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April 04, 2017 @ 01:15 PM

Economic Reforms: Ups and Downs

Published : Tuesday, 19 January, 2016 02:20 PM

Economic Reforms: Ups and Downs

MBA aspirants must be updated with General Awareness on current affairs. General Awareness topics with analytically drawn conclusions will benefit you in XATIIFTNMATSNAP ,CMATMAT, and later in Post exams screening Tests like  WATGD & PI , Essay writing

Read General Awareness Topic:  Economic Reforms: Ups and Downs

The year 1991 will be remembered as a watershed in the economic history of India when economic reforms were introduced. The liberalization, privatization and globalization (LPG) were the three pedestals of reforms. The motive of liberalization was to liberate the economy from the shackles of licence-raj which was putting a drag on the potential of economic growth. Before 1991, the government had virtually unlimited control over every aspect of economic activity. Privatization called for the disinvestment of the loss making public sector enterprises which were a burden on exchequer. Globalization tried to integrate the Indian domestic market with the global market which infused the competition in the market to remove the element of complacency from Indian producers. The major impact of the economic reforms on various dimensions of the economy is as under –

Economic Growth

In the year 1991, the Indian economy was really in shambles because of which five year plans were suspended for two years and instead two annual plans were launched between 1990-92. The Eighth Five Year Plan which was the first plan in the reformed economy clocked the 6.78% GDP growth which was highest in the post-independence economy. In the pre-reform era, Indian economic growth was sarcastically called as Hindu Rate of growth as it remained between 3-5% taking a clue from the Hindu ideology of ‘contentment is happiness’ (santosham param sukham)’.

However, the highest benchmark of economic growth in pre-reform era becomes the lowest benchmark of growth in post reform era. Post 1991, economy witnessed the New Hindu Growth Rate of 8.1%, and 8.0% in the tenth and eleventh five year plans respectively. In 2015-16, despite a global slowdown, the economic growth is estimated to remain around 7.5% which was a dream before 1991.


The secondary and tertiary sector of the economy gained most from the economic reforms. Prior to reforms, large and heavy industries under government control, central planning were considered key for development. Rigid price controls and restrictions on private investments were stifling the economy. Following the economic reforms, the Monopolies and Restricted Trade Practices (MRTP) Act was deregulated and replaced by Competition Commission of India (CCI).

 Numbers of activities reserved for the public sector enterprises (PSE) were reduced, licence requirement was eliminated for several industries and foreign investment restrictions were deregulated. These factors lead to the growth of industry and services. The growth in service sector was more pronounced as Indian IT capabilities were acknowledged worldwide.

Foreign Trade

Foreign Trade is one of the most significant determinants of economic development in a country. Globalization had integrated the Indian market with the global market and its affect is witnessed in the increase in share of India in the world trade. Foreign trade reforms introduced in 1991 were as under –

  • Rationalisation of exchange rate policy.
  • Liberalisation of imports.
  • Incentive to exporters.
  • Simplification of procedural formalities and fostering of transparency.

In 1991, share if Indian exports in the world exports was 0.5% which rose to 1.25% by the year 2010 and to 2% in 2015. The Foreign Trade Policy of 2015-20 further plans to increase this share to 3.5% by 2020.


The most important fallout of the economic reforms was that it was centred around industrial and service sector only leaving aside the agriculture sector which provided the subsistence to more than 50% of the workforce. Thus improvement in agricultural growth could improve the lives of 50% of the workforce but reforms failed to achieve this. Since the agriculture remained more or less stagnant while manufacturing and service sector achieved high rate of growth, it led to the rise in income inequalities.

Income Inequalities

Rising income inequalities is the most potent weapon in the arsenal of opponents of economic reforms. As already stated, nearly stagnant growth in agriculture sector and high growth in others resulted in the widening of income gap. Though in absolute numbers, poverty is reduced but still there is still large number of people living in abject poverty. Failure of reforms to usher inclusive growth had left the poor and downtrodden out of the reach of fruits of growth. Indeed, a second generation of reforms is needed to enable the fruits of reforms reach most vulnerable sections of the society.

Human Development

Economic reforms indeed succeeded in removing much of the woes of Indian economy and succeeded in bringing large amounts of capital in the form of foreign investment but failed in improving the human capital, the most crucial contributor to the economic growth. In 2015, India ranked at 130th position out of 188 in the Human Development Index (HDI) released by United Nations Development Programme (UNDP). A below mediocre performance on human development front revealed that economic reforms are devoid of humane touch.

Though economic reforms succeeded in ushering the phase of economic growth but they are yet to usher economic development. While the growth is merely increasing the income of the country, development refers to improving the quality of life. If the economic growth is polluting the air we breathe, it cannot be called economic development. If growth is not able to provide affordable health facilities to the people at the bottom of the economic ladder, reforms cannot be called as successful.

Therefore, now the goalpost of economic reforms must be changed economic growth to the economic development. Also, reform is not a sudden one-time event but a continuous and gradual process. If reforms have failed at some fronts, relevant policy changes must be introduced but discarding the reforms altogether will be a backward step.

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