What was the rationale for economic reform?

The inception of planning, growth with social justice and self-reliance have remained the central objectives of development strategy.

Import-substitution, licenses and controls coupled with dominant role of public sector in economic activities were the peculiar features of development strategies till July, 1991.

License  permit quota raj led to widespread corruption. The bureaucracy was the principal beneficiary of this system. The Government officials in collusion with the political bosses earned huge money via corruption.

Also read | The determinants of Cost Function.

It was increasingly felt to dismantle the system of licensing and controls: Quite a large number of public enterprises which played crucial role in setting up heavy and basic industries, social and economic infrastructural development were facing problem of inefficiency and high cost of operation.

Further, there was a high pressure of the World Trade Organization (WTO) to expose Indian industry to face world competition. The performance of the Italian Economy was not up to expectations.

All these factors made the Government to introduce the economic reforms. The industrial policy announced in 1991 provided following rationale for introducing economic reforms :

Also read | The Managerial uses of Production Function.

  • To de-control the Indian industrial economy from unnecessary bureaucratic controls;
  • To introduce liberalization with a view to integrate the Indian Economy with world economy,
  • To remove the restrictions on foreign direct investment,
  • To remove the restrictions of MRTP Act; and
  • To shed the load of public sector enterprises which have shown a very low rate of return and incurring losses over the years.

Also read | Long-Run Average Cost Curve.

Tags: Ba Economics

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