Economic Reforms

On July 23 1991, India launched a process of economic reforms in response to a fiscal and balance of payment crisis. The reforms were historic as they were going to change the nature of the economy in the coming times.

Back in the mid 1980s the government had taken is first step to economic reforms. While the reforms of the 1980s witnessed rather limited deregulation and partial liberalization of only a few aspects of the existing control regime, the reforms started in early 1990s in the field of industries, trade, investment and later to include agriculture were much ‘wider and deeper’[1]. Though liberal policies were announced by the governments during the reforms of the 1980s itself, with the slogan of ‘economic reforms’, it was only launched with the full convictions in the early 1990s.

The reforms of 1980s were launched under the influence of famous ‘Washington Consensus’ ideology had a crippling impact on the economy. The whole Seventh Plan promoted further relaxation of market regulations with heavy external borrowings to increase exports. Though the thrust increased the growth led by a higher industrial growth (riding on a costly imports supported by foreign borrowings, which are industries would not be able to pay back and service), it also led to the substantial increase in foreign indebtedness that played a major role in the BOP crisis of 1991[2].

Causes of the crisis

The crisis was immediate by the First Gulf War (1991) which had two- prolonged negative impact on the Indian Foreign exchange (forex) reserves.

  • The War led the oil prices to go upward forcing India to use its forex reserves in comparatively short period
  • And the private remittances from Indians working in the Gulf region fell down fast.

But the balance of payment crisis also reflected deeper problems of rising foreign debt, a fiscal deficit of over 8 per cent of the GDP and a hyper-inflation over 13 per cent situation.

Under the Extended Fund facility programme of the International Monetary Fund, countries get external currency supports have some obligatory conditionalities put on the economy to be fulfilled. There are no set of rules of such conditions already available with the IMF, though they are devised and prescribed to the BOP-crisis ridden economy at the time of the need. The IMF conditions put forth for India were as under –

  • Devaluation of the rupee by 22 per cent.
  • Drastic reduction in the peak import tariff from the prevailing level of 130 per cent to 30 per cent.
  • Excise duties to be hiked by 20 per cent to neutralize the revenue short falls due to custom cut.
  • All government expenditure to be cut down by 10 per cent.

Though India was able to pay back its IMF dues in time, the structural reforms of the economy were launched to fulfill the conditions of the IMF. The ultimate goal was to bring about equilibrium in its BOP situation in the short-term and go for macroeconomic and structural adjustments so that in future the economy faces no such crisis.

The process of economic reforms in India has to be completed via three processes namely liberalization, privatization and globalization, known popularly as LPG. These processes specify the characteristics of the reform process India initiated. Liberlisation shows the direction of the of reform, privatization shows the path of the reform and the globalization shows the ultimate aim of the reform.


The minority government of the time had taken a highly bold step in the form of economic reforms crticised throughout the 1990s by one and all- right from the opposition in the parliament, to the communist parties, to the industrial houses, the business houses, and media experts and by masses and all. By now the benefits of economic reforms have been accrued to many, the criticism has somewhat calmed down, but still the reform is considered as anti-poor or poor-rich. The benefits of the reforms are not tickling to the masses at the desirable pace[3]. The need of the hour is to go for ‘distributive growth’, though the reform has led the economy to a higher growth path.


Ramesh Singh, “Indian Economy” (Mc Graw Hill Education (India) Private Limited, 13th edn.) 6.1

[1] Jeffrey D. Sachs, Ashutosh Varshney and Nirupan Bajpai, India in the era of economic Reforms, (New Delhi : Oxford University Press, 199), p.1

[2] J. Barkley Rosser, Jr. and Marina V. Rosser, Comparative Economics in a Transforming World Economy, 2nd Edition (New Delhi : Prentice Hall of India, 2005 pg. 469.

[3] Vijay Joshi and I.M.D Little, India’s Economic Reforms, 1991-2001 (Oxford: Clarendon Press, 1996), p.17

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