Introduction – 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 petroleum 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. In this chapter, we will look at the background of the crisis, measures that the government has adopted and their impact on various sectors of the economy.
Background –
The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s. We know that for implementing various policies and its general administration, the government generates funds from various sources such as taxation, running of public sector enterprises etc. 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. When we import goods like petroleum, we pay in dollars which we earn from our exports.
Liberalization – As pointed out in the beginning, rules and laws which were aimed at regulating the economic activities became major hindrances in growth and development. Liberalisation was introduced to put an end to these restrictions and open various sectors of economy. Though a few liberalization measures were introduced measures were introduced in 1980s in areas of industrial licensing, export-import policy and foreign investment, reform policies initiated in 1991 were more comprehensive. Let us study some important areas, such as the industrial sector, financial sector, tax reforms, foreign exchange markets and trade and investment sectors which received greater attention in and after 1991.
- 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 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.
- 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 regulated by the Reserve Bank of India (RBI). You may be aware that all banks and other financial institutions in India are regulated through various norms and regulations of the RBI.
- Tax Reforms – Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies, which are collectively known as its fiscal policy. There are two types of taxes: direct and indirect. Direct taxes consist of taxes on incomes of individuals, as well as, profits of business enterprises. Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion.
- 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 and increase in the inflow of foreign exchange. It also set the tone to free the determination of rupee value in the foreign exchange market from government control. Now, more often than not, markets determine exchange rates based on the demand and supply of foreign exchange.
- Trade and Investment Policy Reforms – Liberalisation of trade and investment regime was initiated to increase regime was initiated to increase international competitiveness of industrial production and also foreign investments and technology and also foreign investments and technology into the economy. The aim was also to promote the efficiency of local industries and adoption of modern technologies.
Privatization – It implies shedding of the ownership or management of a government owned enterprise. Government companies are converted into private companies in two ways (i) by withdrawal of the government from ownership and government from ownership and management of public sector companies and or (ii) by outright sale of public sector companies. Privatization of the public sector enterprises by selling off part of the equity of PSEs to the public is known as disinvestment. The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernization. It was also envisaged that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs.
Globalization – Although 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. Globalization attempts to establish links in such a way that the happenings in India can be influenced by events happening miles away. It is turning the world into one whole or creating a borderless world.
- Outsourcing – this is one of the important outcomes of the globalization 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 (like legal advice, computer service, advertisement, security – each provided by respective departments of the company). As a form of economic activity, outsourcing has intensified, in recent times, because of the growth of fast modes of communication, particularly the growth of Information Technology (IT).
- World Trade Organization (WTO) – The WTO was founded in 1995 as the successor organization to the General Agreement on Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade orgnisation to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purpose. WTO is expected to establish a rule-based trading regime in which nation cannot place arbitrary restrictions on trade. In addition, the purpose is also to enlarge production and trade of services, to ensure optimum utilization of world resources and to protect the environment. As an important member of WTO, India has been in the forefront of framing fair global rules, regulations and safeguards and advocating the interests of the developing world. India has kept its commitments towards liberalization of trade, made in the WTO.
Indian Economy During Reforms – An Assessment
The post-1991 India witnessed a rapid growth in GDP on a continual basis for two decades. The growth of GDP increased from 5.6 per cent during 1980 – 91 to 8.2 per cent during 2007-12. During the reform period, the growth of agriculture has declined. While the industrial sector reported fluctuation, the growth of the service sector has gone up. This indicates that GDP growth is mainly driven by growth in the service sector. During 2012-15.
Since 1991, India is seen as a successful exporter of auto parts, pharmaceutical goods engineering goods, IT software and textiles. Rising prices have also been kept under control. On the other hand, the reform process has been widely criticized for not being able to address some of the basic problems facing our economy especially in areas of employment, agriculture, industry, infrastructure development and fiscal management.
- Growth and Employment – Though the GDP growth rate has increased in the reform period, scholars point out that the reform-led growth has not generated sufficient employment opportunities in the country. You will study the link between different aspects of employment and growth in the next unit.
- Reforms in Agriculture – Reforms have not been able to benefit agriculture, where the growth rate has been decelerating. Moreover, because of export-oriented policy strategies in agriculture, there has been a shift from production for the domestic market towards production for the export market focusing on cash crops in lieu of production of food grains. This puts pressure on prices of food grains.
- 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. In a globalized world, developing countries are compelled to open up their economies to greater flow of goods and capital from developed countries and rendering their industries vulnerable to imported goods. Moreover, a developing country like India still does not have the access to developed countries’ markets because of high non-tariff barriers. For example, although all quota restrictions on exports of textiles and clothing have been removed in India, USA has not removed their quota restriction on import of textiles from India and China.
- Disinvestment – Critics point out that the assets of PSEs have been undervalued and sold to the private sector. This means that there has been a substantial loss to the government and the outright sale of public assets Moreover, the proceeds from disinvestment are used to offset the shortage of government revenues rather than using it for the development of PSEs and building social infrastructure in the country.
- 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 curb tax evasion, have not resulted in increase in tax revenue for the government. Also, the reform policies, involving tariff reduction, have curtailed the scope for raising revenue through custom duties. In order to attract foreign investment, tax incentives are provided to foreign investors which further reduced the scope for raising tax revenues. This has a negative impact on developmental and welfare expenditures.
Conclusion –
The process of globalization through liberalization and privatization policies has produced positive, as well as, negative result both for India and other countries. Some scholars argue that globalization should be seen as an opportunity in terms of greater access to global markets, high technology and increased possibility of large industries of developing countries to become important players in the international arena.
On the contrary, the critics argue that globalization is a strategy of the developed countries to expand their markets in other countries. According to them, it has compromised the welfare and identity of people belonging to poor countries. It has further been pointed out that market-driven globalization has widened the economic disparities among nations and people.
