New Economics Policy 1991: Business Economics

New Economics Policy 1991

New Economics Policy 1991

What is liberalisation? Explain different policy measures undertaken to liberalise the Indian economy since 1991

  • Liberalisation refers to reducing government regulations and restrictions for more participation by private sectors.
  • Economic liberalisation is reducing the role of the public sector in a country and to allow private sector companies to operate business transactions with comparatively fewer restrictions.
  • Liberalization refers to the end of license, quota, and many more restrictions and controls which were put on industries before New Economics Policy 1991.
  • The Objectives of liberalization is to increase the economic activities by removing the licensing policy and makes the easy process for an industrial step up, to promote foreign trade i.e. export and import, Exchanging technology and FDI( Foreign Direct Investment), reduce the debt burden, encouraging private sector for an economic development and reduce the role of the public sector.

Different policy measures are undertaken to liberalise the Indian economy since 1991 were:

  1. Industrial reform
  2. Public sector reform and disinvestment
  3. Trade ad capital flows reforms
  4. Financial sector reform

Industrial sector reforms:

The industrial development of the country was due to industrial policy resolution of 1948 and 1956. The government started to liberalize industrial policy measures in 1985. The momentum of industrial sector reforms increased with the announcement of the New Industrial Policy in 1991 (NIP). The important industrial sector reforms introduced in July 1991 the following:

  1. Abolition of industrial licensing: The new policy abolished industrial licensing for all Industries except 18 Industries. At present, there are only five Industries under compulsory licensing. They are alcohol, cigarette, hazardous chemical, electronic Aerospace and defence equipment, and industrial explosive.
  2. Permitted foreign investment and foreign technology: The New New Economics Policy 1991 encouraged direct investment and foreign Technology import in high priority industries. The number of industries eligible for foreign direct investment has been expanded initially FDI was allowed up to 51 percent.
  3. Reduces the role of the public sector: The new policy reduces the number of the industry for the public sector from 17 to 3, at present the industries that are reserved for the public sector at present Are (1) Atomic energy (2) substances notified by (3) Department of Atomic energy and (4) railway transport. Thus core Industries like Iron and Steel, electricity, air, transport, etc., and even strategic Industries like defence production are opened up for the private sector.
  4. Removal of MRTP limit: Under the Monopoly and Restrictive Trade Practices(MRTP) Act large companies with assets of rupees 100 crores and above Were are not allowed to expand their activities without the government’s permission. This restricted the growth expansion and efficiency of such firms. The new policy removed this threshold limit this eliminated the requirement of prior approval of the government for large Industries houses for expansion, the establishment of the new undertaking mergers, takeover, and amalgamation. The MRTP Act is now replaced by the competition Act 2002.

Public sector reforms and disinvestment:

  • The public sector reforms consisted of disinvestment involving the sale of a portion of the government equity in public sector enterprises to the private sector.
  • Since 1991 there have been major changes in the public sector policy in India. Other measures introduced were rising of equity directly by the public sector from the market greater competition from new private Enterprises and giving greater financial and optional autonomy to public Enterprises.
  • It has provided India with a large and diversified industrial base, generated employment, and earned foreign exchange through export and import substitution.

Trade and Capital Flows Reforms:

  1. The government took the following reforms in the external factor to open up the Indian economy to foreign competition and foreign investment:
  2. Liberalisation of Imports helps in free trade by allowing imported input for the domestic market.
  3. Reduction in traffic structure: It means reducing taxes on imported products.
  4. Promotion of Export: Various incentives, tax deductions, and subsidies are provided to exporters in the foreign trade policies of the government.
  5. Liberalized capital inflows: The government has liberalized capital inflows in the form of foreign direct investment(FDI) and foreign portfolio investment FPI (foreign portfolio investors are allowed to invest in all types of securities traded in the primary and secondary market.

Financial Sector Reforms

  1. The financial sector reforms that were introduced by the government in the early 1990s are aimed to make the Indian financial sector strong and transparent. The Indian financial sectors consist of Banking, Insurance, and Capital Market.
  2. Banking sector reform is the entry of new private sector banks, lowering SLR, CRR, Introduction of Prudential Norms, Capital Adequacy Norms, etc.
  3. The capital market is the market where long term funds can be raised through debt and equity. The Capital Market reforms are SEBI as Statutory Body to regulate the Securities market, online trading and dematerialized trading and establishment of NSC.
  4. Reforms in the insurance sector commenced with the passing of the Insurance Regulatory and Development Authority (IRDA) Act of 1999. The IRDA Act ended the monopoly of the government in the insurance sector. This is done by encouraging private investment in the insurance sector. The IRDA give license to the private sector to do insurance business.

What is Privatization? Explain different policy measures undertaken to Privatization the Indian economy since 1991

  1. Privatization implies a reduction in the role of the public sector and increases in the role of the private sector in business and non-business activates. In India, the concept of privatization gained importance, especially in the post-reform period after New Economics Policy 1991.
  2. Disinvestment of the public sector means the transfer of public sector enterprise to the private sector.
    Board of Industrial and Financial Reconstruction (BIFR) board was set up to revive sick units in public sector enterprises suffering a loss.
  3. Navratna Status is given to nine public enterprises based on performance. They are given full financial and managerial freedom to make them global giants.
  4. National Renewal Board is set up to take care of retrenched workers the board also provides compensation to employees who take voluntary retirement.
  5. Reduces the role of the public sector: The new policy reduces the number of the industry for the public sector from 17 to 3, at present the industries that are reserved for the public sector at present Are (1) Atomic energy (2) substances notified by (3) Department of Atomic energy and (4) railway transport. Thus core Industries like Iron and Steel, electricity, air, transport, etc., and even strategic Industries like defence production are opened up for the private sector.
  6. Removal of MRTP limit: Under the Monopoly and Restrictive Trade Practices(MRTP) Act large companies with assets of rupees 100 crores and above Were are not allowed to expand their activities without the government’s permission. This restricted the growth expansion and efficiency of such firms. The new policy removed this threshold limit this eliminated the requirement of prior approval of the government for large Industries houses for expansion, the establishment of the new undertaking mergers, takeover, and amalgamation. The MRTP Act is now replaced by the competition Act 2002.

Trade and Capital Flows Reforms:

  1. The government took the following reforms in the external factor to open up the Indian economy to foreign competition and foreign investment:
  2. Liberalisation of Imports helps in free trade by allowing imported input for the domestic market.
    Reduction in traffic structure: It means reducing taxes on imported products.
  3. Promotion of Export: Various incentives, tax deductions, and subsidies are provided to exporters in the foreign trade policies of the government.
  4. Liberalized capital inflows: The government has liberalized capital inflows in the form of foreign direct investment(FDI) and foreign portfolio investment FPI (foreign portfolio investors are allowed to invest in all types of securities traded in the primary and secondary market.

Financial Sector Reforms

  1. The financial sector reforms that were introduced by the government in the early 1990s are aimed to make the Indian financial sector strong and transparent. The Indian financial sectors consist of Banking, Insurance, and Capital Market.
  2. Banking sector reform is the entry of new private sector banks, lowering SLR, CRR, Introduction of Prudential Norms, Capital Adequacy Norms, etc.
  3. The capital market is the market where long term funds can be raised through debt and equity. The Capital Market reforms are SEBI as Statutory Body to regulate the Securities market, online trading and dematerialized trading and establishment of NSC.
  4. Reforms in the insurance sector commenced with the passing of the Insurance Regulatory and Development Authority (IRDA) Act of 1999. The IRDA Act ended the monopoly of the government in the insurance sector. This is done by encouraging private investment in the insurance sector. The IRDA give license to the private sector to do insurance business.

Write notes on Macroeconomics stabilization

The new government under the Prime Minister of PV Narasimha Rao which assumed office in June 1991 to the following policy measures they relied on a combination of macroeconomics stabilization and structural reforms in Industrial and trade policy together the policy are popularly at LPG policies as they resulted in Liberalisation, Privatisation and Globalisation of the Indian economy.

Macroeconomic stabilization demand management

Thus measures short measured at demand management to return to low and stable inflation and a sustainable fiscal and balance of payment position the measures consisted of the following
  1. Control of inflation
  2. Fiscal correction and
  3. Improvement in the balance of payment

Control of inflation:

  • A combination of policies such as fiscal and monetary policies was undertaken to bring down the high inflation rate, the fiscal deficit was brought down from 7.7% of GDP in 1990-91 to 4.9% in 1995-98.
  • RBI continued with a tight monetary policy aimed at making borrowing costlier by rising bank rates, CRR, and SLR. It was done to reduced the money supply and control inflation. SLR was a rise from 38 % to 38.5% in September 1990.
  • Thus the inflation rate was brought down to 8% in 1995 – 96 and further to 4.6% in 1996 – 97

Fiscal Correction:

  • Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy fiscal policy deals with taxation and government spending and is often administered by an executive under the laws of a legislature.
  • Government reduces and budgetary support to public enterprises and also undertook repayment of old public debt in order to reduce the interest burden.
  • Measures were taken to increase revenue through text reforms. Taxes were rationalized and simplified.

Balance of payment adjustment:

  • The Balance of payments is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time.
  • Measures were taken to improve the balance of payment of the country. The Rupee was devalued by 18-19 percent in July 1991. This was followed by the introduction of Liberalised Exchange Rate Management System LERMS  1992-93.
  • Under this, a dual exchange rate was fixed under which 40% of foreign exchange was to be surrendered at the official rate and the remaining 60% can be converted at the market rate.
  • Efforts were made to increase exports in order to bring about technology up gradation in the export sector, imports were liberalised.

Write notes on Trade and Capital Flows Reforms:

The government took the following reforms in the external factor to open up the Indian economy to foreign competition and foreign investment.

  1. Liberalisation of Import: It helps promote free trade by allowing imported input for the domestic market.  import control where visually abolished except for some consumer goods.
  2. Reduction in traffic structure: It means reducing taxes on imported products. The peak import duty on non Agricultural Products was reduced from more than 300 % to 150 1991-92 it was for the lowered to 20% in 2004-5 and to 10% in 2007-8.
  3. Promotion of Export: Various incentives, tax deductions, and subsidies are provided to exporters in the foreign trade policies of the government.
  4. Change in exchange rate policy: The exchange rate was allowed to be determined by demand and supply in the foreign exchange market since 1993. This would help to is the balance of payment problems the RBI interview news in the foreign exchange market to reduce excess volatility in the foreign exchange market to stabilise the exchange rate of the rupee.
  5. Introduce Current Account Convertibility: The government introduced convertibility of the Rupee first on trade account, and subsequently on the entire current account in August 1994 this increase the value ability of the foreign exchange to exporters and importers and for studies, aboard travel, medical expenses, and so on.
  6. Liberalized capital inflows: The government has liberalized capital inflows in the form of foreign direct investment(FDI) and foreign portfolio investment FPI (foreign portfolio investors are allowed to invest in all types of securities traded in the primary and secondary market.

Write notes on Financial Sector Reforms

  1. The financial sector reforms that were introduced by the government in the early 1990s are aimed to make the Indian financial sector strong and transparent. The Indian financial sectors consist of Banking, Insurance, and Capital Market.

(A) Banking Sector Reforms

  1. Lowering of SLR: Statutory liquidity ratio (SLR) has been reduced gradually as on April 2018 it is 19.5%
  2. Lowering of CRR: The Cash Reserve Ratio(CRR) was reduced gradually from 15% in 1991 to 4.5% in June 2003 this has released more points for lending to other sectors as on April 2018 CRR is 4%
  3. Deregulation of interest rate: Scheduled commercial banks have now the freedom to set the interest rates on their deposit subject to minimum floor rate and maximum ceiling rate. This is expected to bring healthy competition among the banks and encourage their operational efficiency.
  4. Introduction of Prudential norms: Prudential norms are guidelines issued by the central bank (RBI) for the proper and accountable functioning of banks.
  5. Introduction of Capital Adequacy Norms: Capital adequacy ratio measures Bank capital in relation to its risk-weighted assets. It promotes financial stability under based III. it must be a minimum of 8%.
  6. Access to Capital Market: Nationalised commercial banks are allowed to access the capital market for funds, through public issues.
  7. The entry of a new Private Sector Bank: Government has permitted the entry of a new private sector banks. This has provided competition to the public sector banks.
  8. Freedom of Operation: Scheduled banks have been given the freedom to open new branches and upgrade extension countries they are also permitted to close non-viable branches other than in ruler areas. Bank lending norms have been also liberalised.
  9. Special Recovery Tribunals: The government has set up a special recovery Tribunal for the recovery of loan arrears.

(B) Capital Market Reforms

The capital market is the market where the long-term funds can be raised through debt and equity. Along with reform in the banking sector reforms were also introduced in the capital market the important reforms introduced in the capital market are:

  1. SEBI as Statutory body: securities and exchange board of India was set up in 1988. SEBI is authorized to regulate all the merchant banks on issue activity, lay the guidelines and supervise and regulate the working of mutual fund and oversee the working of the stock exchange in India.
  2. Primary market reforms: Companies raising capital in the primary market are required to disclose all the information. Companies are allowed to determine the power value of shares issued by them. stricter norms have been introduced in all the aspect of initial public offering (IPO)
  3. Online trading and dematerialized training: SEBI has introduced online trading and dematrelised training. This is expected to lead to a reduction in time and cost and elimination of various risks associated with the paper-based or physical settlement.
  4. Rolling settlement: SEBI has introduced a rolling settlement from January 2000 under the system that trading has been shortening to a day and traded are settled within two working days. This is expected to increase the efficiency and integrity of the securities market.
  5. Investment by FII: foreign institutional investor FIR are allowed to invest in all types of security traded in the primary market and secondary market.
  6. Investor protection: measures have been taken for investor protection for this purpose the investor education and protection fund has been established in October 2001.
  7. Derivatives trading: Trading in equity derivatives was introduced in 2000 there is no equity derivatives product in the Indian Indian capital market namely stock option, stock future, index future, and index option
  8. Establishment of NSE: National stock exchange of India was set up in November 1992. It is stated its operation in 1994. It has helped to bring transparency and operational efficiency in the secondary market operation.
  9. Setting up of national securities clearing corporation: the NSCC was set up in 1996. It guarantees all the traders on NSE. Thus every trade that has to take the place is freed from the risk of the counterparty defaulting. This has ended the risk of failure leading to a payment crisis.
  10. Strengthening the government securities market: A number of measures were taken to strengthen the government securities market. They are in the introduction of the auction system for the sales of government securities setting of the securities trading corporation of India and so on.

(C) Insurance Sector Reforms

Reforms in the insurance sector commenced with the passing of the Insurance Regulatory and Development Authority (IRDA) Act of 1999. The IRDA Act ended the monopoly of the government in the insurance sector. This is done by encouraging private investment in the insurance sector. The IRDA give license to the private sector to do insurance business.

policy measures undertaken to liberalise the Indian economy, policy measures undertaken to Privatization the Indian economy, Trade and Capital Flows Reforms For More Business Economic Notes Click Here

Reference: Manan Prakashan

2 comments on “New Economics Policy 1991: Business Economics

Post your Comment

Your email address will not be published. Required fields are marked *

three + 1 =