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.

Need of New Economic Policy

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.

Main feature of new economic policy

1. Liberalization

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. d) Increase in investment limit for small scale industry. e) Liberalization of import & export transaction. f) Liberalization in Taxation policy

Privatization

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 :

a) 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.

Globalization

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:

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

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) Simplification of taxation system.b) Shares of public enterprises are sold.c) Subsidies are cut off.d) Control over public enterprises.

Financial reforms

Financial reforms relate to reform in country’s monetary & banking system. Following reforms were introduced :

a) Reduction in SLR from 38.5% to 23%.b) Reduction in CRR from 14% in 1993 to 4 % in 2007.c) 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.

Evaluation of New Economic Policy - 1991

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

Evaluation of New Economic Policy - 1991

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.

Component of New Economic Policy

1. New industrial policy of 19912. New foreign trade policy3. New fiscal policy4. 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

1. Investment limit for foreign investment has been increased.

2. Procedure for foreign trade are simplified.3. Special economic zones are set up to promote

export.4. Custom duties & traffic are lowered.5. 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 :

1. Reduction of subsidies.2. Reduction in dependence on external borrowing.3. To decrease non plan expenditure.4. To improve the basis infrastructure in economy.5. To disinvest in loss making public sector

undertaking.6. 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.

Aspects of economic reforms and its effects on business

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

Reforms have led to attempts of simplifying and reducing the tax burden

alleviation of the bureaucratic burdens