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Indian Banking Today & Tomorrow -
Economic Reforms 1991-92

The then urgent need of the hour was assessed as under: -

1. To aim at quick revival of the momentum of exports.

2. To create strong incentives to economise on imports, without resorting to proliferation of licensing controls, which promote delay and inefficiency, generate arbitrariness and stifle enterprise.

3. There was urgent need to create an environment free from bureaucratic controls in which our exporters will be able to respond with speed and flexibility to changing international conditions.

4. To recognise the change that is taking place in the world economy, where countries are shedding isolation and getting increasingly integrated, and to shape our economic policies as part of the prevailing global environment.

LERMS representing Liberalised Exchange Management System was introduced in the year 1992 as part of a package of reforms intended to secure instant and permanent remedies for the problems ailing the Indian economy at that time. Some of the problems facing the country at that timer were as under:-

1. The balance of payments position facing the country had become critical and foreign exchange reserves had depleted to dangerously low levels i.e. $585 million, which was sufficient for financing just one week of India's exports.

2. Export momentum built during 1986-87 to 1989-90 was lost and exports decelerated to 9% in U.S. Dollars

3. Imports had to be severely curbed in 1990-91 because of shortage of foreign exchange. This affected the availability of many essential items and also led to a distinct slow down in industrial growth.

4. Inflation was rocking the country and fiscal deficit was going uncontrolled, resulting domestic prices unfavourable for export promotion.

5. The system of administered exchange allocations and rate fixation gave rise to parallel markets in foreign exchange, trade mis-invoicing and capital flights. Persons who required foreign exchange were unable to get the same under the regulations in force, but had recourse to the 'hawala' markets and brought the required foreign exchange at premium rates

6. Exporters under-invoiced their export earnings and moved away foreign exchange abroad or repatriated the same at a premium through the hawala route. There was considerable leakage of accruals in foreign exchange earnings due to NRI remittances being routed through these markets.

7. The unauthorised market also acted as conduits for financing smuggling operations into and out of the country. The black market for foreign exchange was supported by the unofficial gold movements into India.

8. There was urgent need to usher in a policy to end economic isolation of the country, remove the controlled economic regime, and follow market oriented economic policy to link India with the global economy

The package of urgent economic reforms not only to put an end to the above problems facing the country, but could also permanently curbed their further occurrence. This included the following:

• The Liberalised Exchange Control Management Scheme

• A liberal trade policy for both exports and imports

• Curbing fiscal deficit and government spending and to hold inflation under control

In March 1992 the Government announced the full convertibility of the Rupee in Current Account. A fully convertible rupee provides full freedom to both residents and non-residents to trade in goods, services and assets, thereby to integrate the domestic economy into the world economy. Convertibility on current account along with trade liberalization measures has enhanced the competitiveness of the domestic tradables and has made the world prices to prevail in the domestic economy. The rupee convertibility process has been implemented since July 1991, involving several important elements:

• The relaxation of quantitative restrictions on imports by doing away with import quotas and licensing.

• The reduction of the level and dispersion of import tariff rates

• The elimination of several export subsidization schemes

• The liberalization of exchange restrictions on capital flows, particularly the inflow in foreign direct investments and portfolio investments, and

• Introduction of the market-driven exchange rates of the rupee, instead of the administered system through the mechanism of the basket-peg.

1. In July 91, trade policy introduced EXIM scrips at a standard rate of 30 per cent of the FOB value of exports to Exporters. These scrips were freely tradable in the open market, which fetched about 30% premium to the exporters.

2. Due to operational difficulties the system of EXIM Scrips were abolished in 1992-93 budget and the partial convertibility of the rupee was introduced with effect from 1st March 1992. Whereby 60% of all exports and inward remittances were convertible into rupees at the market determined rates and the remaining 40 per cent being surrendered to Reserve Bank at the official exchange rate for financing of the essential imports.

3. A new export and import policy (EXIM Policy) came into force on 1st April 1992. The new EXIM policy allows licence-free import of all goods except those specified in the negative list. The negative list contained 3 banned items, 68 restricted items and canalised items.

4. The EPGC (Export Promotion Capital Goods) allowed exporters to import capita goods at concessional duty subject to prescribed export obligation.

5. With regards to exports a negative list of 79 items was drawn up. Of these 7 items are banned items, 51 items are exportable subject to licensing, 11 items are exportable subject to quantitative ceilings and 10 items are exported through canalising agencies.

It is in this background that the full convertibility of the rupee in Current Account was announced. The measure abolished the dual exchange system, and thus it completely floats the rupee in the exchange markets. Under the present float, exporters can realise their entire earnings at the free market rates, while all imports, including the government imports consisting of petroleum, fertilizers and defence have also to be paid at free market rates.

Basically two types of macroeconomic constraints are sought to be resolved in the new regime: the balance of payments and the inflation regimes. The balance of payment of constraint is sought to be alleviated through a market driven exchange allocation and exchange rate process. Once exchange rates are market determined and import controls abolished, firms who will be paying at the market rates would be using the imported inputs. The market rate is expected to self-balance the demand and supply of foreign exchange, thus, curbing the excess demand situation and correcting the present trade imbalances.

These measures heralded the building of a new India. Our foreign exchange reserves have today crossed US $ 62 million and our country is now rated as an economic power with unlimited future potential. Inflation is under total control and kept below 5%, and generally less than 2%. Reforms have been accepted by everyone and it has become an integral part of our thinking on economic policy.