RBI Grade B 2023 – Economic reforms in India


ECONOMIC  REFORMS IN INDIA – Industrial Policy and Labour Policy

What is Economic Reforms?

Economic Reforms is the set of policies, rules and regulations to achieve economic growth.

Why India needs Economic Reforms ? 

  • To maintain a sustained growth in productivity;
  • to enhance gainful employment;
  • to achieve optimal utilisation of human resources;
  • to attain international competitiveness; and
  • to transform India into a major partner and player in the global arena.

INDUSTRIAL POLICY IN INDIA : Industrial Policy in India since Independence

( Most important from the exam point of view is New Industrial Policy , 1991.)

New Industrial Policy, 1991

The year 1991 witnessed a drastic change in the industrial policy governing industrial development in the country since decades. Features of the new industrial policy : Government decided to take a series of initiatives in respect of the policies relating to following areas:

  1. Industrial licensing : Abolition of Industrial Licensing for all projects except for a short list of indus­tries.There are only 4 industries at present related to security, strategic and environmental concerns, where an industrial license is currently required-
    (a) Electronic aerospace and defence equipment;

(b) Specified hazardous chemicals

(c) Industrial explosives

(d) Cigars and cigarettes of tobacco and manufactured tobacco substitutes

2. De-reservation of Public sector: Sectors that were earlier exclusively reserved for public sector were reduced. However, pre-eminent place of public sec­tor in 8 core industries.

3. Disinvestment of Public Sector: Government stakes in Public Sector Enterprises were reduced to enhance their efficiency and competitiveness.

4. Liberalisation of Foreign Investment: This was the first Industrial policy in which foreign companies were allowed to have majority stake in India. In 47 high priority industries, upto 51% FDI was allowed. For export trading houses, FDI up to 74% was allowed. Today, there are numerous sectors (such as Core investment company , Food products and retail trading , satellite , etc.) in the economy where government allows 100% FDI.

5. MRTP Act : MRTP (Monopolies and Restrictive Trade Practices) Act was amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. MRTP Act was replaced by the Competition Act 2002. This eliminates the requirement of prior approval of Central Government for establishment of new undertakings, merger, amalgamation and takeover under certain circumstances. The MRTP limit for companies was made 100 crore.


(1) Liberalisation – Liberalisation means movement towards a free market system. Liberalisation otherwise known as withdrawal of regulation and restrictions for private sectors. Private sectors are encouraged to enter into core industries which are reserved for the public sector.  Following are the steps taken under liberalization :

(i) Free determination of interest rate by the commercial Banks itself not by RBI.

(ii) Increase in the investment limit for the Small Scale Industries (SSIs)

(iii) Freedom to import capital goods:Indian industries will be free to buy machines and raw materials from foreign countries to do their holistic development.

(2) Privatisation  – Privatisation means transforming all economic activities from public sector to private sector. It also refers to the setting up of private units in public utility services. Following steps are taken under privatisation.

1. Sale of shares of PSUs

2. Disinvestment in PSUs

3.Minimisation of Public Sector:

(3) Globalisation -Globalisation refers to where a country draws raw materials from any source of the world and manufacture goods and services. The finished goods also find a place in the global market. Thus globalisation is the linkage of nation’s markets with global markets.Reduction in tariffs helps to enhance globalisation.

Important Points:

  1. Core Industries : There are 8 core industries in India i.e Coal, Crude oil, Natural gas, Petroleum Refinery , Fertilisers, Steel, Cement and Electricity. The growth of 8 core sectors is a lead indicator of the monthly industrial performance. Index of 8 core industries in released by Ministry of Commerce and Industries on monthly basis. The Eight Core Industries comprise 40.27 per cent of the weight of items included in the Index of Industrial Production (IIP).

Petroleum refinery is the highest contributor in the index i.e. 28.04% followed by Electricity generation i.e 19.85%. Fertilisers is the lowest contributor in the index i.e 2.63%.

2. Foreign Direct Investment: FDI is investment by non-resident entities like MNCs to carryout business operations in India with management of investment, production of goods or services, employing people and marketing their products. In FDI, both the ownership and control of the firm is with the investor depending upon investors shareholdings. It is a long term investment with less risk. Investment is greater than 10%.

3. Foreign portfolio Investment:  It is investment in the financial assets i.e shares, debentures bonds etc. FPI on the other hand is investment aimed at getting profits from shares, interests from deposits etc. In Portfolio investment, an investor is not involved in day to day management of the company. It is often of short term and highly volatile. Investment is less than 10%.

Labour Laws  In India:

Meaning : Labour law is a body of laws and regulations which deals with the legal rights of, and restrictions on, working people and their organizations. Labour law defines the rights and obligations of the workers, union members, and employers in the workplace.

Labour is in the concurrent list, there was an entire gamut of 200+ state and 40+ central laws with often colluding jurisdictions. The multiplicity, rigidity, and overlapping nature of laws also makes compliance difficult which leads to inspector raj like conditions even now. This leads to corruption, exploitation of workers, etc

The above situation also hampers the ease of doing business in India.

So , In 2019 , GoI codify 44 Labour laws are converted into 4 codes of labour laws in India. The following are the four codes  :

  1. The Code on Wages : It seeks to regulate wage and bonus payments in all employments where industry, trade, business or manufacture is carried out. Four laws are replaced under this code.
  2. The Code on Industrial relations : It attempts to offer some degree of flexibility on government permissions for retrenchment and presents the legal framework for ushering in the concept of ‘fixed-term employment’ through contract workers on a pan-India basis. It seeks to replace three laws.
  3. The Code on social security: It strives to amend and consolidate the laws relating to the social security of the employees and the matters connected to social security i.e retirement benefits, fees for child education, maternity care etc. It seeks to replace 9 laws.
  4. The Code on Occupational Safety, Health, and Working conditions:  The code seeks to regulate health and safety conditions of workers in establishments with 10 or more workers. Welfare facilities, working conditions and working hours will be prescribed by government under this code. It replaces 13 labour laws relating to safety, health and working conditions.