Rationale of Economic Reforms

Topics: Investment, Economic growth, Macroeconomics Pages: 12 (4697 words) Published: November 3, 2013
Though economic liberalization in India can be traced back to the late 1970s, economic reforms began in earnest only in July 1991. The reforms initiated by former Prime Minister Narasimha Rao and former Finance Minister Dr. Manmohan Singh in July 1991 represent a watershed in India's economic development strategy and policies since independence. A balance of payments crisis at the time opened the way for an International Monetary Fund (IMF) program that led to the adoption of a major reform package.Though the foreign-exchange reserve recovered quickly and ended effectively the temporary clout of the IMF and World Bank, reforms continued in a stop-go fashion. To understand how much of a break from the past the reform programme represents, why it was called for, and what brought it about, and indeed in understanding why some components of the programme, such as privatization for example, have not made as much headway as others and are facing significant resistance including from some of the constituents of the United Front, one has to go back to the pre-independence roots of Indian economic development strategy. Economic liberalisation in India

From Wikipedia, the free encyclopedia
The economic liberalisation in India refers to ongoing economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. Attempts were made to liberalise economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. Second major attempt was in 1985 by prime minister Rajeev Gandhi. The process came to a halt in 1987, though 1966 style reversal did not take place. The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate of 9%.[7] With this, India became the second fastest growing major economy in the world, next only to China.[8] The growth rate has slowed significantly in the first half of 2012.[9] An Organisation for Economic Co-operation and Development (OECD) report states that the average growth rate 7.5% will double the average income in a decade, and more reforms would speed up the pace.[10] Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, therupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. India also operated a system of central planning for the economy, in which firms required licenses to invest and develop. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors.


A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalisation was slowly embraced. The reforms process continues today and is accepted by all political parties, but the speed is often held hostage by coalition politics and vested interests.


The impact of these reforms may be gauged from the fact that total foreign investment  (including foreign direct investment, portfolio investment, and investment raised on international capital markets) in India grew from a minuscule US$132 million in 1991–92 to $5.3 billion in...
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