Class 12 Economics (NCERT)
Economic Reforms Since 1991
Part 2
Definition Box
Liberalisation: Removal or reduction of unnecessary government controls to provide
greater freedom to businesses.
1. Liberalisation
Need: Excessive government regulations slowed industrial growth and discouraged
entrepreneurship.
Objective: Increase efficiency, competition, investment and productivity by reducing
unnecessary controls.
Greater Freedom: Businesses could make production and investment decisions
without seeking multiple approvals.
Market Orientation: Resources were increasingly allocated through market forces
rather than government directives.
Industrial Sector Reforms
Abolition of Industrial Licensing: Licences were removed for most industries, making
it easier to establish and expand businesses.
Reduction of Public Sector Reservation: Many industries earlier reserved for the
public sector were opened to private participation.
MRTP Act Reforms: Restrictions on expansion of large firms were removed to
encourage competition and growth.
Financial Sector Reforms
Definition Box
Financial Sector: Includes banks, financial institutions, stock markets and insurance
companies.
Private Banks: Private banks were allowed to operate, improving customer service and
competition.
Role of RBI: RBI focused on regulation and supervision to maintain financial stability.
SEBI Strengthened: SEBI was empowered to regulate the securities market and protect
investors.
Tax Reforms
Definition Box
Tax Reforms: Measures taken to simplify the tax system, reduce tax rates and improve tax
collection.
Lower Tax Rates: Reduction in income and corporate tax encouraged compliance and
investment.
Simplified Structure: A simpler tax system reduced tax evasion and improved
administration.
Broader Tax Base: More individuals and businesses were brought under the tax net.
Foreign Exchange Reforms
Definition Box
Foreign Exchange: Foreign currencies used for international trade and payments.
Flexible Exchange Rate: The value of the rupee increasingly depended on market
demand and supply.
Current Account Convertibility: People could obtain foreign exchange more easily for
trade, travel and education.
Trade Policy Reforms
Import Licensing Removed: Most import licences were abolished, making imports
easier.
Lower Tariffs: Customs duties were reduced to promote competition and trade.
Export Promotion: Government encouraged exports through incentives and simplified
procedures.
Advantages of Liberalisation
Higher Competition: Competition encouraged firms to improve quality and reduce
costs.
Industrial Growth: Businesses expanded more rapidly because of fewer restrictions.
Better Technology: Industries adopted modern technology through easier imports and
collaborations.
Consumer Benefits: Consumers received better quality products with greater choice.
Disadvantages of Liberalisation
Pressure on Small Industries: Small firms struggled to compete with large companies
and MNCs.
Job Losses: Some inefficient firms reduced their workforce to remain competitive.
Regional Imbalances: Investment concentrated in already developed states.
Definition Box
Privatisation: Increasing the role of the private sector by reducing government ownership
and control over enterprises.
2. Privatisation
Need: Many public sector enterprises suffered from low productivity, losses and poor
management.
Objective: Improve efficiency, reduce government burden and encourage competition.
Disinvestment: Government sold part of its shares in PSUs to private investors.
Private Participation: Several sectors such as telecom, aviation and banking were
opened to private firms.
Advantages of Privatisation
Efficient Management: Private firms generally make faster decisions and use resources
efficiently.
Reduced Fiscal Burden: Government receives revenue through disinvestment and
spends less on loss-making PSUs.
Better Services: Competition improves quality and customer satisfaction.
Disadvantages of Privatisation
Job Insecurity: Employees may face retrenchment during restructuring.
Profit Motive: Private firms may focus more on profits than social welfare.
Risk of Monopoly: Private firms may dominate some sectors if competition is limited.