If India is the fifth largest economy in the world today, then former Prime Minister Dr. Manmohan Singh was one of the people who played a big role behind it. While being the Finance Minister, Manmohan Singh, understanding the serious condition of the country’s economy and sensing the need of the time, brought the New Economic Policy 1991 under the guidance of the then Prime Minister PV Narasimha Rao. It was this major economic reform that showed India the path to progress. The economy gradually started gaining momentum. Economic policy refers to the work that governments do in the economic field. It covered levels of taxation, government budgets, money supply and interest rates, as well as labor markets, national ownership, and many other areas of government intervention in the economy.
economic crisis of 1991
By the year 1985, balance of payments problems had started in India. This happened because there was more spending by the government while less income was generated. Apart from this there were huge disparities between income and expenditure. By the end of the 1990s it was in a serious economic crisis. The government was close to default, with its central bank refusing to grant new loans. In the year 1991, India faced an economic crisis. This was related to external debt. The government was not able to repay its loans taken from abroad. The foreign exchange reserves, which we maintain for the import of petroleum and other important commodities, have fallen to a level which could not last even for a fortnight. Rising prices of essential commodities further aggravated the crisis.
Manmohan Singh’s statement before proposing economic reforms on July 24, 1991
Before proposing economic reforms in his budget speech on July 24, 1991, former Prime Minister Dr. Manmohan Singh had said-
“There is no time to waste. Neither the government nor the economy can spend more than its capacity year after year. There is no longer any room for borrowing money or getting things done on time. There is a need to expand the scope and scope.”
Special announcements were made on these issues in economic reforms
Structural reforms were carried out in the 1991 economic reforms under the leadership of the then Prime Minister P.V. Narasimha Rao and the then Finance Minister Dr. Manmohan Singh. Apart from this, major decisions were taken on stabilization measures, privatization, liberalization, globalization, deregulation, financial sector, tax reforms, foreign exchange and trade policy reforms.
economic reform measures
stabilization measures
These are short-term measures aimed at solving the immediate cause – the economic crisis of 1991. These included addressing the weaknesses resulting from the balance of payments crisis and taking steps to bring inflation under control.
structural measures
These were long-term measures aimed at improving the efficiency of the economy and enhancing its international competitiveness by removing rigidities in various sectors of the Indian economy. These reforms fall into three major areas – liberalization, privatization and globalization.
liberalization
Industrial areas were regulated. Industrial licensing was abolished for all product categories except liquor, cigarettes, hazardous chemicals, drugs, explosives etc. Many industries which were reserved for the public sector have now been unreserved. Only railways, defense equipment, nuclear power generation have been reserved with the public sector. The market is allowed to determine prices.
financial sector reforms
The role of the Reserve Bank of India (RBI) was reduced from a regulator to a facilitator of the financial sector. These reforms led to the establishment of private banks. FDI in banks was increased to 50%. But some managerial aspects have been retained with the RBI to protect the interests of the account holders.
tax reform
As a major reform, corporate tax, which was earlier very high, was gradually reduced. Tax procedures were simplified and rates were also reduced. In 1973–74, there were 11 tax slabs, with rates ranging from 10 to 85 percent. 1990–91 – In 5 budgets between 1991–96, Finance Minister Manmohan Singh reduced the IT slab to three (20, 30 and 40 percent).
foreign exchange reform
The rupee depreciated against foreign currencies, leading to an increase in foreign exchange inflows. The market is allowed to determine foreign exchange rates.
trade and investment policy reforms
Economic reforms included elimination of quantitative restrictions on imports, reduction in tariff rates (taxes on imports), removal of licensing procedures for imports except for hazardous and environmentally sensitive products, the latter also completely reducing quantitative restrictions on imports. Steps like paying taxes were taken. Also, export duties were removed to promote exports.
Privatization
The new reform approved privatization which means transfer of assets from public sector to private sector. Privatization helps in improving financial discipline and facilitating modernization. Privatization helped in strong FDI inflows. Privatization of public sector enterprises by selling their equity share to the public is called disinvestment. Under the reform, assets of public sector undertakings were undervalued. The money gained from disinvestment was diverted to meet the shortfall in government revenues instead of creating new assets.
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