Economic Reforms of 1991

Economic Reforms of 1991

Notes

Background: the 1991 crisis

• A balance of payments crisis: the current account deficit was about 3% of GDP; forex reserves fell to about US$1.2 billion (less than three weeks of imports).
• Causes: the Gulf War oil price shock, loss of Gulf remittances, a high fiscal deficit (about 8% of GDP), inflation of 13-17%, heavy external borrowing, political instability and the collapse of the USSR (a major trade partner).
• India took an IMF loan, and pledged about 47 tonnes of gold (airlifting part of it). The new Government of P.V. Narasimha Rao (Finance Minister Manmohan Singh) launched reforms in July 1991: the New Industrial Policy (24 July 1991) and the Union Budget of 24 July 1991.

The LPG reforms

• Liberalisation:
  • Industrial licensing abolished for most industries (except a short list); the MRTP Act limits relaxed (replaced by the Competition Act, 2002); the number of industries reserved for the public sector cut from 17 to 8 (later to 2).
  • Financial sector reforms (Narasimham Committee 1991): lower CRR and SLR, deregulated interest rates, new private banks, and a statutory SEBI (1992).
  • Tax reforms (Chelliah Committee): lower rates and a simpler structure.
• Privatisation: disinvestment of public sector enterprises; public sector units given more autonomy (today managed by DIPAM).
• Globalisation:
  • Rupee devalued by about 18-19% (July 1991); LERMS (1992) and a market-determined rate (1993); current account convertibility (1994).
  • Trade liberalisation: import licensing abolished (except for some consumer goods), and peak customs duties cut sharply.
  • FDI: automatic approval up to 51% in 34 priority industries; the FERA (1973) replaced by FEMA (1999).

Outcomes

• Growth rose from about 3.5% (the "Hindu rate of growth", a term of Raj Krishna) to about 6-7%; a services and IT boom; forex reserves and FDI rose strongly; poverty fell; and India became a major global economy.

Criticisms: jobless growth, rising inequality, regional and sectoral imbalances, neglect of agriculture, and farm distress.

Later reforms: the FRBM Act (2003), GST (2017), IBC (2016), RERA (2016), the labour codes, Make in India and PLI schemes.

Key Points

• 1991: a BoP crisis; reserves about US$1.2 billion; gold pledged; IMF support.
• Narasimha Rao and Manmohan Singh launched LPG reforms in July 1991.
• Industrial licensing abolished; public sector reservation cut; FDI liberalised; rupee devalued.
• Narasimham Committee (1991) reformed banking; SEBI became statutory (1992).
• Outcomes: higher growth, services boom, higher reserves; criticisms: jobless growth, inequality.

MCQs

Q1. The New Industrial Policy was announced on: (a) 1 January 1991 (b) 24 July 1991 (c) 15 August 1991 (d) 31 March 1992 Ans: (b).

Q2. The 1991 reforms are popularly called: (a) LPG reforms (b) Green revolution (c) White revolution (d) Planning reforms Ans: (a). Liberalisation, privatisation and globalisation.

Q3. The MRTP Act was replaced in 2002 by the: (a) FEMA (b) Competition Act (c) IBC (d) SEBI Act Ans: (b).