Economic reforms refers to the changes introduced by the Government to bring an improvement in the economy of the country.
Economic reforms refers to the introduction of innovative policies such as eliminating the market barriers, encouraging economic participation from private sector, reducing the fiscal deficit, increasing exports and reducing imports, etc. for increasing the growth rate of the economy.
The Indian Government has introduced many Economic Reforms in India since 1991. During 1990-91, India had to face various economic problems. The massive deficiency in foreign trade balance was expanding further. Since 1987-88 till 1990-91 it was increasing in such a rapid scale that by the end of 1990-91 the amount of this deficit balance became 10,644 crores of rupees.
At the same time the foreign exchange stock was also decreasing. In 1990 and 1991 the government of India had to take huge amount of loan from the IMF as compensatory financial facility. Even by mortgaging 46 tons of gold it had taken short-term foreign loan from the Bank of England.
At the same time, India was also suffering from inflation, the rate of which was 12% by 1991. The reasons of that inflation were the increase in the procurement price of the agricultural products for distribution, the increase in the amount of monetized deficit in the budget, increase of import cost and decrease in the rate of currency exchange and Administered price like. Thus she was facing trade deficit as well as Fiscal Deficit.
To get relief from such economic problem the government of India had only two ways before it:
- To take foreign debt and to create favorable conditions within the country for increasing the flow of foreign exchange and also to increase the volume of export.
- The other was to establish fiscal discipline within the country and to make structural adjustment for the purpose.
Hence the government of India had to introduce a package of reforms which included:
- To liberalize the industrial policy of the government and to invite foreign investment by privatization of industries and abolishing the license system as a part of that liberalization.
- Automatic approval for Foreign Direct Investment (FDI) was introduced for many industrial sectors.
- To make the import-export policy of the country more liberal and so that the export of Indian goods may become more easy and the necessary raw materials and instruments for both industrial development and production of exportable commodities may be imported and also to facilitate free trade by reducing the import duty.
- To decrease the value of money in terms of dollar.
- To take huge amount of foreign debt from the IMF and the world Bank for rejuvenating the economic condition of the country and to introduce the structural adjustment in the economic condition of the country as a pre-condition of that debt.
- To reform the banking system and the tax structure of the country.
- To establish market economy by withdrawing and restricting government interference on investment.
- For several industries, the monopoly of public sector came to an end.
- To encourage the private sector to make investment in large scale industries.
The main objectives of the new fiscal policy are, however, to establish economic structural adjustment at the first stage and then to establish market economy by removing all controls and restrictions on it. There are two phases in the structural adjustment phase:
- The stabilization phase where all government expenditures are reduced and the banks are restricted on creating debt.
- The second phase is the structural adjustment phase where the production of exportable good and the alternative of import goods are increased and at the same time reducing governmental interference in industry, the management skill and productive capacity of the industries are increased through privatization.
Thus, the new fiscal policy has introduced three significant things Deregulation, Privatization and Exit Policy. Excepting 15 important industries all other industries have been made free from license system. To encourage foreign investment its highest limit has been increased up to 51%. Thirty-eight (38) industries have been made open for foreign investment like the Metal industry, Food Processing industry, Hotel and tourism industry etc. Exit Policy has been introduced in the industries which are running at a loss with surplus staff and the sick industries are scheduled to be closed.
The Economic liberalization have helped India to grow at faster pace. India is now considered one of the major economy of Asia. The Foreign investments in India have increased over the years. Many multinational companies have set-up their offices in India. The per-capita GDP of India have increased, which is a sign of growth and development.
India has emerged as a leading exporter of services, software and information-technology products. Many companies such as Wipro, TCS, HCL Technologies, Tech Mahindra have worldwide fame.
Thus the new economic policy is taking India towards liberal economy or market economy. It has relieved India much of her hardship that she faced in 1990-91.