The stabilisation measures adopted in 1991 were intended mainly to:

Fix the balance of payments and inflation

Raise the long-run efficiency of Indian industry

Replace the public sector with private firms

Fix the balance of payments and inflation

Join the World Trade Organization

The World Trade Organization was set up in 1995 as the successor to:

The United Nations Conference on Trade and Development

Disinvestment, as a means of privatisation, refers to:

The government selling part of its equity in public enterprises

The government withdrawing all subsidies to farmers

Foreign firms withdrawing investment from India

Private firms investing their own money in new public sector units

Which of the following is the main criticism of the economic reforms in relation to agriculture?

Less public investment in farm infrastructure

Industrial licensing was extended to farming

Tariffs on agricultural imports were sharply raised

Farmers were barred from growing export crops

Less public investment in farm infrastructure

Which combination best describes the situation that led to the economic crisis of 1991?

Fiscal deficits, a widening trade gap and near-empty reserves

A large budget surplus and rapidly rising foreign exchange reserves

Falling oil prices and a sudden surge in exports

Excessive foreign investment flowing into Indian industry

Liberalisation, Privatisation and Globalisation — the 1991 Reforms and Their Appraisal

In 1991 India faced an economic crisis severe enough to change the direction of policy set in the 1950s. The response, the New Economic Policy (NEP), is remembered by three words — liberalisation, removing the controls that had governed industry, finance, taxes and trade; privatisation, reducing the role of the public sector; and globalisation, integrating the economy with the rest of the world. This chapter covers why the crisis came, what each reform did, and how the reforms are judged, because the paper asks both kinds of question: "which reform belongs to which sector" and "what is the main criticism of the reforms in agriculture".

The Crisis of 1991 and the Two Kinds of Measure

The crisis had been building through the 1980s. Government spending ran well ahead of its revenue, and the gap was filled by borrowing, so interest payments kept growing. Imports grew much faster than exports, and the gap in the external account was financed by borrowing abroad. A sharp rise in oil prices made things worse. By 1991 India's foreign exchange reserves had fallen to a level that was not enough to pay for even two weeks of imports, and the country could not meet its repayments on external loans. India approached the World Bank (IBRD) and the International Monetary Fund (IMF) for loans, which came with conditions to liberalise and open up the economy.

Stabilisation versus structural reform
Point	Stabilisation measures	Structural reform measures
Time horizon	Short term	Long term
Aim	Correct the weaknesses in the balance of payments and bring inflation under control	Raise efficiency and international competitiveness by removing rigidities in the economy
Example	Building up foreign exchange reserves, restraining price rise	Abolishing industrial licensing, opening trade and finance

Liberalisation — Industry, Finance, Taxes, the Rupee and Trade

The five areas of liberalisation, and what changed in each
Area	What changed
Industrial sector	Industrial licensing abolished for almost all products, except a short list such as alcohol, cigarettes, hazardous chemicals and industrial explosives; the industries reserved for the public sector cut to a very few; many goods de-reserved from small-scale industry; prices in many industries left to the market
Financial sector	The RBI's role shifted from regulator to facilitator; private Indian and foreign banks allowed to enter; foreign institutional investors allowed to invest in Indian financial markets
Tax reforms	Rates of personal income tax and corporation tax reduced; indirect taxes simplified, leading eventually to the Goods and Services Tax (GST), which came into effect in July 2017 and replaced many central and state indirect taxes with one tax
Foreign exchange	The rupee was devalued against foreign currencies in 1991 to increase the inflow of foreign exchange; the rate was later left largely to the market
Trade and investment	Quantitative restrictions on imports dismantled in stages; tariff rates reduced; import licensing removed except for hazardous and environmentally sensitive goods; export duties removed

⚠️ Devaluation in 1991 was meant to bring foreign exchange in

A cheaper rupee makes Indian exports cheaper for foreigners and imports dearer for Indians, so it was used to raise export earnings and slow imports at a time when reserves had almost run out. Options sometimes describe it as a way to "make imports cheaper" — that is the effect of an appreciation, the opposite move.

Privatisation and Globalisation

Privatisation means transferring ownership or management of public enterprises to the private sector, either by selling them outright or by disinvestment — the government selling part of its equity in a public sector undertaking to the public or to private investors. The stated aim was to improve financial discipline and efficiency. To give the better-performing enterprises room to compete, the government granted them Maharatna, Navratna and Miniratna status, which carries greater managerial and operational autonomy.

Globalisation is the integration of a country's economy with the world economy through trade, investment, technology and the movement of people. One visible form is outsourcing: a company hires regular services from an outside source, often in another country, instead of producing them itself. Advances in information technology made it possible to deliver voice-based business services (call centres), record keeping, accountancy, banking services, medical transcription and software work from India to clients abroad.

The World Trade Organization (WTO) was founded in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT), which had been set up in 1948. It aims at a rules-based trading system in which tariff and non-tariff barriers are reduced and member countries get equal opportunities, and unlike GATT it covers trade in services as well as goods. India is a founding member.

An Appraisal — Gains and Criticisms

Supporters point to faster growth of GDP after the reforms, a rapid expansion of the services sector, a rise in foreign investment, a build-up of foreign exchange reserves, and success in exports of IT-enabled services, automobile parts and engineering goods. The book's appraisal is that the growth was led mainly by services, while agriculture slowed and industry fluctuated.

The main criticisms, sector by sector
Sector	Criticism
Agriculture	Public investment in agricultural infrastructure — irrigation, power, roads, market linkages, research — declined; reduced fertiliser subsidies raised costs for small farmers; a shift from food crops to export-oriented cash crops
Industry	Cheaper imports replaced demand for domestic goods; investment in infrastructure, including power, remained inadequate; access to developed-country markets was limited by their non-tariff barriers
Disinvestment	Assets of public enterprises were said to be undervalued when sold, and the proceeds were used to meet shortfalls in government revenue rather than to develop the enterprises or build social infrastructure
Fiscal policy	Lower tax rates did not always raise revenue as hoped, and tariff cuts reduced the room to raise revenue from customs duties

ℹ️ Demonetisation, November 2016

On 8 November 2016 the government announced that the existing ₹500 and ₹1,000 notes would cease to be legal tender. The stated aims were to curb corruption, black money, counterfeit currency and the financing of terrorism, and to encourage digital and formal transactions. The book discusses it as one of the policy measures of the reform era, along with GST.

Key takeaways

The 1991 crisis came from persistent fiscal deficits, imports outrunning exports, and reserves that fell below two weeks of imports.
Stabilisation measures are short term (BoP and inflation); structural reforms are long term (efficiency and competitiveness).
Liberalisation covered industry (licensing abolished), finance (RBI from regulator to facilitator), taxes (lower rates, later GST), the rupee (devalued in 1991) and trade (quotas removed, tariffs cut).
Disinvestment is the sale of part of the government's equity in public enterprises; Maharatna, Navratna and Miniratna status gives autonomy.
Outsourcing is hiring regular services from an outside source, often abroad; IT made India a major destination for it.
The WTO was founded in 1995 as the successor to GATT (1948) and covers services as well as goods.
Growth after 1991 was led by services; the main criticisms are neglect of agriculture, pressure on domestic industry, and undervalued disinvestment.

Practice questions (8)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

India's New Economic Policy of liberalisation, privatisation and globalisation was introduced in:
1. 1985
2. 1991
3. 1995
4. 2001
Show answer
Answer: B — 1991
The New Economic Policy was the response to the balance-of-payments crisis of 1991 and was announced that year. 1995 is the year the WTO was founded, a later step in globalisation that is often confused with the start of the reforms themselves.
The stabilisation measures adopted in 1991 were intended mainly to:
1. Raise the long-run efficiency of Indian industry
2. Replace the public sector with private firms
3. Fix the balance of payments and inflation
4. Join the World Trade Organization
Show answer
Answer: C — Fix the balance of payments and inflation
Stabilisation measures are short-term: they deal with the immediate weaknesses — a balance of payments in crisis and high inflation. Raising long-run efficiency and competitiveness is the purpose of structural reform measures, which is the distinction this question tests.
The World Trade Organization was set up in 1995 as the successor to:
1. The International Monetary Fund
2. The World Bank
3. The United Nations Conference on Trade and Development
4. The General Agreement on Tariffs and Trade
Show answer
Answer: D — The General Agreement on Tariffs and Trade
GATT, set up in 1948, governed trade in goods until the WTO replaced it in 1995 with a broader rules-based system that also covers services. The IMF and the World Bank still exist alongside the WTO — they were the lenders India approached in 1991, which is why they are tempting here.
Disinvestment, as a means of privatisation, refers to:
1. The government selling part of its equity in public enterprises
2. The government withdrawing all subsidies to farmers
3. Foreign firms withdrawing investment from India
4. Private firms investing their own money in new public sector units
Show answer
Answer: A — The government selling part of its equity in public enterprises
Disinvestment is the sale of part of the government's shareholding in public enterprises to the public or to private investors, and it is the main route by which privatisation proceeded in India. Foreign firms pulling money out is capital flight, a different thing despite the similar word, and subsidy withdrawal is a fiscal measure.
A British bank hires a firm in Bengaluru to handle its customer-service calls. This is an example of:
1. Import substitution
2. Outsourcing
3. Disinvestment
4. Devaluation
Show answer
Answer: B — Outsourcing
The bank is buying a regular service from an outside source in another country instead of producing it in-house, which is outsourcing — made possible by information technology. Import substitution means producing at home what was imported, and disinvestment concerns government shareholdings, so neither describes this arrangement.
Which of the following is the main criticism of the economic reforms in relation to agriculture?
1. Industrial licensing was extended to farming
2. Tariffs on agricultural imports were sharply raised
3. Farmers were barred from growing export crops
4. Less public investment in farm infrastructure
Show answer
Answer: D — Less public investment in farm infrastructure
Critics argue that the reforms cut public investment in irrigation, power, roads, market linkages and research, while reduced fertiliser subsidies raised costs — hurting small farmers. The reforms lowered tariffs and abolished licensing rather than extending them, and they encouraged a shift towards export crops instead of barring it.
The change in the role of the Reserve Bank of India from "regulator" to "facilitator" was part of which group of reforms?
1. Industrial sector reforms
2. Trade policy reforms
3. Financial sector reforms
4. Land reforms
Show answer
Answer: C — Financial sector reforms
Financial sector reform loosened the RBI's detailed control over banks and markets, let private Indian and foreign banks in, and allowed foreign institutional investors into Indian markets. Industrial reform concerned licensing and reservation, trade reform concerned tariffs and quotas, and land reform belongs to the 1950s.
Which combination best describes the situation that led to the economic crisis of 1991?
1. Fiscal deficits, a widening trade gap and near-empty reserves
2. A large budget surplus and rapidly rising foreign exchange reserves
3. Falling oil prices and a sudden surge in exports
4. Excessive foreign investment flowing into Indian industry
Show answer
Answer: A — Fiscal deficits, a widening trade gap and near-empty reserves
The crisis combined a fiscal problem — spending persistently above revenue, financed by borrowing — with an external one: imports outran exports, foreign borrowing piled up, and reserves fell too low to pay for more than about two weeks of imports. Rising rather than falling oil prices added to the strain, and heavy foreign investment was a result of the reforms, not a cause of the crisis.