Impact of economic reforms

Definition:
• Economic reforms denote the process in
which a government prescribes declining
role for state and expanding role for the
private sector in an economy.
• “Reform is not the aim of economy,
Reforming the economy is the aim”. Reform
is an means towards the end .

• High fiscal deficit more than 8%
• Acute situation of BOP
• Low forex reserve
• Gulf war and hike in oil price
• Poor performance of public sector

LPG stands for
L-Liberalisation
P-Privatisation
G-Globalisation
These 3 process specify the characterstics of
economic reforms initiated in 1991.
They are regarded as direction,path and
ultimate goal of the reform.

It is the process of decreasing traits of a state economy and
increasing traits of market economy. In Indian case it is declining
influence of planned economy and that of increasing for capital
economy.
Prior 1991, government had imposed several types of
controls on Indian economy e.g. industrial licensing system,
price control or financial control on goods, import license,
foreign exchange control, restriction on investment by big
business houses, etc. These controls leads to fall in economy
growth
Setting the direction

Moving through the path
• In narrow sense it refers to introduction of private ownership in
publicly owned enterprise.While in broder sense it implies private
ownership,induction of private management and control in the
private sector enterprise.
• The first major programme of privatisation was adopted in U.K. by
the conservative government of Margaret Thatcher during 1980s.
• It covers 3 sets of measures:
1. Ownership: joint venture, liquidation, management bye-out,
complete handover
2. Organizational:leasing,holding a company structure, restructuring
3. Operational : autonomy in decision making,development of
investment criteria,freedom in rising fund from capital

Reaching the ultimate goal
• It is the process of integrating various economies
of the world without creating any hinerances in
the free flow of goods,services,technology,capital
as well.
• The term become more familiar after WTO
emerged by Marrakesh agreement of Uruguay
round of negotiation 1994.

Economic reforms were initiated by Congress led government of
Sri P V Narashimha Rao
2 kind of reforms were being launched. Such as :
1. Macroeconomic stabilization measure i.e increase aggregate
demand and provide gainful and quality employment opportunities
2. Structural reform measures i.e policy reforms initiated by
government to boost the aggregate supply of goods and services in the
economy.
Some of the measures was taken for obligation to IMF. Such as
a. Devaluation of rupee by 22%
b. Reduction in the tariff upto 30%
c. Excise duty to be hiked by 20%
d. Annual reduction of all government expenditure by 10%

Industrial Policy Reforms:
Introduction of Industrial policy 1991 fostered competition by
a. abolishing monopoly restrictions,
b. Terminating the phased Manufacturing programmes
c. Freeing foreign direct investment and import of foreign
technology
d. De-reservation of sectors hitherto reserved for the public sector.
At present, only five industries are under licensing, mainly on account of
environmental, health, safety and strategic considerations.
Only two industries are reserved
for the public sector, viz, atomic energy and railway transport.
Foreign Direct Investment (FDI) up to 100 per cent is allowed under the automatic route in
most sectors, with a few exceptions

Trade Reforms:
• Withdrawal of the quantitative restrictions on exports and imports
Quantitative restrictions on imports of manufactured consumer goods and agricultural
products were removed on April 1, 2001, almost exactly ten years after the reforms began
• phasing out of the system of import licensing
Import licensing was abolished relatively early for capital goods and intermediates which
became freely importable in 1993,
• lowering the level and dispersion of nominal tariffs
The peak customs tariff rate was progressively brought down from 150 per cent in 1991-92 to
10 per cent by 2008-09.
• The liberalization of restrictions on various external transactions led to
current account convertibility under Article VIII of the Articles of Agreement of the IMF in
1994
• Later on ,The capital account made virtually free for non-residents and resident corporates
with some restrictions on financial institutions and higher
restrictions on resident individuals.

Fiscal sector Reforms:
• Tax reforms : such as lowering of tax rates, broadening the tax base and so on.
As a result, The combined fiscal deficit of the central and state governments was
successfully reduced from 9.4 percent of GDP in 1990-91 to 7 percent in both 1991-92
and 1992-93 and the balance of payments crisis was over by 1993.
• Introducing CENVAT,VAT,GST for collection of more revenue.
• restructuring of public sector: reduce central government subsidies ,increase public saving
• introduction of the Fiscal Responsibility and Budget Management Act (FRBM) in 2004
Monetary policy Reforms:
• elimination of automatic monetization from April 1997, which provided
instrument independence to the Reserve Bank of India in the conduct of monetary policy.
• reduction of statutory pre-emption of the lendable resource of banks
• interest rate deregulation
• RBI switched from a monetary targeting framework, adopted in the mid-1980s, to a
multiple indicator approach
• Following Basel norms . After completing norm I & II, Now RBI has set to follow norm III

Finance sector Reforms:
The development of financial markets has been regarded as a critical prerequisite for
improving the operational effectiveness of the transmission of monetary policy
• measures for liberalization, like dismantling the complex system of interest rate controls,
eliminating prior approval of the Reserve Bank of India for large loans
reducing the statutory requirements to invest in government securities;
• measures designed to increase financial soundness, like introducing capital adequacy
requirements and other prudential norms for banks and strengthening banking
supervision
• measures for increasing competition like more liberal licensing of private banks and freer
expansion by foreign banks
• Insurance Regulation and Development Authority (IRDA) has been formed to govern the
insurance industry.
• The Securities and Exchange Board of India was formed as the capital market regulator
& NSE as a new modern technology oriented stock exchange was formed (the National
Stock Exchange
• private sector mutual funds allowed and encouraged; along with the abolition of the
Controller of Capital Issues (CCI) who controlled both issuance of securities and
administered their price.

• Sharp correction in fiscal deficit-GDP ratio and reduced monetisation of deficits .
• New industrial policy fostered competition
• Real GDP growth averaged 5.7 per cent per annum in the 1990s, which accelerated further
to 7.3 per cent per annum in 2000s.
• There is gain in the share of services, including construction, from 52 per cent to 65 per
cent during the period 1990s to 2010-11.
• Exports and imports of goods and services have more than doubled from 23 per cent of
GDP in the 1990s to 50 per cent in the recent period of 2009-11.
• Debt-GDP ratio has declined from 29% to 18.6%. & Debt-service ratio fell to 24.9% to 4.7%
for the period of 1991-00 to 2009-11.
• The high growth was achieved in an environment of price stability as headline WPI
inflation dropped to an annual average of 5.5 per cent in the 2000s from 8.1 per cent to
the 1990s.
Positive impact:

• Agriculture as a percentage of real GDP declined from 3.2% to 2.4%.
There is a need to increase agricultural productivity.
• Failed to address labour market inflexibity and there by increasing
concentration of labour force in agricultural sector hence high
unemployment.
• It could not attract sufficient investment in Infrastructure.
• Credit market has still remain an important issue.
Negative impact:

Impact of economic reforms

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