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This article provides information about the economical and political circumstances in India that led to adopt the economic structured programme:
According to Ghosh, liberalisation means, “reducing government regulation of economic activity and the space for state intervention (except in the all- important matter of guaranteeing private property rights) and allowing for the unfettered operation of market forces in determining economic processes.” This could mean an opening up of the economy to external flow of goods and services or the relaxation of domestic controls.
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It is theoretically possible to undertake liberalisation in only one of the areas domestic or external – but in most instances, as in India, both domestic and external fronts are simultaneously opened up. In common parlance liberalisation is the loosening up of controls, which the government exercises on economic forces.
Structural adjustment, on the other hand, relates to changes which have sectoral implications – tax rates, deficit and debt ratios, levels of subsidy, intervention of the public sector in provision of goods and services, etc. “Structural adjustment policies may be defined as policy responses to external shocks, carried out with the objective of regaining the pre-shock growth path of the national economy. Regaining the growth path, in turn, will necessitate improvements in the balance of payments following the adverse effects of external shocks, since a country’s balance-of- payments position constrains its economic growth…. A broader definition will also include adjustments to internal shocks which may find their origin in inappropriate policies”.
Does this mean the economy left to market forces or does the government regulate the functioning of the market? Does it directly intervene with public expenditure and taxes to ensure outcomes in a manner that a social planner would like to? What are the areas that government expenditure gives priority to? What is its approach to deficits and social sectors? Are the interest rates and exchange rate market determined or institution determined? The answers to these questions would broadly define the structure of the economy. Once again, theoretically it would be possible to have structural adjustment without liberalisation and vice versa.
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In the Indian economy, however, both a programme of liberalisation domestic and external – as well as structural adjustment in the period since 1991, has been seen, which marks a defining break in the way our economy has been managed. The devaluation of the rupee in July 1991 was a landmark in Indian economic development since such a drastic devaluation had been done only once before in 1966. The rupee was devalued by 18% in nominal terms and this meant a fall in the value of the rupee by 12.4% in real terms. Prior to 1991, the Indian economy had a fixed official exchange rate, and the Reserve Bank of India (RBI) maintained the foreign currencies at stable values.
The disadvantage of a fixed official exchange rate is that it does not maintain parity in purchasing power of the currency in the international market. If the rate of inflation in India, for example, is higher than in the USA, this would reduce the purchasing power of the rupee vis-a-vis the dollar and therefore the amount one should pay to buy a dollar in rupees should go up. This did not happen under a fixed exchange rate regime.
Logically, there would be a profit involved in buying the dollar cheap from official sources and selling it in the grey market. The government would exercise control in this scenario by severe restrictions on foreign currency withdrawals. However, there was a very active grey market for foreign exchange, which reflected the true value of the rupee in the world market
However, this was the culmination of a series of developments that originated long before the actual devaluation.
In 1989, the general elections saw the defeat of Rajiv Gandhi-led Congress party and the installation of a coalition government led by former Congressman Mr. V.P. Singh. However, the inner wrangling within the coalition government saw Mr. V.P. Singh lose majority support in Parliament and Mr. Chandra Shekhar became the Prime Minister with the help of the Congress, which had been his political adversary till then.
His government collapsed by the end of 1990 and general elections were declared as no single party or leader could muster a majority in the House. In May 1991, the Congress became the largest parliamentary party in an election, which witnessed the assassination of Rajiv Gandhi during the election campaign. Narasimha Rao became the Prime Minister and it was his ministry that brought in significant changes in the policy framework of the Indian economy.
The political uncertainty within the country was matched by turbulence in the international arena of which two were of critical importance to the Indian economy. The first was the break-up of the Soviet Union into its constituent nationalities and sub- nationalities. The Soviet Union and its Eastern European neighbours had very strong trade links with India, which were on a rupee account, i.e., trade with the former USSR was not in hard currency like the dollar.
This meant that trade between these countries and India did not require hard currencies and was mutually beneficial. The surplus of Indian exports to Eastern Europe partly financed the capital equipment and defence supplies India imported. By 1991 -92 these arrangements had broken down imposing a further crunch on the limited hard currency available to India.
As if this was not enough, our woes on the external account were further compounded when Iraq decided to attack Kuwait in August 1990. India is largely dependent on crude oil imports from the Gulf to meet its domestic demand for petroleum products. In the five-month period between August 1990 and January 1991, crude oil prices rose by 6S% and India’s import bill on the oil account rose by a similar degree. The impact of this on India was double because its long- term oil import contracts with both Iraq and Kuwait became infructuous and India had to buy oil in the world spot oil market at substantially higher prices.