Economic Reforms In India

Economic Reforms In India

Economic Reforms In India

Economic Reforms In India


You have learnt in the previous units that after Independence the state assigned the predominant role under the belief that resources better allocated by a planning authority.

Licensing considered the best way to manage the limited I resources.

However, over the years, it experienced that such a system was inefficient and led only to corruption, delay and inefficiency. Economic Reforms In India

 Since July 1991, economic reforms introduced.

These new policy measures seek to redefine the role of the state and market so as to improve the productivity and efficiency of the system.

In this unit, after discussing the rationale for economic reforms, we shall explain the terms privatization, liberalization and globalization.

We shall also examine to what extent economic reforms achieved the goals of our development strategies.

Let us begin with explaining the meaning of economic reforms and rationale behind them. Economic Reforms In India

Economic Reforms: Rationale

Since the inception of planning, growth with social justice and self-reliance remained the central objectives of development strategy.

Import-substitution, licenses and controls coupled with dominant role of public sector in economic activities the peculiar features of development strategies till July, 1991.

License permit quota led to widespread corruption.

The bureaucracy was the principal beneficiary of this system. The Government officials in collusion with the political bosses earned huge money via corruption.

Hence, it increasing felt to dismantle the system of licensing and controls.

A large number of public enterprises which played crucial role in setting up heavy and basic industry ; social and economic infrastructure development king problem of inefficiency and high cost of operation.

Further, there was a high pressure of the World Trade Organisation (WTO) to expose Indian industry to face world competition.

The performance of the Indian Economy was not up to expectations. All these factors made the Government to introduce the economic reforms. Economic Reforms In India

The industrial policy announced in 1991 provided following rationale for introducing economic reforms:


  1. to de-control the Indian industrial economy from unnecessary bureaucratic controls;
  2. to introduce liberalization with a view to integrate the Indian Economy with the world economy;
  • to remove the restrictions on foreign direct investment;
  1. to remove the restrictions of MRTP Act; and
  2. to shed the load of public sector enterprises which have shown a  low rate of return and incurring losses over the years.

Constituents Of Economic Reforms:

Economic reforms in India refer to the set of instruments and strategies adopted since 1991.

Liberalization, privatization and globalization are the three constituents of economic reforms. Let us discuss all these three constituents one by one. Economic Reforms In India

Liberalization of the Economy:

In the context of economic reforms, liberalization refers to shifting of licenses dominated regime to de-licensing, deregulation and de-bureaucratization.

India taken following measures towards liberalizing the economy. Economic Reforms In India

Removal of Industrial Licensing:

Except 18 industries relating to security and strategic concerns, social reasons, hazardous chemicals and over-riding environmental, all industrial licensing abolished.

Subsequent, this list reduced to a small group of five industries. Economic Reforms In India

Reservation of SSI Items:

The items earlier reserved for SSI sector gradual de-reserved. In the budget 2003-04,75 items and in 2005-06, 108 items deserved.

Thus the small scale industry forced to face both domestic and international competition. Economic Reforms In India

Withdrawing MRTP Restrictions:

The provisions for MRTP companies for clearance of investment proposal withdrawn.

This  freed big business house to undertake expansion and establishment of new undertakings as well as to undertake mergers, amalgamations and takeovers.

They given the freedom in the appointment of directors.

This provided a more liberal environment for expansion of existing undertakings and setting up of new undertakings. Economic Reforms In India

Privatisation of the Economy:

Privatisation refers to any process that reduces the involvement of state/public sector in economic activities of a nation.

In a narrow sense, privatization refers to the induction of private ownership in a public sector undertaking.

In a broader sense, it implies the enlargement of the scope of the private sector in the growth of the economy. Economic Reforms In India 

Privatisation in the narrow sense can take the following forms:

1.Total Denationalization: This implies complete transfer of ownership of a public enterprise to private hands.

Some examples of total de-nationalization are: Allwyn Nissan  handed over to Mahindra; Bangalore Chemical

and Fertilizers to UB Group and Maharashtra scooters to Bajaj Auto (India). Economic Reforms In India.

2.Joint Venture: This implies partial induction of private ownership from 25 to 50 per cent

or even more in a public sector enterprise depending upon the 8 nature of the enterprise and state policy in this regard. Economic Reforms In India

3.Workers’ Co-operative: Transfer of ownership of a loss-making concern to the workers another form of privatisation.

The basic logic of the proposal that workers besides receiving wages for work also entitled to a share in ownership dividend.

Since workers’ personal interest  linked to the interest of the enterprise, the workers are likely to work hard to increase productivity so that they can earn more.

Such schemes introduced in Kamani Tubes, Central Jute and Mewar textiles, etc. Economic Reforms In India

4.Token Privatisation: The sale of 5 per cent to 10 per cent shares of a profit making public sector enterprise in the market known token privatisation.

The objective of such privatisation to obtain revenue to reduce budget deficit.

Out of the forms of privatisation, the most acceptable the joint venture in which the share of the private sector kept at either 49 per cent or’74 per cent.

But simple a change of ownership not sufficient to increase productivity and profitability.

For this purpose, other measures like linking wages to productivity,

changing promotion policy based on the efficiency of the workers  needed so that a competitive environment created in which efficiency pricing becomes a non. Economic Reforms In India

The following steps taken towards privatisation of the Indian economy:

  • Permitting the entry of the private corporate sector in such core sectors as steel, telecommunications, ports, airlines and power; and
  • No fresh budgetary support for Public Sector Enterprises (PSEs). This will lead for new projects and expansion;
  • No new Central Public Sector undertakings (Ps Us) will be set up in the Country.
  • Issue of equity to the public by the identified PSUs; and
  • Outright sale of identified PSUs.


As part of the ongoing privatisation, the shares of public sector undertakings being sold in the market with the objective of obtaining revenue to reduce budget deficit.

This policy  referred to as disinvestment.

In a democratic society like India, it not possible to carry out privitisation in total disregard of the interests of workers.

In spite of having a strong case for privatisation of certain PSUs, it become increasing difficult to push though proposals of privatisation in reality due to following reasons:

First, with the emergence of strong trade unions in India,

privatisation in the sense of total denationalization not acceptable to trade unions.

The trade unions of all shades left, center and right all opposed to privatisation of profit-making PSUs.

Consequently, the Government forced to slowdown its pace of disinvestments.

Second, using book value of net assets in disinvestments by the State results in gross under valuation of assets.

As a result of it, the assets transferred to big businesses at low prices.

Third, the State intention of encouragement of corporatisation and thereby providing benefit to big business houses also opposed. It argued that instead of total de-nationalization, the workers’ cooperative forms of privatisation adopted as was done in the case of Kamani Tubes.

Fourth, in the privatisation process, workers’ retrenchment through the route of Voluntary Retirement Scheme (VRS) in respect of sick units of PSUs also opposed by the workers.

Last, the absence of a social security system in India another major cause of opposition to privatisation.

Unless the problems associated with privatisation taken care of in a proper and honest manner, the resistance to privatisation will continue.

Globalisation of the Economy Economic Reforms :

In India Globalisation means the economic integration of the country with the rest of the world.

In other words, it a process of integrating the many economies of the world without creating any hindrances in the flow of goods and services, technology, capital and labour.

This involves four components: 

  1. Reduction of trade barriers in the form of custom duties or quantitative restrictions or quotas so as to permit free flow of goods and services among different economies;
  2. Creation of an environment in which free flow of capital (or investment) can take place between nation-states;
  • Creation of an environment for free flow of technology; and s
  1. Creation of an environment in which free flow of labour or human resources can take place among different countries of the world.

Advantages of Globalisation:

Globalisation generates many advantages for a developing economy like India.

Among these, the more important ones   brief summed up as follows:

  • Globalisation helps in removing inefficiency In the absence of globalization prolonged protection of domestic industry serious damaging effects on cost.
  • Industries habitual fall asleep under protective umbrellas and become careless about cost.
  • Globalisation serves to give a boost to the long-run average growth rate of the by: (i) improving the allocation efficiency of resources; (ii) reducing the capital output ratio; and (iii) increasing the labour productivity.
  • Globalisation helps to restructure the production and trade pattern in favor of labour-intensive goods and labour-intensive techniques.
  • Foreign capital attracted to exploit the professional export opportunities along the above lines. With the entry of foreign capital, updated technology also enters the country.
  • With the entry of foreign competition and the removal of import tariff barriers, domestic industry will be subject to price-reducing and quality-improving effects in the domestic economy.
  • Uneconomic import substitution will slow disappear and cheaper imports, particularly of capital goods, will reduce the capital-output ratio in manufacturing. Lower prices of manufactured goods will improve the terms of trade in favour of agriculture.
  • The main effect of globalisation felt in the consumer goods industries. As there a large domestic demand for these goods, employment opportunities would expand and over a period of time, the trickle down effect will operate and the proportion of people below the poverty line will go down.
  • It also believed that the efficiency of banking and financial sectors will increase with the opening up of these areas to foreign capital and foreign banks.

Disadvantages of Globalisation:

Globalisation its pitfalls also. Among these, the more important ones identified as follows:

  • Globalisation process in essence a tremendous redistribution of economic power at the world level. This increasing translate into redistribution of economic power. Economical weak nations dominated by economical powerful nations.
  • Globalisation process challenges some familiar assumptions. Until now, for instance, it was conventional wisdom that technological change and increases in productivity would translate into more jobs and higher wages. But in the last few years, technological changes eliminated more jobs than they created.
  • It becoming harder in the industrial developed democratic countries to ask the public to go through the pains and uncertainties of structural adjustment for the sake of benefits yet to come.
  • Globalisation sounded the death-knell of village and small industries. These cannot stand up to competition against the well-organised MNCs.

In short, the human and social costs of globalisation multiply to a level that tests the social fabric of the democracies in an unprecedented way.

It implies that the effort of focusing on training and education, on the constant overhauling of telecommunication

and transport infrastructures, on entrepreneur-incentive fiscal policies to be a central part of a national competitiveness policy going beyond the traditional concept of economic policy.

Globalisation of the Indian Economy

The following measures taken towards globalisation of the Indian economy:

  • Automatic approval for direct foreign investment up to 5 1 per cent foreign equity ownership in a wide range of industries. Earlier, all foreign investments limited to 40 per cent.
  • Automatic permission for foreign technology agreements royalty payments up to 5 per cent of domestic sales or 8 per cent of export sales or lump sum payment of Rs. 10 million. Automatic approval for all other royalty payments  also given if the projects can generate internal the foreign exchange
  • With a view to provide access to international markets, majority foreign equity holdings up to 51 per cent equity allowed for trading companies primary engaged in export activities.
  • As a part of shift in policy orientation from import substitution to export promotion, tariff rates reduced and quantitative controls over imports removed. Quantitative restrictions replaced by price-based system. Other measures include setting up of special economic zones, aligning EXIM procedures with WTO norms, removal of disincentives, export promotion through import entitlement.

Consequent upon opting the strategy of export-led growth during the last 15 Economic Reforms years,

Indian exports as a percentage of GDP have gone up from 5.8 per cent in India in 1990-9 1 to 1 1.1 per cent in 2004-05.

Along with this, imports have also gone up from 8.8 per cent of GDP to 13.8 per cent during the same period.

Similar, foreign direct investment flows which a mere trickle in 1990-91 of the order of $97 million shot up to $6,130 million in 2003-04.

Another major benefit of globalisation been the sharp increase in the export of invisible items,

especially software exports. A unique achievement of globalisation the increase of our net software export earnings to a level of $23.41 billion in 2003-04.

India started thinking in terms of reaching international standards in productivity and, thus, competing effective in the global market.  


Assessment Of Economic Reforms:

In the First and Second Five Year Plans, the goals of economic development identified as under:

  • A higher rate of growth of GDP;

    2)  Enlargement of employment potential leading to full employment;

    3)  Removal of poverty;

   4) Promotion of equity in distribution of income; and

   5) Removal of regional disparity between the rich and the poor states.

On the basis of these goals, economic reforms assessed as under:

  1. It argued by the proponents of economic growth that the reform process accelerates the economic growth. The annual average growth rate of GDP during the decade of 1990’s was about 6 per cent against the average GDP growth rate of 5.5 per cent during the pre-reform period (between 1980-8 1 and 1990-91). Present, the economy all set to grow at a still higher rate of 7.0 per cent which may go on to become and even exceed 8.0 per cent. Thus, the reform process to a certain extent been successful in obtaining high GDP growth
  2. The growth rate of employment declined from 2.39 per cent per annum during 1983 and 1990-9 1 to a mere 1.0 per cent per annum during 1990-9 1 to 1999- 2000. The growth rate of employment in organised sector was mere 0.6 percent. This was just one-third of the growth of employment witnessed in the pre-reform period. The growth rate of unorganized sector which was of the order of 2.4 1 per cent during the pre-reform period (1 983 to 1990-9 1), also declined to 1.1 per cent in the post-reform period. Thus, decline in the employment indicates the state of jobless growth.
  3. Poverty ratio declined from 36 per cent to 26.1 per cent in 1999-2000. However, the rate of poverty reduction which was around 3.1 per cent per annum during the period 1983-1 991 reversed to 1 per cent in the 1990’s, i.e., between 199 1 and 1997. Thus, an inverse relationship observed between GDP growth and poverty reduction. This reflects that the benefits of growth do not reach to the poor.
  4. During the pre-reform period, of the total- days lost, 53.8 per cent accounted for by the strikes and remaining 4432 per cent due to the lockouts. However, in the post-reform period, i.e., 1991-2000, the proportion of the mandays lost due to strikes came down to 39.8 per cent and share of lockouts increased to 60.2 per cent. Thus, in the post-reform period, proportion of mandays lost due to lockouts was much higher in the post-reform period than in the pre-reform period. This shows that due to privatisation and policy of reform, the employers’ militancy increased and the workers been put in much vulnerable position.
  5. The quality of employment also deteriorated in the post-reform period. The share of casual labour in the total workforce which was 32 per cent in 1993-94 rose to 33.2 per cent in 1999-2000. All these facts indicate that labour adverse affected by the economic reforms.
  6. The agriculture sector neglected in the reform period. The growth rate of agriculture declined from 3.7 per cent per annum during the pre-reform period to only 2.9 in the post-reform period.
  7. Economic reforms aggravated regional disparities by favoring the forward states. The ratio of maximum and minimum Net State Domestic Product (NSDP) increased from 2.7 in 1990-91 to 4.6 in 2000-01. Thus, regional disparities in terms of growth of NSDP both total and per capital widened further.

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