Since the early days of independence, we were accustomed to a highly protected economy. The main instruments of our protected economic policy were:
(i) Trade and exchange controls,
(ii) Selective access to foreign investment,
(iii) Discretionary control on industrial investment and capacity expansion,
(iv) Dominance of public sector in industrial activity, and
(v) Public ownership and regulation of the financial sector.
In this way, we protected our economic enterprises, our investment, our currency, our commodity and capital markets, and our trade. The consequences were recurrent fiscal deficits, heavy external/internal debt burden, low capital formation, self perpetuating subsidies, low inflows of technologies, low competitiveness and low productivity levels. The Indian economic scenario in 1991 was very much depressing as the economy was on the brink of collapse. Inflation was out of control, exports were declining, foreign exchange reserves had declined to no more than two weeks’ imports and industry was virtually crippled. The sum total picture which had emerged, after the four decades of planning, was of a stagnant and sick India.
Objectives and Thrust of Economic Reforms
In response to the emerging crisis, the government took a series of corrective measures starting in July 1991. This is termed as New Economic Policy (NEP) or the policy of Economic Liberalisation and Reforms. The main objectives of this policy are as follows
(i) To reduce the domestic inflation rate;
(ii) To improve the balance of payment situation
(iii) To improve efficiency and productivity; and
(iv) To put the economy back on the path of growth with justice.
Thus, the basic objective of the economic reforms is to transform the country into a strong, stable, attractive, efficient, competitive and vibrant economy.
The broad thrust of these economic reforms was in the following directions:
(i) Increasing the role of the private sector,
(ii) Redirecting scarce public sector resources to areas where the private sector is unlikely to enter, and
(iii) Opening up of the economy to trade and investment and thus integrating it with the global economy.