Economic Reform Since 1991 - Class 12 Notes

Introduction

• The Indian government adopted major measures under the New Economic Policy post-1991, known as LPG:
  • Liberalisation
  • Privatisation
  • Globalisation
• These measures were recommended by international banks to open up the Indian economy.

Brief Overview of the Era Before LPG

• Before 1991, the Indian economy was under protection from international competition to shield domestic companies.
• The New Economic Policy was announced in 1991, aiming for future economic growth.
• Reforms categorized into:
  • Structural reforms
  • Stabilization measures

Stabilization Measures

• Aimed at correcting weaknesses in Balance of Payments (BOP) and controlling inflation.
• Short-term measures different from long-term structural reforms.

Structural Reforms

• Focused on long-term competitiveness by removing economic rigidity:
  • Liberalization
  • Privatization
  • Globalization

Factors Responsible for Economic Reforms

• Decrease in foreign exchange reserves due to higher imports than exports.
• Unfavorable balance of payments leading to a repayment crisis.
• Worsening budget deficit due to increased public expenditure.
• Rising prices affecting investments.
• State-owned enterprises showing low ROI.
• Impact of the Gulf crisis on crude oil prices.
• High deficit funding ratio.
• Collapse of the Soviet bloc.

Liberalization

• Ended various restrictions hindering economic growth.
• Allowed private sector entry with fewer government restrictions.

Objectives of Liberalization

• Increase domestic competitiveness.
• Encourage regulated foreign trade.
• Improve foreign capital and technology.
• Expand global market boundaries.
• Reduce national debt burden.

Major Economic Reforms under Liberalization

1. Industrial Sector Reforms
   • Contraction of public sector
   • Abolition of industrial licensing
   • Freedom to import capital goods
2. Financial Sector Reforms
   • Deregulation of interest rates
   • Reduction of SLR and CRR
   • RBI's role changed from regulator to facilitator
3. Foreign Exchange Reforms
   • Devaluation of the rupee
4. Trade and Investment Reforms
5. Fiscal Reforms
6. Tax Reforms

Privatization

• Enhanced the role of private sector enterprises.
• Reduced government management of public enterprises.

Forms of Privatization

• Denationalization
• Partial Privatization
• Deficit Privatization

Objectives of Privatization

• Improve fiscal situation.
• Reduce public sector workload.
• Raise capital via divestment.
• Increase efficiency of government agencies.
• Offer improved goods/services to consumers.
• Encourage competition and FDI in India.

Policies Adopted for Privatization

1. Contraction of the public sector.
2. Abolishment of government ownership in management.
3. Sale of public enterprise shares.

Globalization

• Integration of national economy with the global economy.
• Focused on foreign trade and investment.
• Promoted outsourcing model.

Benefits of Globalization

• Access to good services at lower rates.
• Abundant skilled human resources in India.
• Growth of the tertiary sector and job creation.

Policies Promoting Globalization

1. Increase in foreign investment equity limit.
2. Partial convertibility.
3. Long-term business policies.
4. Tariff reduction.

Positive and Negative Impacts of LPG Policies

• Positive: Increase in foreign investments, foreign exchange reserves, and national income.
• Negative: Neglect of agriculture sector, jobless growth, income inequality.

World Trade Organisation (WTO)

• Established in 1995, replacing GATT.
• Aims for smooth, fair, and free trade globally.

Functions of WTO

1. Monitoring and revising domestic policies.
2. Support through technical assistance.
3. Administration of trade agreements.
4. Forum for trade negotiations.
5. Management of trade disputes.
6. Technical training for developing nations.
7. Cooperation with international organizations.

Conclusion

• LPG reforms were crucial in transforming the Indian economy post-1991.
• These changes aimed to integrate India more closely with the global economy and to improve economic efficiency and growth.