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1991 economic reforms/Economic Liberalization

By 1985, India had started having balance of payments problems. By the end of1990, it was in a serious economic crisis. he government was close to default, itscentral ban! had refused new credit and foreign e"change reserves had reduced tosuch a point that India could barely #nance three wee!s$ worth of imports. his istermed as Balance of Payments Crisis, meaning India was not able to balance itsaccounts % e"ports were signi#cantly less than imports. &ome of the events of thethen economic crisis are'

1. (urrency overvaluation, the current account de#cit, declining investorcon#dence, balance of payments crisis

). *+ ' increased to 1).- percent in 1990%91. / *' opened Indian economy to the world leading to increasing foreign

capital, technology and trade in ows in the country2. +iscal policy was re%oriented to cohere with these changes5. 3"ternal debt grew to as much as 8.-4 of the * in 1991%199).

. /ed to the Indian government airlift national gold reserves as a pledge tothe International 6onetary +und 7I6+ in e"change for a loan to coverbalance of payment debts.

*old pledged by India abroad in 1991 7tons -

*old sold by I6+ to India in )009 7tons )00

Government steps

1. &ervice ta" introduction 71992%95 to cover more services). he 6 :ct 7that protected businesses from monopolies was reformed

and India could #nally be on the path to producing competitive andproductive industries

. Industrial de%licensing followed shortly afterward.2. *radual reduction of import duties followed, allowing foreign investments

to slowly start owing in. 6ore clearance was given to capital goods.5. &lowly, ta"es were lowered 7income and corporate ta"es and +oreign

echnology :greements started getting signed


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Gross De cit

yeargross scal

e cit 1991%9) .)5199)%9 201.-199 %92 0).5-1992%95 5--.01995%9 0).2

!even"e e#penses

$ear!even"e Defencee#pen it"re

%nterestPayments

&"bsiies

1991%9) 112.2) ) 5.9 1)).5199)%9 1)1.09 10.-5 108.)2199 %92 129.-8 -.21 11 .051992%95 1 2.) 220. 118.521995%9 188.21 500.25 1) .


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'a# %ncome

$ear Direct ta#es %n irect ta#es

1991%9) 15).0- 5)1.52199)%9 181. 1 5 5.05199 %92 )0).98 552.251992%95 ) 9. 5 .)81995%9 5. -- . 1

199()*+++


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:mong countries withover )0 million in

population, Indiancentral government$s average #scal de#cit during the decade 198-%199- wase"ceeded by the de#cit of only three countries, ;igeria, a!istan and Bra


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In 199-%98, #scal de#cits became 10 percent of * range and governmentdebt grew. =igh de#cit, unproductive e"penditure and ta" distortion haveconstrained the economy .

he combined #scal de#cit of the centre and the states was . percent in199 %9- before creeping bac! up to 9.0 per cent in 1998%99.

he #scal de#cit of the central government, as a proportion of * , declinedto 2.1 percent in 199 %9-, revenue de#cit declined to ).2 percent in 199 %9-

Defence expenditure in 1998-99 was Rs. 39,897 crores. During the year ofthe Kargil conflict 1999-!"""# it $u%ped &y 18 per cent to Rs. '7,"71 crores,defence outlay increased further &y 1( per cent to Rs. )','(1 crores in !""".*hat was a total of Rs. 1',)(' crores or a 3( per cent growth o+er two years.

iscal policy for *++()1+

6 &ubsidies constituted 1.1 percent of * in )00-%08 which increased to ).24of *

6 Introduction of the securities transaction ta" 7& in )002 and the fringebene#t ta" 7+B in the budget of )005%0

6 &ervice ta" rate has been reduced from 1)4 to 104 in )00-%08

*++- &"b Prime Crisis

'.e global nancial crisis t.at er"pte aro"n &eptember *++- sa%n ian scal policy being teste to its limits0 %mpact of t.e crisis t.at as


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a ecting t.e %n ian economy t.ro"g. t.ree c.annels2 contagion ris3s tot.e nancial sector2 t.e negative impact on e#ports2 an t.e e ect one#c.ange rates

6 Industrial growth declined to .)4 from 8.-4.

6 +II reduced to %>885- million from >1 020 million.

6 * growth rate reduced to .84 from 9. 4.

6 a" to * ratio reduced to 10.954 from 1).5 4.

6 +oreign 3"change eserve reduce to >)5) billion from > 09.- billion.

Government4s steps to tac3le *++- crisis5 a" cuts and increase ine"penditures7e"pansionary #scal policy .

6 3"panded safety% net programme for the rural poor such as ; 3*:

6 s 0,000%crore loan waiver for farmers

6 (entral e"cise duty cut of 2 percent,

6 Implementation of revised salaries and compensations for the central public

servants as per the recommendations of the &i"th ay (ommission.

6 ublic e"penditure across the budgets of )00-%08 and )008%09 is ta!entogether it

amounted to about percent of *

Parliamentary elections of *++- also res"lte in f"rt.er governmente#pen it"res0

GDP gro t. ecline to 60- percent 7year)on)year8 in t.e secon .alf of*++-)+9 compare to 0- percent in t.e rst .alf0 By *++9)1+ %n ia4s GDP

as gro ing at - percent 0'.is increase to -06 percent in *+1+)110

or *++9)1+, scal e cit eclining to 606 per cent of t.e gross omesticpro "ct 7GDP80 '.e .ig.er estimate levels of scal e cit in *++9)1+ o elargely to t.e f"ller impact of t.e ta# c"ts anno"nce as a part of t.e

scal stim"l"s pac3ages late in t.e secon .alf of scal *++-)+90

:ote5

After the presentation of the Union Budget in February 2008, the world economy was hit by three

unprecedented crises -- first, the petroleum price rise; second, rise in prices of other commodities; and

third, the brea down of the financial system!


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"he first two crises resulted in serious inflationary pressure in the first half of 2008-0#! "he focus of the

fiscal policy shifted from fuelling growth to containing inflation, which had reached $2!# per cent in

August, 2008! %eries of fiscal measures both on ta& re'enue and e&penditure side were underta en

(eadline inflation fell to )!*# per cent in +anuary, 200# but significantly altered the deficit position of the

o'ernment!

"he moderation in growth of the economy and the impact of the fiscal measures ta en to stimulate growth

can be seen reflected in the estimates for gross ta& re'enue which stand reduced from s .,8/,/$ crore in

B!1!2008-0# to s .,2/,#)# crore in !1!2008-0#! (igher fiscal deficit of . per cent of 3 in 1 2008-

0# as compared to 2! per cent of 3 in B!1!2008-0#!

$ear Direct ta#es %n irect ta#es)00 %0- ) 0).29 )21).)00-%08 1)).2 )-91.02)008%09 8.52 ) 9 .25)009%10 --2.8- )2 8.81)010%11 2259.92 2 1.-8


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