Economic reforms and its impact on External Sector in India

Abstract

This study focuses on the economic reforms and its impact on external sector in newlineIndia. The study shows that during the past two decades, India has experienced wide ranging reforms in the various sectors of the economy. These reforms were initiated in July 1991 when an economic crisis of unprecedented severity surfaced in the country in the form of high inflation, rising food prices, large current account deficit, huge domestic and foreign debt, a sharp fall in foreign exchange reserves, a steep decline in India s credit rating, and a cut off of commercial loans accompanied by a net outflow of Non-Resident Indian (NRI) deposits. The crisis was the outcome of the long-term constraints of the preceding four decades, especially the 1980s and certain immediate factors. After achieving independence from British rule in 1947, India pursued policies that sought to assert government planning in most sectors of the economy and promote self-sufficiency. This was essentially a reaction to the colonial regime s laissez faire and free trade policy that was identified as the basic cause of India s economic underdevelopment by the pre-independence political leadership. These policies achieved some economic goals (such as rapid industrialisation) but the overall effect was to promote widespread inefficiency throughout the economy. The strategy of import substituting industrialisation made the Indian industry inefficient and technologically backward due to the absence of competition. Discouragement of foreign capital compounded this problem. Private sector was heavily regulated through the system of licenses and permits. This caused a great damage to entrepreneurship and innovation. Public sector dominated this strategy but became highly inefficient and even sick due to the excessive political interference. Emphasis on self sufficiency led to export pessimism.