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In 1991, India faced a severe economic crisis involving external debt, depleted foreign exchange reserves, and rising prices of essential goods. To address this, the government introduced the New Economic Policy (NEP), which included liberalisation, privatisation, and globalisation. These reforms aimed to create a competitive environment, remove barriers to growth, stabilise the economy, and enhance international competitiveness. In this blog, we will cover all the important pointers on each aspect of this chapter. These notes summarise key concepts for effective revision. You can also download the free PDF for revision.
Contents
- 1 Introduction
- 2 Background
- 3 Reforms fall under liberalisation, privatisation, and globalisation.
- 4 Indian Economy During Reforms: An Assessment
- 5 Conclusion
- 6 Important Definitions in NCERT Notes Class 11 Indian Economic Development Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal
- 7 FAQs
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Introduction
Since independence, India has followed a mixed economy framework, combining the advantages of capitalist and socialist systems. Some scholars argue that this led to rules and laws that hampered growth, while others highlight achievements like increased savings, a diversified industrial sector, sustained agricultural expansion, and food security.
In 1991, India faced an economic crisis: inability to repay external borrowings, foreign exchange reserves insufficient for even a fortnight, and rising prices of essential goods.
This led to the introduction of new policy measures changing developmental strategies, including liberalisation, privatisation, and globalisation.
Background
The financial crisis originated from inefficient management in the 1980s. Government generated funds from taxation, public sector enterprises, etc., but expenditure exceeded income, leading to borrowing from banks, domestic sources, and international institutions. Here are some important pointers that one should know about the background.
- Development policies addressed challenges like unemployment, poverty, and population explosion, but revenues were low, and the government overshot its revenue without generating additional income.
- Income from public sector undertakings was low; foreign exchange was spent on consumption needs; no reduction in profligate spending or boost to exports.
- By the late 1980s, expenditure exceeded revenue unsustainably; imports grew faster than exports; foreign exchange reserves dropped to cover imports for only two weeks; no international lending was available.
- India approached the World Bank (IBRD) and the IMF, receiving a USD 7 billion loan with conditions to liberalise, open the economy, remove private sector restrictions, reduce government role, and eliminate trade restrictions.
- India agreed and announced the New Economic Policy (NEP) with wide-ranging reforms for a competitive environment and firm growth.
- Policies classified as: stabilisation measures (short-term: correct balance of payments, control inflation, maintain foreign reserves) and structural reform measures (long-term: improve efficiency, remove rigidities).
Reforms fall under liberalisation, privatisation, and globalisation.
Certain reforms fall under each: Liberalisation, Privatisation and Globalisation. Some of these reforms are mentioned below:
Liberalisation
Liberalisation ended restrictions hindering growth and opened sectors. Measures started in the 1980s but became comprehensive in 1991, focusing on the industrial sector, the financial sector, tax reforms, foreign exchange, and trade/investment.
Deregulation of the Industrial Sector:
Pre-reform: Industrial licensing required government permission to start/close firms or decide production; the private sector was barred from many industries; some goods were reserved for small-scale production; controls on prices and distribution.
Post-reform: Licensing abolished except for alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, drugs, pharmaceuticals; only atomic energy generation and some railway activities reserved for the public sector; small-scale goods deregulated; market determines prices in most industries.
Financial Sector Reforms:
The financial sector includes commercial banks, investment banks, stock exchanges, foreign exchange market, regulated by the RBI, which sets reserves, interest rates, and lending norms.
Reforms reduced RBI’s role from regulator to facilitator, allowing sector decisions without RBI consultation.
Led to private sector banks (Indian/foreign); foreign investment limit in banks to 74%; freedom for qualifying banks to open branches without RBI approval and rationalise networks; permission to generate resources domestically/abroad, with RBI retaining some managerial aspects for safeguards.
Foreign Institutional Investors (FII), like merchant bankers, mutual funds, and pension funds allowed in the Indian markets.
Tax Reforms:
Concerned with fiscal policy (taxation and public expenditure). Direct taxes: on individual incomes and business profits; indirect: on commodities. Since 1991, reduced individual income taxes to curb evasion and encourage savings/voluntary disclosure; gradual reduction in high corporation tax rates.
Indirect tax reforms for a common national market; 2016 constitutional amendment for Goods and Services Tax (GST), creating ‘one nation, one tax, one market’; expected to increase revenue, reduce evasion.
Foreign Exchange Reforms:
1991: Rupee devalued against foreign currencies to increase foreign exchange inflow; set tone for market-determined rupee value, not government control. Markets now determine exchange rates based on the demand/supply of foreign exchange.
Trade and Investment Policy Reforms:
Aimed at international competitiveness, foreign investments/technology, efficiency of local industries, and modern technologies.
Pre-reform: Quantitative restrictions on imports, high tariffs to protect domestic industries; reduced efficiency and manufacturing growth.
Reforms: Dismantled quantitative restrictions on imports/exports; reduced tariff rates; removed licensing for imports except for hazardous/environmentally sensitive goods. Quantitative restrictions on manufactured consumer goods and agricultural products were removed from April 2001; export duties were removed for competitiveness.
Privatisation
Involves shedding government ownership/management of enterprises: withdrawal from ownership/management or outright sale. Privatisation via disinvestment: selling PSE equity to the public; aims to improve financial discipline, facilitate modernisation, utilise private capital/managerial capabilities for PSU performance. The government improved PSU efficiency by granting autonomy: special status as maharatnas, navratnas, and miniratnas.
Globalisation
Integration of the economy with the world economy, a complex phenomenon from policies for interdependence/integration, creates networks transcending boundaries; turns the world borderless; events elsewhere influence India.
Outsourcing:
Important outcome: Company hires external services (mostly foreign) previously internal (e.g., legal advice, computer service, advertisement, security). It is intensified due to fast communication, IT growth; services like BPO/call centres, record keeping, accountancy, banking, music recording, film editing, book transcription, clinical advice, and teaching outsourced to India.
Digitised text/voice/visual data transmitted in real-time via telecom/Internet. MNCs/small companies outsource to India for cheaper cost, skill, accuracy; low wages, skilled manpower make India a destination.
World Trade Organisation (WTO):
Founded in 1995, a successor to GATT (1948, 23 countries); administers multilateral trade agreements, providing equal opportunities. It establishes a rule-based regime without arbitrary restrictions; purpose: fair trade in goods/services, optimum world resource use, and environmental protection.
India: Active member, frames fair rules, advocates developing world interests; kept commitments by removing quantitative restrictions, reducing tariffs.
Critics: Major trade among developed nations; developing countries feel cheated—forced to open markets but denied access to developed ones; complaints over subsidies.
Also Read: NCERT CBSE Class 10 Economics Chapter 4 Notes
Indian Economy During Reforms: An Assessment
Reforms have been completed for three decades; GDP growth measures reform performance.
Post-1991: Rapid GDP growth from 5.6% (1980-91) to 8.2% (2007-12); agriculture growth declined; industry fluctuated; services increased, driving GDP.
2012-15 setback: Agriculture high in 2013-14, negative next; services high (9.8% in 2014-15); industry declined 2012-13, then positive.
Opened economy: FDI/FII increased from US$100 million (1990-91) to US$30 billion (2017-18); forex reserves from US$6 billion (1990-91) to US$413 billion (2018-19); India top reserve holder.
Successful exporter: Auto parts, pharmaceuticals, engineering goods, IT software, textiles; controlled rising prices.
Criticisms: Failed to address employment, agriculture, industry, infrastructure, fiscal management.
Growth and Employment: GDP growth increased, but insufficient employment opportunities.
Reforms in Agriculture: Growth decelerating; public investment has fallen in infrastructure (irrigation, power, roads, market linkages, research/extension). Partial fertiliser subsidy removal increased production costs, affecting small/marginal farmers.
Policy changes: Reduced import duties, low minimum support price, lifted quantitative restrictions, due to international competition.
Shift to export-oriented: From domestic food grains to cash crops for export, pressuring food grain prices.
Reforms in Industry: Slowdown due to decreasing demand from cheaper imports, and inadequate infrastructure investment.
Globalisation: It has opened up goods/capital from developed countries; vulnerable industries; cheaper imports replace domestic; competition; inadequate power supply. Developing countries lack access to developed markets due to non-tariff barriers (e.g., the USA quota on Indian/Chinese textiles despite India removing quotas).
Disinvestment:
Annual targets: e.g., 1991-92 target Rs 2,500 crore, achieved Rs 3,040 crore; 2017-18 target Rs 1,00,000 crore, achieved Rs 1,00,057 crore.
Critics: PSE assets undervalued, sold to private; government loss; proceeds offset revenue shortages, not for PSE development/social infrastructure.
Reforms and Fiscal Policies:
Limits on public expenditure growth, especially in social sectors. Tax reductions for revenue/evasion didn’t increase tax revenue; tariff reductions curtailed customs duties; tax incentives to foreign investors reduced the scope. It hurts developmental/welfare expenditures.
Conclusion
Globalisation via liberalisation/privatisation produced positive/negative results.
Some argue: Opportunity for global markets, high technology, and large developing industries as international players.
Critics: Strategy for developed countries to expand markets; compromises poor countries’ welfare/identity; widens disparities.
Indian context: Crisis from deep-rooted inequalities; reforms aggravated inequalities; increased income/quality for high-income groups; growth concentrated in select services (telecom, IT, finance, entertainment, travel, hospitality, real estate, trade), not agriculture/industry providing livelihoods to millions.
Important Definitions in NCERT Notes Class 11 Indian Economic Development Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal
This section lists key terms for clarity and revision:
- New Economic Policy (NEP): A Set of economic reforms announced in 1991 to address the crisis, focusing on liberalisation, privatisation, and globalisation.
- Stabilisation Measures: Short-term policies to correct balance of payments weaknesses and control inflation.
- Structural Reform Measures: Long-term policies to improve economic efficiency and international competitiveness by removing rigidities.
- Liberalisation: Removal of restrictions and regulations to open sectors of the economy.
- Privatisation: Shedding government ownership or management of enterprises, often through disinvestment.
- Globalisation: Integration of the economy with the world economy, creating interdependence and a borderless world.
- Outsourcing: Hiring external services, often from other countries, previously provided internally.
- World Trade Organisation (WTO): Global organisation established in 1995 to administer multilateral trade agreements and ensure fair trade.
- Disinvestment: Selling off part of the equity of public sector enterprises to the public.
- Goods and Services Tax (GST): Tax introduced post-2016 amendment to create one nation, one tax, one market.
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FAQs
The crisis originated from inefficient management in the 1980s, with government expenditure exceeding revenue, unsustainable borrowings, rapid import growth without export matching, and depleted foreign exchange reserves.
Stabilisation measures are short-term to correct the balance of payments and control inflation. Structural reform measures are long-term to improve efficiency and remove rigidities in the economy.
Liberalisation involves removing restrictions like industrial licensing, reserving industries for the public sector, and controls on prices to open various sectors of the economy.
Through disinvestment by selling part of public sector enterprises’ equity to the public, and granting autonomy to PSUs like maharatnas, navratnas, and miniratnas.
Globalisation is the integration of the economy with the world, creating interdependence. A key outcome is outsourcing, where services are hired externally, often from India, due to low costs and skilled manpower.
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