ECONOMIC REFORMS SINCE 1991

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New Economic Policy was introduced in 1991. This policy basically converted economy from LPQ (Licensing, Permits and Quotas) to LPG (Liberalisation, Privatisation and Globalisation). This policy was adopted with the motive of rapid industrialisation and economic growth of the country.

Need for new Economic Policy:

New economic policy replaced socialistic pattern-based economy with capitalistic ideology-based economy

Disappointing Performance of Public Sector: Public sector was given major role in all development policies in India during 1951-1990. But majority of the public sector enterprises were suffering from huge losses. Many public enterprises were turned into sick units. These were not now assets, but turned into liability on the Government and needed reforms in the working patterns.

Rising Fiscal Deficits: Fiscal deficit is the excess of government expenditure over its revenue in an accounting year. Rising Fiscal Deficit symbolizes weak financial status of an economy. In India, fiscal deficits shoot up from 5.4 percent of GDP in 1981-82 to 8.4 percent of GDP in 1990 91. It was the result of over expenditure on non-development projects by the government. It led to inflation in the economy causing expensive living for people and costly production. Government got into debt trap, further worsening the economic situations.

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Balance of Payment (BOP) Deficit: BOP is the gap between total receipts for exports and total payments for imports of a country with rest of the world. BOP has two components: Current Account and Capital Account. Mostly current account deficits are met with borrowings. However, in India due to low exports and high imports BOP was extremely unfavourable. It was 2,214 crores in 1980-81, which increased to 17,367 crores in 1990-91. This resulted in huge foreign debts and hence depletion of foreign exchange reserves.

Gulf Crisis: Due to Iraq war 1990-91 prices of crude oil increased rapidly, resulting in huge oil import bill. India was receiving remittances from gulf countries in foreign exchange, which stopped during crisis. This affected India adversely and worsened the BOP situation further.

Decreased Foreign Exchange Reserves: To pay import bills maintaince of foreign exchange reserves is of extreme importance. However, in 1990-91, these reserves were too low to pay only 10 days import bill. So, to meet requirements government mortgaged gold reserves with International Monetary Fund (IMF) and World Bank. Then these financial institutions advised India to resort to policy of structural Adjustment programmes (SAP) to deal with the crisis.

Inflation: Inflation was another problem which was important to be dealt with. Due to huge deficits, government resorted to deficit financing. This resulted increase in money supply, which triggered price rise. Inflation not only increased domestic production cost, but also hampered the domestic and foreign demand for Indian products.

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CHARACTERISTICS OF NEW ECONOMIC POLICY 1991:

To overcome the financial crisis, India agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy (NEP) in 1991. The NEP consisted of wide-ranging economic reforms. The thrust of the policies was towards creating a more competitive environment in the economy and removing the barriers to entry and growth of firms. This set of policies can broadly be classified into two groups: the Stabilisation Measures and Structural Reform Measures.

Stabalisation measures are short term measures, intended to correct some of the weaknesses that have developed in the balance of payments (BOP) and to bring inflation under control. Simply, these measures aimed at need to maintain sufficient foreign exchange reserves and keep inflation under control.

Structural reform measures are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy The Government initiated a variety of policies which fall under three heads viz. Liberalisation, Privatisation and Globalisation (LPG). New Economic Policy was formulated and implemented by then Finance Minister Dr. Manmohan Singh on July 24, 1991.

LIBERALISATION:

Liberalisation aimed at the freedom from restrictions imposed by the Government. Many kinds of restrictions like licensing policy, checks on price, controls on foreign exchange etc. were imposed in Indian economy. Although these controls were imposed to improve the efficiency of the economy, but they adversely affected Indian economy. These restrictions increased corruption in the system, inefficiency, higher cost of production and unnecessary delays etc. To get rid of these limitations Government put an end to these restrictions and opened up various sectors of the economy, so that economy can grow rapidly without any hurdle.

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PRIVATISATION

The board meaning of privatization in economics includes private investment in industries reserved for public sector and ownership transition from government to private sector. This de nationalization can be partial or complete. Government companies can be converted to private companies in three ways as shown in following chart:

• Delegation refers to the ownership of enterprises by government, but management by private sector.

• Disinvestment refers to the sale of a part or whole enterprise of public sector to private sector.

• Displacement means that private sector will displace public sector entering to the market, competing with public enterprises and outperforming them.

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NEED FOR PRIVATISATION

Public sector was suffering from long term losses due to the increased inefficiency and mismanagement. Many factors were responsible for its inefficiency like, political interference in decisions of public sector enterprise. So, decisions were taken keeping in mind the political interest. not economic interest. Moreover, in public sector performance of a company was not associated with the income of managers. So, they took least interest in improving efficiency of the enterprises, Whereas, in private sector incomes of officials and performance of company are inter related, leading to higher level of efficiency in the company. Also, private sector gives competition to public sector, pushing efficiency and performance. It also benefits consumers.

INITIATIVES TAKEN FOR PRIVATISATION

Government has adopted following measures for privatization:

1. Sale of Share of Public Sector Undertakings (PSUS): Government has started selling shares of its enterprises to public and financial institutions, resulting in partial ownership by private sector over these enterprises. For instance, shares of Maruti Udyog Ltd. has been sold by government. Share of private sector in total investment has been increased from 45% to 55%.

2. Minimised Role of Public Sector: Although public sector was given great importance in industrialisation, but it failed to achieve objectives of economic growth, industrialisation, poverty alleviation etc. So new economic policy contracted the role of this sector by reducing the number of industries reserved for public sector from 17 to 8. Gradually this number reduced to 2 (atomic energy and railways). However, now only one industry atomic energy is reserved for public sector.

3. Disinvestment: Disinvestment in public sector undertakings is another initiative towards privatisation. It refers to the sale of industries under public sector to private sector, transferring ownership and management of these from public to private sector. The purpose of this is mainly to improve financial discipline and facilitate modernisation.

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GLOBALISATION

Globalization implies the integration of economy of the country with the international economy by the way of the free trade, capital flows, foreign direct investment and migration. Globalisation involves creation of networks and activities transcending economic, social and geographical boundaries. It is turning the world into one whole or creating a borderless world. This allowed free flow of technology from other developed economies to India. Now international trade is unrestricted and all these helped Indian economy to grow faster.

INITIATIVE TAKEN FOR GLOBALISATION

Following are the initiatives taken for Globalization in India:

Partial Convertible Currency: To facilitate foreign trade. Indian currency was made partially convertible. Partial convertibility refers to the freedom to convert domestic currency into foreign currency and vice-versa for restricted purpose. It allowed easy foreign transactions. However, the rate of foreign exchange was determined by the market. Currency was convertible in case of:

(i) Export and import of goods and services.

(ii) Interest payment.

(iii) Foreign remittances.

Foreign Direct Investment: Under this policy the limit of Foreign Direct Investment (FDI) was increased from 40 % to 100 %. Under this policy FDI was allowed to 100% in 47 significant industries without any restrictions. FERA (Foreign Exchange Regulation Act) was changed into FEMA (Foreign Exchange Management Act) which facilitated foreign trade.

Trade Policy: New economic policy introduced liberal trade policy for long term. Free and unrestricted trade was promoted. Efforts were made to minimise administrative controls. Except some specific goods, all other goods could be imported or exported without any restrictions.

Tariff Rates: To enhance global trade, tariff rates were reduced, which affected Indian economy favourably.

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Outsourcing: Outsourcing is one of the important outcomes of the globalisation process. In outsourcing, a company hires regular service from external source, mostly from the countries, which was previously provided or form within in the country (like legal advice, computer service, advertisement, security). The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post reform period.

Distinction between Liberalisation and Privatisation is described as below:

Liberalisation	Privatisation
1. Liberalisation means freedom from restrictions, non-interference of state in economic activities.	Privatisation means freedom of ownership of assets and business.
2. Liberalisation makes the business free from rules, procedures and instructions.	Privatisation promotes personal control and management over the business.
3. Liberalisation widens the scope of business	Privatisation restricts the management of business in few hands

Distinction between Liberalisation and Globalisation is described as below:

Liberalisation	Privatisation
1. Liberalisation means freedom of restrictions and non-interference of government	Globalisation means to link an economy with the world economy
2. Liberalisation of economy is generally limited to National Level.	Globalisation refers to internationalisation of trade
3. Liberalisation refers to freedom of trade, agriculture industry or activities of financial institutions.	Globalisation is always referred with the economy as a whole.

EVALUATION OF NEW ECONOMIC POLICY (NEP)

New economic policy had both favourable and unfavourable impacts on the Indian economy.

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1 FAVOURABLE IMPACTS OF NEW ECONOMIC POLICY

Following facts prove the positive impacts of new economic policy:

(i) Rapid Economic Growth: NEP has improved the growth rates of gross domestic product and per capita income a lot. These rates were extremely low earlier. But effective implementation of new economic policy increased GDP and per capita income from 3.6 % and 1.4 % per annum to 6.5 % and 4.3% per annum respectively during 1981-2002. The GDP growth further increased to 8.2 percent during 2007-2012. India’s growth has shown rising trends during the reforms period. The service sector has shown tremendous growth of 10% from 2007-2017.

(ii) Lower Fiscal Deficits: Before 1991 industrial policy, fiscal and budgetary deficits were too high, for which increased amounts of loans were raised by the government. This increased expense of interest payments. But new economic policy has reduced these deficits a lot. Fiscal deficit in 2016-17 were 3.5 % of GDP, which came down from 8.5 % of GDP.

(iii) Favourable Impact on Balance of Payments: New economic policy has adopted favourable policies for globalisation, which has increased exports and reduced imports. This has reduced the deficits of balance of payments tremendously. Moreover, reserves of foreign exchange have also increased. India is now seen as a successful exporter of auto parts, engineering goods, IT software and textiles in the reform period. The foreign exchange reserves have also increased from US$6 billion in 1990-91 to about US$ 321 billion in 2014-2015.

(iv) Stimulus to Industrial Sector: LPG policy has improved the status of industrial sector of India in the international market. It has worked as a stimulant to the industrial growth. It has helped it to increase efficiency productivity and improved standards of technology. India IT industry is a great example of its achievements.

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(v) Check on Increasing Prices: Due to LPG policy, free trade of goods and services became possible. This increased the flow of goods and services in the economy resulting in increased supply of goods and services so prices were controlled.

(vi) Foreign Direct Investment: Owing to LPG policy, FDI was substantially increased, which was a matter of relief for Indian government, because on one side, not sufficient surplus was generated to reinvest in India and on the other side, Indian technology was obsolete. So foreign investment was beneficial from both aspects. The FDI and foreign institutional investment (FII) has increased from US$ 100 million in 1990-91 to US$ 73.5 billion in 2014-2015.

2. UNFAVOURABLE IMPACTS OF NEW ECONOMIC POLICY

Following are the unfavourable impacts of New Economic Policy:

(i) Ignored Agriculture: Owing to the more contribution of secondary and tertiary sector to growth of GDP, agriculture sector suffered a neglect. This policy mainly concentrated on the industrial growth. This resulted a fall in growth rate of agricultural sector. However, this will be a big loss to industries in further as both sectors are inter related.

(ii) Lop-sided Growth: New economic policy has undoubtedly accelerated economic growth but it did not embraced all the sectors. This basically relied on IT sector. So, this cannot be an inclusive growth, rather it was lop-sided and entirely ignored the primary sector. Scholars point out that the reform led growth has not generated sufficient employment opportunities in the country.

(iii) Spread of Consumerism: LPG policy spread MNCs in India, resulting in variety of brands in the Indian market. So, consumers got attracted towards new products and extravagancy increased. Although this is beneficial for the growth of market, but adversely affects households, as they spent more than their means.

(iv) Increased Dependency on Foreign Technology: Foreign direct investment brings innovative technologies with it. LPG policy increased be use of foreign technical know-how. This has more adverse effects, like regional imbalance, economic concentration, monopolistic practices, more investments in undesirable sectors etc.

(v) Negatively influenced Domestic Industry: LPG policy increased competition for Indian

industries by allowing free foreign trade. This has adversely affect small industrialists of India. Consumers got attracted towards imported goods which caused a blow to indigenous industry. Cheaper imports have, thus, replaced the demand for domestic goods.

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(vi) Discouraged Public Sector: Economic reforms were adopted for rapid economic growth by minimising the role of public sector and promoting private sector. But public sector is important for social and economic welfare, where private sector concentrates on profits. Critics point out that assets of Public Sector Enterprises have been undervalued and sold to the private sector. This means that there has been a substantial loss to the government. Moreover, proceeds from disinvestment were used to offset the shortage of government revenues rather than using it for the development of PSES and building social infrastructure in the country.

In nutshell, process of globalisation through liberalisation and privatisation polices has mixed outcomes. It has produced both positive as well as negative results for India.

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Table of Contents

ECONOMIC REFORMS SINCE 1991

1. The programme of economic reforms in India was started on 24th July………………

(a) 1991

(b) 1990

(d) 1993

Ans. a

2. Which major reforms in India are adopted in 1991?

(a) Economic

(b) Financial

(d) Monetary

Ans. a

3. Which of the following was the reasons for the start of economic reforms in India?

(a) Mounting fiscal deficit

(b) Gulf crisis

(d) All of these

Ans. d

4. Which situation of India was deteriorated in 1991 when the imports of the country increased an exports decreased?

(a) Balance of Trade

(b) Balance of Payment

(d) Economic equilibrium

Ans. b

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5. Which of the following was not the reason for start of economic reforms in 1991?

(a) Poor performance of PSUS

(b) Fall in foreign exchange reserves

(d) High growth rate of population

Ans. d

6. What are the basic pillars of New Economic Policy?

(a) Liberalisation

(b) Privatisation

(d) All of the above

Ans. d

7. In which sectors, the former finance minister Dr. Manmohan Singh implemented the policy of liberalisation in 1991?

(a) Licensing Trade

(b) Foreign Policy

(d) All of the above

Ans. d

8. Liberalisation implies:

(a) Greater role of public sector

(b) Reduction in governments control over the private sector

(d) None of these

Ans. b

9. The different steps raised under privatisation in India are:

(a) Disinvestment

(b) De-nationalisation

(d) All of the three

Ans. d

10. Which of the following is not a component of privatisation?

(a) Contraction of public sector

(b) Disinvestment in public sector enterprises

(d) Purchases of public sector’s share by the government

Ans. d

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11.Which of the following is an element of financial sector of the economy?

(a) Banking and non-banking financial

(b) Stock exchange market

(d) All of these

Ans. d

12. Globalisation means opening up the economy towards:

(a) Domestic Market

(b) World Market

(d) All of the above

Ans. b

13. What is rising due to foreign direct investment and foreign institutional investment under new economic policy?

(a) Foreign Exchange Reserves

(b) Money Stock

(d) All of the above

Ans. a

14. Which sector of Indian Economy is not given importance in Economic Reforms?

(a) Industry

(b) Services

(d) Trade

Ans. c

15. When did the World Trade Organisation (WTO) established?

(a) 1997

(b) 1995

(d) 1996

Ans. b

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Fill In The Blanks

1. …………………….. an important outcome of globalisation is good for India as it provides employment to large number of unemployed citizens of India.

Outsourcing

2. The World Trade Organisation was founded in ……………………..

1995

3. …………………….. refers to transfer of ownership, management and control of government sector enterprises to the private sector.

Privatisation

4. …………………….. aims at creating a borderless world.

Globalisation

5. ……………………..refers to decrease in the value of domestic currency by the government.

Devaluation

6. BPO means ……………………..

Business Process Outsourcing

7. Government declared …………………….. Public Sector Units as Navaratnas.

9 (Nine)

8. ……………………..implies free interaction among all the countries in various fields like technology trade, outsourcing etc.

Globalisation

9. Selling off part of the equity of Public Sector Units is called ……………………..

Disinvestment

10. Taxes imposed on incomes of individuals are called ……………………..

Direct Taxes

True or False Statements

1. In 1991 foreign exchange reserves were enough to meet the demand.

False

2. A series of economic reforms were introduced to face the big challenge in 1991…

True

3. Iran-Iraq war in 1990-91 was not known as gulf crisis.

False

4. In new industrial policy, Govt. of India exempted almost all the industries from licensing and registration.

True

5. The depreciation of the value of rupee in comparison to other currencies is called devaluation.

True

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6. Three components of new economic policy are:

(i) Liberalisation (ii) Privatisation (iii) Globalisation.

True

ONE WORD TO ONE SENTENCE QUESTIONS ANSWERS

Q. 1. Define economic reforms.

Ans. Economic reforms refer to a set of economic policies directed to achieve improvement in economic efficiency.

Q. 2. What is meant by fiscal deficit?

Ans. Fiscal deficit refers to borrowing by the government owing to the excess of its expenditure over receipts during a year.

Q.3. What do you mean by fiscal reforms?

Ans. Fiscal reforms relate to revenue and expenditure policy of the government. These reforms focus on tax reforms on the revenue side and fiscal discipline (rationalising government expenditure) on the expenditure side.

Q.4. Define liberalisation.

Ans. Liberalisation of the economy means its freedom from direct or physical controls imposed by the government.

Q. 5. Define privatisation.

Ans. Privatisation is the general process of involving the private sector in the ownership or operation of a state-owned enterprises.

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Q. 6. What do you mean by globalisation?

Ans. Globalisation may be defined as a process associated with increasing openness, growing economic interdependence and deepening economic integration in the world economy.

Q. 7. Define devaluation.

Ans. Devaluation refers to lowering the value of domestic currency in relation to other currencies of the world.

Q. 8. What is disinvestment?

Ans. Disinvestment refers to selling off share capital of PSUs (public sector undertakings) to the private entrepreneurs.

Q. 9. Define Gulf crisis.

Ans. War among the Gulf countries in 1990-91 is known as Gulf crisis.

Q.10. What do you mean by outsourcing?

Ans. In outsourcing a company hiers regular service from external sources from other countries.

ECONOMIC REFORMS SINCE 1991

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