Prime Minister of India during the Economic Reforms in 1991?
Narasimha Rao was the Prime Minister of India during the Economic Reforms in 1991.
Q.3 Who was the Finance Minister of India during the Economic Reforms in 1991?
Dr Manmohan Singh was the Finance Minister of India during the Economic Reforms in 1991.
Q.4 What was a significant benefit of liberalisation?
An increase in foreign direct investment was a primary benefit of the liberalisation policy launched during Economic Reforms in 1991.