The essentials
In 1991 India faced a crisis: foreign exchange reserves fell so low that they could pay for only about two weeks of imports, prices of essential goods were rising, and government spending had far exceeded revenue for years. India approached the World Bank and the International Monetary Fund for loans and announced the New Economic Policy (NEP). Its measures were of two kinds: stabilisation measures (short-term, to correct the balance of payments and control inflation) and structural reform measures (long-term, to improve efficiency and competitiveness).
Liberalisation
- Industrial sector: industrial licensing was abolished for almost all products except a short list (such as alcohol, cigarettes, hazardous chemicals and industrial explosives). Many industries were de-reserved and the number reserved for the public sector was cut.
- Financial sector: the RBI's role shifted from regulator to facilitator; private and foreign banks were allowed more freely; foreign institutional investors could invest in financial markets.
- Tax reforms: income and corporate tax rates were reduced and procedures simplified.
- Foreign exchange reforms: the rupee was devalued in 1991, and later the market was allowed to play a larger role in setting the exchange rate.
- Trade reforms: quantitative restrictions on imports were removed, tariffs reduced, and export duties largely removed.
Privatisation
Transfer of ownership or management of government enterprises to the private sector, including disinvestment: selling part of the government's equity in public sector enterprises to the public.
Globalisation
Integration of the economy with the world economy. Examples: outsourcing (firms hiring services such as call centres, software and accounting from outside, often from other countries) and membership of the World Trade Organisation (WTO), founded in 1995 as the successor to GATT, which aims at a rule-based trading system.
Common mistakes
- Calling disinvestment a form of liberalisation; it is part of privatisation.
- Thinking stabilisation measures are long-term.