1991 Reforms & 2021 Crisis
Thirty years ago, the liberalization regime launched in 1991 completed its 30 years in 2021. The
1991 was a landmark moment in India’s post-independence history that changed the nature of the economy in fundamental ways.
A severe balance of payments problem triggered an acute economic crisis in 1991. In response, India’s economic establishment launched a multipronged reforms agenda to repair India’s mac- roeconomic balance sheet and ignite growth.
Three decades later, the country faces another big test due to the Covid-19 pandemic. While the two crises differ vastly in content and structure, they are completely comparable in their respective severities.
Significance of 1991 Reforms India’s Post-1990 Economic Strategy
The extensive web of licenses and regulations that governed the economy was destroyed by it. It reinterpreted the state’s function as an impartial regulator and an enabler of economic exchanges, rather than as the main supplier of goods and services.
As a result, the import substitution regime was abandoned, and full integration with the world trade system was achieved.
Effect of Reforms
By the first decade of the 21st century, India began to be seen as one of the fastest growing emerging markets.
◆ The 1991 reforms unleashed the energies of Indian entrepreneurs, gave untold choice to consumers and changed the face of the Indian economy.
Far from poverty increasing, for the first time, there was a substantial reduction in it.
Facts about 1991 Reforms
India’s 1991 economic reforms, also known as the “New Economic Policy” or “Liberalization, Privatization, and Globalization (LPG),” represented a dramatic shift in the economic history of the nation. Even though there has been much discussion about many well-known aspects of these reforms, there are a few lesser-known details that also played a role in forming India’s economic landscape:
Origins in a Balance of Payments Crisis: India was experiencing a serious balance of payments crisis at the time, which led to the 1991 reforms. The economy had to be stabilized by emergency measures because foreign exchange reserves had fallen to critical levels. Years of unsustainable economic policies and external borrowing culminated in this crisis.
Launched by a Minority Government: Prime Minister P.V. Narasimha Rao, who headed a coalition with outside assistance, led a minority government that carried out the reforms. Rao’s administration deviated from the historically socialist policies of the past and bravely liberalized the economy in spite of political obstacles.
Quiet Rollout: The 1991 reforms were implemented gradually and covertly, in contrast to big policy declarations. To reduce the possibility of opposition from powerful interests and ideological rivals, the government refrained from making major announcements. This strategy made it possible for reforms to gather steam without immediately sparking opposition.
The significance of Dr. Manmohan Singh cannot be overstated. He was instrumental in the design and implementation of the reforms, even though P.V. Narasimha Rao provided the political leadership.
Change in Favor of Market-Oriented Policies: The reforms were designed to increase the adoption of market-oriented policies while minimizing government interference in the economy. This entailed lifting the License Raj, loosening regulations on foreign investment, and allowing private involvement in a number of sectors. It indicated a change from the previous period of strict government regulation and control.
Impact on Industrial Licensing: The elimination of the industrial licensing system for the majority of industries was one of the reforms’ lesser-known features. By lowering bureaucratic barriers that inhibited entrepreneurial activity, this action sought to promote competition, foster innovation, and draw investment.
Highlights on Export Promotion: As a catalyst for economic expansion, the reforms reemphasized the importance of export promotion. The purpose of Special Economic Zones (SEZs) is to create an environment that is favorable for export-oriented industries, offering tax incentives and streamlined regulatory processes.
Changes in the Financial Sector: As a result of the reforms, the Indian financial sector saw a substantial change. These brought about the opening up of the capital markets to private banks, the liberalization of interest rates, and the creation of regulatory agencies such as the Securities and Exchange Board of India (SEBI).
Impact on Agriculture: Although the financial and industrial sectors frequently take center stage in conversations, agriculture was also impacted by the reforms. Modernizing the agricultural sector and increasing farmers’ income were the goals of policies like loosening fertilizer price controls, opening up the agricultural trade, and promoting contract farming.
Long-Term Records: India’s fast economic growth in the following decades was made possible by the reforms implemented in 1991, which turned the nation into one of the major economies with the fastest rate of growth in the world.
Comparing 1991 Crisis With 2021
High Fiscal Deficit
1991 Crisis: 1991 crisis was caused by excess domestic demand sucking in imports and widening the current account deficit (CAD).
• A loss of confidence triggered an outflow of funds and financing CAD forced a sharp drawdown in reserves.
2021 Crisis: The pandemic-induced lockdown brought the wheels of economic activity to a grinding halt, triggering a sharp economic contraction. This has resulted in a collapse in production following the disruption caused by the pandemic, which, in turn, has caused a fall in demand.
* Faced with a collapse in demand, it is appropriate to increase the fiscal deficit. The government allowed the fiscal deficit to expand to 9.6% last year
Macroeconomic Situation
1991 Crisis: India had to pledge tonnes of gold to stave off a default on sovereign debt. Then, we had almost run out of foreign exchange to pay for critical importe
• 2021 Crisis Today, the economy is shrinking at a rapid pace, with the central government ,defaulting on its revenue commitments to the states.
of unemployed, poverty is increasing after decades of decline
Criticism of the reform
1991 Reforms :1991 reforms package faced heavy criticism as being dictated by the International Monetary Fund (IMF) and World Bank.
• Further, some of the reforms were criticized as a sellout to capitalists.
2021 Reforms :Such a centralised approach to reforms may not work now. It can be seen in the protest emanating from three farm laws.
India Energy Outlook 2021: IEA
The India Energy Outlook 2021 Report, which examines the potential and challenges India faces in ensuring affordable, sustainable, and dependable energy for a growing population, was recently released by the International Energy Agency (IEA).
Third-largest energy consumer by 2030, according to a new special report from the IEA’s World Energy Outlook series, is India Energy Outlook 2021. India, which is expected to surpass the European Union as the third-largest energy consumer globally by 2030, will account for the largest portion of the expansion in energy consumption, with a growth rate of 25% over the next 20 years.
Presently, India is the fourth-largest global energy consumer behind China, the United States and the European Union.
◆India’s energy consumption is expected to nearly double as the nation’s Gross Domestic Product (GDP) expands to an estimated USD 8.6 trillion by 20-40 under its current national policy scenario
-Prior to the global pandemic, India’s energy demand was projected to increase by almost 50% between 2019 and 2030, but growth over this period is now closer to 35%. Industrialisation is a Major Driving Force:
Over the last three decades, India accounted for about 10% of World Growth in Industrial Value-added [In Purchasing Power Parity (PPP) terms).
By 2040, India is set to account for almost 20% of Global Growth in Industrial value-added and to lead global growth in industrial final energy consumption, especially in steelmaking Reliance on Imports:
India’s increasing energy requirements will increase its dependence on imported fossil fuels, as the country’s domestic output of gas and oil has stagnated for years, despite government initiatives to support renewable energy and petroleum exploration and production.
In comparison to 2019, rising oil demand would nearly triple India’s oil import bill to USD 255 billion by 2040 and nearly double it to USD 181 billion by 2030.
Oil Demand:
India’s oil demand is seen rising by 74% to 8.7 million barrels per day by 2040 under the existing policies scenario.
A five dold inerente in per capita car ownership will result in India leading the oil demand growth in world.
Its net del products the reases to tablet into account both the import of crude oil and the export of oil products the Teoretion prethan 90%, by 2040 from the current 75% as domestic consumption rises much more than production.
Gas Demand:
India will become the fastest-growing market for Natural gas, with demand more than tripling by 2040
Natural gas import dependency increased from 20% in 2010 to almost 50% in 2019 and is set to grow further to more than 60% in 2040.
Coal Demand:
Coal currently dominates India’s electricity sector, accounting for over 70% of overall generation. Coal demand is seen rising to 772 million tonnes in 2040 from the current 590.
Renewables Energy Resources Demand:
India’s share in the growth in renewable energy is the second-largest in the world, after China. The International Energy Agency is an autonomous Intergovernmental Organisation estab-
International Energy Agency
lished in 1974 in Paris, France.
The primary areas of concentration for the IEA are its energy policies, which cover environmental preservation, energy security, and economic growth. The three E’s of IEA are another name for these guidelines. India has involved with the International Energy Agency (IEA) long before it was admitted as an Associate member in March 2017.
• India and the IEA have signed a Strategic Partnership Agreement to reinforce
collaboration for the stability, security, and sustainability of the world’s energy. The IEA publishes the World Energy Outlook Report once a year.
IEA Clean Coal Centre is dedicated to providing independent information and analysis on how coal can become a cleaner source of energy, compatible with the UN Sustainable Development Goals.