Acknowledgement
I have taken efforts in this project. However, it would not have been possible without the kind support
and help of many individuals and organizations. I would like to extend my sincere thanks to all of
them.
I am highly indebted to Seedling School of Law And Governance,Jaipur National University for
their guidance and constant supervision as well as for providing necessary information regarding the
project & also for their support in completing the project.
I would like to express my gratitude towards Mrs. Komal Audichya for their kind co-operation and
encouragement which help me in completion of this project.
My thanks and appreciations also go to my colleagues in developing the project and people who have
willingly helped me out with their abilities.
India's Economic Reforms
The reform process in India was initiated with the aim of accelerating the pace of economic
growth and eradication of poverty. The process of economic liberalization in India can be traced
back to the late 1970s. However, the reform process began in earnest only in July 1991. It was
only in 1991 that the Government signaled a systemic shift to a more open economy with greater
reliance upon market forces, a larger role for the private sector including foreign investment, and
a restructuring of the role of Government.
The reforms of the last decade and a half have gone a long way in freeing the domestic economy
from the control regime. An important feature of India's reform programme is that it has
emphasized gradualism and evolutionary transition rather than rapid restructuring or "shock
therapy". This approach was adopted since the reforms were introduced in June 1991 in the wake
a balance of payments crisis that was certainly severe. However, it was not a prolonged crisis
with a long period of non-performance.
The economic reforms initiated in 1991 introduced far-reaching measures, which changed the
working and machinery of the economy. These changes were pertinent to the following:
Dominance of the public sector in the industrial activity
Discretionary controls on industrial investment and capacity expansion
Trade and exchange controls
Limited access to foreign investment
Public ownership and regulation of the financial sector
The reforms have unlocked India's enormous growth potential and unleashed powerful
entrepreneurial forces. Since 1991, successive governments, across political parties, have
successfully carried forward the country's economic reform agenda.
Objective of Reforms
As per the Discussion Paper on Economic Reforms brought out by the Ministry of Finance in
July 1993, the objectives of the reforms were:
“…to bring about rapid and sustained improvement in the quality of the people of India. Central
to this goal is the rapid growth in incomes and productive employment… The only durable
solution to the curse of poverty is sustained growth of incomes and employment… Such growth
requires investment: in farms, in roads, in irrigation, in industry, in power and, above all, in
people. And this investment must be productive. Successful and sustained development depends
on continuing increases in the productivity of our capital, our land and our labour.
Within a generation, the countries of East Asia have transformed themselves. China, Indonesia,
Korea, Thailand and Malaysia today have living standards much above ours… What they have
achieved, we must strive for.”
Reforms in Industrial Policy
Industrial policy was restructured to a great extent and most of the central government industrial
controls were dismantled. Massive deregulation of the industrial sector was done in order to
bring in the element of competition and increase efficiency. Industrial licensing by the central
government was almost abolished except for a few hazardous and environmentally sensitive
industries. The list of industries reserved solely for the public sector -- which used to cover 18
industries, including iron and steel, heavy plant and machinery, telecommunications and telecom
equipment, minerals, oil, mining, air transport services and electricity generation and distribution
was drastically reduced to three: defense aircrafts and warships, atomic energy generation, and
railway transport. Further, restrictions that existed on the import of foreign technology were
withdrawn. The central elements of industrial policy reforms were as follows:
Industrial licensing was abolished for all projects except in 18 industries. With this, 80
percent of the industry was taken out of the licensing framework.
The Monopolies & Restrictive Trade Practices (MRTP) Act was repealed to eliminate the
need for prior approval by large companies for capacity expansion or diversification.
Areas reserved for the public sector were narrowed down and greater participation by
private sector was permitted in core and basic industries. The new policy reduced the
number of areas reserved from 17 to 8. These eight are mainly those involving strategic
and security concerns. (Example, railways, atomic energy etc.)
The policy encouraged disinvestment of government holdings of equity share capital of
public sector enterprises.
The public sector units were provided greater autonomy and professional management
that could be helpful for generating reasonable profits, through an MOU(Memorandum of
Understanding) between the enterprise and the concerned Ministry, through which targets
that the enterprise had to achieve were set up.
Reforms in Trade Policy
It was realized that the import substituting inward looking development policy was no longer
suitable in the modern globalising world.
Before the reforms, trade policy was characterized by high tariffs and pervasive import
restrictions. Imports of manufactured consumer goods were completely banned. For capital
goods, raw materials and intermediates, certain lists of goods were freely importable, but for
most items where domestic substitutes were being produced, imports were only possible with
import licenses. The criteria for issue of licenses were non-transparent, delays were endemic and
corruption unavoidable. The economic reforms sought to phase out import licensing and also to
reduce import duties.
Import licensing was abolished relatively early for capital goods and intermediates which
became freely importable in 1993, simultaneously with the switch to a flexible exchange rate
regime. Quantitative restrictions on imports of manufactured consumer goods and agricultural
products were finally removed on April 1, 2001, almost exactly ten years after the reforms
began, and that in part because of a ruling by a World Trade Organization dispute panel on a
complaint brought by the United States.
Financial sector reforms
Financial sector reforms have long been regarded as an integral part of the overall policy reforms
in India. India has recognized that these reforms are imperative for increasing the efficiency of
resource mobilization and allocation in the real economy and for the overall macroeconomic
stability. The reforms have been driven by a thrust towards liberalization and several initiatives
such as liberalization in the interest rate and reserve requirements have been taken on this front.
At the same time, the government has emphasized on stronger regulation aimed at strengthening
prudential norms, transparency and supervision to mitigate the prospects of systemic risks.
Today the Indian financial structure is inherently strong, functionally diverse, efficient and
globally competitive. During the last fifteen years, the Indian financial system has been
incrementally deregulated and exposed to international financial markets along with the
introduction of new instruments and products.
Monetary and Financial Sector Reforms aimed at doing away with interest rate distortions and
rationalizing the structure of lending rates.
The new policy tried in many ways to make the banking system more efficient. Some of the
measures undertaken were:
Reserve Requirements: reduction in statutory liquidity ratio (SLR) and the cash
reserve ratio (CRR) in line with the recommendations of the Narasimham
Committee Report, 1991. In mid-1991, SLR and CRR were very high. It was
proposed to cut down the SLR from 38.5 percent to 25 percent within a time span
of three years. Similarly, it was proposed that the CRR br brought down to 10
percent (from the earlier 25 percent) over a period of four years
Interest Rate Liberalisation: Earlier, RBI controlled the rates payable on deposits
of different maturities and also the rates which could be charged for bank loans
which varied according to the sector of use and also the size of the loan. Interest
rates on time deposits were decontrolled in a sequence of steps beginning with
longer term deposits, and liberalisation was progressively extended to deposits of
shorter maturity
Greater competition among public sector, private sector and foreign banks and
elimination of administrative constraints
Liberalisation of bank branch licensing policy in order to rationalize the existing
branch network
Banks were given freedom to relocate branches and open specialized branches
Guidelines for opening new private sector banks
New accounting norms regarding classification of assets and provisions of bad
debt were introduced in tune with the Narasimham Committee Report.
Fiscal Reforms
A key element in the stabilization effort was to restore fiscal discipline. The data reveals that
fiscal deficit during 1990-91 was as large as 8.4 percent of GDP. The budget for 1991-92 took a
bold step in the direction of correcting fiscal imbalance. It envisaged a reduction in fiscal deficit
by nearly two percentage points of GDP from 8.4 percent in 1990-91 to 6.5 percent in 1991-92.
The budget aimed at containing government expenditure and augmenting revenues; reversing the
downtrend in the share of direct taxes to total tax revenues and curbing conspicuous
consumption. Some of the important policy initiatives introduced in the budget for the year
1991-92 for correcting the fiscal imbalance were: reduction in fertilizer subsidy, abolition of
subsidy on sugar, disinvestment of a part of the government’s equity holdings in select public
sector undertakings, and acceptance of major recommendations of the Tax Reforms Committee
headed by Raja Chelliah. These recommendations aimed to raise revenue through better
compliance in case of income tax and excise and customs duties, and make the tax structure
stable and transparent.
