Structural reform measures

Also called: Structural reforms · Topic: The 1991 Crisis and LPG Reforms: An Appraisal · NCERT: Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 11, Ch 8 "Comparative Development Experiences of India and its Neighbours"

Meaning

Structural reform measures are long-term steps that raise the efficiency and international competitiveness of an economy. They do this by removing rigidities in different parts of the economy. Rigidities are fixed rules and controls that stop firms and markets from adjusting.

Why it matters: in the New Economic Policy (NEP), 1991, these measures dealt with the deeper, slow problem. Under the licence-permit system, Indian industry was inefficient and could not compete with the world. Class 11 NCERT sorts the NEP into two groups: stabilisation measures and structural reform measures. The three tools of structural reform are Liberalisation, Privatisation and Globalisation (LPG).

Explanation

Why structural reform was needed alongside stabilisation

• The crisis of June 1991 had two layers:
• The urgent layer: India's gross official reserves had fallen to only a few weeks' worth of imports, and inflation was in double digits and still rising [2]. This needed quick "fire-fighting", which is stabilisation.

• The deep layer: controls, licences and a closed economy made industry slow and costly. This needed long-term rewiring, which is structural reform.

• How structural reform works (the supply-side chain):

• Controls are removed → firms can enter, grow and import inputs freely.
• Competition, including from foreign firms, rises → firms cut costs and improve quality.

• The economy can produce more, and more cheaply → exports become competitive.

• Institutional style: this is World Bank-style supply-side reform. It aims to raise the economy's ability to produce. Stabilisation, by contrast, is IMF-style demand management, which cuts total spending.

• In the IMF's account of the four-part 1991 strategy, the start of major structural reforms was the fourth element. The other three were immediate stabilisation, fiscal consolidation and exceptional financing [2].

The three pillars: L, P and G

• Liberalisation: ending regulatory restrictions and opening up sectors of the economy. Class 10 NCERT calls it "removing barriers or restrictions set by the government".
• Privatisation: moving ownership or management of public sector enterprises to the private sector, for example through disinvestment (the government selling part of its shares in a public sector company).
• Globalisation: linking the Indian economy more closely with the world economy through trade, investment, technology and people.
• Link to the problem of choice (Class 9): after 1991, the government decides less about what, how and for whom to produce. Markets and prices decide more. India moved towards a market economy but remains a mixed economy.

Liberalisation in five areas (Class 11)

1. Industrial sector (deregulation): most industrial licensing was ended. Fewer industries were reserved for the public sector. Price and capacity controls were relaxed.

2. Financial sector: the RBI's role shifted from controller to facilitator. - The Narasimham Committee (November 1991) recommended a phased cut in SLR and CRR [3].

   • CRR (Cash Reserve Ratio): the share of deposits a bank must keep as cash with the RBI.
   • SLR (Statutory Liquidity Ratio): the share of deposits a bank must keep in safe assets such as government securities.
   • April 1992: norms for income recognition, asset classification, provisioning and capital adequacy were introduced, with compliance deadlines in 1994 and 1996 [3].

3. Tax reforms: lower and simpler income and corporate tax rates, a wider tax base and lower customs duties.

4. Foreign exchange: the rupee's value moved step by step from a government-set rate to a market-set rate (see In India).
5. Trade and investment: import licensing was phased out, tariffs were cut and FDI caps were raised. Quantitative restrictions (QRs) were removed. QRs are physical limits on the quantity of imports, instead of a tax on them.

Order and pace of structural reform

• First focus: industrial deregulation and trade liberalisation, which sharply cut the licences needed for investment and imports [2].
• Later focus: tax reform, tariff cuts and financial-sector reform [2].
• Sequencing: stabilise first, then restructure. An economy whose reserves are close to zero cannot absorb deep reform.
• Gradualism: India opened up in small, planned steps instead of all at once ("big bang").
• Two generations:
• First generation: product markets, trade, finance and the exchange rate. These were mostly done by the Centre and were easier.
• Second generation: factor markets (markets for inputs such as land, labour and power). These need action by states and are harder.

In India

• Who carried it out: mostly the Centre, often through executive orders. It was supported by World Bank lending alongside IMF stabilisation loans [2]. In the financial sector the RBI managed the reforms.
• Exchange-rate reform, step by step:
• March 1992: the Liberalised Exchange Rate Management System (LERMS) was introduced. It was a dual exchange rate (part official rate, part market rate) [3][4].
• 1 March 1993: a unified, market-determined exchange rate replaced LERMS [4].
• August 1994: the rupee became convertible on the current account, and India accepted Article VIII of the IMF's Articles of Agreement [3][4].
  • Current-account convertibility: rupees can be freely changed into foreign currency for trade, travel, education and similar payments. Buying assets abroad (the capital account) is still controlled.

• Full capital-account convertibility has still not been adopted.

• Removal of QRs, step by step:

• India had kept QRs on balance-of-payments grounds, an exception that GATT allows [6].
• The US took India to the WTO (dispute DS90) over QRs on 2,714 tariff lines [5].
• The EXIM Policy of 31 March 2000 removed QRs on 714 items, which left 715 items [6].

• QRs on the last 715 items were removed with effect from 1 April 2001 [5].

• Global backdrop: the package matched much of the Washington Consensus. This was the late-1980s policy list of the IMF, World Bank and US Treasury, covering fiscal discipline, trade and FDI liberalisation, privatisation and deregulation.

Don't confuse with

• Stabilisation measures: short-term steps to fix the BoP (Balance of Payments) and control inflation, in the IMF's demand-management style. Examples are devaluation (the rupee was devalued on 1 and 3 July 1991, about 18% in USD terms [3]), fiscal correction and tight money. Structural reform is long-term and supply-side.
• Second-generation reforms: a later stage of structural reform that targets factor markets (land, labour, power) and needs action by states. First-generation reforms (trade, finance, the rupee) were led by the Centre.
• "Big bang" / shock therapy: freeing everything at once, as Russia did in the 1990s. It led to an output collapse and asset grabbing. India's structural reform was gradual.
• Washington Consensus: the external policy list (IMF, World Bank, US Treasury) that India's reforms resembled. It is not the WTO, and it is not the same as India's own chosen pace and order of reform.

Prelims Hooks

• Structural reform = long-term, World Bank-style supply side, aimed at efficiency and international competitiveness. Stabilisation = short-term, IMF-style demand management. A common trap is to swap the two institutions.
• LPG measures are structural reforms. Devaluation and fiscal correction are stabilisation measures.
• LERMS (March 1992) was a dual rate. The unified market-determined rate came from 1 March 1993 [4]. Current-account convertibility and IMF Article VIII: August 1994 [3].
• Narasimham Committee (1991): financial-sector reform, including a phased cut in SLR and CRR [3].
• QRs fully removed from 1 April 2001 (last 715 items), after WTO dispute DS90 brought by the US [5].
• Early structural reform focused first on industrial deregulation and trade liberalisation. Tax, tariff and financial-sector reform came later [2].

Mains Points

• Sequencing and gradualism as India's strength: India stabilised first, then opened up in steps (1992 → 1993 → 1994 → 2001) [3][4][5]. This helped it avoid the output collapse Russia suffered under shock therapy. The cost was slower reform, and the push to reform faded once the crisis passed. Full capital-account convertibility is still pending.
• Unfinished agenda in factor markets (GS-III, GS-II): first-generation structural reforms led by the Centre are largely done. The main limits today are in land acquisition, labour codes and power distribution. States must act here, so progress depends on cooperative federalism and political consensus.
• "Externally imposed" or "home-grown"? The reforms came alongside IMF and World Bank lending and matched the Washington Consensus [2], so critics call them externally driven. Supporters point out that India chose its own pace and order. A balanced answer should cover both views and judge the results by efficiency and competitiveness gains.

Related concepts

• Stabilisation measures
• Liberalisation

Read more

• Stabilisation and structural reform: the architecture of LPG