You are on page 1of 9

Categories

New Economic Policy of 1991 Objectives, Features and Impacts


Nov 24, 2015 1233 IST
Hemant Pratap Singh
General Knowledge CategoryEconomy, Indian Economy, GK for Exams, Horizon of Indian
Economy, GK for UPSC, GK for State PSC, India An Overview

The year 1991 is an important landmark in the economic history of post-Independent


India. The country went through a severe economic crisis triggered by a serious
Balance of Payments situation. The crisis was converted into an opportunity to
introduce some fundamental changes in the content and approach to economic policy.
The response to the crisis was to put in place a set of policies aimed at
stabilisation and structural reform. While the stabilisation policies were aimed at
correcting the weaknesses that had developed on the fiscal and the Balance of
Payments fronts, the structural reforms sought to remove the rigidities that had
entered into the various segments of the Indian economy.

Main Objectives of New Economic Policy � 1991

The main objectives behind the launching of the New Economic policy (NEP) in 1991
by the union finance minister Dr. Manmohan Singh are stated as follows

1. The main objective was to plunge Indian economy in to the arena of


�Globalization and to give it a new thrust on market orientation.

2. The NEP intended to bring down the rate of inflation and to remove imbalances in
payment.

3. It intended to move towards higher economic growth rate and to build sufficient
foreign exchange reserves.

4. It wanted to achieve economic stabilization and to convert the economic in to a


market economy by removing all kinds of unnecessary restrictions.

4. It wanted to permit the international flow of goods, services, capital, human


resources and technology, without many restrictions.

5. It wanted to increase the participation of private players in the all sectors of


the economy. That is why the reserved numbers of sectors for government were
reduced to 3 as of now.

Beginning with mid-1991, the govt. has made some radical changes in its policies
bearing on trade, foreign investment exchange rate, industry, fiscal discipline
etc. The various elements, when put together, constitute an economic policy which
marks a big departure from what has gone before.

The thrust of the New Economic Policy has been towards creating a more competitive
environment in the economy as a means to improving the productivity and efficiency
of the system. This was to be achieved by removing the barriers to entry and the
restrictions on the growth of firms.

Main Measures Adopted in the New Economic Policy

Due to various controls, the economy became defective. The entrepreneurs were
unwilling to establish new industries (laws like MRTP Act 1969 de-motivated
entrepreneurs). Corruption, undue delays and inefficiency rose due to these
controls. Rate of economic growth of the economy came down. Economic reforms were
introduced to reduce the restrictions imposed on the economy.
Following steps are taken under the Liberaliation measure

(i) Free determination of interest rate by the commercial Banka

Under the policy of liberalisation interest rate of the banking system will not be
determined by RBI rather all commercial Banks are independent to determine the rate
of interest.

(ii) Increase in the investment limit for the Small Scale Industries (SSIs)

Investment limit of the small scale industries has been raised to Rs. 1 crore. So
these companies can upgrade their machinery and improve their efficiency.

(iii) Freedom to import capital goods

Indian industries will be free to buy machines and raw materials from foreign
countries to do their holistic development.

(v) Freedom for expansion and production to Industries

In this new liberalized era now the Industries are free to diversify their
production capacities and reduce the cost of production. Earlier government used to
fix the maximum limit of production capacity. No industry could produce beyond that
limit. Now the industries are free to decide their production by their own on the
basis of the requirement of the markets.

(vi) Abolition of Restrictive Trade Practices

According to Monopolies and Restrictive Trade Practices (MRTP) Act 1969, all those
companies having assets worth Rs. 100 crore or more were called MRTP firms and were
subjected to several restrictions. Now these firms have not to obtain prior
approval of the Govt. for taking investment decision.

1. Liberalisation

Removal of Industrial Licensing and Registration

Previously private sector had to obtain license from Govt. for starting a new
venture. In this policy private sector has been freed from licensing and other
restrictions.

Industries licensing is necessary for following industries

(i) Liquor

(ii) Cigarette

(iii) Defence equipment

(iv) Industrial explosives

(v) Drugs

(vi) Hazardous chemicals.

2. Privatisation

Simply speaking, privatisation means permitting the private sector to set up


industries which were previously reserved for the public sector. Under this policy
many PSU�s were sold to private sector. Literally speaking, privatisation is the
process of involving the private sector-in the ownership of Public Sector Units
(PSU�s).

The main reason for privatisation was in currency of PSU�s are running in losses
due to political interference. The managers cannot work independently. Production
capacity remained under-utilized. To increase competition and efficiency
privatisation of PSUs was inevitable

Step taken for Privatisation

The following steps are taken for privatisation

1. Sale of shares

Indian Govt. has been selling shares of PSU�s to public and financial institution
e.g. Govt. sold shares of Maruti Udyog Ltd. This was the private sector will
acquire ownership of these PSU�s. The share of private sector has increased from
45% to 55%.

2. Disinvestment in PSU�s

The Govt. has started the process of disinvestment in those PSU�s which had been
running into loss. It means that Govt. has been selling out these industries to
private sector. Govt. has sold enterprises worth Rs. 30,000 crores to the private
sector.

3. Minimisation of Public Sector

Previously Public sector was given the importance with a view to help in
industralisation and removal of poverty. But these PSU�s could not able to achieve
this objective and policy of contraction of PSU�s was followed under new economic
reforms. Number of industries reserved for public sector was reduces from 17 to 3.

(a) Transport and railway

(b) Mining of atomic minerals

(c) Atomic energy

4. Globalization

Literally speaking Globalisation means to make Global or worldwide, otherwise


taking into consideration the whole world. Broadly speaking, Globalisation means
the interaction of the domestic economy with the rest of the world with regard to
foreign investment, trade, production and financial matters.

Steps taken for Globalisation

Following steps are taken for Globalisation

(i) Reduction in tariffs

Custom duties and tariffs imposed on imports and exports are reduced gradually just
to make India economy attractive to the global investors.

(ii) Long term Trade Policy

Forcing trade policy was enforced for longer duration.


Main features of the policy are

(a) Liberal policy

(b) All controls on foreign trade have been removed

(c) Open competition has been encouraged.

(iii) Partial Convertibility

Partial convertibility can be defined as to convert Indian currency (up to specific


extent) in the currency of other countries. So that the flow of foreign investment
in terms of Foreign Institutional Investment (FII) and foreign Direct Investment
(FDI).

This convertibility stood valid for following transaction

(a) Remittances to meet family expenses

(b) Payment of interest

(c) Import and export of goods and services.

(iv) Increase in Equity Limit of Foreign Investment

Equity limit of foreign capital investment has been raised from 40% to 100%
percent. In 47 high priority industries foreign direct investment (FDI) to the
extent of 100% will be allowed without any restriction. In this regard Foreign
Exchange Management Act (FEMA) will be enforced.

If the Indian economy is shining at the world map currently, its sole attribution
goes to the implementation of the new economic policy in 1991.

=======

7 Features of New Economic Policies of India


Article shared by

Here we detail about the seven important features of new economic policies under
economic reforms, i.e., (1) Liberalisation, (2) Privatisation, (3) Globalisation of
the Economy, (4) New Public Sector Policy, (5) Modernisation, (6) Financial
Reforms, and (7) Fiscal Reforms.
1. Liberalisation:

The new economic policy has made provision for liberalizing the economy against
unnecessary controls and regulations. Here the liberalisation simply indicates
liberating the trade and industry from unwanted restrictions. In order to
liberalise the economy and to bring transparency in the policy, the New Industrial
Policy, 1991 has abolished the system of industrial licensing for all industrial
undertaking, irrespective of the level of investment, except for a short list of 18
industries related to security and strategic concern, social reasons, hazardous
chemicals and overriding environmental concerns and items of elitist consumption.

The New Industrial Policy has liberalized the industries in the following manner:

(i) All other industries, excepting 18 industries, are delicensed and allowed to
set up and sell shares without any restriction;

ADVERTISEMENTS:

(ii) Industries are allowed to expand their capacity freely as per the needs of the
market;

(iii) Producers are allowed to produce any commodity or diversify their output as
per the demand in the market;

(iv) MRTP companies (having investment beyond Rs. 100 crore) are now no longer
required to go for pre-entry of investment decisions and they are now allowed to
expand their size;

(v) In 1996-97, the policy of industrial reforms has enhanced the investment
ceilings in plant and machinery for small scale industries (SSI) and ancillary
units from Rs. 60 lakh and Rs. 75 lakh respectively to Rs. 3 crore and that for the
tiny sector has also been raised from Rs. 5 lakh to Rs. 25 lakh;

ADVERTISEMENTS:

(vi) Industries have been set free to buy foreign exchange from open market and
also to make necessary imports. The aforesaid measures have liberalised the
industries to take prompt decisions so as to raise their efficiency in production
and to face open competition in the market.
2. Privatisation:

Another important feature of New Economic Policy is the promotion of the policy of
privatisation. Here the word privatisation means introduction of private ownership
in publicly owned and managed enterprises and also signifies introduction of
private control and management in public sector enterprises. Under the policy of
economic reforms private sector has been allowed to play a major role in respect of
economic activities.

The privatisation programme of the economic reforms includes:

(i) Reducing the number of industries reserved for the public sector from 17 to 8;

ADVERTISEMENTS:

(ii) Raising the share of private sector to total investment to 55 per cent at the
end of Eighth Plan;

(iii) Selling the government equity holdings of public sector enterprises among the
workers and public for greater participation of private individuals;

(iv) Institutional credit support, to private sector enterprises from the national
financial institutions. Thus this privatisation move is expected to raise the
efficiency and productivity of the private sector.
3. Globalisation of the Economy:

By the term globalisation we mean opening up of the economy for world market by
attaining international competitiveness. Thus the globalisation of the economy
simply indicates interaction of the country relating to production, trading and
financial transactions with the developed industrialised countries of the world.

ADVERTISEMENTS:

Globalisation of the economy offers both challenges and opportunities to the


developing countries. While facing the trend of globalisation, the developing
countries are preparing themselves to face the challenge of international
competitiveness. With the introduction of new economic policy, Indian economy has
accepted the challenge of facing globalisation of the economy.

Globalisation of the Indian economy has made the following changes:

(i) The New Economic Policy (1991) has prepared a specified list of high technology
and high investment priority industries (Annexure III) in which automatic
permission will be available for foreign direct investment up to 51 per cent of
foreign equity.

(ii) In respect of foreign technology agreements, automatic permission is provided


in high priority industry up to a sum of Rs. 1 crore. No permission is now required
for hiring foreign technicians or for testing indigenously developed technology
abroad.

(iii) In order to make international adjustment of Indian currency, rupee was


devalued in July 1991 by nearly 20 per cent which also stimulated exports,
discouraged imports and raised the influx of foreign capital.

(iv) In order to make an inevitable move for the expeditious integration of Indian
economy with that of the world, the Union Budget 1992-93 has made Indian rupee
partially convertible and then the rupee was made fully convertible in 1993-94
budget. Accordingly, in March 1993, the Government introduced a fully unified
market determined exchange rate system.

Thus a major step towards current account convertibility was taken by India in
March 1993 when the foreign exchange budget was abolished, the exchange rate was
unified and transactions on trade account were freed from exchange control. Capital
account convertibility is now being targeted.

(v) A new five year export-import policy, 1992-97 was announced by the Government
on March 31, 1992. The main objectives of the new policy are to establish the
framework of globalisation of India�s foreign trade, to promote productivity,
modernisation and competitiveness of Indian industry and thereby to enhance its
export capabilities and also to simplify and streamline the procedures governing
exports and imports.

The policy removed all restrictions and controls on the external trade and market
forces are allowed to play a greater role in respect of exports and imports. Again
on August 31, 2002, a new Foreign Trade Policy 2004-09 was announced which has
simplified the trade practices further for improving our competitiveness in the
global market.

(vi) In order to bring the Indian economy within the ambit of global competition,
the government has modified the customs duty to a considerable extent. Accordingly,
the peak rate of customs duty has been reduced from 250 per cent to 10.0 per cent
in 2007-2008 budget.

(vii) In order to increase the flow of foreign investment and technology the
Government has taken several measures like:

(a) Granting foreign technical collaborations of high priority industries,

(b) Freedom to import foreign technology by private entrepreneurs and also to test
indigenous technology abroad,

(c) Establishing Foreign Investment Promotion Board (FIPB) for finalizing foreign
investment and collaboration proposals and

(d) Offering concessions to FERA/FEMA companies.

(viii) In order to meet the international competitiveness, the Government has taken
various steps for correcting its balance of payments deficit and also to increase
the share of India in international trade.

Although India is possessing a large domestic market, broad based industrial and
infrastructural sectors, abundant supply of cheap labour, a huge number of educated
and trained manpower and adequate natural resources to attain competitiveness but
the country remains far behind many other Asian countries like Singapore, Malaysia,
Korea, Hong Kong, Indonesia, Taiwan and Thailand. India�s share in the world market
is as poor as 0.6 per cent.

In order to achieve success in the path of globalisation. Indian producers should


improve there competitiveness. This requires attainment of higher growth in
productivity, improved quality products and innovations in products and process
technology. In order to attain international competitiveness, companies will have
to enter into strategic alliances and collaborations in order to bring in state-of-
the-art technology for reducing cost, improve efficiency and to penetrate and
capture global markets with joint efforts.

In this respect, while showing the success of Japanese Companies Kenichi Ohmac
observed, �The Japanese competitive achievement provides hard evidence that a
hallmark of successful strategy is the creation of sustainable competitive
advantage by beating the competition.� Therefore, the competitive spirit should
prevail upon Indian producers so as to earn a respectable place in world markets
for various goods.

Under the present circumstances, a firm must take care to become competitive in an
open global market to face challenges and market opportunities. In this connection,
Peter Drucker has rightly observed, �From now on any country� but also any business
especially a large one� that wants to prosper will have to accept that it is the
world economy that leads and that domestic economic and business policies will
succeed only if they strengthen, or at least trade partners as they have better
competitive capacity than the poorer countries.�

In this connection Mr. George Soros observed that the benefit of globalisation are
unevenly distributed. Capital being more mobile, is in a better position to benefit
than labour. Within capital, it is the international portfolio investors who
benefit the most as they have the greatest flexibility.
4. New Public Sector Policy:

Another important feature of new economic policy is its change in public sector
policy. The new policy has shifted its emphasis from public to private sector.

The Industrial Policy has undertaken the following four major policy decisions in
respect of public sector:

(i) Reduction in the list of industries reserved for the public sector from 17 to 8
and introducing selective competition in the reserved areas.

(ii) Disinvestment of shares in PSEs to raise resources and encourage wider


participation of general public and workers in the ownership of PSEs.

(iii) Policy for sick PSEs be designed at par with that of the private sector. Sick
PSEs which are unlikely to turn around will be referred to BIFR for formulation of
revival schemes.
(iv) Improving performance through the performance contract or Memorandum of
Understanding (MOU) system by which Managements are to be granted greater autonomy
and held accountable for results.
5. Modernisation:

The New Economic Policy has been providing high priority to the introduction of
modern techniques in production system. The policy facilitates the growth of
sunrise industries, i.e. electronics and computers. In order to introduce better
and improved technology, the government is permitting all foreign collaboration
proposals related to the import of high technology.

The 1999-2000 Budget also made special provision of tax initiatives to facilitate
corporate mergers and collaborations to face the new challenges ahead. Private
entrepreneurs are now free to finalise the terms of such collaborations in their
own term. Development of indigenous technology is also being encouraged. Private
companies are also encouraged to develop their own Research and Development (R&D)
centres through tax concessions.

Steps have also been taken for the modernisation of the age-old steel, textile,
jute, sugar, leather industries having rich potential. This is important for
attaining self reliance and also for cost reduction and the production of high
quality goods required for both internal consumption and exports. Steps have also
been taken for the revival and modernisation of sick industrial units established
both under public and private sectors.
6. Financial Reforms:

As per the recommendations of the Narasimham Committee the Government has


undertaken various measures for the reform of the financial sector.

These include:

(i) Reduction in liquidity ratio,

(ii) Abolition of direct credit programmes,

(iii) Free determination of interest rates,

(iv) Necessary improvement in the banking accounting system,

(v) Making provision for Non-performing assets (NPAs),

(vi) Establishing speedy recovery of loans by special tribunals,

(vii) Reconstitution of banking system for the establishment of a few banks of


international standard, national banks, local banks, rural banks, private sector
banks etc.,

(viii) Liberal treatment to foreign banks;

(ix) Abolition of branch licensing system,

(x) Giving more freedom to banks and ending dual control of RBI and Finance
Ministry, and

(xi) Reform of the financial institutions consisting financing companies, merchant


banks, mutual funds etc. and

(xii) Introducing capital market reforms.


7. Fiscal Reforms:

Another important feature of New Economic Policy is to introduce fiscal policy


reforms. The Government initiated various fiscal measures in order to reduce the
fiscal deficit from 8.4 per cent of GDP in 1990-91 to 5.0 per cent in 1996-97 and
then to 4.4 per cent in 1999- 2000.

In order to achieve the target the Government has introduced various controls over
public expenditure and took initiative to raise its both tax and non-tax revenue.
The other measures include imposition of fiscal discipline by both Central and
State Governments, reduction of subsidies, rationalisation of excise and custom
duties rate structure, constituting Expenditure Reforms Commission in 1999-2000
budget, streamlining the working of State and Central public sector enterprises and
withdrawal of budgetary support to these enterprises, rationalisation of tariff
structure of SEBs and user charges of transport corporations, irrigation projects
etc.

You might also like