Economic Reforms of 1991

It is likely that there will be two important dates from 20th century: 1947, 1991. 1947 is obvious
but why is 1991 a turning point of similar importance in Indian history?
Reforms were introduced strategically in India in July 1991 as a mixture of macroeconomic
stabilization and structural adjustment. Divided in short term objectives and long term
objectives. Stabilization in Indian economy was necessary in the short run to restore balance of
payments equilibrium and to control inflation.
Numerous resources were used to reinforce intellectual justification for the failing system.
Institutions like JNU were created explicitly for this purpose and an elaborate systems of
national awards and positions was built to promote loyalists as public expense.
Thus, when reforms finally came into picture in 1991, due to economic collapse and not a
change in mindset. With a few notable exceptions, the leading Indian visionaries of that time
thought uniformly that liberalization was a bad thing.
What is liberalization?
Till 1991 custom duty on the imported items was around 400 percent in India, and import of
gold was completely banned. Other import and exports were restricted through strict licensing,
and production in Indian factories was equally restricted through licenses. Production were
strongly regulated in most of the core industry under public sector only, there was all out and
all around license Raj gripping the nation in its clutches and crushing its bones in cripples.
So, when finance minister Manmohan Singh presented the budget in February 1992, he felt it
was necessary to say, “Our nation will remain eternally grateful to Jawaharlal Nehru for his
vision….” He concluded his speech with “Tonight I feel like I am going to the theater. Let the
assassins be informed, I am prepared for the onslaught.”
Only when someone re-reads these words then ze recognizes the political risks Prime Minister
Narasimha Rao was taking by liberalizing the economy. He was going to unroll the industrial
licensing that penetrated into the lives of Indian.
Major Steps in the 1991 reforms
Steps taken by government to fundamentally address the balance of payments problems and
structural rigidities
Fiscal Reform- Main element in the stabilization effort of fiscal discipline. Some data revels that
fiscal deficit during 1990-91 were as high as the 8.4 % of the GDP. But the budget of 1991-92
took a bold step in the direction of correcting fiscal deficit. It forecast a reduction in fiscal deficit
by nearly 2% points of GDP from 8.4 in 1990-91 to 6.3 in 1991-92.
The budget of 1991-92 aimed to control the government expenditure, raise revenues and
reducing the conspicuous consumption. Some of the important decision were taken in the
budget of 1991-92 for correcting the fiscal imbalance were:

 Reduction in fertilizer subsidy

 Abolition of subsidy on sugar
 Privatization of selected public sector
Acceptance of major recommendation of the Tax reforms Committee headed by Raja Chellieh.
The aim of these recommendation was to raise revenues through better compliance in case of
income tax and excise and custom duties, and make the tax structure much more stable and
transparent.
Monetary and Financial Sector Reform- One of the most important financial reform has been
the reduction in Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) so that more
money is available in bank for loan to industry, trade and agriculture. The SLR which was as
large as 39 percent of deposits with the banks has been reduced to 25%.In similar fashion Cash
Reserve Ratio (CRR) which was 15 percent was reduced over phases to 4.5 percent in 2003.
And the biggest weakness of Indian financial system was that interest rate which were
administered by Reserve Bank/ Government. In the case of commercial bank, both deposit
rates and lending rates were regulated by The Reserve Bank of India.
After nationalization of 14 banks in 1969 no other bank has been allowed to be set up in the
private sector. While the importance and the role of public banks in Indian financial system
continued to be emphasized, it is a well-known fact that competition breeds excellence and
performance same thing happen in the Indian Money Market because they are leaders there is
no incentive for them to improve but after the implementation of private banks in Indian
Market which increase competition for them which leads to the higher efficiency of the
financial System.
Accordingly, private banks such as HDFC, ICICI Bank, UTI Bank and some other have been set
up. Establishment of these banks has made considerable contribution to housing finance, car
loans, study loans and retail credit through credit card system. They have made possible the
wide use of ITM cards, debit cards, credit cards which we often called them plastic money.
Reforms in Capital Markets- Aim of the capital market reform was to remove the direct control
of government and replace it with a regulatory framework based on the transparency and
supervised by an independent regulator. The Securities & Exchange Board of India (SEBI) which
was set in 1988 but get recognition in 1992 on the bases of Narasimham Committee. The SEBI
plays a vital role in maintaining stable and efficient financial and investment markets by
creating and enforcing effective regulation in India’s financial marketplace.
Industrial Policy Reforms- In order to combine the gains which were already achieved during
the 1980s and to provide greater competitive stimulus to domestic industry, a series of reforms
were introduced in Industry Policy. The Government introduced a New Industrial Policy on 24
July 1991. Key points of industrial policy reforms were as follow:

 Industrial licensing was abolished for all the projects except in 18 industries. With this
80 percent of industry were taken out of the License Raj.
 The Monopolies and Restrictive Trade Practice (MRTP) Act was repealed to eliminate
the need for prior approval by the large industry of expansion and diversification.
 Areas which were reserved for public sector were narrowed down for the greater
participation of private industries.
 The policies encouraged the disinvestment of government holding of equity share
capital of public capital enterprises.
Trade Policy Reform- Under trade policy reforms, the main focus was on the openness. Hence,
the policy package was essentially an outward oriented one. New initiatives were taken to
create an environment which catalyzed the exports while at same time reduce the degree of
regulation and licensing control on foreign trade.
The main features of trade policy reforms were as follow:

 Freer import and exports; prior to 1991, in India imports were regulated by means of a
positive list of freely importable items. Which were regulated by a limited negative list
by 1992.
 Rationalization of tariff structure and removal of quantitative restriction. The Chelliah
Committee’s reports had suggested drastic reduction in import duties.
 1991 policy allowed exports houses and trading houses to import a wide of range of
items. The Government also allowed to setting up of trading houses with 51 percent of
foreign equity for the purpose of promoting exports.
Promoting Foreign Investment- In 1991, the government announced a specific list of high
technology and high investment priority industries. Which automatically grant permission for
foreign direct investment (FDI) up to 51 percent foreign investment. The limit was raised to 74
percent and subsequently 100 percent for many of these industry.
Foreign Investment Promotion Board (FIPB) has been set up to negotiate with international
firms and approve direct foreign investment in select areas. Steps were taken from time to time
to promote foreign institutional investment (FII) in India.
Rationalization of Exchange rate Policy- One of the important measures undertaken to
improve the balance of payments situation was the devaluation of Indian Rupee. In the first
week of July 1991, Rupee was devalued by around 20 percent.
The 1991 economic reforms were focused primarily on the formal sector, and as a result, we
have seen significant boom in those areas that were liberalized. Sectors such as telecom and
civil aviation have benefited greatly from deregulation and subsequent reforms. However,
liberalisation and economic reforms still have a long way to go, especially for the informal
sector—including the urban poor who hold jobs as street vendors or rickshaw pullers, the
agricultural sector, Micro, Small and Medium Enterprises (MSMEs) and tribals. The slow growth
and stagnation in these sectors which have not seen any reform further highlights the
significant role of the 1991 reforms in helping India’s economy become what it is today.