Why New Economic Policy 1991 Was Needed?

The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy combining features of capitalism and socialism

Resulting in an inward-looking, interventionist policies and import-substituting economy

The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market.

India also operated a system of central planning for the economy, in which firms required licenses to invest and develop.

This model contributed to widespread inefficiencies and corruption, and

the failings of this system were due largely to its poor implementation.

Some Other Problems Faced Were

Economic instability/fiscal deficit. Gulf war/crisis Shortage of foreign exchange reserves. Burden of debt/liquidity crisis. Inefficient industrial growth. Fall in growth rate. Inflationary pressure. Poor performance of financial sector

The process of economic reforms was need of the hour and thus was started by the government of India in 1991 for taking the country out of economic difficulty and speeding up the development of the country.

The main characteristics of new Economic Policy

Delicensing- Only six industries were kept under licensing scheme.

Entry to Private Sector- The role of public sector was limited only to four industries; rest all the

industries were opened for private sector also.

Disinvestment- Disinvestment was carried out in many public sector enterprises.

Liberalisation of Foreign Policy- The limit of foreign equity was raised to 100% in many activities, i.e. NRI

and foreign investors were permitted to invest in Indian companies.

Liberalisation in Technical Area- Automatic permission was given to Indian companies for signing

technology agreements with foreign companies.

Contd.

Setting up of Foreign Investment Promotion Board (FIPB)-

This board was set up to promote and bring foreign investment in India.

Promoting the Small Scale Industries-

Various benefits were offered to small scale industries Entry of new private and foreign banks. SEBI was made the statutory body

Components of New Economic Policy

There are 3 major components of economic policy

1. Liberalization

2.Privatization

3.Globalization

Liberalization

Liberalisation refers to end of licence, quota and many more

restrictions and controls which were put on industries before 1991. Indian companies got liberalisation in the following way:

1. Except the six industries , all other kinds of industrial license were abolished.

2. No restriction on expansion or contraction of business activities.3. Freedom in fixing prices.4. Liberalisation in import and export.5. Easy and simplifying the procedure to attract foreign capital in

India.6. Freedom in movement of goods and services

Liberalization

7. Freedom in fixing the prices of goods and services.

8. Emphasis to be on controlling and regulating monopolistic, restrictive and unfair trade practices

9. Need for achieving economies of scale for ensuring higher productivity and competitive advantage in the international market, the interference of the government through the MRTP Act was restricted

Privatization

Privatisation refers to giving greater role to private sector and reducing the role of public sector.

To execute policy of privatisation government took the following steps:

1. Disinvestment of public sector i.e. transfer of public sector enterprise to private sector

2. Setting up of Board of Industrial and Financial Reconstruction (BIFR).

This board was set up to revive sick units in public sector enterprises suffering loss.

3. Dilution of Stake of the Government. If in the process of disinvestments private sector acquires more than 51%

shares then it results in transfer of ownership and management to the private sector.

Globalization

It refers to integration of various economies of world.

Till 1991 Indian government was following strict policy in regard to import and foreign investment in regard to licensing of imports, tariff, restrictions, etc.

But after new policy government adopted policy of globalisation by taking following measures:

1. Import Liberalisation. - Government removed many restrictions from import of capital goods.

2. Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act (FEMA).

3. Rationalisation of Tariff structure

4. Abolition of Export duty.

Contd.

5. Reduction of Import duty.

As a result of globalisation physical boundaries and political boundaries remained no barriers for business enterprise. Whole world became a global village.

Impact of Changes in Economic Policy on the Business

Increasing Competition: Because of all round competition companies which could adopt latest technology and which

were having large number of resources could only survive . For example, Weston Company which was a leader in Т. V. market with more than 38% share in

T.V. market lost its control over the market because of all round competition from MNCs.

More Demanding Customers: Prior to new economic policy there were very few industries or production units. Because of product shortage the market was producer-oriented But after new economic policy many more businessmen joined the production line and various

foreign companies also established their production units in India. As a result there was surplus of products in every sector. Which further resulted in buyer

market. The market became customer- oriented and many new schemes were made by companies to

attract the customer. Rapidly Changing Technological Environment: As world class competition started , to stand this global competition the companies needed to

adopt the world class technology. To adopt and implement the world class technology the investment in R & D department was

increased. Many pharmaceutical companies increased their investment in R and D department from 2% to

12% and companies started spending a large amount for training the employees.

Necessity for Change: Prior to 1991 business enterprises could follow stable policies for a long

period of time but after 1991 the business enterprises had to modify their policies and operations from time to time.

Need for Developing Human Resources: Indian enterprises were managed by inadequately trained personnel’s. New market conditions required people with higher competence skill and

training. Hence Indian companies felt the need to develop their human skills.

Market Orientation: Earlier firms were following selling concept, i.e., produce first and then go

to market but now companies started following marketing concept, i.e., planning

production on the basis of market research, need and want of customer.

Loss of Budgetary Support to Public Sector: Prior to 1991 all the losses of Public sector were used to be made

good by government by sanctioning special funds from budgets. But today the public sectors have to survive and grow by utilising

their resources efficiently otherwise these enterprises have to face disinvestment.

Export a Matter of Survival: The Indian businessman was facing global competition and the new

trade policy made the external trade very liberal. As a result to earn more foreign exchange many Indian companies

joined the export business and got lot of success in that For example, the Reliance Company, Videocon, MRF etc. got a great

hold in the export market.

Effect of new economic policy (positive)

Increase in GDP growth rate.Increase in foreign direct investment.Increase in foreign exchange.Increase in per capita incomeIncrease in foreign trade.Increase mobility of factor of productionOutsourcing

Effect of new economic policy (negative)

Growing unemploymentNeglect of agricultureGrowing personal disparitiesInfrastructural inadequaciesWide spread povertyDemonstration effect (luxury goods)Indian small scale industries badly affected

Structural Adjustment Programmes

Structural Adjustment Programmes (SAPs) are economic policies for developing countries that have been promoted by the World Bank and International Monetary Fund (IMF) since the early 1980s by the provision of loans conditional on the adoption of such policies.

They are designed to encourage the structural adjustment of an economy by, for example, removing “excess” government controls and promoting market competition as part of the neo-liberal agenda followed by the Bank.

India, in 1991

In 1991, India faced an unprecedented balance of payments crisis. For almost a decade the government had borrowed heavily to support an economic strategy that relied on expansionary public spending to finance growth. From 1980 to 1991 India's domestic public debt increased steadily, from 36 percent to 56 percent of the GDP, while its external debt more than tripled to $70 billion.

SAP in INDIA

It took a new government, which came to power in June 1991, to launch India's first comprehensive economic policy reform program, which the World Bank supported with a $500 million structural adjustment operation (SAL), approved in December 1991 and closed in December 1993.

To help India address its immediate balance of payments crisis and

To support a broad set of policy reforms aimed at liberalizing the Indian economy and opening it up to more competition both from within and abroad.

Implementation

The government devalued the rupee by 23 percent, raised interest rates, and revised the 1991/92 union budget, making sharp cuts in subsidies and transfers to public enterprises

It abolished the complex system of industrial and import licensing, liberalized trade policy, and introduced measures to strengthen capital markets and institutions.

By 1995, India had moved from a regime in which private investment was not allowed in major economic sectors to one whose openness to foreign investment compares favourably with that of most Asian countries.

Results

After declining in the first year of the reforms, GDP growth resumed to 5 percent in 1993/94 and 6.3 percent in 1994/95

Exports increased almost 12 percent. Most important, there was a surge of foreign investment, which increased almost sevenfold over projections.

References

http://www.preservearticles.com/201107169222/what-are-the-main-features-of-new-economic-policy-of-india.html http://www.yourarticlelibrary.com/economics/the-features-of-new-economic-policy-1991-explained/8646/ http://www.who.int/trade/glossary/story084/en/ http://www.investorwords.com/6501/economic_policy.html

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