Features of Economic Reforms since 1991

Features of Economic Reforms since 1991

The New Economic Policy (1991) adopted the route of privatization, liberalisation and globalisation. New Economic Policy of liberalisation, globalisation and privatization have been implemented in the following way:

Fiscal Policy

The immediate aim of fiscal policy must be to improve the fiscal balance in order to eliminate the inflationary pressure emanating from the budget deficit. The fiscal policy reforms were backed by the findings and recommendations of the Chelliah Committee.
Some improvements in fiscal policy were made possible by the decision to abolish export subsidies, to increase fertilizer prices to keep non-plan expenditures (including defence expenditure) in check. Additionally, the following measures have been initiated:
Import duties on capital goods were reduced to 15% on export-related capital goods, 25% for project imports and most capital goods and continuation of concessional duties at 20% for power projects and nil for fertilizer projects.
The biggest reform in the medium term has to be in the direction of adopting a full-fledged VAT. A preliminary step has already be taken by adopting MODVAT.

Phasing Out of Subsidies/Dismantling of Price Controls

Economic liberalisation phased out and dismantled the subsidies and price control which were earlier the key characteristics of Indian economy. The Cash Compensatory Support (CCS), which was the bulk of export subsidy, was abolished. The subsidies or fertilisers and petro-products were reduced to the extent possible.
The government also started dismantling price control. In Kerosene and LPG, dual pricing and parallel marketing by the private sector was allowed. Price control on a number of products was removed, the price and distribution controls on iron and steel and some categories of chemical fertilizers was removed. Restrictions on pricing of commodities like sugar, rice, etc., was removed. The government is in the process of dismantling administered price mechanism in the petroleum sector. The present policy of the government in petroleum is to keep prices at par with international prices.

Deregulation of Industry

The statement of industrial policy dated July 24, 1991 and frequently termed the New Industrial Policy, did away with investment licensing and myriad entry restrictions on MRTP firms. It also ended public sector monopoly in many sectors and initiated a policy of automatic approval for foreign direct investment up to 51%.


Except a few areas of strategic importance such as railways and atomic energy, all areas are now open to the private sector. License is not required for projects except for a short list of industries related to security and strategic concerns, hazardous chemicals and overriding environmental reasons and items of elitist consumption.
Presently, only seven industries required licensing they are: (1) Alcoholic Drinks, (2) Cigars and Cigarettes of tobacco, and manufactured tobacco substitutes, (3) Electronic aerospace and defense equipment, (4) Industrial explosives including detonating fuses, safety fuse, gun powder, nitrocellose and matches, (5) Hazardous chemicals, (6) Drugs and pharmaceuticals, as announced in the Drug Policy. As per the Drug Policy 1994 (as amended on 26.2.99) only drugs which involve use of recombinant DNA technology and bulk drugs requiring vivo use of nucleic acid as the active principles and formulations based on use of specific cell or tissue targeted formulations will require license. Other drugs will not require a license, (7) Defence Production.

Public Sector

The statement of Industrial Policy 1991 reduced the list of industries reserved for the public sector to eight from 17, and further four more areas were de-reserved, which trimmed the list to four. By 1994 only three areas in manufacturing remained reserved, defence, strategic concern and petroleum. Even here, the government was ready to invite the private sector to participate as it has in the case of oil exploration and refining.
Public sector monopoly was limited only for eight of security and strategic relevance. This was also later trimmed and only railways, Arms and Ammunition and allied items of defence equipment, defence aircraft and warships, Atomic energy, minerals specified in the schedule to the Atomic Energy, remained. Presently only two sectors are under public sector monopoly: Atomic Energy and Rail Transport.
More and more PSUs were brought under the purview of the Memorandum of Understanding (MoU) to increase their productivity by giving them autonomy and making them accountable. Sick industries were referred to BIFR . The process of disinvestments was initiated to bring down government holding in PSUs. The government also decided to go for disinvestments and an exit policy for PSUs.

Foreign Investment

In the sphere of foreign investment industrial policy took revolutionary steps. The Reserve Bank of India was empowered to approve equity investment up to 51% in 34 industries through the automatic approval route. Subsequently, automatic approval was made available to most of the industries except those of public sector monopoly and industrial licensing. In eight categories, including mining services, electricity generation and transmission, and construction of roads, bridges, ports, harbours and runways, the automatic approval route is available for equity investment of up to 74%. The automatic approval of FDI up to 100% is given in all manufacturing activities in Special Economic Zones, except those subject to licensing or public sector monopoly. Presently even defence is also open to the private sector for 100% investment, with FDI up to 26%.