What were the factors that led to the introduction of structural reforms in 1991 in India?

Solution

The macroeconomic imbalances of the late 1980s and early 1990s pushed the government towards introducing the structural reforms of 1991. The high combined deficit of the central and state governments, elevated inflationary pressures, and large and unsustainable current account deficit (CAD) led to a balance of payments crisis in the Indian economy. In response to the situation, trade and investments were liberalised in 1991. Import licensing on almost all intermediate inputs and capital goods was done away with, and the entry restrictions for firms were simplified. The new policy encouraged the entry of private sector firms by ending the public sector monopoly in many sectors and initiating the automatic approval policy for FDI up to 51 per cent. The exchange rate was made flexible and allowed to depreciate as necessary to maintain competitiveness. The rupee was made fully convertible on the current account and partially on the capital account. These reforms had a positive effect on the economy. The product and capital market reforms continued slowly over the decade of the 1990s through the introduction of New Telecom Policy 1999. And the government set up a dedicated Ministry to take this agenda forward. It sold equity stakes in some CPSEs and privatised companies such as Maruti Udyog, Hindustan Zinc, Bharat Aluminum, and Videsh Sanchar Nigam Limited. The banking system, which had accumulated bad debts during the period of economic resurgence after the 1991 reforms, was supported through the deregulation of interest rates and the enactment of the SARFAESI Act 2002.