Introduction | ISC Class 11 Economics Notes

This note covers India's 1991 economic reforms and the Indian economy after liberalisation: the main features, problems and policies of agriculture, industry and foreign trade, together with the meaning of liberalisation, privatisation and globalisation, disinvestment, and how the economy has performed during the reform period.

Why were economic reforms introduced in India in 1991?

By the late 1980s, government expenditure had begun to exceed its revenue by such large margins that meeting the gap through borrowing became unsustainable.

Prices of many essential goods rose sharply, and imports grew at a very high rate without a matching rise in exports.

Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks, and there was not enough foreign exchange even to pay the interest owed to international lenders. No country or international funder was willing to lend to India.

India approached the International Bank for Reconstruction and Development (the World Bank) and the International Monetary Fund (IMF), and received $7 billion as a loan to manage the crisis.

In return, these agencies expected India to liberalise and open up the economy by removing restrictions on the private sector, reducing the role of government in many areas and removing trade restrictions between India and other countries. India agreed to these conditions and announced the New Economic Policy.

Definition: Balance of payments crisis. A situation in which a country's foreign exchange reserves fall so low that it cannot pay for its imports or repay its external borrowings, as happened to India in 1991.

What was the New Economic Policy of 1991?

The New Economic Policy (NEP) consisted of wide-ranging economic reforms whose thrust was towards creating a more competitive environment and removing barriers to the entry and growth of firms. The policies fall into two broad groups.

1. Stabilisation measures — short-term measures intended to correct weaknesses in the balance of payments and to bring inflation under control, meaning the government had to maintain sufficient foreign exchange reserves and keep rising prices in check.
2. Structural reform measures, long-term measures aimed at improving the efficiency of the economy and increasing its international competitiveness by removing rigidities in various segments of the economy.
3. The structural reforms were grouped under three heads: liberalisation, privatisation and globalisation, often referred to together as LPG.
4. Though a few liberalisation measures had already been introduced in the 1980s in areas such as industrial licensing, export-import policy and technology upgradation, the reform policies initiated in 1991 were more comprehensive.

What is liberalisation, and how did it change industry, finance and taxation?

Liberalisation means putting an end to the rules and laws that were aimed at regulating economic activities but had become major hindrances to growth.

Before 1991, regulatory mechanisms included industrial licensing (every entrepreneur needed government permission to start or close a firm, or to decide how much to produce), reservation of many industries for the public sector, reservation of some goods for small-scale industry only, and government control over price fixation and distribution of selected industrial products.

Deregulation of industry and finance

Industrial licensing was abolished for almost all product categories except alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals.

The only industries now reserved for the public sector are a part of atomic energy generation and some core activities in railway transport.

Many goods earlier reserved for small-scale industries have since been dereserved, and in most industries the market has been allowed to determine prices.

The financial sector, regulated by the Reserve Bank of India (RBI), saw one of its major reform aims being to reduce the role of the RBI from regulator to facilitator, so that banks could take many decisions without consulting the RBI.

This led to the establishment of private sector banks, Indian as well as foreign; the foreign investment limit in banks was raised to around 74 per cent, and Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds were allowed to invest in Indian financial markets.

Tax and foreign exchange reforms

Since 1991 there has been a continuous reduction in income tax rates, since high rates were seen as encouraging tax evasion; moderate rates, it is now widely accepted, encourage savings and voluntary disclosure of income.

Corporation tax, earlier very high, has been gradually reduced. In 2016, the constitution was amended to empower state and union governments to impose the Goods and Services Tax (GST), intended to generate additional revenue, reduce tax evasion and create "one nation, one tax and one market".

In 1991, the rupee was devalued against foreign currencies as an immediate measure to resolve the balance of payments crisis; this also set the tone for the rupee's value to be determined, more often than not, by the market forces of demand and supply of foreign exchange rather than by government control.

Definition: Liberalisation. The removal of government rules and restrictions (such as licensing and price controls) that regulated industry, finance, taxation and foreign exchange, so as to open these sectors to greater market forces and private participation.

Definition: Devaluation. A deliberate reduction in the official value of a country's currency against foreign currencies, used in 1991 to resolve India's balance of payments crisis.

What is privatisation, and what is disinvestment?

Privatisation implies shedding the ownership or management of a government-owned enterprise. Government companies are converted into private companies in two ways: by withdrawal of the government from ownership and management of public sector companies, or by outright sale of public sector companies.

Privatisation carried out by selling off part of the equity of public sector enterprises (PSEs) to the public is known as disinvestment.

According to the government, the purpose of the sale was mainly to improve financial discipline and facilitate modernisation, and to utilise private capital and managerial capability to improve PSU performance.

Every year the government fixes a disinvestment target. In 1991-92, the target was to mobilise Rs 2,500 crore; the government mobilised Rs 3,040 crore more than this target.

In 2022-23, the government was able to mobilise about Rs 46,000 crore through disinvestment. To improve PSU efficiency, the government has also granted some PSUs greater autonomy, giving them the status of maharatnas, navratnas and miniratnas; examples include Indian Oil Corporation Limited and Steel Authority of India Limited as maharatnas, Hindustan Aeronautics Limited as a navratna, and Bharat Sanchar Nigam Limited as a miniratna.

Definition: Disinvestment. The sale of part of the government's equity holding in a public sector enterprise to private investors, as one method of privatisation.

Worked example 1. In 1991-92, the government's disinvestment target was Rs 2,500 crore. The actual amount mobilised exceeded this target by Rs 3,040 crore. Calculate the actual amount of disinvestment proceeds mobilised in 1991-92.

Answer: Actual proceeds = Target + Excess over target = Rs 2,500 crore + Rs 3,040 crore = Rs 5,540 crore. The government therefore mobilised Rs 5,540 crore through disinvestment in 1991-92.

What were the main features, problems and policies in agriculture after the reforms?

Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.

Main features of agriculture after liberalisation

Agriculture's share of growth has fallen: its growth rate was 3.6 per cent in 1980-91, 3.3 per cent in 1992-2001 and 2.3 per cent in 2002-07, falling to 1.5 per cent in 2012-13 before recovering to 4.8 per cent in 2021-22.

Public investment in the sector, especially in infrastructure such as irrigation, power, roads, market linkages and research and extension, has fallen since 1991, even though this investment had played a crucial role in the Green Revolution.

Production has shifted, under export-oriented policy strategies, from production for the domestic market towards production for the export market, with a focus on cash crops in place of food grains.

Problems of agriculture after liberalisation

The partial removal of the fertiliser subsidy has increased the cost of production, severely affecting small and marginal farmers.

The sector has also faced a reduction in import duties on agricultural products, a low minimum support price, and the lifting of quantitative restrictions on agricultural imports, which have adversely affected Indian farmers by exposing them to increased international competition.

The shift towards cash crops for export puts pressure on the prices of food grains in the domestic market.

Policies for agriculture after liberalisation

The policy changes affecting the sector have been a reduction in import duties on agricultural products, a low minimum support price, the lifting of quantitative restrictions on imports of agricultural products, the partial removal of the fertiliser subsidy and an export-oriented strategy that favours cash crops.

These policies have exposed Indian farmers to increased international competition and raised their cost of production, so that the sector has not shared in the gains of the reform period.

Worked example 2. Mahadeva, a farmer in Anantpur district, spent Rs 10,000 to grow groundnut on half an acre. He harvested two quintals of groundnut, each quintal selling for Rs 7,000. Calculate Mahadeva's income and his profit from the crop.

Answer: Income = 2 quintals × Rs 7,000 = Rs 14,000. Profit = Income − Cost = Rs 14,000 − Rs 10,000 = Rs 4,000.

This small margin left him vulnerable once subsidies on seeds and fertilisers were reduced and cheap imported edible oils flooded the local market, making it hard for him to get a price that covered even this cost.

What were the main features, problems and policies in industry after the reforms?

Main features of industry after liberalisation

Industrial licensing was abolished for almost all industries except a short reserved list, and controls on price fixation in most industries were removed, allowing the market to determine prices.

Industrial growth, however, has recorded a slowdown: it was 7.1 per cent in 1980-91, 6.5 per cent in 1992-2001, 9.4 per cent in 2002-07, 7.4 per cent in 2007-12 and 3.6 per cent in 2012-13, before recovering to 12.7 per cent in 2021-22.

Problems of industry after liberalisation

The slowdown is because of a decreasing demand for domestic industrial products, due to reasons such as cheaper imports and inadequate investment in infrastructure, including power supply, which has remained inadequate because of lack of investment.

In a globalised world, developing countries are compelled to open their economies to greater flows of goods and capital from developed countries, which renders domestic industries vulnerable to imported goods, so that cheaper imports have replaced demand for domestic goods and domestic manufacturers face competition from imports.

Moreover, a developing country like India still does not have access to developed countries' markets because of high non-tariff barriers: although India removed all quota restrictions on exports of textiles and clothing, the USA has not removed its quota restriction on imports of textiles from India and China.

Policies for industry after liberalisation

The policies that reshaped industry were the abolition of industrial licensing for almost all product categories, the narrowing of public sector reservation to a part of atomic energy generation and some core activities in railway transport, the dereservation of many goods earlier reserved for small-scale industries, and the removal of price fixation and distribution controls in most industries.

Alongside these, trade policy lowered tariffs and removed import licensing, which brought domestic manufacturers into direct competition with imports.

Note: Siricilla Tragedy. Power sector reforms in several states did away with subsidised electricity rates and raised power tariffs steeply.

Since powerloom weavers' wages were linked to cloth production, power cuts meant wage cuts; this crisis led 50 powerloom workers to commit suicide in the small town of Siricilla, then in Andhra Pradesh and now in Telangana.

Worked example 3. The table below gives the growth rate of industry (per cent) for selected periods: 1980-91: 7.1; 1992-2001: 6.5; 2002-07: 9.4; 2007-12: 7.4; 2012-13: 3.6. Calculate by how many percentage points industrial growth fell between 2002-07 and 2012-13.

Answer: Fall in growth = 9.4 − 3.6 = 5.8 percentage points. Industrial growth fell by 5.8 percentage points between 2002-07 and 2012-13, reflecting the steep decline in the industrial sector witnessed during 2012-13.

What were the main features, problems and policies in foreign trade after the reforms?

Main features of foreign trade after liberalisation

India had earlier followed a regime of quantitative restrictions on imports, enforced through tight control over imports and very high tariffs, to protect domestic industries; this reduced efficiency and competitiveness and led to slow growth of the manufacturing sector.

Since 1991, India is seen as a successful exporter of auto parts, pharmaceutical goods, engineering goods, IT software and textiles.

The opening of the economy has led to a rapid increase in foreign direct investment and foreign exchange reserves: foreign investment rose from about US $100 million in 1990-91 to US $23 billion in 2022-23, and reserves from about US $6 billion in 1990-91 to about US $646 billion in 2023-24.

Policies for foreign trade after liberalisation

The trade policy reforms aimed at (i) dismantling quantitative restrictions on imports and exports, (ii) reduction of tariff rates and (iii) removal of licensing procedures for imports.

Import licensing was abolished except for hazardous and environmentally sensitive industries. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were fully removed from April 2001.

Export duties have been removed to increase the competitive position of Indian goods in international markets.

Problems of foreign trade after liberalisation

Cheaper imports have replaced the demand for domestic goods, and domestic manufacturers face competition from imports.

A developing country like India still does not have access to developed countries' markets because of high non-tariff barriers; for example, although all quota restrictions on exports of textiles and clothing have been removed in India, the USA has not removed its quota restriction on import of textiles from India and China.

Some scholars also question the usefulness of India being a member of the World Trade Organisation, as a major volume of international trade occurs among the developed nations, and developing countries feel cheated because they are forced to open their markets to developed countries but are not allowed access to the markets of developed countries.

Definition: Quantitative restrictions. Limits placed by a government on the physical quantity or value of a good that may be imported or exported, as opposed to a price-based tariff.

Worked example 4. India's foreign investment (FDI and FII together) rose from about US $100 million in 1990-91 to US $23 billion in 2022-23. Calculate approximately how many times foreign investment increased over this period (1 billion = 1,000 million).

Answer: US $23 billion = US $23,000 million. Number of times increase = 23,000 ÷ 100 = 230 times. Foreign investment increased by approximately 230 times between 1990-91 and 2022-23, reflecting the opening up of trade and investment policy after 1991.

How has the Indian economy performed during the reform period?

Growth is measured by the Gross Domestic Product (GDP). The post-1991 Indian economy witnessed rapid growth in GDP on a continual basis for two decades, rising from 5.6 per cent during 1980-91 to 9.4 per cent during 2021-22.

During the reform period, the growth of agriculture declined, while industry fluctuated and the service sector's growth went up, indicating that GDP growth has mainly been driven by the service sector.

The foreign exchange reserves increased from about US $6 billion in 1990-91 to about US $646 billion in 2023-24, making India one of the largest foreign exchange reserve holders in the world. Rising prices have also been kept under control during this period.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

What is globalisation, and how does outsourcing work?

Globalisation is generally understood as the integration of a country's economy with the world economy, though it is a complex phenomenon.

It is the outcome of a set of policies aimed at transforming the world towards greater interdependence and integration, creating networks and activities that cross economic, social and geographical boundaries, so that events happening far away can influence a country's own economy.

Outsourcing is one of the important outcomes of globalisation: a company hires a regular service from external sources, mostly in other countries, that was previously provided internally.

As a form of economic activity, outsourcing has intensified because of the growth of fast modes of communication, particularly Information Technology.

Services such as voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice and even teaching are outsourced by companies in developed countries to India.

The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.

Definition: Globalisation. The process of integrating a country's economy with the world economy through policies that create cross-border networks of trade, investment and services.

Note: Global footprint of Indian companies. Globalisation has let some Indian companies expand abroad: ONGC Videsh has projects in 16 countries; Tata Steel operates in 26 countries and sells in 50 countries, employing nearly 50,000 persons abroad;

HCL Technologies has offices in 31 countries; Dr Reddy's Laboratories has manufacturing plants and research centres across the world.

What is the World Trade Organisation, and why does it matter for trade policy?

The World Trade Organisation (WTO) was founded in 1995 as the successor organisation to the General Agreement on Trade and Tariff (GATT), which was established in 1948 with 23 countries as the global trade organisation.

The WTO administers multilateral trade agreements, providing equal opportunities to all countries in the international market for trading purposes, and is expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade.

The WTO's agreements cover trade in goods as well as services, facilitating international trade through the removal of tariff and non-tariff barriers and by providing greater market access to member countries.

As an important member, India has kept its commitments towards liberalisation of trade by removing quantitative restrictions on imports and reducing tariff rates.

Some scholars, however, question the usefulness of India's membership, pointing out that while developed countries file complaints over agricultural subsidies in developing countries, developing countries feel cheated because they must open their markets to developed countries without being given equal access in return.

Definition: Non-tariff barriers. Trade restrictions other than tariffs, such as quotas or quality standards, that limit imports from other countries, for example the quota restriction the USA kept on textile imports from India and China.

What are the advantages and merits of the liberalisation, privatisation and globalisation process?

• GDP growth increased from 5.6 per cent (1980-91) to 9.4 per cent (2021-22), with the service sector growing faster than overall GDP during 2007-22.
• Foreign direct investment and foreign institutional investment rose from about US $100 million (1990-91) to US $23 billion (2022-23).
• Foreign exchange reserves rose from about US $6 billion (1990-91) to about US $646 billion (2023-24), making India one of the largest holders of reserves in the world.
• India has become a successful exporter of auto parts, pharmaceutical goods, engineering goods, IT software and textiles, and inflation has been kept under control.
• Some Indian companies, such as ONGC Videsh, Tata Steel, HCL Technologies and Dr Reddy's Laboratories, have expanded operations across many countries.
• Granting maharatna, navratna and miniratna status to PSEs gave them greater financial, managerial and operational autonomy, resulting in better performance for many of these companies.

What are the limitations and disadvantages of the liberalisation, privatisation and globalisation process?

• Though the GDP growth rate increased, reform-led growth has not generated sufficient employment opportunities in the country.
• Agriculture has not benefited: public investment in irrigation, power, roads and research has fallen, and small and marginal farmers have faced increased international competition.
• Industrial growth has slowed due to cheaper imports, inadequate infrastructure investment and continuing non-tariff barriers against Indian exports such as textiles.
• Critics point out that the assets of PSEs have been undervalued in disinvestment, and that disinvestment proceeds are used to offset government revenue shortfalls rather than for developing PSEs or building social infrastructure.
• Tax reductions and tariff cuts, while aimed at raising revenue and curbing evasion, have curtailed the scope for raising tax revenue, reducing the funds available for developmental and welfare expenditure.
• Some scholars argue that market-driven globalisation has widened economic disparities among nations and people, with growth concentrated in select services (telecommunication, IT, finance, entertainment, travel, real estate) rather than in agriculture and industry, which provide livelihoods to millions.

How do scholars read the reform period differently?

Some scholars see globalisation as an opportunity in terms of greater access to global markets, high technology and an increased possibility of large industries of developing countries becoming important players in the international arena.

Critics argue that globalisation is a strategy of the developed countries to expand their markets in other countries, and that it has compromised the welfare and identity of people belonging to poor countries.

Some studies have suggested that the crisis that erupted in the early 1990s was basically an outcome of deep-rooted inequalities in Indian society, and that the reform package further aggravated these inequalities by raising the income and quality of consumption mainly of high-income groups.

Glossary

• Liberalisation — removal of government rules and restrictions that regulated industry, finance, trade and taxation, to allow greater play of market forces.
• Privatisation — shedding of government ownership or management of an enterprise, by withdrawal from management or outright sale.
• Globalisation — integration of a country's economy with the world economy through policies creating cross-border networks in trade, investment and services.
• Disinvestment — sale of part of the government's equity holding in a public sector enterprise to the public or private investors.
• New Economic Policy (NEP) — the wide-ranging set of reforms announced by India in 1991 under the conditions of the World Bank and IMF loan.
• Stabilisation measures — short-term measures to correct balance of payments weaknesses and bring inflation under control.
• Structural reforms — long-term measures aimed at improving efficiency and international competitiveness by removing rigidities in the economy.
• Devaluation — a deliberate reduction in the official value of a currency against other currencies.
• Quantitative restrictions — government-imposed limits on the physical quantity of goods that may be imported or exported.
• Tariff — a tax imposed on goods when they cross a national border, usually on imports.
• Non-tariff barriers — trade restrictions other than tariffs, such as quotas, that limit imports.
• Outsourcing — hiring a regular service from an external source, often in another country, that was previously provided within the firm.
• World Trade Organisation (WTO) — the organisation founded in 1995, successor to GATT, which administers multilateral trade agreements.
• Navratna, Maharatna, Miniratna — statuses given by the government to certain public sector enterprises, granting them greater financial and managerial autonomy.
• Foreign Institutional Investor (FII) — an entity such as a mutual fund, pension fund or merchant bank investing in a country's financial markets from abroad.

Common errors and misconceptions

• Misconception: Privatisation and disinvestment mean exactly the same thing. Correct: Disinvestment is one method of privatisation, carried out by selling part of a PSE's equity to the public; privatisation can also occur through full withdrawal of government ownership or management.
• Misconception: Liberalisation, privatisation and globalisation are three unrelated policies. Correct: They are the three heads under which the structural reform measures of the 1991 New Economic Policy were classified, and globalisation is described as an outcome of liberalisation and privatisation policies.
• Misconception: The 1991 crisis was caused only by rising prices. Correct: It was a balance of payments crisis caused by low foreign exchange reserves, inability to repay external borrowings and growing imports without matching exports, with rising prices compounding the problem.
• Misconception: All industries were deregulated after 1991. Correct: Industrial licensing was abolished for almost all industries, but a few categories such as alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals still require licensing.
• Misconception: Growth after 1991 has benefited all sectors equally. Correct: GDP growth has mainly been driven by the service sector, while agriculture's growth rate has been decelerating and industry has seen periods of slowdown.
• Misconception: Trade barriers against Indian goods disappeared once India removed its own quotas. Correct: Non-tariff barriers persist; for example, the USA has not removed its quota restriction on textile imports from India and China even though India removed its own quota restrictions on textile exports.
• Misconception: Reforms raised the growth of every sector. Correct: Agriculture's growth rate fell from 3.6 per cent in 1980-91 to 2.3 per cent in 2002-07, while the service sector's growth rose from 6.7 per cent to 7.8 per cent over the same periods.

Exam-style questions with model answers

Q1. State the meaning of disinvestment. [1 mark]

1. Disinvestment is the sale of part of the equity of a public sector enterprise to the public, as a method of privatisation.

Q2. Choose the correct option. After 1991, industrial licensing was abolished for almost all product categories except: (a) textiles and auto parts (b) alcohol, cigarettes and hazardous chemicals (c) iron and steel (d) information technology software [1 mark]

1. The correct option is (b).
2. Licensing was retained for alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals.

Q3. Defend or refute the statement: "The reforms of 1991 benefited Indian agriculture as much as they benefited the service sector." Give one valid reason. [1 mark]

1. The statement is refuted.
2. Agriculture's growth rate fell from 3.6 per cent in 1980-91 to 2.3 per cent in 2002-07, while the service sector's growth rose from 6.7 per cent to 7.8 per cent over the same periods, so the gains were not equal.

Q4. State any two conditions that the World Bank and the IMF attached to the $7 billion loan given to India in 1991. [2 marks]

1. India had to remove restrictions on the private sector and reduce the role of the government in many areas.
2. India had to remove trade restrictions between itself and other countries.

Q5. Compare stabilisation measures with structural reform measures. [4 marks]

1. Stabilisation measures are short-term measures, while structural reform measures are long-term measures.
2. Stabilisation measures are intended to correct weaknesses in the balance of payments and to bring inflation under control.
3. Structural reform measures aim at improving the efficiency of the economy and increasing its international competitiveness by removing rigidities.
4. Structural reforms were grouped under the three heads of liberalisation, privatisation and globalisation, which stabilisation measures were not.

Q6. Explain any two problems faced by Indian industry after liberalisation. [4 marks]

1. Industrial growth slowed because of decreasing demand for domestic industrial products, caused by cheaper imports and inadequate investment in infrastructure such as power supply.
2. Developing countries were compelled to open their economies to greater flows of goods and capital, so cheaper imports replaced demand for domestic goods and domestic manufacturers faced competition from imports.
3. Indian exporters still lacked access to developed countries' markets because of high non-tariff barriers, such as the quota restriction the USA kept on textile imports from India and China.

Q7. Explain the main features, problems and policies of Indian agriculture after liberalisation. [8 marks]

1. Feature: the growth rate of agriculture decelerated, falling from 3.6 per cent in 1980-91 to 2.3 per cent in 2002-07 and 1.5 per cent in 2012-13.
2. Feature: public investment in agricultural infrastructure such as irrigation, power, roads, market linkages and research and extension fell after 1991.
3. Feature: export-oriented policy shifted production from the domestic market towards exports, with a focus on cash crops in place of food grains.
4. Problem: the partial removal of the fertiliser subsidy raised the cost of production, severely affecting small and marginal farmers.
5. Problem: lower import duties, a low minimum support price and the lifting of quantitative restrictions on agricultural imports exposed farmers to increased international competition.
6. Problem: the shift to cash crops for export puts pressure on the prices of food grains in the domestic market.
7. Policy: import duties on agricultural products were reduced and quantitative restrictions on their imports lifted.
8. Policy: the fertiliser subsidy was partly removed and an export-oriented strategy favouring cash crops was followed, alongside a low minimum support price.

Q8. Explain the main features, problems and policies of India's foreign trade after liberalisation. [8 marks]

1. Feature: India moved away from a regime of quantitative restrictions on imports, tight import control and very high tariffs.
2. Feature: India is seen as a successful exporter of auto parts, pharmaceutical goods, engineering goods, IT software and textiles.
3. Feature: foreign investment rose from about US $100 million in 1990-91 to US $23 billion in 2022-23, and reserves from about US $6 billion to about US $646 billion in 2023-24.
4. Policy: quantitative restrictions on imports and exports were dismantled, tariff rates reduced and licensing procedures for imports removed.
5. Policy: import licensing was abolished except for hazardous and environmentally sensitive industries, and quantitative restrictions on imports of manufactured consumer goods and agricultural products were fully removed from April 2001.
6. Policy: export duties were removed to increase the competitive position of Indian goods in international markets.
7. Problem: cheaper imports replaced demand for domestic goods, and domestic manufacturers faced competition from imports.
8. Problem: high non-tariff barriers kept Indian goods out of developed markets, for example the USA's quota restriction on textile imports from India and China.

Key takeaways

• The 1991 balance of payments crisis, with reserves insufficient for even a fortnight of imports, led India to borrow $7 billion from the World Bank and IMF and announce the New Economic Policy.
• The New Economic Policy classified reforms into short-term stabilisation measures and long-term structural reforms grouped as liberalisation, privatisation and globalisation.
• Liberalisation abolished most industrial licensing, reduced RBI's controller role in finance, cut income and corporation tax rates, introduced GST in 2016, and let market forces determine the rupee's exchange rate.
• Privatisation, through disinvestment, sells part of a PSE's equity to the public; maharatna, navratna and miniratna status gives select PSEs greater autonomy.
• Agriculture's growth rate decelerated after 1991, public investment in irrigation and research fell, and farmers faced higher costs and more competition from imports.
• Industry's problems include slower growth from cheaper imports, inadequate infrastructure investment and continuing non-tariff barriers abroad, for example on Indian textiles entering the USA.
• Foreign trade reforms dismantled quantitative restrictions, lowered tariffs and removed most import licensing, fully removing QRs on manufactured consumer and agricultural goods from April 2001.
• GDP growth rose from 5.6 per cent (1980-91) to 9.4 per cent (2021-22), driven mainly by the service sector, while agriculture's growth rate declined.
• Critics argue reforms widened inequality, concentrated growth in select services, and did not generate enough employment despite higher GDP growth.

Test yourself

Why did India approach the World Bank and IMF in 1991?

India's foreign exchange reserves had dropped to levels insufficient to pay for even a fortnight of imports, and no country or institution was willing to lend otherwise, so India sought a $7 billion loan from them.

What is the difference between liberalisation and privatisation?

Liberalisation removes government rules and restrictions that regulated the economy, while privatisation specifically means shedding government ownership or management of an enterprise, for example through disinvestment.

Name three product categories for which industrial licensing was retained after 1991.

Alcohol, cigarettes and hazardous chemicals are three categories that still required industrial licensing after the reforms (others include industrial explosives, electronics, aerospace and pharmaceuticals).

Why has the agricultural sector not benefited much from the reforms?

Public investment in irrigation, power and research has fallen, fertiliser subsidies have been partly removed, and farmers face more competition from imports, lowering their incomes, as shown by farmers such as Mahadeva.

What were the three main trade policy reforms after 1991?

Dismantling quantitative restrictions on imports and exports, reducing tariff rates, and removing licensing procedures for imports, except for hazardous and environmentally sensitive industries.

What criticism is made of disinvestment proceeds?

Critics say PSE assets were undervalued when sold, causing a loss to the government, and that proceeds were used to cover revenue shortfalls rather than to develop PSEs or build social infrastructure.

Which sector drove India's GDP growth during the reform period?

The service sector, whose growth stayed higher than overall GDP growth during 2007-22, while agriculture's growth declined and industry fluctuated.