Economic Reforms Since 1991- Liberalisation, Privatisation and Globalisation—An Appraisal


In 1991, India embarked on a path of economic reform in response to a severe economic crisis. Several compelling factors underscored the urgency of these reforms:

Sluggish Economic Growth: The Indian economy was experiencing an anemic growth rate of merely 0.8% at that time.

Soaring Inflation: Inflation had surged to an alarming 16.8%, causing widespread economic distress.

Balance of Payments Crisis: India was grappling with a critical balance of payments crisis, with a deficit amounting to 10,000 crores.

Mounting Debt: India was burdened by a substantial debt load, necessitating the annual payment of 30,000 crores in interest charges.

Depleted Forex Reserves: Foreign exchange reserves were alarmingly low, standing at only 1.8 billion dollars, sufficient for a mere three weeks of imports.

Gold Reserves Depletion: To alleviate the crisis, India had to sell a substantial amount of its gold to the Bank of England.

External Assistance: India had to request a significant loan of 7 billion dollars from international institutions such as the World Bank and the IMF.

Fiscal Imbalance: The fiscal deficit exceeded 7.5%, and deficit financing was around 3%, further straining the economic situation.

Strained Trade Relations: Trade relations with the Soviet bloc had deteriorated, exacerbating economic challenges.

Decline in Remittances: Due to conflicts in Arab countries, remittances from non-resident Indians had ceased, resulting in a loss of vital income.

High Petroleum Prices: The exorbitant cost of petroleum products further burdened the economy.

In order to secure the much-needed loan from the IMF and the World Bank, India had to commit to specific conditions, which included:

  • Economic Liberalization: India had to relax regulations and open up its economy by reducing restrictions on the private sector.
  • Decreased Government Intervention: The government needed to scale back its involvement in various sectors of the economy.
  • Removal of Trade Barriers: Trade restrictions had to be eliminated to facilitate international commerce.

India accepted these conditionalities imposed by the IMF and the World Bank, recognizing the need for sweeping economic reforms. This need for reform was evident from the successful experiences of several Asian countries, such as South Korea, Singapore, and Thailand, which had achieved remarkable economic growth through similar reforms in the 1980s.

Objective Types Questions

1.What was India’s inflation rate during the 1991 economic crisis?

A) 0.8%

B) 7.5%

C) 16.8%

D) 30,000 crores
Answer: C) 16.8%

2.What was the primary reason for India’s balance of payments crisis in 1991?

A) High petroleum prices

B) Low foreign exchange reserves

C) Decline in remittances

D) Strained trade relations with the Soviet bloc
Answer: B) Low foreign exchange reserves

3.To secure a loan from the IMF and the World Bank, what were the conditions India had to agree to?

A) Increase government intervention

B) Maintain trade barriers

C) Reduce fiscal deficit

D) Implement economic liberalization
Answer: D) Implement economic liberalization

4.What was the annual interest payment India had to make on its debt during the 1991 crisis?

A) 0.8%

B) 16.8%

C) 7.5%

D) 30,000 crores
Answer: D) 30,000 crores

5.Which Asian countries served as examples of successful economic reforms that influenced India’s decision in 1991?

A) China and Japan

B) South Korea, Singapore, and Thailand

C) Russia and Indonesia

D) Vietnam and Malaysia
Answer: B) South Korea, Singapore, and Thailand

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