Economic Reforms in India

Economic Reforms in India

Before 1991 several reforms were made to the Indian Economy. As a result GDP grew at the annual growth rate of 7.6% from 1988-89 to 1990-1991.
Broadly the reforms of the 1980s, which were largely in place by early 1988, can be divided into five categories.
First, the OGL list was steadily expanded. In 1976 this list had 79 capital goods items. The list of items expanded to 1,007 in April 1987, 1,170 in April 1988 and 1,329 in April 1990. With capital goods even intermediate inputs were placed in OGL. Items in OGL were usually machinery and raw material, and tariff was also reduced on these items, which increased the productivity in the country.
Second, the source of liberalisation was the decline in the share of canalised imports. Canalisation refers to monopoly rights of the government for the imports of certain items.
Third, several exports incentives were introduced or expanded, especially after 1985.
Exporters were given Replenishment (REP) licenses in an amount approximately twice their imports needs. These REP licenses allowed holders to even import items on the restricted list. These REP were freely tradable in the market. Export profits were exempted from tax, interest rate on income tax reduced. Duty-free import of capital goods was allowed in selected export industries.
The fourth source of reforms was relaxation of industrial controls and related reforms:
In 1985, 25 industries were de-licensed. By 1990 this number reached 31. No industrial licence was required up to the investment limit of 500 million in backward areas and Rs. 150 million elsewhere. Twenty-seven major industries subject to licence regardless of their investment and location are usually major industries like coal, large textile units, power motor vehicles etc. Ceiling for SSI units was raised from Rs. 2 million to Rs. 3.5 million.
Broad Banding: In 28 industries, broad-banding was allowed according to which, industries can switch to similar production lines such as from scooter to motorcycle or from TV to video. Firms were also allowed to expand their capacity.
Asset limit for MRTP regulation was raised from Rs. 200 million to Rs. 1,000 million.
For 27 industries, requirement for MRTP clearance was waived altogether.
Price and distribution control on aluminium were entirely abolished. The multipoint excise duty was converted into
MODVAT.
The most important source of external liberalisation was a realistic exchange rate. At least during the years of rapid growth, there was strong evidence of nominal depreciation of the rupee, correcting the overvaluation of nominal depreciation of the real exchange rate.
The substantial yet half-hearted reforms of 1980s gave way to more systematic and deeper reforms of the 1990s and beyond.
The consequence of this first wave of economic reform was an economic boom. Real GDP growth averaged 5.6 % per year over the Rajiv Gandhi administration, while real rupee exports grew at 15% per year. The country’s net capital import bill rose to 3% of GDP by the end of the 1980s. This growing foreign indebtedness-more than a quarter of exports resulted in the exchange crisis of 1991.