Development Experiences in India Solutions | KalviGavani

(a) 1985    (b) 1990    (c) 1991    (d) 1995

(a) Increasing government control    (b) Reducing government restrictions on business    (c) Selling public sector units    (d) Opening trade with other countries

(a) Free trade    (b) Foreign investment    (c) Self-reliance and closed economy    (d) Technology transfer

(a) Investing in new industries    (b) Selling government's stake in PSUs    (c) Increasing foreign investment    (d) Reducing taxes

(a) 8    (b) 5    (c) 3    (d) 1

(a) IMF    (b) World Bank    (c) WTO    (d) RBI

(a) Increase restrictions on large companies    (b) Remove restrictions on growth and mergers    (c) Nationalise private companies    (d) Ban foreign investment

(a) High GDP growth    (b) Low fiscal deficit    (c) Gulf War and rising oil prices    (d) Low inflation

Liberalisation is the process of reducing government restrictions, controls, and regulations on economic activities to promote free market operations and efficiency.

Two examples: 1. Abolition of industrial licensing (License Raj): Before 1991, most industries required a government license to establish or expand. After 1991, licensing was abolished for all but 5 industries. 2. Reduction in tariffs: Import duties were significantly reduced from an average of over 80% to around 30%, making trade more open.

The 1991 economic crisis was caused by multiple factors:

1. High fiscal deficit: Government spending far exceeded revenue (8.4% of GDP) 2. Balance of payments crisis: Foreign exchange reserves fell to just ~$1 billion (enough for 2 weeks of imports) 3. Gulf War (1990-91): Oil prices rose sharply; remittances from Gulf workers dropped 4. Rising external debt: India's external debt reached $83.8 billion 5. High inflation: WPI inflation reached 13.6% 6. Low growth: GDP growth fell to just 1.4% 7. Political instability: Weak coalition governments delayed reforms

India had to pledge its gold reserves to the Bank of England to secure an IMF loan.

A Special Economic Zone (SEZ) is a designated geographical area within a country that has special economic regulations and policies that are more liberal than the rest of the country.

Purpose:

• Attract foreign direct investment (FDI)
• Promote export-oriented industries
• Generate employment opportunities
• Facilitate technology transfer
• Develop infrastructure
• Provide tax holidays and simplified regulations

SEZ benefits include: No customs duty, income tax exemptions for initial years, single-window clearance, and freedom to repatriate profits.

1. Higher GDP growth: India's GDP growth rate increased from around 3-4% (Hindu rate of growth) to 6-8% after reforms 2. Increased foreign investment: FDI inflows rose from negligible levels to billions of dollars annually 3. Growth of IT and services sector: India became a global IT hub with companies like TCS, Infosys, Wipro 4. Greater consumer choice: Removal of import restrictions and entry of foreign brands increased product variety and quality 5. Improved foreign exchange reserves: Reserves grew from crisis levels to hundreds of billions of dollars

Liberalisation refers to the process of reducing government restrictions, controls, and regulations on economic activities. India introduced wide-ranging liberalisation measures as part of the New Economic Policy of 1991:

• Industrial licensing was abolished for all industries except 5: defence, atomic energy, coal and lignite, mineral oils, and hazardous chemicals
• Only 3 industries remain reserved for the public sector: atomic energy, minerals specified in the Atomic Energy Act, and railway operations
• The MRTP Act was amended to remove restrictions on the growth of large companies
• Companies no longer needed government permission to establish, expand, or diversify

• SLR (Statutory Liquidity Ratio) was reduced from 38.5% to 25%
• CRR (Cash Reserve Ratio) was reduced progressively from 15% to around 4-5%
• Interest rates were deregulated — banks could set their own lending rates
• Private banks were allowed to operate (ICICI, HDFC, Axis, etc.)
• SEBI was given statutory powers to regulate stock markets

• Import licensing was abolished for most goods
• Tariff rates were significantly reduced from an average of over 80% to around 30%
• Quantitative restrictions (QRs) on imports were removed
• EXIM policy was liberalised to promote exports
• Rupee was made partially convertible (1992) and then fully convertible on current account (1994)

• Direct tax rates were reduced — corporate tax and personal income tax rates were lowered
• Tax brackets were simplified
• Indirect taxes were streamlined (eventually leading to GST in 2017)
• Customs duties were reduced

• FDI was allowed in many sectors with automatic approval
• FDI limits were progressively increased (up to 100% in many sectors)
• Foreign Institutional Investors (FIIs) were allowed to invest in Indian stock markets
• Joint ventures with foreign companies were encouraged

• The rupee was devalued by about 18-19% in 1991
• A dual exchange rate system was introduced in 1992
• The rupee was made fully convertible on the current account in 1994
• Market forces increasingly determined the exchange rate

Impact of Liberalisation:

• GDP growth rate increased significantly
• Indian companies became more competitive globally
• Consumer choice increased with more products and brands
• The economy became more market-oriented and efficient

Globalisation refers to the process of integrating India's economy with the world economy through free trade, foreign investment, technology transfer, and movement of people. Its impact has been both positive and negative:

Positive Impacts:

• India's share in world trade increased from about 0.5% to over 2%
• Export growth accelerated significantly
• India became a major exporter of IT services, pharmaceuticals, textiles, and gems

• FDI inflows increased from negligible levels to over $80 billion annually
• Multinational corporations set up operations in India (Samsung, Apple, Amazon, etc.)
• Created jobs, brought technology, and improved management practices

• India became a global leader in IT and IT-enabled services
• Companies like TCS, Infosys, Wipro, and HCL became multinational corporations
• Software exports grew from $100 million (1990) to over $200 billion
• Created millions of high-paying jobs and transformed India's global image

• Access to global technology improved productivity across sectors
• Telecommunications, internet, and digital services expanded rapidly
• Manufacturing processes were modernised

• Greater variety and quality of goods and services
• Competitive pricing due to competition
• Access to global brands and products

• Reserves grew from crisis levels (~$1 billion in 1991) to over $600 billion
• India became more resilient to external shocks

Negative Impacts:

• Benefits of globalisation were concentrated in urban areas and among the educated
• Rural India, small farmers, and informal workers saw limited benefits
• Income inequality widened

• Many small and cottage industries could not compete with cheaper imports
• Traditional artisans and weavers faced displacement
• Import competition led to closures of domestic units

• Farmers faced competition from subsidised foreign agricultural products
• Reducing import duties on agricultural products hurt domestic farmers
• Many farmers shifted to cash crops, increasing vulnerability

• Westernisation and loss of traditional values
• Consumerism increased
• Local cultural industries were affected

• India's economy became more vulnerable to global economic fluctuations
• The 2008 global financial crisis affected Indian IT and export sectors
• Trade deficits widened in some periods

• Industrialisation and urbanisation increased pollution
• SEZs and factories sometimes led to land and water issues
• Carbon emissions increased with economic growth

Overall Assessment: Globalisation has transformed India from a closed, slow-growth economy to one of the fastest-growing major economies. However, the benefits have been unevenly distributed, and inclusive policies are needed to ensure that the gains reach all sections of society.

Before 1991 (The License Raj Era):

• The economy was highly regulated with the License Raj system
• Businesses needed multiple permits to establish, expand, or diversify
• The public sector dominated key industries
• Foreign investment was severely restricted
• Tariffs were extremely high, protecting domestic industries but reducing efficiency
• GDP growth was slow (3-4% annually, called the "Hindu rate of growth")
• Foreign exchange reserves were chronically low
• Consumer choice was limited with few product options
• India was isolated from the global economy

After 1991 (Reforms Era):

• The economy became market-oriented with minimal government controls
• Private enterprise was encouraged across almost all sectors
• Foreign investment flowed in, bringing technology, management practices, and jobs
• Trade liberalisation made India a major player in global trade
• GDP growth accelerated to 6-8% and made India one of the fastest-growing economies
• Foreign exchange reserves grew to over $600 billion
• The IT sector became a global powerhouse
• Consumer choice expanded dramatically
• India became integrated with the world economy

Continuing Challenges:

• Poverty and inequality persist despite growth
• Agricultural distress and farmer suicides continue
• Employment growth has not kept pace with GDP growth
• Regional disparities remain wide
• Manufacturing growth has been slower than expected (the "missing middle" in industrialisation)
• Environmental degradation has accompanied growth

The 1991 reforms fundamentally transformed India's economy from a closed, regulated system to an open, market-oriented one, but inclusive growth remains a challenge.