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2. NEED FOR NEW ECONOMIC POLICY
Factors responsible for economic reforms –
1. Fall in foreign exchange reserve : as imports grew faster than exports
2. Adverse balance of payments resulted repayment crisis
3. Mounting fiscal deficit as govt. expenditure grew faster than revenue
4. Rise in prices, which has the negative impact on Investment.
5. Failure of public enterprises:- very low return on high Investment
6. Gulf crisis increases crude oil prices which negatively affected BOP.
7. High rate of deficit financing
8. Collapse of soviet block.
3. NEW ECONOMIC POLICY 1991
LPG which is also known as Liberalisation, Privatisation and
Globalisation were the three major measures that the Indian
government had adopted under its New Economic Policy. For
this, they approached International Banks for development and
the betterment of the country and economy. When they
approached these international banks and organisations, these
agencies asked them to open up our Indian economy to the
world, remove trade restrictions and trade barriers and foster
the private sector.
4. LIBERALISATION
Liberalisation of the economy means freedom of
the producing units from direct or physical
controls of the government. Though a few
liberalisation measures were introduced in 1980s
in areas of industries, export-import policy,
technology upgradation, fiscal policy and
foreign investment, reform policies initiated in
1991 were more comprehensive. Following are
some notable observations in this regard –
• Prior to 1991, government had imposed
several types of controls on private
enterprises in the domestic economy.
These included industrial licensing system,
price control or financial control on goods,
import license, foreign exchange control,
restrictions on investments by big
business houses, etc.
5. • It was experienced by the government that several shortcomings had
emerged in the economy on account of these controls.
• These controls had given rise to corruption, undue delays and inefficiency.
• Growth rate of GDP had fallen sharply and high-cost economic system
came into being.
In view of these facts liberalisation of the economy was considered as a key
component of New Economic Policy. Greater influence was to be placed on
market foces rather than public control.
6. ECONOMIC REFORMS
UNDER LIBERALISATION
Liberalisation virtually implied de-
regulation of industrial sector of
the economy.
• Abolotion of industrial
licencing: In July 1991, a new
industrial policy was announced
.It aboloshed the requirement of
licencing except for the
following five industries. ( a)
liquor (b) cigarette (c) defence
equipments (d)industrial
explosives (e) Dangerous
chemicals
7. • Contraction of Public sector:
Under the new industrial policy,
number of industries reserved
for public sector was reduced
from 17 to 8. In 2010-11, the
number of these industries was
reduced merely to two:
1. Atomic Energy
2. Railway
• De-reservation of Production
Areas: Many production areas
which earlier were reserved for
SSI (Small Scale Industries) were
de-reserved. Forces of the
market were allowed to
determine allocation of
resources
8. • Expansion of Production
Capacity: Earlier production
capacity was linked with
licencing. Now, freedom from
licensing implied freedom from
capacity constraints. ‘What to
produce and how much to
produce’ was now matter of
producer’s choice depending on
market conditions. v. Freedom to
• Import Capital Goods:
Liberalisation also implied
freedom for the industrialists to
import capital goods with a view
to upgrading their Technology.
Permission was no longer
required from the government to
enter into international
agreements for the import of
technology
9. ECONOMIC REFORMS
UNDER LIBERALISATION
2. Financial sector includes :
(i) banking and non-banking financial
institutions, (ii) Stock exchange market
and (iii) Foreign exchange market.
In India, financial sector is regulated and
controlled by the RBI (Reserve Bank of
India). Liberalisation implied a
substantial shift in the role of the RBI
from ‘a regulator’ to ‘a facilitator’ of the
financial sector.
Free play of the market forces has led to
the emergence of private bankers- both
domestic as well as international in the
Indian banking Industry.
Liberalisation also allowed FII (Foreign
Institutional Investors) to invest in Indian
financial markets .
10. ECONOMIC REFORMS
UNDER LIBERALISATION
3. Fiscal reforms/Tax reforms -Broadly, Taxes are
classified as:
a) Direct Taxes
b) Indirect taxes
Direct taxes are those taxes ,the burden of which can
not
be shifted to others Example: Income tax
Indirect taxes are those taxes which can be shifted to
others. Example: GST(Goods and Services Tax)
Prior to liberalisation, tax structure in the country has
been highly complex and evasive.
Now tax structure has been simplified and
moderated
under fiscal reforms.
11. ECONOMIC REFORMS
UNDER LIBERALISATION
4. External sector reforms include:
1. Foreign exchange reforms and
2. Foreign trade policy reforms
Foreign exchange reforms were initiated in 1991 with
devaluation of the Indian currency against foreign
currencies. Devaluation implies lowering the value of our
currency in relation to other foreign currencies. This
Devaluation increased the supply of foreign currency into
the Indian economy by way of higher exports of the
domestic goods and services.
Foreign Trade Policy underwent a substantial change in
the wake of liberalisation. Tariff restrictions have been
moderated and competition replaced protection of
industries.
12. PRIVATISATION
Privatisation is the process of involving the
private sector in the ownership or
operation of state owned enterprise. It
implies gradual withdrawal of
government ownership / managements
from the public sector enterprises. It may
happen in two ways 1. Out right sale of
the government enterprises to the private
entrepreneurs or 2. Withdrawal of the
government ownership and
managements from the mixed
enterprises.
13.
14. GLOBALISATION
Globalisation refers to the integration of the
economy of the nation with the global
economy. During globalization, the emphasis
is placed on foreign trade and private and
institutional foreign investment. It was the final
LPG policy to be implemented in India.
Having said that, globalization as a term is a
very complicated phenomenon. The main
objective is to transform the world into an
independent and integrated world by
defining various strategic policies.
Globalisation tries to create a world without
borders, where the needs of a country can
come from all over the world and become a
great economy.
15. BENEFITS OF
GLOBALISATION
• The biggest advantage of globalisation and its
outcome outsourcing is that large multinational
corporations or even small businesses can benefit
from good services at a lower rate than their country’s
standards.
• The skill set and the availability of the human resource
capital in abundance in India is regarded as the most
dynamic and effective throughout the world.
• The professionals in India are the best at what they
do.
• The low wage rate and highly skilled personnel have
made India the most favourable global outsourcing
destination in the subsequent phase of the reform.
• It has helped in the growth and development of the
tertiary sector of the economy and creation of more
jobs and employment for the people.
16. POLICIES PROMOTING
GLOBALISATION
• Increase in the equity limit for
foreign investments
• Partial convertibility
• Long-term business and trade
policy
• Reduction of tariffs
17. AN APPRAISAL OF
LPG POLICIES
1. Increase in
foreign
investment.
2. Increase in
foreign
exchange
reserves.
3. A check of
inflation.
4. Increase in
national income.
5. Increase in
exports.
6. Consumer
sovereignty.
18. NEGATIVE IMPACT OF
LPG POLICIES
1. Neglect of
agriculture.
2. Jobless
growth.
3. Increase
income
inequalities.
4. Adverse effect
of disinvestment
policy.
5. Spread of
consumerism.
6. Cultural
erosion.
7. Encourages
economic
colonialism
