• In 1991, India met with an economic crisis relating to its external debt — the government was not able to make repayments on its borrowings from abroad; foreign exchange reserves, which we generally maintain to import petrol and other important items, dropped to levels that were not sufficient for even a fortnight.
  • The crisis was further compounded by rising prices of essential goods. All these led the government to introduce a new set of policy measures which changed the direction of our developmental strategies.
  • The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s.
  • When expenditure is more than income, the government borrows to finance the deficit from banks and also from people within the country and from international financial institutions. 
  • India agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy (NEP).

This set of policies can broadly be classified into two groups:

The stabilization measures and the structural reform measures. Stabilization measures are short- term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control.


    Liberalization was introduced to put an end to these restrictions and open up various sectors of the economy. Though a few liberalization measures were introduced in 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive.

Deregulation of Industrial Sector:

  • In India, regulatory mechanisms were enforced in various ways

(i) industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or to decide the amount of goods that could be produced

(ii) private sector was not allowed in many industries

(iii) some goods could be produced only in small scale industries and

(iv) controls on price fixation and distribution of selected industrial products.

  • The only industries which are now reserved for the public sector are defence equipments, atomic energy generation and railway transport. Financial Sector Reforms:
  • Financial sector includes financial institutions such as commercial banks, investment banks, stock exchange operations and foreign exchange market.
  • The financial sector in India is controlled by the Reserve Bank of India (RBI).
  • One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector. This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI. 
  • Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets.

Tax Reforms:

  • Tax reforms are concerned with the reforms in government‘s taxation and public expenditure policies which are collectively known as its fiscal policy. There are two types of taxes: direct and indirect.

Foreign Exchange Reforms: 

  • The first important reform in the external sector was made in the foreign exchange market. In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange.

Trade and Investment Policy Reforms: 

  • Liberalization of trade and investment regime was initiated to increase international competitiveness of industrial production and also foreign investments and technology into the economy.


  • Government companies are converted into private companies in two ways

(i) By withdrawal of the government from ownership and management of public sector companies and or

(ii) By outright sale of public sector companies. Privatization of the public sector undertakings by selling off part of the equity of PSUs to the public is known as disinvestment. 


  • Globalization is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries.
  • Outsourcing: This is one of the important outcomes of the globalisation process. In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country

World Trade Organisation (WTO): 

  • The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade and Tariff (GATT).
  • GATT was established in 1948 with 23 countries as the global trade organisation to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes. 
  • WTO is expected to establish a rule- based trading regime in which nations cannot place arbitrary restrictions on trade.
  • The WTO agreements cover trade in goods as well as services to facilitate international trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing greater market access to all member countries.


  • Growth and Employment: Though the GDP growth rate has increased in the reform period, reform-led growth has not generated sufficient employment opportunities in the country.
  • Reforms in Agriculture: Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.
  • Reforms in Industry: Industrial growth has also recorded a slowdown. This is because of decreasing demand of industrial products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc. 
  • Disinvestment: Every year, the government fixes a target for disinvestment of PSUs. Critics point out that the assets of PSUs have been undervalued and sold to the private sector. This means that there has been a substantial loss to the government. 
  • Reforms and Fiscal Policies: Economic reforms have placed limits on the growth of public expenditure especially in social sectors. The tax reductions in the reform period, aimed at yielding larger revenue and to curb tax evasion, have not resulted in increase in tax revenue for the government.

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