Which of the following is a structural reform under the 1991 policy?
- AOption (a)
Devaluation of rupee
- BOption (b)
Cut in subsidies
- COption (c)
Privatization of public sector units
- DOption (d)
Export duty imposition
View answer & explanationHide answer & explanation
Correct answer
Privatization of public sector units
Why this answer is correct
The correct answer is Privatization of public sector units.
Key Points
- The New Economic Policy (NEP) was launched in July 1991 to pull the Indian economy out of a severe Balance of Payments (BoP) crisis and high Inflation. The policy categorized reforms into two groups: Stabilization Measures and Structural Reform Measures.
- Structural Reform Measures are long-term policies aimed at improving the efficiency of the economy and increasing international competitiveness by removing rigidities in various sectors. Privatization of public sector units is a core structural reform that involves reducing the role of the government in business and encouraging private ownership. Hence, statement 3 is correct.
- Devaluation of the rupee was a short-term Stabilization Measure undertaken in 1991 (specifically on July 1 and July 3) to boost exports and discourage imports, thereby improving the Foreign Exchange Reserves. It is not classified as a structural reform. Hence, statement 1 is incorrect.
- A Cut in subsidies is a part of Fiscal Policy stabilization aimed at reducing the Fiscal Deficit. While it was a necessary step during the 1991 crisis to achieve macroeconomic stability, it falls under stabilization measures rather than long-term structural changes. Hence, statement 2 is incorrect.
- The 1991 policy actually focused on the removal or reduction of export duties and import tariffs to promote trade Liberalization. The imposition of export duty would contradict the goals of Globalization and trade expansion. Hence, statement 4 is incorrect.
Additional Information
- Liberalization: This structural reform involved the abolition of Industrial Licensing for most industries, except for a strategic few like Defense equipment, Industrial explosives, and Hazardous chemicals. It also included Financial Sector Reforms where the role of the Reserve Bank of India (RBI) shifted from a regulator to a facilitator.
- Privatization: It refers to the withdrawal of the state from ownership or management of Public Sector Undertakings (PSUs). This was achieved through Disinvestment (selling a part of the equity of PSUs to the public) and Strategic Sale (transfer of management control).
- Globalization: This involves the integration of the national economy with the global economy. Key steps included the reduction of Customs Duties, removal of Quantitative Restrictions (QRs) on imports, and allowing Foreign Direct Investment (FDI) in various sectors.
- Economic Context of 1991: The reforms were initiated under the leadership of Prime Minister P.V. Narasimha Rao and then Finance Minister Dr. Manmohan Singh. The crisis was so severe that India had to mortgage its Gold reserves to the Bank of England and the Union Bank of Switzerland to secure loans from the International Monetary Fund (IMF) and the World Bank.
Important Points
- LPG Model: The 1991 reforms are popularly known as the LPG Model (Liberalization, Privatization, and Globalization). This model marked a shift from the Nehruvian Socialist model to a Market-oriented economy.
- Tax Reforms: As part of the structural reforms, Direct Tax rates (Income tax and Corporate tax) were reduced to encourage voluntary compliance and increase revenue. Indirect Tax structures were also simplified, eventually leading towards the Goods and Services Tax (GST) framework years later.
- Foreign Exchange Reforms: To resolve the BoP crisis, the Foreign Exchange Regulation Act (FERA), 1973 was eventually replaced by the more liberal Foreign Exchange Management Act (FEMA), 1999.
- Navratnas and Maharatnas: To improve the performance of PSUs, the government granted greater administrative and financial autonomy to certain profit-making companies, categorizing them as Maharatnas, Navratnas, and Miniratnas.