8. Effect of Reforms on Indian Economy

The new economic policy comprising liberalisation, globalisation, and privatisation has brought about many changes in the Indian economy. Economic reforms, initiated since 1991, have resulted in improving the performance of various sectors of the economy. Some of the major achievements of the new economic policy are as follows:

Higher Growth Rates: The new economic policy has played an important role in stepping up the growth rate of the Indian economy in recent years. The growth rate of national income picked up from 5 per cent in 1990-1991 to about 9.3 per cent in 2007-08.

Performance of the Industrial Sector: The performance of the industrial sector during the post- reform period is much higher than during the pre-reform period. The period immediately following the economic reforms was marked by a low growth rate of industrial output. However, the slowdown in the industrial output was a transitional phenomenon. Industrial production in India averaged 6.59 per cent from 1994 until 2017, reaching an all time high of 20 per cent in November of 2006. It experienced a growth rate of 9.2 per cent during the Tenth Plan, and a growth rate of around 7.7 per cent during the Eleventh Plan. This allays all fears that once the economy opens up, the industrial sector will not be able to withstand the competition from other countries.

Changes in the Composition of National Income: The post-reform period has been characterised by significant changes in the composition of national income. The share of the agriculture and allied sector in national income has decreased from 29 per cent in 1991-92 to about 17 percent in 2016-17. The share of the industrial sector, on the other hand, showed a steady increase from 24 per cent in 1991-92 to about 29 per cent in 2016-17. Importantly, the share of the tertiary or service sector has increased significantly from 44 per cent in 1991-92 to about 54 per cent in 2016-17. Thus, the service sector has registered a large and consistent growth in the post-reform period. This reflects the structural transformation of the Indian economy.

Savings and Investment Performance: Post-reform period showed a remarkable increase in savings and investment. Gross domestic savings increased from about 23 per cent in 1990-91 to 31 per cent in 2015-16, rate of investment (rate of gross domestic capital formation as per cent of GDP) has increased from 26 per cent in 1990-91 to about 31 per cent in 2015-16. Private sector has been assigned a major role under the new economic policy. As a consequence, rates of Private Final Consumption Expenditure (PFCE) at current and constant (2011-12) prices during 2016-17 are estimated at 58.8 percent and 55.8percent, respectively, as against the corresponding rates of 58.0 percent and 55.0 percent, respectively in 2015-16.

Foreign Trade: Post 1991, the gradual liberalization of the Indian economy, characterized by policy reforms, created a conducive environment for India’s exports to flourish and evolve into an engine of social and economic growth. Since then India has transformed from a closed economy to a considerable player in the global market. Over time, the export sector has grown to be a significant earner of foreign exchange and a major contributor to India’s national income.

Foreign Exchange Reserves: Indian economy faced a serious foreign exchange crisis during 1990–91 because of adverse balance of payments. But the balance of payments has shown significant improvement after economic reforms. As a result, India's foreign exchange reserves

have increased rapidly. The reserves stood at US $405 billion in July 2018 as against only $1.1 billion in June, 1991.

Foreign Direct Investment: FDI in India has increased significantly since 1991. It has increased from US $1.3 billion in 1990-91 to US $60.08 billion in 2016-17. This is a reflection of liberalised policy changes as well as an improved investment climate. In the three years since 2014, the government has eased 87 FDI rules across 21 sectors to accelerate economic growth and boost jobs. Over time, FDI rules have been radically overhauled across sectors such as broadcasting, retail, trading and air transport. The present government has amended legislation to hike the foreign investment cap to 49% in insurance and pension from the earlier 26%.For retail trading of food products, the government has permitted 100% FDI with unqualified condition that such food products have to be manufactured or produced in India.

Overseas Investment by Indian Companies: Outbound investments from India have undergone a considerable change not only in terms of magnitude but also in terms of geographical spread and sectoral composition with Indian companies also undertaking overseas investment. In a significant development, UK announced that India has become the third largest source of FDI for them as investments increased by 65 per cent in 2015 leading to over 9,000 new and safeguarded jobs.

Reforms in any sector cannot be seen in isolation. There is a huge degree of complementarity among different kinds of reforms. If there is delicensing of the export of a particular item/good but production of that good remains controlled, then the benefit of the reform will be limited. Instead, if the industrial policy deregulates production of goods, then the benefit will be much greater. Similarly, external-sector reforms will reach its potential if sufficient reforms are introduced in the financial, fiscal, industrial and agricultural sectors.