1991 Economic Crisis - Measures taken to Overcome



1)Fiscal Reforms –

Budget for the year 1991 – 92 for correcting the fiscal imbalance were as follows :  
- Reduction in fertilizer subsidy;
-  Abolition of Cash Compensatory Support for exports;
-  Abolition of subsidy on sugar;
-  Disinvestment of a part of the government’s equity holdings in select public sector undertakings; and
- Acceptance of major recommendations of Tax Reforms Committee headed by Raja Chelliah in order to raise revenue through better compliance in case of income tax, excise and customs duties and make the tax structure stable and transparent.

2) Monetary & Financial Sector Reforms

Some of the measures undertaken were
–  Greater competition among public sector, private sector and foreign banks and elimination of administrative constraints;  
Liberalization of branch licensing policy in order to rationalize the existing branch network;  
Banks were given freedom to relocate branches, open specialized branches, and set up controlling offices;  Setting up of special tribunals for loan recovery;
  Guidelines for opening new private sector banks; and  New accounting norms regarding classification of assets and provisions of bad debt were introduced in tune with the Narasimham Committee Report.
Capital Issues (Control) Act, 1947 was repealed and the Office of the Controller of Capital Issues was abolished.
The companies issuing securities were free to fix issue price and premium.
The companies were also permitted to approach international capital market through the issue of Global Depository Receipts (GDR) and American Depository Receipts (ADR).
The Securities & Exchange Board of India (SEBI) which was set up in 1988 was given statutory recognition in 1992

3) Industrial Policy Reforms –

The government announced a New Industrial Policy on July 24, 1991.
The central elements of industrial policy reforms were as follows – (a) Industrial licensing was abolished for all projects except in 18 industries where strategic or environmental concerns are paramount or where industries produced 233 goods with exceptionally high import content. With this, 80 per cent of the industry was taken out of the licensing framework. (b) The Monopolies & Restrictive Trade Practices (MRTP) Act was repealed to eliminate the need for prior approval by large companies for capacity expansion or diversification. (c) Areas covered reserved for the public sector were narrowed down, and greater participation by private sector was permitted in core and basic industries. Earlier, 17 industries were reserved for public sector. The new policy reduced this to number 8. These eight are mainly those involving strategic and security concerns. (d) Government clearance for the location of the projects was dispensed with except in case of 23 cities with a population of more than one million. (e) The requirement of phased manufacturing programmes was discontinued for all new projects. (f) The policy encouraged disinvestment of government holdings of equity share capital of public sector enterprises. This was initially in favour of mutual funds, and other institutions, but later, in favour of general public. (g) The public sector units were provided greater autonomy and professional management that could be helpful for generating reasonable profits, through an MOU between the enterprise and the concerned Ministry.

4) Trade Policy Reforms –

(A) Freer imports and exports
(B) Rationalization of tariff structure & removal of quantitative restrictions
(C) Decanalisation of exports and imports
(D) Trading Houses
(E) Concessions and Exemptions - to liberalize imports and promote exports

5) Promoting Foreign Investment –

(a) In 1991, the government announced a specified list of high technology and high – investment priority industries wherein automatic permission was granted for foreign direct investment (FDI) up to 51 per cent foreign equity.
(b) Foreign Investment Promotion Board (FIPB) was set up
(c) Steps were also taken from time to time to promote foreign institutional investment (FII)

6) Rationalization of Exchange Rate Policy –

Devaluation of rupee-  In the very first week of July 1991, the rupee was devalued by around 20 per cent vis – a – vis a basket of five currencies
Liberalized Exchange Rate Management System (LERMS) was introduced in 1992 – 93 to introduce partial convertibility of rupee.

7)Approach towards Capital Account Convertibility –

On account of the dangers of full capital account convertibility and the unhappy experience of other countries who opted for such convertibility, the RBI opted for a gradualist and phased capital account liberalisation programme.

Report of the Committee on Capital Account Convertibility (S. S. Tarapore) was submitted in May 1997. The Committee defined Capital Account Convertibility (CAC) as “ the freedom to convert local financial assets into foreign financial assets and vice - versa at market determined exchange rates.”
Reserve Bank constituted another Committee on capital account convertibility again under the Chairmanship of S. S. Tarapore. The Committee submitted its Report on Fuller Capital Account Convertibility (FCAC) on 31st July 2006. The Committee gave a five year time frame for movement towards fuller convertibility in three phases : Phase I (2006 – 07); Phase II ( 2007 – 08 to 2008 – 09 ); and Phase III ( 2009 – 10 to 2010 -11).

Over a period of time, several steps have been taken to liberalize the capital account.

Wednesday, 26th Oct 2016, 03:02:16 AM

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