New Economic Policy of 1991_CSE Exam.pptx

New Economic Policy

1. Introduction New Economic Policy of India was launched in the year 1991 under the leadership of P. V. Narasimha Rao . This policy opened the door of the India Economy for the global exposure for the first time . New Economic Policy refers to economic liberalisation or relaxation in the import tariffs, deregulation of markets or opening the markets for private and foreign players. 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.

2. Factors which lead to 1991 Economic Reforms Rise in Prices: The inflation rate increased from 6.7% to 16.7% due to rapid increase in money supply and the country’s economic position became worse. Rise in Fiscal Deficit: Due to increase in non-development expenditure fiscal deficit of the government increased. Due to rise in fiscal deficit there was a rise in public debt and interest. In 1991 interest liability became 36.4% of total government expenditure. Increase in Adverse Balance of Payments: In 1980-81 it was Rs . 2214 crore and rose in 1990- 91 to Rs . 17,367 crores . To cover this deficit large amount of foreign loans had to be obtained and the interest payment got increased. Gulf war crisis: In 1990-91, war in Iraq broke, which led to a rise in oil prices. Disintegration of the Soviet Union led to believe that more socialism could not be the solution for India’s ills.

3. Objectives of New Economic Policy 1991 Integrate the economy with the world. Accelerate the pace of economic growth and create enough foreign exchange reserves to withstand any BOP crisis Stabilise the economy and convert the economy into a market driven economy by the removal of barriers to trade Facilitate and encourage international flow of goods, capital, services, technology, human resources, etc. Increase the participation of private players in all sectors of the economy.

4. Liberalization 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 . Compulsory Industries licensing is necessary for following industries : Liquor Cigarette Defence equipment Industrial explosives Drugs Hazardous chemicals

5. Privatisation P rivatization  allowing 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. In other words, privatization is the process of involving the private sector-in the ownership of Public Sector Units. Presently, Number of Industries reserved for public sector is two: Atomic energy Railway Transport

6. Globalization Globalization  integration of the economy with the whole world. It facilitates the interaction of the domestic economy with the rest of the world with regard to foreign investment, trade, production and financial matters . Globalization is a phenomenon driven by technology and the movement of ideas, people, and goods . Thomas L. Friedman in his book, “The World is Flat” has stressed the role of globalisation in terms of trade, outsourcing, supply-chains and political forces which have made lasting impacts on the world and have changed it for good or bad. .

7. Generations of Economic Reforms First Generation reforms (1991–2000 ) ( i ) Promotion to Private Sector This included various important and liberalising policy decisions, i.e., ‘de-reservation’ and ‘ delicencing ’ of the industries, abolition of the MRTP limit, abolition of the compulsion of the phased-production and conversion of loans into shares, simplifying environmental laws for the establishment of industries, etc. ( ii) Public Sector Reforms The steps taken to make the public sector undertakings profitable and efficient, their disinvestment (token), their corporatization, etc., were the major parts of it .

8. (iii) External Sector Reforms They consisted of policies like, abolishing quantitative restrictions on import, switching to the floating exchange rate, full current account convertibility, reforms in the capital account, permission to foreign investment (direct as well as indirect), promulgation of a liberal Foreign Exchange Management Act (the FEMA replacing the FERA), etc. ( iv) Financial Sector Reforms Several reform initiatives were taken up in areas such as banking, capital market, insurance, mutual funds, etc.

9. (v) Tax Reforms This consisted of all the policy initiatives directed towards simplifying, broadbasing , modernising , checking evasion etc. A major re-direction was ensued by this generation of reforms in the economy—the ‘command’ type of the economy moved strongly towards a market-driven economy, private sector (domestic as well as foreign) to have greater participation in the future.

10. Second Generation reforms (2000–01 onwards) ( i ) Factor Market Reforms Considered as the ‘backbone’ for the success of the reform process in India, it consists of dismantling of the Administered Price Mechanism (APM). There were many products in the economy whose prices were fixed /regulated by the government, viz., petroleum, sugar, fertilizers, drugs, etc. Cutting down subsidies on essential goods is a socio-political question in India. Till market-based purchasing power is not delivered to all the consumers, it would not be possible to complete the FMRs .

11. (ii)  Public Sector Reforms The second generation of reforms in the public sector especially emphasizes on areas like greater functional autonomy, freer leverage to the capital market, international tie-ups and Greenfield ventures, disinvestment. ( iii)  Reforms in Government and Public Institutions This involves all those moves which really go to convert the role of the government from the ‘controller’ to the ‘facilitator’ or the administrative reform, as it may be called.

12. iv ) Legal Sector Reforms Though reforms in the legal sector were started in the first generation itself, now it was to be deepened and newer areas were to be included, such as, abolishing outdated and contradictory laws, reforms in the Indian Penal Code (IPC) and Code of Criminal Procedure ( CrPC ), Labour Laws, Company Laws and enacting suitable legal provisions for new areas like Cyber Law, etc. (v) Reforms in Critical Areas The second generation reforms also commit to suitable reforms in the infrastructure sector (i.e., power, roads, especially as the telecom sector has been encouraging), agriculture, agricultural extension, education and healthcare, etc. These areas have been called by the government as  ‘critical areas’.

13. Third Generation reforms Announcement of the third generation of reforms were made on the margins of the launching of the Tenth Plan (2002–07). This generation of reforms commits to the cause of a fully functional Panchayati Raj Institution (PRIs), so that the benefits of economic reforms, in general, can reach to the grassroots. Though the constitutional arrangements for a decentralized developmental process were already effected in the early 1990s, it was in the early 2000s that the government gets convinced of the need of ‘inclusive growth and development’. Till the masses are not involved in the process of development, the development will lack the ‘inclusion’ factor; it was concluded by the government of the time .

14. Fourth Generation reforms This is not an official ‘generation’ of reform in India. Basically, in early 2002, some experts coined this generation of reforms which entail a fully ‘information technology-enabled’ They hypothesized a ‘two-way’ connection between the economic reforms and the information technology (IT), with each one reinforcing the other.

15. Outcome of LPG reforms: India’s GDP growth rate increased. During 1990-91 India’s GDP growth rate was only 1.1% but after 1991 reforms India achieved 6-7% average GDP growth rate and now India is the world’s fastest-growing major economy. Since 1991, Budget size grew 19 times, economy 9 times; Per capita income 5.6 times Since 1991, India has firmly established itself as a lucrative foreign investment destination and FDI equity inflows in India in 2019-20 stood at US$ 19.33 billion. In 1991 the unemployment rate was high but after India adopted new LPG policy more employment got generated as new foreign companies came to India and due to liberalisation and Privatisation many new industries started. Per Capita income increased due to an increase in employment.

16. India's share in world exports has increased from 0.6% in 1991 to 1.7% in 2018 but remains paltry compared with China's 12.8%. India's CPI inflation rules at 4 per cent. However, this was not the case in 1990s, when Inflation was in double digits. As suggested above, inflation was as high of 16.7 per cent in August 1991. India had forex reserves of Rs 2,500 crore ($1.1 billion) when the then FM Manmohan Singh delivered his 1991-92 Budget speech. India’s foreign exchange reserves has now crossed the milestone $500 billion mark for the first time in country’s history.

17. IMPACT OF LPG REFORMS ON INDIAN ECONOMY

18. The evolution of the Indian economy since economic reforms in 1991

19. Challenges in the Indian economy at present Indian industry has legitimate complaints about poor infrastructure, poor logistics and time-consuming trade procedures, which reduce its competitiveness. The government’s economic agenda of building a self-reliant India ( Aatmanirbhar Bharat) has meant not only a rise in import tariffs for some goods but also the return of a discretionary incentive system to encourage investment in different sectors of the economy. For instance, The proposed policy for the e-commerce entities has provisions that threaten to reintroduce an inspector raj, banished some years ago from most businesses. The COVID-19 pandemic has of course triggered a collapse in employment .

20. Globalization 4.0 Globalization 4.0 was the theme for World Economic Forum Annual Meeting 2019 held in Davos, Switzerland in January 2019 . Globalization 4.0 is latest stage of globalization which involves cutting-edge new technologies like artificial intelligence that powers forward with the explosion of information technology. These technologies shrink distances, open up borders and minds and bring people all across the globe closer together.

21. Challenges of Globalization 4.0 Globalization 4.0 is latest stage of globalization which involves cutting-edge new technologies like artificial intelligence that powers forward with the explosion of information technology Mixed results: Globalization 4.0 could, like preceding waves of globalization, have mixed results e.g. even though countries are globally connected political crisis and global level conflict have also increased. Income Inequality: Negative effects of globalization have a disproportionate impact on already marginalized populations. Globalization 4.0 may increase income inequality even if it can create more wealth .

22. Demographic disaster: Countries like India, if do not take steps to meet the skill requirements of globalisation 4.0, then it may bring demographic disaster, given its huge population and low employment generation. Unintended consequences: Globalization 4.0 in conjunction with Industry 4.0 will produce many unintended consequences which may not be foreseeable for now and for which world is vastly unprepared the ethical, legal, environmental concerns are yet to be seen for which no framework has been laid out. Infrastructural challenges: Apart from skilling, India also needs to set up required infrastructure and technology to harness the advantages of globalization 4.0.