Industrial Policy – 1991
The Industrial Policy announced on July 24, 1991 by the Finance Minister Dr. Manmohan Singh heralded the economic reforms in India and sought to drastically alter the industrial scenario in our country. The Industrial Policy Statement of 1991 stated that “the Government will continue to pursue a sound policy framework encompassing encouragement of entrepreneurship, development of indigenous technology through investment in research and development, bringing in new technology, dismantling of the regulatory system, development of the capital markets and increased competitiveness for the benefit of common man". It further added that "the spread of ...view middle of the document...
THE DRIVING FORCES BEHIND THE REFORMS
As in many developing countries, India also launched its massive economic reforms in 1991 under the pressure of economic crises. The twin crises were reflected through an unmanageable balance of payments crisis and a socially intolerably high rate of inflation that were building up in the 1980s and climaxed in 1990-91.
The current account deficit as a percentage of GDP peaked at a high of 3.1 percent (compared to an average level of 1.4 percent in the early 1980s). The inflation rate (as measured by point-to-point changes in the Wholesale Price Index) had also climbed to the socially and politically dangerous double-digit level, hitting 12.1 percent in 1990-91.
Most economic policy makers and analysts held widely convergent views on the causes of the unprecedented economic crisis faced by India in 1990-91. The root cause of the twin crisis could be traced to macro-economic mismanagement throughout the 1980s as reflected in an unsustainably high fiscal deficit, in particular the revenue deficit and the monetized deficit.10 The central government’s fiscal deficit alone peaked at 7.9 percent as a percentage of GDP in 1989-90. Thus growing fiscal profligacy (and irresponsibility) and the unviable financing patterns of the fiscal deficit prevailing in the 1980s made high levels of annual GDP growth (peaking at 5.6 percent in 1989-90) unsustainable. Foreign-exchange reserves dwindled to a low of US$2.2 billion (with less than 15 days’ cover against annual imports). India stared bankruptcy in the face as it struggled to meet external debt obligations.
Prime Minister Narasimha Rao converted the prevailing economic crisis into an opportunity to launch massive economic reforms. First, he introduced an economist (rather than a politician)...