Download New Economic Policy

Introduction :
Before 1991, economic development of the country was due
to the public sector. But it is realized that public sector was
insufficient due to red- tapism, bureaucratic, lack of initiative
etc. which result into economic crises.
In July 1991, New economic policy was announced to get the
country out of the crises. In this policy main emphasis was on
the liberalization, privatization & globalization.
New economic policy refers to various policy measures &
changes undertaken since 1991 to increase productivity &
growth of economy.
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Very low foreign exchange reserve i.e. only
Rs. 2400 crore which was just sufficient to
buy from abroad only three weeks
requirements.
Increased borrowings resulting in increased
national debt.
Price rise.
Gulf crisis.
1.
Liberalization
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Liberalization means reducing unnecessary restriction &
control, procedural simplification, relaxing trade & from
bureaucratic hurdles. New economic policy make following
changes through liberalization :
a) Necessary licensing has been abolished expect 8 industries.
b) MRTP act has been abolished.
c) No requirement of approval for expand of business &
production.
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d) Increase in investment limit for small scale industry.
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e) Liberalization of import & export transaction.
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f) Liberalization in Taxation policy
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Privatization means allowing private sector to set up
industry in the sector which are earlier reserved for
public sector. The existing enterprises of private sector
are partially or fully sold to private sector. Following
measure are adopted through privatization :
Reducing nos. of industries reserved for public sector
from 17 to 8.
b) Public sector share are sold to foreign investor,
mutual funds etc.
c) Sick industries cases are forward to Board of industrial
& financial reconstruction.
a)
Globalization means linking the economy of the country
with the global economy by free trade, free mobility of
capital & goods etc. it also means inviting multinational
corporation to invest in India. Measure adopted through
globalization are as follows:
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Increasing the limit for the foreign investment
Foreign trade policy was imposed for the 5 years.
Reduction in custom duty on import & export.
To promote export, special facilities has been provided.
Reduction of trade barriers with a view to allowing free
flow of goods to and from the country.
Fiscal reforms means increasing the revenue
receipts & reducing the public expenditure of the
govt. the main aim was to reduce the fiscal
deficit which stood at 8.5% of GDP in 1991.
Measure adopted are as follows:a)
b)
c)
d)
Simplification of taxation system.
Shares of public enterprises are sold.
Subsidies are cut off.
Control over public enterprises.
Financial reforms relate to reform in country’s
monetary & banking system. Following reforms were
introduced :
Reduction in SLR from 38.5% to 23%.
Reduction in CRR from 14% in 1993 to 4 % in 2007.
Free determination of interest rates by banks
independently, but within certain limits.
d) Relaxed conditions on borrowing from oversea
market by banks.
e) Introducing capital market reforms.
f) Liberal treatment to foreign banks.
a)
b)
c)
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Positive Aspects:
Fulfilled a long-felt demand of the corporate sector for declaring in
very clear terms that licensing was abolished for all industries
except 8 industries which included coal, petroleum, sugar, motor
cars, cigarettes, hazardous, chemicals, pharmaceuticals and some
luxury items
Business houses intending to float new companies or undertake
substantial expansion were not required to seek clearance from
the MRTP Commission
Bottlenecks created by the bureaucracy were struck down by this
singular decision of the Government
Private investment in important areas has increased.
Overall relief in the dismantling of industrial licensing and regime
of controls
Technology upgradation
Foreign capital
Negative Aspects:
Neglected agricultural
Dependence on foreign technology
foreign capital led to complete surrender of economy
to foreign bodies.
 Prudence demanded that utmost care to be taken to
invite foreign capital in high priority industries only
 Monitoring of payment of dividends by RBI
 Public Sector Policy: The govt. should concentrate on
improving the performance of the redeemable and
surplus generating public sector enterprises which
constitute 85% of the investment.
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Component of New Economic Policy
1.
2.
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4.
New industrial policy of 1991
New foreign trade policy
New fiscal policy
New monetary policy
New Foreign Policy
The objective of this policy is to liberalize the foreign trade from
various restrictions. Following provision has been taken
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Investment limit for foreign investment has been increased.
Procedure for foreign trade are simplified.
Special economic zones are set up to promote export.
Custom duties & traffic are lowered.
Import of technology is increased.
New Fiscal Policy
New Economic policy has introduced various fiscal reforms to
control inflation & public expenditure etc. following are taken :
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Reduction of subsidies.
Reduction in dependence on external borrowing.
To decrease non plan expenditure.
To improve the basis infrastructure in economy.
To disinvest in loss making public sector undertaking.
To increase the tax revenue of the govt.
New Monetary Policy
Monetary policy refers to steps taken to regulate the cost &
supply of money & credit to achieve socio economy objective of
the economy. Monetary policy influence the supply of money,
cost of the money & availability of money. Following measure has
been taken
1. Reduction in SLR & CRR.
2. Reconstruction of banking system.
3. Liberal treatment to foreign banks.
Government’s fiscal deficit, having fallen from 6.6%
of GDP in 1990-91 to a low of 4.1% in 1996
 cost cutting, product quality improvement, product
or design change, organizational change
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Reforms have led to attempts of simplifying
and reducing the tax burden
alleviation of the bureaucratic burdens