Q. Critically analyse how the 1991-92 economic reforms have transformed Indian economy during last 30 years. [66th BPSC: Expected question]
Ans:
During the 1991-92 economic reforms neo-liberal polices were introduced by the government. The central point of the reforms was liberalization of the economy, simplifying regulations, giving more role to the private sector and opening up of the economy to competition. New industrial policy of 1991 is the heart of the new economic reforms. The philosophy of the new economic policy was enhancing competition based upon more market orientation. During last three decades the economic reform has transformed Indian economy in multiple ways.
The 1991-92 economic reforms have transformed Indian economy:
- Rates of growth went up:
- The growth of GDP increased from 5.6 per cent during 1980-91 to around 8 per cent during 2007-2012. Between 2012-2017, an average annual growth rate of 6.7% was reached.
- India became fastest growing economy in world. However, in recently it has lost this position.
- During the reform period, the growth of agriculture has declined. While the industrial sectors reported fluctuation, the growth of service sector has gone up. This indicates that the growth is mainly driven by the growth in the service sector.
- India has targeted economy of $5 trillion by 2024. However, some experts have termed it too difficult to achieve.
- It opened up its economy and abolished the intricate system of controls that gave the state primacy in most aspects of business and daily life.
- BOP crisis has been solved in the first few years and recently India crossed the threshold of $600 billions foreign exchange reserve becoming the fifth country after Switzerland to do so.
- Nature of external debt has changed and the short term component is less.
- Not only was India’s growth in this quarter-century substantially higher than in the past, it was also less volatile than in the high-growth period of the 1980s, when it was hovering at an average of around 6%. Resilience of the economy was also tested in the face of Great Recession.
- By the first decade of the 21st century, India began to be seen as one of the fastest growing emerging markets. Far from poverty increasing, for the first time, there was a substantial reduction in it.
- The fiscal deficit in 1991 was almost 8% of GDP, which was around 4% in 2019-20.
- However, India recorded a fiscal deficit of 9.3% of GDP in 2020-21 due to rise in expenditure and moderation in revenue amid the pandemic.
- In the Banking sector, the reforms led to
- reduction of CRR and SLR leaving more funds with banks for allocation to agriculture, industry, trade etc.,
- significant liberalization of interest rate and credit controls on commercial banks,
- increasing competition within the banking sector by giving new banking licenses for Indian private sector banks etc.
- New foreign banks were licensed to enter the market, and existing banks were allowed to expand branches more liberally.
- Services sector (tertiary sector) has grown in importance and today contributes almost 60% of GDP(2017) emerging as a global player-India being the global back office.
- Consumer choice has increased with the arrival of variety of products in the market.
- Tax-GDP ratio may have shrunk-but the tax collections and base increased.
- India’s domestic saving rate increased from a low of 21.6 per cent in 1991-92 to a record high of 37.7 per cent in 2007-08. Currently, in continues to be over 30 percent.
- Indian companies are listed on Nasdaq and New York Stock Exchange and raised billions of dollars for investment. Indian rupees denominated bond like Masala bond has been listed in foreign countries.
- FIls and FDI picked up:
- India has attracted highest ever total FDI inflow of US$ 81.72 billion during the financial year 2020-21 and it is 10% higher as compared to the last financial year 2019-20 (US$ 74.39 billion).
- Indian has become the highest recipient of remittances in the world according to world bank data.
- India has emerged as Information technology super power and backoffice of the world due to boom in the software sector.
- India is seen as a successful exporter of auto parts, engineering goods, IT software and textiles in the reform period.
- Rising prices have also been kept under control.
- Various PPP models has increased the pace of infrastructure development. Some of the major developments were The Golden Quadrilateral, north–south and east–west corridors etc. The total Length of National Highways in India increased from about 33,000 km to about 1.36 lakh km.
- India also became the third-largest domestic market for civil aviation in the world, after China.
- India’s rank in the world bank’s ease of Doing Business 2020 has increased to 63rd position.
- The reforms spurred a new age of entrepreneurship, making India one of the fastest growing computer and digital start-up hubs in the world. India currently houses the world’s third largest startup ecosystem, with 38 firms being valued at over $1 billion, or what is known as unicorns.
- Indian corporates have acquired global majors like Jaguar and Anglo-Dutch steel maker Corus) Bharati bought Zain’s African telecom operations.
While the above facts paint a positive picture of reforms, there are deficiencies as well:
- The reform process has been widely criticised for not being able to address some of the basic problems facing our economy especially in the areas of employment, agriculture, industry, infrastructure development and fiscal management.
- poverty is a challenge and reforms with a human face is the need of the hour. About 22% of population are still under poverty line. Oxfam report has highlighted that the top 10% of the Indian population holds 77% of the total national wealth.
- Jobless growth is worrying the policy makers. According to NSSO report the unemployment rate in 2018-19 was 5.8%. Further, more than 90% of workforce continues to be employed in informal Economy.
- Jobless growth is worrying the policy makers. According to NSSO report the unemployment rate in 2018-19 was 5.8%. Further, more than 90% of workforce continues to be employed in informal Economy.
- Regional economic imbalances are intensifying. e.g. per capita income in Bihar is only around 41,000 in the financial year 2019 while that of Maharashtra was around 191 thousand Indian rupees in the same financial year.
- While foodgrains production is at 301 mt (2020-21), there is still pressure on food security due to lack of availability and affordability of food items.
- While some sectors—such as broadcasting, telecom, retail, and information technology—have leapfrogged in their development cycle, others such as agriculture, roadways, manufacturing and electricity have yet to change much.
- Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.
- Farmers are feeling directionless under the WTO regime.
- Agriculture now contributes only about 15% to the GDP, down from 29 percent in 1991.
- Globalization threatens to destabilize agriculuture with cheaper imports and questionable provisions related to intellectual property rights, impacting negatively availability of medicines etc.
- 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.
- Infrastructure so far received inadequate attention except telecom, roads and ports. Issues like land acquisition, fund etc. continue to hinder the development of infrastructure.
- Our banking system is facing issue of severe NPAs. It continues to be dominated by public sector banks (PSBs).
- Mergers may help reduce branches, and perhaps monetise excess real estate to boost capital, but it is not a systemic reform.
- Giving the Reserve Bank of India (RBI) the same regulatory control over PSBs that it has over private sector banks would qualify as a real reform.
- PSU reforms have not made progress and disinvestment and privatization are still to see substantial movement.
- GST is a major reform and it was expected to generate greater tax buoyancy. It has not done so. Its rate structure and exclusions need to be reviewed.
- The recent trend of the slowing economic growth has been further accentuated by the impact of Covid-19 pandemic. The impact of pandemic has caused the shrinking of Indian economy by 7.3%.
- 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.
- Also, the reform policies involving tariff reduction have curtailed the scope for raising revenue through customs duties.
- In order to attract foreign investment, tax incentives were provided to foreign investors which further reduced the scope for raising tax revenues. This has a negative impact on developmental and welfare expenditures.
In essence, the reforms initiated in 1991 have transformed much of the country. While the process of reform has produced positive as well as negative results. Niti Aayog vision document and action plan is directed at reducing the negative impacts of reforms and tries to shape a better India going forwards.
