India's economic environment and the 1991 reforms

At independence, India's economy was mainly agricultural and rural, with low productivity. The government planned the economy: the public sector was given the lead, and private firms were tightly controlled by licences.

By 1991, India faced a crisis. The fiscal deficit was about 6.6% of GDP, inflation was 13 to 14%, and foreign exchange reserves would pay for only a few weeks of imports. The country even had to pledge gold to borrow.

In July 1991, the government announced a New Industrial Policy:

• licensing was abolished for all but six industries;
• the public sector was limited to four industries;
• shares of public enterprises were sold (disinvestment);
• foreign direct investment was allowed much more freely, and the Foreign Investment Promotion Board (FIPB) was set up to channel it.

These reforms are summed up in three words:

• Liberalisation: ending unnecessary controls, the old 'licence-permit-quota raj'.
• Privatisation: a bigger role for the private sector, including disinvestment of public enterprises.
• Globalisation: integrating India's economy with the world economy.

Their impact on business: much more competition; more demanding customers with more choice; rapid technology change; the need to change quickly and to develop people; a shift to market orientation (making what customers want); and less budget support for the public sector.