• UGI USER
  • Oct 31, 2023
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1991 economic crisis

Q. Critically evaluate the factors that led to the 1991 economic crisis? Also examine the need for New age economic reforms 2.0 & suggest the policy interventions that are need of the hour.

Structure of Answer

Introduction

  • Briefly explain 1991 economic crisis ,how it transformed Indian economy

Body

  • Mention Factors Leading to the 1991 Economic Crisis
  • Mention Need for New Age Economic Reforms 2.0
  • Mention Policy Interventions needed, and initiatives taken by government of India

Conclusion

  • Mention the need for “New Age Economic Reforms 2.0” to address contemporary challenges and opportunities.

The 1991 economic crisis in India was a pivotal moment that necessitated transformative economic reforms. These reforms were instrumental in liberalizing India’s economy and fostering substantial growth.

Factors Leading to the 1991 Economic Crisis

  • Balance of Payments Crisis: In 1991, India faced a severe balance of payments crisis with foreign exchange reserves sufficient for only a few weeks of imports.
  • Fiscal Mismanagement: fiscal deficit due to inefficient subsidies, coupled with high inflation, impaired the government’s ability to meet financial obligations.
  • Inefficient Regulations: complex licensing system and bureaucratic hurdles, known as the ‘License Raj,’ choked industrial growth and stifled entrepreneurship.
  • External Shocks: Gulf War in 1990 disrupted oil supplies, leading to a sharp rise in oil import costs and adding to the balance of payments crisis.

Need for New Age Economic Reforms 2.0

  • Boosting Productivity: India’s productivity lags behind global standards, with labor productivity at only 20% of the US, hindering exports.
  • Promoting Innovation: India’s innovation rankings are relatively low, India’s R&D spending share is merely 2%, far below China (21%) and the US (28%).
  • Ease of Doing Business: India’s complex business environment and lengthy procedures deter investment and entrepreneurship.
  • Job Creation: Unemployment rates are high, demanding job creation for the growing population.
  • Income Inequality: Income inequality is stark, with the top 1% owning 40% of India’s wealth.
  • Addressing Climate Change: India faces severe climate change impacts and must adopt reforms for sustainability.
  • Global Economic Integration: India must leverage its skilled workforce, IT prowess, and service sector to increase exports and attract foreign investments.

Policy Interventions needed

  • Increased investment in infrastructure:The government needs to increase investment in infrastructure, such as roads, railways, and power. E.g.  Pradhan Mantri Gati Shakti Yojana
  • Tax Reforms: Streamlining the tax structure, reducing tax rates, and broadening the tax base, as exemplified by the introduction of the Goods and Services Tax (GST), can enhance tax compliance.
  • Financial Sector Reforms: Strengthening the banking sector and addressing non-performing assets, supported by “Banking Sector Reforms,” is paramount.
  • Environmental Sustainability: India is committed to environmental sustainability through initiatives like the “National Action Plan on Climate Change” and the promotion of green industries.
  • Skill development:The government needs to invest in skill development programs to train workers for the jobs of the future. g. PM Kushal Vikas Yojana

The 1991 economic crisis led to transformative reforms, but the evolving global landscape requires “New Age Economic Reforms 2.0” to address contemporary challenges and opportunities. India must continue on the path of economic liberalization, global integration, and sustainable development while focusing on inclusive growth.