What were the reasons for undertaking reforms in india in july 1991?
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India instituted a series of ongoing economic reforms, which is now known as the Economic Liberalization of 1991 .
1991, India faced an unprecedented balance of payments crisis. For almost a decade the government had borrowed heavily to support an economic strategy that relied on expansionary public spending to finance growth. From 1980 to 1991 India's domestic public debt increased steadily, from 36 percent to 56 percent of the GDP, while its external debt more than tripled to $70 billion.
Political changes, unrest in parts of the country, and the 1990 Persian Gulf crisis compounded the already volatile situation. The crisis caused oil prices to rise, substantially increasing the cost of oil imports, and foreign exchange earnings to drop. India's creditworthiness, already under strain, became even more vulnerable as Indians from abroad withdrew their substantial foreign currency deposits and commercial banks reduced their exposure. Toward the end of 1990, India's creditworthiness was downgraded, effectively cutting its access to sources of commercial credit. By early 1991, India was on the brink of default.
As the crisis unfolded the debates in India's political and economic circles increasingly focused on reform. In India's large and highly diverse democracy, those debates proved important in building political consensus around the voices for reform. Nevertheless, it took a new government, which came to power in June 1991, to launch India's first comprehensive economic policy reform program, which the World Bank supported with a $500 million structural adjustment operation (SAL), approved in December 1991 and closed in December 1993.
Project goals and implementation
The SAL's objectives were twofold: (1) to help India address its immediate balance of payments crisis and (2) to support a broad set of policy reforms aimed at liberalizing the Indian economy and opening it up to more competition both from within and abroad. The SAL was complemented by an IMF-supported stabilization program. And parallel financing was provided by other donors, as agreed at consortium meetings convened by the Bank.
The SAL proved to be the right response at the right time. The program it supported was bold but carefully sequenced to create a workable balance between economic necessity and the realities of India's political economy. The reforms focused first on the most binding constraints, which also produced quick results, helping to strengthen consensus around the reforms.
Within weeks of announcing the reform package, the government devalued the rupee by 23 percent, raised interest rates, and revised the 1991/92 union budget, making sharp cuts in subsidies and transfers to public enterprises. Over the next six months, it abolished the complex system of industrial and import licensing, liberalized trade policy, and introduced measures to strengthen capital markets and institutions. The reform agenda, though ambitious, was nearly fully implemented during the 1991-93 SAL period.
These measures were followed by additional reforms to liberalize investment, further deregulate trade policy, improve tax administration, and strengthen the financial sector. By 1995, India had moved from a regime in which private investment was not allowed in major economic sectors to one whose openness to foreign investment compares favorably with that of most Asian countries.
Results
The reforms produced immediate results. The timely provision of foreign exchange helped India weather its balance of payments crisis and improve its creditworthiness. Several key macroeconomic indicators improved more than projected (see table). After declining in the first year of the reforms, GDP growth resumed to 5 percent in 1993/94 and 6.3 percent in 1994/95. Exports increased almost 12 percent. Most important, there was a surge of foreign investment, which increased almost sevenfold over projections.
1991, India faced an unprecedented balance of payments crisis. For almost a decade the government had borrowed heavily to support an economic strategy that relied on expansionary public spending to finance growth. From 1980 to 1991 India's domestic public debt increased steadily, from 36 percent to 56 percent of the GDP, while its external debt more than tripled to $70 billion.
Political changes, unrest in parts of the country, and the 1990 Persian Gulf crisis compounded the already volatile situation. The crisis caused oil prices to rise, substantially increasing the cost of oil imports, and foreign exchange earnings to drop. India's creditworthiness, already under strain, became even more vulnerable as Indians from abroad withdrew their substantial foreign currency deposits and commercial banks reduced their exposure. Toward the end of 1990, India's creditworthiness was downgraded, effectively cutting its access to sources of commercial credit. By early 1991, India was on the brink of default.
As the crisis unfolded the debates in India's political and economic circles increasingly focused on reform. In India's large and highly diverse democracy, those debates proved important in building political consensus around the voices for reform. Nevertheless, it took a new government, which came to power in June 1991, to launch India's first comprehensive economic policy reform program, which the World Bank supported with a $500 million structural adjustment operation (SAL), approved in December 1991 and closed in December 1993.
Project goals and implementation
The SAL's objectives were twofold: (1) to help India address its immediate balance of payments crisis and (2) to support a broad set of policy reforms aimed at liberalizing the Indian economy and opening it up to more competition both from within and abroad. The SAL was complemented by an IMF-supported stabilization program. And parallel financing was provided by other donors, as agreed at consortium meetings convened by the Bank.
The SAL proved to be the right response at the right time. The program it supported was bold but carefully sequenced to create a workable balance between economic necessity and the realities of India's political economy. The reforms focused first on the most binding constraints, which also produced quick results, helping to strengthen consensus around the reforms.
Within weeks of announcing the reform package, the government devalued the rupee by 23 percent, raised interest rates, and revised the 1991/92 union budget, making sharp cuts in subsidies and transfers to public enterprises. Over the next six months, it abolished the complex system of industrial and import licensing, liberalized trade policy, and introduced measures to strengthen capital markets and institutions. The reform agenda, though ambitious, was nearly fully implemented during the 1991-93 SAL period.
These measures were followed by additional reforms to liberalize investment, further deregulate trade policy, improve tax administration, and strengthen the financial sector. By 1995, India had moved from a regime in which private investment was not allowed in major economic sectors to one whose openness to foreign investment compares favorably with that of most Asian countries.
Results
The reforms produced immediate results. The timely provision of foreign exchange helped India weather its balance of payments crisis and improve its creditworthiness. Several key macroeconomic indicators improved more than projected (see table). After declining in the first year of the reforms, GDP growth resumed to 5 percent in 1993/94 and 6.3 percent in 1994/95. Exports increased almost 12 percent. Most important, there was a surge of foreign investment, which increased almost sevenfold over projections.
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Explanation:
The economy was facing problems of declining foreign exchange, growing imports without matching rise in exports and high inflation. Indiachanged its economic policies in 1991 due to a financial crisis and pressure from international organizations like the World Bank and IMF.
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