30 Years of Economic Liberalisation | 26 Jul 2021

Why in News

Recently, on the 30th anniversary of the economic liberalisation reforms, former Prime Minister of India, Manmohan Singh, raised concerns over the macro-economic stability of the country.

Key Points

  • 1991 Crisis & Reforms:
    • 1991 Crisis: In 1990-91, India faced a severe Balance of Payments (BOP) crisis, where its foreign exchange reserves were just adequate to finance 15 days of imports. There were many factors that led to the BOP crisis:
      • Fiscal Deficit: The fiscal deficit during 1990-91 was around 8.4% of GDP.
      • Gulf War I: In 1990-91, the situation was aggravated by the rise in the price of oil due to Iraq’s invasion of Kuwait.
      • Rise in Prices: The inflation rate increased from 6.7% to 16.7% due to a rapid increase in money supply and the country’s economic position became worse.
    • Nature and Scope of 1991 Reforms: In order to get out of the macro-economic crisis in 1991, India launched a New Economic Policy, which was based on LPG or Liberalisation, Privatisation and Globalisation model.
      • Then Finance Minister, Manmohan Singh, was the prime architect of the historic 1991 liberalisation.
      • The broad range of reforms under the LPG model included:
        • Liberalising Industrial Policy: Abolition of industrial license permit raj, Reduction in import tariffs, etc.
        • Beginning of Privatisation: Deregulation of markets, Banking reforms, etc.
        • Globalisation: Exchange rate correction, liberalising foreign direct investment and trade policies, Removal of mandatory convertibility cause, etc.
      • These reforms are credited and applauded for the high economic growth seen from 1991 to 2011 and substantial reduction of poverty from 2005 to 2015.

Way Forward

The 1991 reforms helped the economy stave off a crisis and then bloom. It is time to outline a credible new reform agenda that will not just bring GDP back to pre-crisis levels, but also ensure growth rates higher than it had when it entered the pandemic.

Source: IE