By 1991 India faced a severe economic crisis: foreign-exchange reserves had fallen so low they could not cover even a fortnight of imports, government spending exceeded revenue, prices were rising and imports outran exports. India borrowed about seven billion dollars from the World Bank and the IMF, whose conditions required opening up the economy, and announced the New Economic Policy with short-term stabilisation measures and long-term structural reforms under three heads — liberalisation, privatisation and globalisation. Liberalisation deregulated industry, abolishing industrial licensing except for a few sensitive items, freed the financial sector by turning the RBI from regulator to facilitator and allowing private and foreign banks and foreign institutional investors, reformed taxes (later introducing GST in 2016) and made the exchange rate market-determined after devaluing the rupee, while removing quantitative trade restrictions by April 2001. Privatisation meant disinvestment — selling part of the government's equity in public-sector enterprises — and giving greater autonomy to firms classified as Maharatnas, Navratnas and Miniratnas. Globalisation integrated India with the world economy, encouraging outsourcing and benefiting from low wages and skilled labour, supported by the WTO, founded in 1995. The appraisal is mixed: GDP growth, foreign investment and foreign-exchange reserves rose sharply and India became a strong exporter of services and goods, but agriculture and small industry suffered from falling public investment and cheap imports, disinvestment proceeds were often used merely to bridge deficits, and reforms widened income disparities.
Liberalisation, Privatisation and Globalisation: An Appraisal
Key terms
Liberalisation
The removal of government controls and licensing to free industry, finance, trade and the exchange rate.
Privatisation
Reducing the role of the public sector, mainly through disinvestment of equity in public-sector enterprises.
Globalisation
The integration of a country's economy with the world economy through trade, investment and outsourcing.
New Economic Policy
The 1991 reform package of stabilisation and structural measures under liberalisation, privatisation and globalisation.
Disinvestment
The sale of a part of the government's equity holding in a public-sector enterprise to the public.
Outsourcing
Getting services such as call-centre and back-office work done from another country to cut costs.
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