Economic Reforms of 1991

Year-1991 marked a turning point in the economic history of India. In response to the major balance of payment stimulated by the collapse of Soviet Union (U.S.S.R), India’s major trading partner of the era, and hike in oil prices due to Gulf War, the Government of India soughted the IMF (International Monetary Fund) to grant a bailout loan of 1.8 billion US Dollars. IMF agreed to India’s request for this bailout loan but demanded it to absorb several reforms into its economic policy in return. Government led by Prime Minister, Narasimha Rao, & Finance Minister, Manmohan Singh, agreed upon this and absorbed some reforms into the economic policy of India. These reforms are famously referred to as the Economic Liberalization of 1991 in India. Under these reforms, major stress was laid by the government on three areas, namely – LiberalizationPrivatization & Globalization. It is for this reason that theEconomic Reforms of 1991 are sometimes also referred as the LPG policy of India.
Below listed are some major areas which were worked upon under the Economic Reforms of 1991 or the LPG Policy of India:
  • Abolition of License Raj
  • Steps to regulate inflation
  • Initiation of privatization
  • Industrial Licensing
  • Foreign Investment
  • Reforms in Taxation
  • Globalization
  • Deregulation
  • Amendment of MRTP Act, 1969
  • Foreign Technology Agreements
The three pillars of the LPG Policy i.e. LiberalizationPrivatization & Globalization are briefly introduced below:

Liberalization in India

Under liberalization, the aim of the government was to dismantle and dismiss excessive constrains which were put ahead by the existing economic policy towards licensing and permissions. Since India got independent, there was a widespread License-Raj in the nation which acted as a hurdle to entrepreneurs and enterprise owners towards initiation and expansion of businesses. Liberalization was proved to be very prudent step under the EconomicReforms of 1991 as it acted as a stimulus to entrepreneurship and gave a smooth way to many business houses, some of which are amongst the top-listed companies of the nation today.
The Monopoly and Restrictive Trade Practices (MRTP) Act, which restricted the business houses to asset ownership of more than 90 crores INR from expansion, was also amended by the government under its liberalization policy.

Privatization in India

Under Privatization, the Government of India took steps to involve the private sector enterprises in the ownership or operation of public sector undertakings. Privatization in India was promoted under the Economic Reforms of 1991 in three forms which are listed and briefly described below:
  • Ownership Measures: In the ownership measures, the degree of privatization is measured in terms of the extent to which the ownership is transferred from a public sector enterprise to private sector. Also, the ownership can be transferred to an individual, corporate or co-operative sector.
  • Organizational Measures: Under the organizational measures, provisions were made to limit the control of state over public assets and allow a certain level of privatization in public sector undertakings. This was done by making provisions for leasing government owned industries & assets and several other similar initiatives.
  • Operational Measures: Operational measures were undertaken by the government to infuse a prudent level of autonomy to the various public sector undertakings with the basic aim of increasing productivity of these enterprises. Several important steps which were undertaken under the Operational Measures are hereby listed below:
  • Public Sector enterprises were provided with a certain level of autonomy in decision making.
  • Public Sector enterprises were allotted a high level of freedom to acquire cost reducing inputs from markets.
  • Provisions were made to grant incentives to the work-force of Public Sector enterprises consistent with the increase in efficiency and productivity of the organization.
  • Proper criteria and procedures for investment panning of various Public Sector enterprises were formulated and absorbed into the system.
  • Public Sector enterprises were granted permission to raise their resources from the capital market for diversification and expansion.

Globalization in India

Globalization was probably the most important economic reform undertaken by the Government of India in 1991. In simple terms, the aim of the globalization was to integrate the Indian Economy with the World Economy. Four parameters which were worked upon under globalization are hereby listed below:
  • To create an environment under which free flow of capital can take place.
  • To create an environment under which free flow of technology can take place across the boundaries of the nation and various states within India.
  • To create an environment under which free flow of work-force can take place.
  • To create an environment under which free flow of goods and services can take place.
Essentially, the aim of globalization was just to enable an unhindered trade flow, technology flow and capital flow across the national and state borders. To enable globalization, several steps were undertaken by the Government of India, most important of which are listed below:
  • Reduction on Import Duties
  • Encouragement to Foreign Investment
  • Encouragement to Foreign Technology Agreements


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