The Indian economy, which is passing through a transitional period, has come out from the crisis of 1990-91 which was the result of a high inflation rate of 17 per cent, a high fiscal deficit of 44,632 crores, and a trade deficit of 10.645 crores.
That was the time when the second most powerful country of the world – the U.S.S.R.-had disintegrated and 15 newly independent nations had emerged out of it: the forces of the U.S.A., U.K., France and Saudi Arab were in confrontation with Iraq to teach her a lesson because she had dared to capture Kuwait unlawfully.
The communism was dying in Eastern Europe and in erstwhile U.S.S.R.; Central economies were opening up to free-market forces and competition; the multinationals of developed countries, rank in the grip of low growth rate and high unemployment rate, were searching the possibilities of a high return on their investment in new market and fields of third world countries.
The condition of the Indian economy was so poor that the Reserve Bank of India had to mortgage 47.5 metric tons of gold with the Bank of England to obtain the required foreign exchange to meet the requirements of import liabilities. In such complex and critical situations, a multidimensional and broad-based programme of economic reforms and liberalization was started.
The immediate task was to save the nation from a relentless slide into the abyss of falling production, soaring inflation deepening poverty and the falling credit in the comity of nations.
India dealt swiftly with the immediate crisis and also worked towards a broader objective of shifting the economy on to a path of rapid, employment-generating growth. The aim of all this was to raise India to her rightful place in the international community.
The policies of economic reforms were related to fiscal reforms, financial and banking reforms, industrial reforms, taxation reforms, foreign exchange reforms, capital market reforms, public sector undertaking reforms and infrastructural reforms.
With the aim of increasing the efficiency of resources and improving in the international competitiveness of India, structural reform policies became decisive in providing a permanent solutions to the crisis of balance of payment.
Promotion of efficiency through broad domestic competition, bringing domestic manufacturers in a position to import at reasonable rates of duties, promoting foreign investment and technology helped in integrating the Indian economy with the global economy.
Fiscal discipline was an important factor in the direction of stabilization of budgetary deficit which had been increasing in the last few years. The Government had to borrow to fill this gap. It inflated the fiscal deficit which ultimately resulted in an increase in the interest liabilities of the government.
Essay on Economic Reforms
The fiscal deficit was Rs. 44,632 crores during the year 1990-91 which was 8.3 per cent of Gross Domestic Product. Reduction in non-plan expenditure and some other fiscal measures helped to bring down the fiscal deficit at the level of 2:5 per cent of G.D.P. in the Budget for 2008-09. But in the revised estimate for 2008-09, it has increased to 60% of GDP. It is now targetted to be 5.5% of GDP in the budget figure for 2009-10.
The Indian rupee was devalued by 18 per cent on 1st and 3rd July 1991 with the aim of strengthening the viability of external payment position i.e., to ensure that exchange rate movements maintain a reasonable incentive for export promotion and encourage efficient import substitution activities, and at the same time, to stem the flight of capital from India and discourage flow of remittances from abroad through illegal channels.
Far-reaching changes were announced in trade policies. The main objectives of these policies were to strengthen export promotion measures, abolition of import licensing to a large extent, providing high-quality world standard machines and raw materials to bring domestic manufacturers to the world level and make them highly competitive in the international market.
To eliminate the weaknesses of the foreign exchange market; to control the black marketing and smuggling of foreign exchange, to allow the foreign exchange earner to convert their foreign exchange earnings at market-determined exchange rate and to provide the easy availability of foreign exchange to the importers and other Indians going abroad, the Indian rupee was made fully convertible on the balance of payments current account. Besides capital goods, the import of silver and gold was also simplified.
New Industrial Policy has paved way for domestic and foreign private investors to invest more and more in India under an open business environment.
Licensing was abolished for all industries except five important industries; diversification and capacity expansion of large companies was simplified; the public sector has remained limited to just 3 industries and those too of strategic significance.
foreign equity limit in high priority industries had been raised from 40 per cent to 51 per cent; in special circumstances, 100 per cent foreign equity was also allowed and automatic sanctions were allowed to foreign technological agreements.
The disinvestment policy with regard to public sector undertakings was yet another plank of economic liberalization which gave a new lease of life to sick enterprises and a broad encouragement to private entrepreneurs.
A high powered statutory body Securities and Exchange Board of India – SEBI, has been set up to control and regulate the functioning of primary and secondary markets of securities. Foreign institutional investors were allowed to operate in the Indian capital market. Indian companies were also allowed to raise capital through Euro Issues.
In view of the Chelliah Committee’s recommendations, significant changes were made in the personal income tax, corporation tax, excise and customs duties. Personal income tax was restructured with lower tax rates, fewer slabs and higher exemption limits.
The taxation of corporate bodies was revamped. Import duties and excise duties were lowered significantly so as to make the domestic companies more competitive.
The banking sector has been made more transparent and responsible by improving its accounting system; making provisions for their effective supervision and helping those banks which were under severe resource crunch.
The results of economic reforms and liberalization have been very encouraging. The annual growth rate of gross domestic product reached the record level of 9.6 per cent in 2006-07 and then declined to 9-3 per cent in 2007-08, 6-7 per cent in 2008-09. It again rose to 8.6 per cent in 2009-10 and 9.3 per cent in 2010-11.
But thereafter shows a declining trend. GDP growth rate was 6.2% per cent in 2011-12, 5-0 per cent in 2012-13 and is likely to remain 4-5 per cent in 2013-14. Thereafter it has been estimated to be 9.0 per cent in the year 2007-08 and 7.1% in 2008-09.
The industrial growth rate reached its record level of 11% in 2006-07. All is not well with growth in the manufacturing sector which showed a negative growth rate of (-) 0:6 per cent in 2011-12 and a meagre growth rate of 0.4 per cent in 2012-13.
The annual growth rate of the gross domestic product in 1991-92 was less than even one per cent. The Indian industries have achieved technological development through modernization and this has led to increasing in their competitiveness.
From 1991 to March 2013 foreign direct investment has been secured to the line of about 287.372 billion dollars. Foreign direct investment has taken place primarily in priority sectors like electricity, communications, road construction etc.
The successes in the foreign sector are especially noteworthy, up to 1st November 2013 we had reserves of 281.296 billion dollars in foreign exchange out of which foreign currency reserves amounted to $ 253-609 billion, gold-stock valued at $ 21.227 billion while reserve tranche with IMF valued at 2-039 billion and the remaining was the SDRs.
The deficit of the current account of the balance of payments in 2006-07 was only 1.1 per cent of gross domestic product. There have been substantial improvements in the exports structures also.
The banks which had been running in loss so far are now showing profits. The capital market now stands totally globalized.
The Mumbai Stock Exchange, the National Stock Exchange and the Delhi Stock Exchange are now carrying on their business on the computers. There has been a virtual revolution in the field of communications and information technology.
These indicators testify that the Indian economy has come out of the crisis. It has transformed itself into an economy showing strong growth in agricultural and industrial output, a strong revival of domestic investment, a steady increase in foreign direct investment, renewed growth of employment and a comfortable foreign exchange position.
But these are certain challenges that need urgent attention. At the macro level, the slow growth rate, high inflation rate, rising current account deficit, increasing unemployment, high incidence of poverty are to be dealt with courteously.
These are in the urgent need to break the vicious circle of poverty-illiteracy mal-nutrition employment. Growth must be inclusive.
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