Econ Ied CH 3

NEW ECONOMIC POLICY -1991
ECONOMIC REFORMS:
- set of economic policies directed to accelerate the pace of ‘growth and development’
- new economic reforms were initiated to pull the economy out of the crisis of 90’s
CONCEPTS OF NEP
LIBERALISATION PRIVATISATION GLOBALISATION
LICENSING SYSTEM, QUOTAS AND TARRIF SYSTEM AND PERMITS WERE REPLACED WITH
LIBERALISATION, PRIVATISATION AND GLOBALISATION
Therefore, LPQ was replaced by LPG.
REASONS FOR MAKING ECONOMIC REFORMS:

- POOR PERFORMANCE OF PUBLIC SECTOR - Public sector was given leading role but due
to red-tapism, leakages and overall incompetence, the poor performance of public sector
- DEFICIT IN BALANCE OF PAYMENT - Less exports, more imports. There was a sharp rise in
imports despite of high tari s
- INFLATIONARY PRESSURE - General rise in price levels

- FALL IN FOREIGN EXCHANGE RESERVES - foreign exchange reserves fell to the lowest level
and it led to the foreign exchange crisis.
- HUGE BURDEN OF DEBTS (FISCAL DEFICIT): The expenditure > the revenue. This put the
country in a huge debt along with the loans borrowed from all sorts of sources.
- INEFFICIENT MANAGEMENT: Lots of losses, ine cient management and stagnant growth. The
funds borrowed were used as consumption expenditure and the nancial management was
weak.
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NEP-
STABILISATION MEASURES (short term)- correcting weaknesses in the balance of payments by
maintaining su cient foreign exchange reserve.
Controlling in ation by keeping rising prices under control.
STRUCTURAL REFORMS (long term)- Improving e ciency of the economy and increasing
international competitiveness by removing the rigidities in various segments of the economy.
LIBERALISATION :
- Liberalisation was brought in place of licensing for the industries and trade
- Entry and growth restrictions were removed on the private sector
MEANING: liberalisation of the economy means the freedom of the producing units from direct or
physical controls imposed by the government
NEED FOR LIBERALISATION:

- before 1991, the oft had imposed several types of controls on pvt sector like licensing system,
price control, or nancial control on goods, import license, foreign exchange control,
restrictions on investments.
- These controls gave rise to corruption delays and ine ciency
- GDP had fallen
Economic reforms were based on the assumption that market forces would drive the economy
toward the path of competitive growth and development.
PURPOSE OF LIBERALISATION;
- It was done to unlock the economic potential of he country by encouraging pvt sector to invest
and expand.
- To introduce competition into the economy and create incentives.
ECONOMIC REFORMS IN LIBERALISATION:

1) Industrial reforms
2) Trade and investments reforms
3) Financial reforms
4) Tax reforms
5) Foreign exchange reforms
INDUSTRIAL SECTOR REFORMS:

- Abolition of industrial licensing: Only things needing license are Liquor, defence equipments,
dangerous chemicals, cigar, explosives
- De-reseravtion of production areas: Reservation for SSI’s and PSU’s was stopped and equity
was promoted
- Freedom to import capital goods: to upgrade technology
- Expansion of production capacity: freedom to produce as per market forces
- Contraction of role of public sector: No. of industries in w public were reduced from 17 to 8.
FINANCIAL SECTOR REFORMS;

- Origin of private banks: The nationalised banks were now converted to private banks
- Change in Role of RBI from regulator to facilitator
*RBI as a regulator- x rate of int for commercial banks
*RBI as a facilitator- would let commercials banks choose rate of interest and would only facilitate
the free play of market forces
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- Increase in limits of foreign exchange- 51 percent of foreign investment was allowed
- Ease In Expansion- banks can expand and set up with ease
FISCAL REFORMS
- Relates to revenue and expenditure of the govt.
- TAX REFORMS UNDER FISCAL REFORMS - Direct taxes- burden of which cannot be shifted
to others. Indirect taxes: levied on goods and services. Burden of which can be shared on
others.
- Before lib. - highly evasive and complex. Out of fear of heavy burden of faxes people would
evade taxes
- After lib. Tax structure simpli ed and moderated. Raised tax compliance, therefore raised tax
revenue of govt.
EXTERNAL SECTOR REFORMS:

- Foreign exchange reforms- Devaluation of currency (Supply of foreign exchange increased in
- Bringing quota and tari in imports
- Increasing exports which gave increased foreign exchange
- Instead of policy of protection to the domestic industry, now there is the policy of survival of the
ttest
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Econ Ied CH 3

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NEW ECONOMIC POLICY -1991

LIBERALISATION PRIVATISATION GLOBALISATION

Therefore, LPQ was replaced by LPG.

REASONS FOR MAKING ECONOMIC REFORMS:

- INFLATIONARY PRESSURE - General rise in price levels

NEED FOR LIBERALISATION:

ECONOMIC REFORMS IN LIBERALISATION:

INDUSTRIAL SECTOR REFORMS:

FINANCIAL SECTOR REFORMS;

EXTERNAL SECTOR REFORMS:

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