Need For Reforms Of The Indian Economy Economics Essay

In the centre of India`s flag there is a spinning wheel, a symbol used by our Father of Nation M.K.Gandhi to protest English textile imports under British rule and to demonstrate the nobility of a society of small scale agriculture and industry. For a long period of time India`s economy was governed by the same principle and led to some disastrous economic crisis.

India`s recent progress towards economic growth is only because of the reforms undertaken after the 1991 fiscal crisis, which lifted India from decades of slow growth rate under socialist rule and offered an opportunity to improve living conditions in the country. Though the recent growth is impressive but the progress is not enough. Some great steps have been taken in field of trade, industrial policies, financial systems in order to reduce poverty but still much is to be done. The government intrudes where it should not, everywhere from coal mines to discos and always fails to manage the basic services that it should like decent roads, stable power distribution, primary education etc.


The first PM of India J.L.Nehru established a blend of democratic politics and central planning. He named his reforms as “mixed economy” or “socialism”.

“A second-rate Indian good is superior to a first-rate foreign product.” With such statements Nehru established state ownership and import-substitution industrialization in hopes of developing the nation’s internal capacity.

Two major crisis at that time were :

License Raj: Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. 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 that means a huge number of departments had to be satisfied before a firm could be granted a license to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. 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.

COSEQUENCES-: However, by the 1980s, the country was left with:

Low growth rates

Closure to trade and investment

A license-obsessed, restrictive state

Inability to sustain social expenditures

Macro instability, indeed crisis.

Increase in corruption

Balance of Payments: India started having balance of payments problems since 1985 i.e. right after the assassination of Indira Gandhi, and by the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports.

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having balance of payments problems. Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up and investors took their money out.

When India was only one week away from defaulting on its external balance of payment obligation the PM Chandrashekhar and finance minister Yashwant Sinha decided to transfer 47 ton of gold to London and 20 tons to the union bank of Switzerland to raise 600 million dollars.

But the government collapsed a month later and this helped in tiding over the balance of payment crisis by the reforms introduced by Manmohan Singh.

REFORMS BY P.V.N. Rao in 1991

The economic reforms or liberalization in India mark a shift from socialist economy to a market economy. Initiated by the then Indian Prime Minister P.V. Narasimha Rao and his Finance Minister Manmohan Singh, their immediate cause was a foreign exchange crisis during Chandrashekhar government when India had to sell its gold reserves. Reforms were as follows-:

In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to licensing. Industrial regulation was rationalized.

Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue.

Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries.

Starting in 1994 of the National Stock Exchange as a computer-based trading system which served as an instrument to leverage reforms of India’s other stock exchanges. The NSE emerged as India’s largest exchange by 1996.

Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative controls i.e. the rupee was made convertible on trade account.

Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors.

Streamlining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation.

Marginal tax rates were reduced.

Privatization of large, inefficient and loss-inducing government corporations was initiated.


Atal Bihari Vajpayee’s administration surprised many by continuing reforms, when it was at the helm of affairs of India for five years.

Vajpayee oversaw his National Highway Development Project and Pradhan Mantri Gram Sadak Yojana begin construction, in which he took a personal interest.

Vajpayee promoted pro-business, free market reforms to reinvigorate India’s economic transformation and expansion that were started by former PM Narasimha Rao but stalled after 1996 due to unstable governments and the 1997 Asian financial crisis

Increased competitiveness, extra funding and support for the information technology and high-tech industries, improvements in infrastructure, deregulation of trade, investments and corporate laws – all increased foreign capital investment and set in motion an economic expansion.

In March 2000 Bill Clinton, the President of the United States, paid a state visit to India. His was the first state visit to India by a US President in 22 years. President Clinton’s visit to India was hailed as a significant milestone in the relations between the two countries.

In 2001, the Vajpayee government launched the Sarva Shiksha Abhiyan, which aimed at improving the quality of education in primary and secondary schools.


After the onset of economic liberalization in 1991, the government made valiant efforts

toward privatizing public enterprises. However, political difficulties have forced it to

backtrack time and again. But if we get a chance to do the change, there are a lot of things to be altered. A few of them are as follows:-

Restructure tax collection and allocation system to increase revenues at local and

state levels

Downsize overstaffed public institutions, particularly at state and local levels

Allow pension funds to invest in stocks

Further reduce import duties and restrictions

Invest in infrastructure and education, as a recent survey of global CEOs cited

infrastructure and poor skill level as the two leading deterrents

Privatize the energy sector and base user-charges on economic cost

Eliminate subsidies that have largely benefited interest groups rather than poor

Farmers and Reallocate these freed-up resources toward urgent public interventions, such as building roads, irrigation channels, and refrigeration facilities.

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Date of submission:- 31st May ’10


The economy of India is the eleventh largest economy in the world by nominal GDP and the fourth largest by purchasing power parity (PPP). In the 21st century, India is an emerging economic power with vast human and natural resources, and a huge knowledge base. By 2035, India was projected to be the third largest economy of the world, behind US and China.

In the 1990s, after economic liberalisation by P. M. Narasimha Rao along with his finance minister Dr. Manmohan Singh which was socialist-inspired economy after independence ,the country began to experience rapid economic growth, as markets opened for international competition and investment. Jawahar lal Nehru and Indira Gandhi also contributed to it.

India was under social democratic-based policies from 1947 to 1991. Since 1991, continuing economic liberalisation has moved the economy towards a market-based system. A revival of economic reforms and better economic policy in 2000s accelerated India’s economic growth rate.


India’s economy is a mixed economy comprising of both public n private sectors. The economy of India is the eleventh largest economy in the world by nominal GDP and the fourth largest by purchasing power parity (PPP). Due to economic liberalisation India, by 2008 emerged as the world’s second-fastest growing major economy.

Agriculture is the predominant occupation in India, accounting for about 52% of employment. Other major industries include telecommunications, textiles, chemicals, food processing, steel, insurance, electrical plants, transportation equipment, cement, mining, petroleum, machinery, information technology enabled services and software. India’s economic history can be broadly divided into three eras-

Pre-colonial period lasting up to the 18th century.

The advent of British colonisation started the colonial period in the early 19th century, which ended with independence in 1947.

The third period stretches from independence in 1947 until now.

Five-Year Plans of India resembled central planning in the Soviet Union. Indian companies are no longer afraid of Multinational Companies. They are becoming competitive and some of them are going global.

Economic reforms brought foreign competition, led to privatisation of certain public sector industries. Textile manufacturing is the second largest source for employment after agriculture and accounts for 26% of manufacturing output. Business services are among the fastest growing sectors contributing to one third of the total output of services in 2000.

Mumbai is the financial and commercial capital of India. Prime Minister Indira Gandhi nationalised 14 banks in 1969, since then, the number of bank branches has increased to 98,910 in 2003.


Development of infrastructure was completely in the hands of the public sector. But India’s low growth rates prompted the government to partially open up infrastructure to the private sector allowing foreign investment which has helped in a sustained growth rate of close to 9% for the past six quarters. Some 600 million Indians have no mains electricity at all. Almost all of the electricity in India is produced by the public sector. Indian Road Network is developing. Trucking goods from Gurgaon to the port in Mumbai can take up to 10 days. India has the world’s third largest road network. Container traffic is growing at 15% a year. some 60% of India’s container traffic is handled by the Jawaharlal Nehru Port Trust in Navi Mumbai.


India has the world’s fifth largest wind power industry, with an installed wind power capacity of 9,587 MW.

India’s total cultivable area is 1,269,219 km² (56.78% of total land area), which is decreasing due to constant pressure from an ever growing population and increased urbanisation. India has a total water surface area of 314,400 km² and receives an average annual rainfall of 1,100 mm. Irrigation accounts for 92% of the water utilisation, India’s inland water resources comprising rivers, canals, ponds and lakes and marine resources comprising the east and west coasts of the Indian ocean and other gulfs and bays provide employment to nearly 6 million people in the fisheries sector. In 2008, India had the world’s third largest fishing industry.

India’s major mineral resources include coal, iron, manganese, mica, bauxite, titanium, chromites, limestone and thorium. India meets most of its domestic energy demand through its 92 billion tonnes of coal reserves (about 10% of world’s coal reserves).

India’s huge thorium reserves – about 25% of world’s reserves – is expected to fuel the country’s ambitious nuclear energy program in the long-run. India is also believed to be rich in certain renewable sources of energy with significant future potential such as solar, wind and bio fuels.


The NSSO survey estimated that in 1999-2000, 106 million, nearly 10% of the population were unemployed and the overall unemployment rate was 7.3%, with rural areas doing marginally better (7.2%) than urban areas (7.7%). India’s labour force is growing by 2.5% annually, but employment only at 2.3% a year.

Official unemployment exceeds 9%. Regulation and other obstacles have discouraged the emergence of formal businesses and jobs.

Unemployment in India is characterized by chronic or disguised unemployment. Government schemes that target eradication of both poverty and unemployment Unemployment also gives rise to Child labour , a complex problem that is basically rooted in poverty. The Indian government is implementing the world’s largest child labour elimination program, with primary education.

Employment status

The number of people employed in non-agricultural occupations in the public and private sectors. Totals are rounded. Private sector data relates to non-agriculture establishments with 10 or more employees.


Industry accounts for 54.6% of the GDP and employ 17% of the total workforce. However, about one-third of the industrial labour force is engaged in simple household manufacturing only .In absolute terms, India is 16th in the world in terms of nominal factory output. India’s small industry makes up 5% of carbon dioxide emissions in the world.

Textile manufacturing is the second largest source for employment after agriculture and accounts for 26% of manufacturing output. Tripura has gained universal recognition as the leading source of hosiery, knitted garments, casual wear and sportswear. Dharavi slum in Mumbai has gained fame for leather products. Tata Motors’ Nano attempts to be the world’s cheapest car. Tourism in India is relatively undeveloped, but growing at double digits. Some hospitals woo medical tourism.


In context to India, globalisation implies:-

opening up the economy to foreign direct investment by providing facilities to foreign companies to invest in different fields of economic activity in India,

removing constraints and obstacles to the entry of MNCs in India,

allowing Indian companies to enter into foreign collaborations and also encouraging them to set up joint ventures abroad;

Carrying out massive import liberalization programs by switching over from quantitative restrictions to tariffs and import duties, therefore globalization has been identified with the policy reforms of 1991 in India.The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing economy and globally competitive.

Thus, Since 1990 India has emerged as one of the fastest-growing economies in the developing world.


Acharya, Shankar (2002a): ‘Macroeconomic Management in the Nineties’, Economic

and Political Weekly, Vol. XXXVII, No. 16 pp 1515-38. Reprinted in Acharya(2006)

(2002b): ‘Managing India’s External Economic Challenges in the 1990s’, inM. S. Ahluwalia, Y.V. Reddy and S. S. Tarapore

Government of India, (2007): Report of the High Powered Expert Committee on

Making Mumbai an International Financial Centre, Ministry of Finance, NewDelhi.

Ahluwalia, Isher J., “Productivity and Growth in Indian Manufacturing,” Oxford University Press, New Delhi 1991.

Ahluwalia, Isher J., “Industrial Growth in India: Stagnation since the mid-sixties,” Oxford University Press, New Delhi, 1995.

(2005): ‘Indian Economy: Current Status and Selected Issues’, Reserve Bankof India Bulletin, February, Mumbai.

(2004): Press Release 2003-2004/1125, March 25, Reserve Bank of India,Mumbai.


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