NEW ECONOMIC POLICY IN INDIA IN 1991

ACKNOWLEDGEMENT

The toughest of endeavors in this world is not possible without the support of a helping hand which guides and motivates a person to take on any challenge head on. Such inputs are always like very essential because more often than not certain mistakes which go unnoticed from our eyes.

We are indebted to our teacher Mrs.SHALINI PRAKASH, Shaheed Sukhdev College of Business Studies, Delhi for giving us such a nice opportunity to work on the most important topic which revolutionized the Indian economy and also for extending her untiring guidance to us. In this project, we have tried to explain the NEW ECONOMIC POLICY OF INDIA IN 1991 Last but not least we wish to avail ourselves of this opportunity, express a sense of gratitude and love to our friends and our beloved parents for their support, help and guidance.

TABLE OF CONTENTS INTRODUCTION PRE REFORMS SCENARIO REASON BEHIND THE IMPLEMENTATION OF THE POLICY SAILENT FEATURES OF NEW ECONOMIC POLICY OF 1991 LIBERALIZATION INDUSTRIAL SECTOR REFORMS EXTERNAL SECTOR REFORMS FINANCIAL SECTOR REFORMS FISCAL REFORMS PRIVATIZATION (DISINVESTMENT) PUBLIC SECTOR POLICY GLOBALIZATION TRADE POLICY(TARIFFS) IMPLICATIONS ON THE SOCIAL SECTORS COMPARISON OF CURRENT POLICY WITH PRE-ECONOMIC POLICY OF 1991 THE POSITIVE ASPECTS AND NEGATIVE ASPECTS OF NEP CONCLUSION BIBLIOGRAPHY .

India is slowly but surely catching up in this race. each of the five successive governments that have held office in India since 1991 have carried on these economic reforms. a more realistic assessment of the experiences of both these major countries of Asia can only be made if we explicitly take into account the stark contrast in their political systems. post-1991 economic reforms have been evolutionary and incremental in nature. The contrast in the experiences of these two countries with economic reforms under radically different political systems are remarkable. which have been based on market liberalization and a larger role for private enterprise. India launched its market-oriented economic reforms in 1991. This is especially so for developing countries like India. . While comparisons between China and India are often made by development analysts and are inevitable when we discuss economic transitions in Asia. However. including China and India where nearly one third of the world¶s population live. The attainment of sustained high economic growth is a necessary condition for improving the national security and the quality of life of the people throughout the country. In India. China launched similar reforms from 1978 and is now well ahead of India in integrating its national economy with the global economy.INTRODUCTION The foundation of credible national security is based on the level of economic prosperity and well-being of the population of any country. However. are currently going through economic transitions. and pressure groups with vested interests. coalition governments. Many developing countries in the Asia-Pacific region. The central objective of transition through economic liberalization is to improve the competitive efficiency of the economy in the global marketplace to sustain accelerated rates of economic growth and thereby continuously improve the security and well being of the people. There have been delays and reverses in some areas due to the interplay of democratic politics.

.. for details of magnitude and diagnosis of causes of this economic crisis.Several official and expert reviews undertaken by the government recommended incremental liberalization of the economy in different areas. However. The inflation rate (as measured by point-to-point changes in the Wholesale Price Index) had also climbed to the socially and politically dangerous double-digit level. the economic reforms launched in the 1990s (by Prime Minister P V Narasimha Rao and Dr. hitting 12. which had been heavily influenced by the Soviet model of development. but these did not address the fundamental issues facing the economy. see intolerably high rate of inflation that were building up in the 1980s and climaxed in 199091. India¶s economy went through several episodes of economic liberalization in the 1970s and the 1980s under Prime Minsters Indira Gandhi and. This was evident from the design of the country¶s Second Five-Year Plan (1956-61). In contrast.The current account deficit as a percentage of GDP peaked at a high of 3. self-contradictory. Manmohan Singh as his Finance Minister) were µmuch wider and deeper µand decidedly marked a µU-turn¶ in the direction of economic policy followed by India during the last forty years of centralized economic planning. The strategy was based on an µinward-looking import substitution¶ model of development. Second Five-Year Plan. and often self-reversing in parts. Rajiv Gandhi. Indian policy-makers stuck to a path of centralized economic planning accompanied by extensive regulatory controls over the economy. . REASON BEHIND THE IMPLEMENTATION OF THE POLICY As in many developing countries.1 percent in 1990-91.PRE_REFORMS SCENARIO It is well known that from 1951 to 1991. India also launched its massive economic reforms in 1991 under the pressure of economic crises. 1956). later.4 percent in the early 1980s). these attempts at economic liberalization were halfhearted. (New Delhi.1 percent (compared to an average level of 1. The twin crises were reflected through an unmanageable balance of payments crisis and a socially See Government of India.

The government came out with a clear enunciation of its vision and the objectives of its economic reforms only after regaining macro-economic stability.Most economic policy makers and analysts held widely convergent views on the causes of the unprecedented economic crisis faced by India in 1990-91. Singapore.6 percent in 1989-90) unsustainable. Prime Minister Narasimha Rao converted the prevailing economic crisis into an opportunity to launch massive economic reforms. The root cause of the twin crisis could be traced to macro-economic mismanagement throughout the 1980s as reflected in an unsustainably high fiscal deficit. as successfully practiced earlier by Japan and South Korea and also by the South East Asian tigers Malaysia. India had missed on both these fronts by relentlessly pursing import substitution and a relatively closed economy model of development. First. The new economic policies radically departed from the economic policies and regulatory framework pursued in India during the previous forty years. he introduced an economist (rather than a politician) into the Cabinet as Finance Minister and gave the new Minister his full support. There are of course. This was contained in the Discussion Paper on Economic Reforms brought out by the Ministry of Finance in July 1993 .5 percent in the 1980s could not be accepted since the latter jump proved to be financially unsustainable. India stared bankruptcy in the face as it struggled to meet external debt obligations. The Rao government. furthering the economic Thus the claim that India had clearly transcended the so-called µHindu rate of growth¶ of GDP at 3. in particular the revenue deficit and the monetized deficit. Therefore. Thus growing fiscal profligacy (and irresponsibility) and the unviable financing patterns of the fiscal deficit prevailing in the 1980s made high levels of annual GDP growth (peaking at 5. was soon confronted with the political constraints of µcompetitive populism¶ during elections held at the state level in 1993.2 billion (with less than 15 days¶ cover against annual imports). Indonesia and Thailand. after launching the relatively aggressive (by past Indian standards) reforms. The East Asian development model had been remarkably successful in achieving sustained high growth rates accompanied by rapid growth in the living standards of the people in just two decades. Foreign-exchange reserves dwindled to a low of US$2. initially with the help of a balance of payments loan facility from the International Monetary Fund. lessons to be learnt by India from the µEast Asian debacle¶ of 1997-98 reforms in an µincremental¶ fashion in order to continue to extending their width and depth during the remainder of the government¶s term.5 percent per annum (trend annual growth rate) achieved for the two decades of 1960s and 1970s and had moved over to higher annual average growth rate of 5. The Rao government recognized in 1991 that the time had come to reshape India¶s economic policies by drawing appropriate lessons from the µEast Asian Miracle¶ based on more export-oriented and more globally connected strategies of development.9 percent as a percentage of GDP in 198990. The government took two years to get over the immediate macroeconomic crisis. the government adopted a µmiddle path¶. The central government¶s fiscal deficit alone peaked at 7. allowing him to evolve and implement path-breaking economic reforms.

LIBERISATION indicates freedom to business enterprises from government control. the terms LPG gained significance with the adoption of New Industrial Policy. 1991 has abolished licensing for industries except six industries i. The new industrial policy. atomic energy and specified minerals. yet these terms have gained prominence in the 20th century in many parts of the world. Now there are only three industries reserved for public sector. alcohol. there is nothing new about these terms. . PRIVATISATION implies reduction in the role of the public sector due to DE reservation of public sector. 1991. For instance. hazardous chemicals. defense. and subsequent economic policies of the government. industrial explosives.e. the new industrial policy. cigarettes.railways. These are less licensing and other formalities for business firms to follow on account of the New Industrial Policy .SAILENT FEATURES OF NEW ECONOMIC POLICY The term LPG is being used a lot in the corporate world. drugs & pharmaceuticals. In India. The number of industries reserved for public sector came down from 17 to 8 in 1991. Although. 1991 has DE reserved the industries of public sector.

Theimportant change is the change in the attitude of the state towards the industrial society. etc. change from centrally planned economy to market led economy. and consolidate the strengths built on the gains already made. the basic philosophy of the New IP. Therefore. Globalisation aims at expanding business from domestic/local level to global level. But these changes. change from excessive government intervention to minimal intervention. ABOLOTION OF LICENSING DERESERVATIO N OF PRODUCTION AREAS FREEDOM TO IMPORT CAPITAL GOODS INDUSTRIAL SECTOR REFORMS FINANCIAL SECTOR REFORMS FOREIGN EXCHANGE REFORMS FOREIGN INVESTMENT AND TECHONOLOGY POLICY EXTERNAL SECTOR REFORMS ROLE OF RBI SHIFTED FROM A REGULATOR TO FACILITATOR FII WERE ALLOWED TO INVEST IN INDIA DOMESTIC AND INTERNATIONAL BANKS EMERGED FISCAL REFORMS TAX REFORMS EFFORTS TO ENSURE VAT IN ALL STATES . These are less licensing and other formalities for business firms to follow on account of the New Industrial Policy . which the government has introduced. represent a sharp departure from the earlier industrial policies. The purpose of globalisation is to exploit global opportunities for local growth. change from subsidization and cross-subsidization to gradual withdrawal of subsidy. change from nationalization to privatization. The important objectives are:(a) to correct the distortions that may have crept in. (b) to maintain sustained growth in the productivity and gainful employment (c) to attain international competitiveness.GLOBALISATION implies integration of the national economy with that of the world economy. and subsequent economic policies of the government. 1991 has been the continuity with change. LIBERALISATION LIBERISATION indicates freedom to business enterprises from government control.

social reasons. and items of elitist consumption LIST OF INDUSTRIES IN RESPECT OF WHICH INDUSTRIAL LICENSING WILL BE COMPULSORY 1. y INDUSTRIAL SECTOR REFORMS a) Industrial licensing b) MRTP Act. 4. 7. Tanned or dressed furskins. 2. Cigars and cigarettes of tobacco and manufactured tobacco substitutes. chamois leather and patent leather. Raw hides and skins. Plywood. leather. 8. and other wood based products such as particle board. medium density fibre board. 10. Coal and Lignite. 5. Distillation and brewing of alcoholic drinks. 1969 y EXTERNAL SECTOR REFORMS a) Foreign investment b) Foreign technology agreements y FINANCIAL SECTOR REFORMS a) Banking reforms b) Financial market reforms y FISCAL REFORMS a) Tax reforms b) Implementation of vat INDUSTRIAL SECTOR REFORMS INDUSTRIAL LICENSING POLICY i. Animal fats and oils. Asbestos and asbestos-based products. 6. Industrial licensing will be abolished for all projects except for a short list of industries related to security and strategic concerns. Sugar. 9. . block board.These changes pertain broadly to five areas viz. 3. Petroleum (other than crude) and its distillation products. hazardous chemicals and overriding environmental reasons. decorative veneers.

18. iii. Areas where security and strategic concerns predominate. will continue to be reserved for the public sector PROPOSED LIST OF INDUSTRIES TO BE RESERVED FOR THE PUBLIC SECTOR 1. White Goods (Domestic Refrigerators. Airconditioners). Microwave ovens. Industries reserved for the small scale sector will continue to be so reserved. if the CIF value of imported capital goods required is less than 25% of total value (net of taxes) of plant and equipment. 13. in cases where foreign exchange availability is ensured through foreign equity or b. C. In view of the current difficult foreign exchange situation.D. automatic clearance will be given a. Mining of copper. Hazardous chemicals. ii. upto a maximum value of Rs. lead. Paper and Newsprint except bagasse-based units. Drugs and Pharmaceuticals (according to Drug Policy). Domestic Dishwashing machines. Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order. 6. manganese ore. In projects where imported capital goods are required. Electronic aerospace and defence equipment. Industrial explosives. Mineral oils. Note: The compulsory licensing provisions would not apply in respect of the small-scale units taking up the manufacture of any of the above items reserved for exclusive manufacture in small scale sector. Arms and ammunition and allied items of defence equipment. 12.e. Mining if iron ore. Coal and lignite. Railway transport. 4. chrome ore. Entertainment electronics (VCRs. safety fuse. colour TVs. gold and diamond. Defence aircraft and warships. sulphur. molybdenum and wolfram. 5. Atomic Energy. 3. gun powder. Players. 17. 16.11. (list attached as Annex II). 2 crore. nitrocellulose and matches. Tape Recorders). 1953. All types. gypsum. zinc. tin. including detonating fuse. this scheme (i. (iii) b) will come into force from April. 14. 2. 7. 8. . 15. Programmable Domestic Washing Machines. 1992. Motor cars.

Existing units will be provided a new broad banding facility to enable them to produce any article without additional investment. Existing projects with such programmes will continue to be governed by them. The important objectives of this were two in number. viii. A flexible location policy would be adopted in respect of such cities (with population greater than 1 million) which require industrial re-generation. Zoning and Land Use Regulation and Environmental Legislation will continue to regulate industrial locations. v. industries other than those of a non-polluting nature such as electronics. To remove the threshold limits of assets in respect of MRTP companies and the dominant industrial undertakings. The system of phased manufacturing programmes run on an administrative case by case basis will be applicable to new projects. In respect of cities with population greater than 1 million. except in prior designated industrial areas. The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects. DGTD registration) will be abolished. 1969 The New Industrial Policy. and . x. All existing registration schemes (Delicensed Registration. computer software and printing will be located outside 25 kms. The exemption from licensing will apply to all substantial expansions of existing units. 1991 proposes to amend suitably the Monopolies and Restrictive Trade Practices Act. In locations other than cities of more than 1 million population. vii. there will be no requirement of obtaining industrial approvals from the Central Government except for industries subject to compulsory licensing. imports of capital goods will require clearance from the Secretariat for Industrial Approvals (SIA) in the Department of Industrial Development according to availability of foreign exchange resources. iv. of the periphery. vi. Entrepreneurs will henceforth only be required to file an information memorandum on new projects and substantial expansions. They are: (a) Prevention of concentration of economic power in the hands of few which will be detrimental to the common interest. ix. Exempted Industries Registration. MRTP Act.In other cases. Appropriate incentives and the design of investments in infrastructure development will be used to promote the dispersal of industry particularly to rural and backward areas and to reduce congestion in cities. 1969.

EXTERNAL SECTOR REFORMS FOREIGN INVESTMENT In view of the significant development of India's industrial economy in the last 40 years. restrictive and unfair trade practices followed by the industrial undertakings and the trading communities. raw materials and intermediate goods. Other foreign equity proposals. it has been decided to provide approval for direct foreign investment upto 51% foreign equity in such industries. Consequential amendments to the Foreign Exchange Regulation Act (1973) shall be carried out. will continue to need prior clearance. the general resilience. i. size and level of sophistication achieved. including proposals involving 51% foreign equity which do not meet the criteria under (I) above. and payment of knowhow fees and royalties will be governed by the general policy applicable to other domestic units. The government will therefore welcome foreign investment which is in the interest of the country's industrial development.(b) Regulation of monopolistic. Foreign equity proposals need not necessarily be accompanied by foreign technology agreements. restrictive and unfair trade practices which are pursued by the business community and which are prejudicial to the public interest. In order to invite foreign investment in high priority industries. To provide access to international markets. .. the MRTP Act now concerned only with the prohibition of monopolistic. Hence. There shall be no bottlenecks of any kind in this process. majority foreign equity holding up to 51% equity will be allowed for trading companies primarily engaged in export activities. The New Policy proposes to renew the threshold limits of assets and therefore. This change will go a long way in making Indian policy on foreign investment transparent. While the thrust would be on export activities. the payment of dividends would be monitored through the Reserve Bank of India so as to ensure that outflows on account of dividend payments are balanced by export earnings over a period of time. Such clearance will be available if foreign equity covers the foreign exchange requirement for imported capital goods. iii. such trading houses shall be at par with domestic trading and export houses in accordance with the Import Export Policy. requiring large investments and advanced technology. While the import of components. 1969 pertaining to the first objective. Such a framework will make it attractive for companies abroad to invest in India. marketing expertise. to repeal the Provisions of MRTP Act. iv. the relationship between domestic and foreign industry needs to be much more dynamic than it has been in the past in terms of both technology and investment. introduction of modern managerial techniques and new possibilities for promotion of exports. Foreign investment would bring attendant advantages of technology transfer. ). ii. This is particularly necessary in the changing global scenario of industrial and economic cooperation marked by mobility of capital. and the significant changes that have also taken place in the world industrial economy.

5% royalty for domestic sales and 8% for exports. . Automatic permission will be given for foreign technology agreements in high priority industries upto a lumpsum payment of Rs. FINANCIAL SECTOR REFORM India¶s reform program included wide-ranging reforms in the banking system and the capital markets relatively early in the process with reforms in insurance introduced at a later stage. iv. subject to total payment of 8% of sales over a 10 year period from date of agreement or 7 years from commencement of production. This would be a special programme to attract substantial investment that would provide access to high technology and world markets. The Indian entrepreneur has now come of age so that he no longer needs such bureaucratic clearances of his commercial technology relationships with foreign technology suppliers. All other proposals will need specific approval under the general procedures in force. The investment programmes of such firms would be considered in totality. FOREIGN TECHNOLOGY AGREEMENT There is a great need for promoting an industrial environment where the acquisition of technological capability receives priority. iii. 1 crore. Indian industry can scarcely be competitive with the rest of the world if it is to operate within such a regulatory environment. No permission will be necessary for hiring of foreign technicians. In the fast changing world of technology the relationship between the suppliers and users of technology must be a continuous one. free from pre-determined parameters or procedures. The prescribed royalty rates are net of taxes and will be calculated according to standard procedures. Approval will be given for direct foreign investment up to 51 percent foreign equity in high priority industries A special Empowered Board would be constituted to negotiate with a number of large international firms and approve direct foreign investment in select areas. v. i.v. permission will be given subject to the same guidelines as above if no free foreign exchange is required for any payments. Payment may be made from blanket permits or free foreign exchange according to RBI guidelines. foreign testing of indigenously developed technologies. ii.

Skeptics doubt whether government control can be made consistent with efficient commercial banking because bank managers are bound to respond to political directions if their career advancement depends upon the government. India¶s banking reforms differ from those in other developing countries in one important respect and that is the policy towards public sector banks which dominate the banking system. Reforms in the stock market were accelerated by a stock market scam in 1992 that revealed serious weaknesses in the regulatory mechanism. This is to some extent reflected in the fact . This would be an important improvement but it needs to be accompanied by reforms in court procedures to cut the delays which are a major weakness of the legal system at present. these figures may overstate the improvement because domestic standards for classifying assets as non-performing are less stringent than international standards. since more efficient banks are not able to expand market share. However. promulgation of rules and regulations governing various types of participants in the capital market and also activities like insider trading and takeover bids. like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervision (c) measures for increasing competition like more liberal licensing of private banks and freer expansion by foreign banks. government ownership means managers of public sector banks are held to standards of accountability akin to civil servants. which necessarily requires time. which makes it very difficult for creditors to enforce their claims. These steps have produced some positive outcomes. and reducing the statutory requirements to invest in government securities (b) measures designed to increase financial soundness. This obviously weakens market discipline. There has been a sharp reduction in the share of non-performing assets in the portfolio and more than 90 percent of the banks now meet the new capital adequacy standards. like dismantling the complex system of interest rate controls. Improvements in the efficiency of the banking system will therefore depend on the ability to increase the efficiency of public sector banks. The government has announced its intention to reduce its equity share to 33-1/3 percent. Effective regulation of stock markets requires the development of institutional expertise. The government has recently introduced legislation to establish a bankruptcy law which will be much closer to accepted international standard. but a good start has been made and India¶s stock market is much better regulated today than in the past. Another major factor limiting the efficiency of banks is the legal framework. Reforms implemented include establishment of a statutory regulator. which tend to emphasize compliance with rules and procedures and therefore discourage innovative decision making. Even if the government does not interfere directly in credit decisions.Banking sector reforms included: (a) measures for liberalization. but this is to be done while retaining government control. The unstated presumption that public sector banks cannot be shut down means that public sector banks that perform poorly are regularly recapitalized rather than weeded out. eliminating prior approval of the Reserve Bank of India for large loans. Regulatory control is also difficult to exercise. introduction of electronic trading to improve transparency in establishing prices. and dematerialization of shares to eliminate the need for physical movement and storage of paper securities.

following the economic crisis of 1991.building a proper information system and computerization of tax returns. it was widely perceived as having one because its top management was appointed by the government. with additional revenues beyond the post-manufacturing stage passedon to the state governments. maintain progressivity but not such as to induce evasion. when this avenue for investment was opened. The Trust had to be bailed out once in 1998. The overall thrust of the TRC was to (i) (ii) (iii) decrease the share of trade taxes in total taxrevenue increase the share of domestic consumption taxes by transforming thedomestic excises into VAT and increase the relative contribution of direct taxes. An important recent reform is the withdrawal of the special privileges enjoyed by the Unit Trust of India. and again in 2001 when the problem recurred. Although the Unit Trust did not enjoy a government guarantee. it did recommend theextension of the central VAT to the wholesale stage with the revenues from the extendedlevy assigned to the states. FISCAL REFORMS TAX REFORMS Tax reform since 1991 was initiated as a part of the structural reform process. It has now been decided that in future investors in the Unit Trust of India will bear the full risk of any loss in capital value. .The TRC recommended a number of measures to broaden the base of all taxes byminimizing exemptions and concessions. the Committee was aware ofthe serious problems of avoidance and evasion in respect of sales taxes levied by thestates predominantly at the manufacturing stage. individual and corporate income taxes andexcises to reasonable levels. However. Italso recommended that the taxes on domestic production should be fully convertedinto a value added tax. when its net asset value fell below the declared redemption price of the units. This removes a major distortion in the capital market. In keeping with the best practice approaches. viz. and a thorough revamping and modernization of the administrative and enforcement machinery.that foreign institutional investors have invested a cumulative $21 billion in Indian stocks since 1993. important proposals put forward by the TRC included reduction in therates of all major taxes. Therefore. drastic simplification of laws and procedures. and this should be extended to the wholesale level in agreementwith the states.the TRC adopted an approach of combining economic principles with conventionalwisdom in recommending comprehensive tax system reforms). in which one of the investment schemes was seen as having a preferred position. customs. a public sector mutual fund which was the dominant mutual fund investment vehicle when the reforms began..

there were a number of ³zero-tax´ companies. infrastructure.telecommunication. saving incentives were given by exempting investmentin small savings and provident funds up to a specified limit. ownership of credit card. become stagnant. a Minimum Alternative Tax (MAT) was introduced (CIDA). In thecase of personal income taxes. generous tax holidaysand preferences are given for investment in various activities (housing. the most drastic and visible changeshave been seen in the reduction in personal and corporate income tax rates. As many corporate entities took generous advantageof all these tax preferences. As regards the personal income taxes.The dividend tax at the individual income tax level has been abolished.). The sales taxes. Attempts have also beenmade to bring in the self-employed income earners into the tax net. Every individualliving in large cities covered under any of the specified conditions (ownership ofhouse.Thus. STATE TAX SYSTEMS While a good deal of progress has been made in the tax system reform ofthe central government. In fact. However. The states .besides depreciation allowances and exemptions for exporters.very little has been done in terms of broadening the base of corporation tax. over the years. Although it did not entirely follow the recommendationsand is yet to implement many of the measures to strengthen the administration andenforcement machinery. a salaried taxpayer up to an income of Rs 75. the rates were progressively reducedon both domestic and foreign companies to 35 per cent and 48 per cent respectively. In the case of corporate income taxes. tourism. progress in the case of state tax systems has not beencommensurate. besides exemption. 20 and 30 per cent.IMPLEMENTATION OF REFORMS SINCE 1991 The government accepted the recommendations of the TRC and hasimplemented them in phases. the exemption limit was raised in stages to Rs 50. sports etc. medicalequipment. membership of a club. software development. oil refining. the number of tax rates have beenreduced to three and the tax rates were drastically reduced to 10. Consequently. revenues from personal and corporate income taxes have shown appreciableincreases after the reforms were initiated in spite of the fact that the rates of tax havebeen reduced significantly.000. the tax base has not grown in proportionto the growth of corporate profits. foreign travel) isnecessarily required to file a tax return. In addition.000 neednot pay any tax. most of the recommendations have been implemented. To ensure minimum tax payments by them.have. which account for over 60 per cent of states¶ revenues.At the same time. Empirical evidence shows that this drasticreduction in the marginal tax rates has improved the compliance index significantly. free trade zones. Voluntary disclosure scheme to allow a one time amnestyto tax defaulters by paying the necessary tax was introduced in 1997-98. the government has started an ambitious programme of computerising tax returns and building a management information system. cars. Itmust also be noted that the pace and content of reforms have not been exactly true toTRC recommendations. Combinedwith the standard deduction.

consumption type value added taxes at the state level.This has given rise to a large number of classification disputes as well. and this makes the tax base narrow. In addition. the taxes on inputs and capital goods resultsin the phenomenon tax-on-tax.The study group made a thorough analysis of the distortions of the prevailing systemof taxation and has recommended the gradual moving over to destination based. Above all. CONCLUSION The New Industrial Policy. etc. Adding to this. in addition. The Government of India appointed a study group to recommend measures toharmonise and rationalize the domestic trade tax system in the country (India 1994). approaches. in spite of the consensuson the need for reforms in the sales tax systems at the state level. opaque and distorting. In order to persuade the states to rationalize their tax systems on the lines recommended by the study group the Government of India appointed a state FinanceMinisters¶ Committee. Unfortunately. At the central level. the tax has become complicated. The Committee has made recommendations to switch over tothe VAT in a given time frame through stages. Like this. there is a tax oninter-state sales. All these have combined to make the salestax system complicated. of the government. which not only causes severe distortions but also results in inter-statetax exportation in favour of richer states. prior to 1991. a large number of changes can be noticed in the new policy. the existing sales taxes were to be transformed into retail stage destinationtype VAT. co-ordinated andharmonized development of domestic trade taxes has become difficult. Though the economy has been benefited significantly from these measures. has contributed to cascading. the economy has not been able to reap the full benefits of the Economic Reform Package owing to the political instability. etc. This process has been continuing even in post liberalization era. the studygroup recommended complete switching over to the manufacturing stage VAT. For instance. With as many as 16-20 ratecategories introduced to fulfil a variety of objectives. Taxation ofinputs and capital goods. with independent andoverlapping commodity tax systems at the central and state levels3. there has been verylittle action in terms of actual rationalization.prefer to levy the tax at the firstpoint of sale. . and mark up on the tax with consumers paying muchmore than the revenues collected by the government. scope of public sector was expanded by reserving more number of industries for the public sector. 1991. the government has taken a number of steps to give effect to its policy decisions included in the New Industrial Policy. its scope has been reduced drastically by reducing the number of industries reserved for the public sector. At thestate level. 1991 certainly differs significantly from the earlier philosophies. In an imperfectmarket characterized by mark up pricing. But now.

1953. Public Sector Policy Prior to the announcement of New Industrial Policy. In India.PRIVATIZATION PRIVATISATION implies reduction in the role of the public sector due to dereservation of public sector. Privatization was meant to improve the performance of public enterprises. 1991 has pruned the list of the industries reserved for the public sector to only 8. Besides. and (f) Railway transport. or sale of public enterprises. Privatization.. The number of industries reserved for public sector came down from 17 to 8 in 1991. in the narrow sense. (d) Mineral oils. Brazil. Consequently. (e) Minerals specified in the schedule to the Atomic Energy Order. The new industrial policy. They are: (a) Arms and ammunition and allied items of defence equipment. However. seventeen industries were reserved exclusively for the state for their future development. Mexico. India is no exception to it. aircraft and warships. Hence. means transfer of ownership. only six industries are now reserved for the public sector. Turkey. (b) Atomic energy . US. with respect to another 12 industries. 1991. and (b) Transferring ownership of state equity in PSUs to private individuals and institutions. the focus of the public sector will be only on strategic and high tech industries and on basic infrastructural projects. Now there are only three industries reserved for public sector. the failure on the part of majority of PSEs has forced the government to review its earlier decision.railways. (a) Having fewer controls and regulations by the state in economic activities. However the objective of the New Industrial Policy . (c) Coal and lignite. the government in its New Industrial Policy. Japan. etc. privatization is taking place by adopting the new public policy consisting of two common methods viz. The revolution of privatization started in 1980 and spread to many parts of the world. China. Further. the state was to play an important role by taking initiative to establish new undertakings. Further. As a result. the government has dereserved 2 more industries. Several countries are privatizing their public sector enterprises. Privatization techniques have been tried in countries like Great Britain.1991 has dereserved the industries of public sector. atomic energy and specified minerals. the state had power to enter into any other area reserved for the private sector.

capital market will compel these enterprises to be more efficient. Improvement in the quality of management and decision making: 3. (b) Mineral resources. 5. The New Industrial Policy also aims at providing greater operational and managerial autonomy to the management of PSEs and making the managements accountable for the performance through a system called Memorandum of Understanding. and the general public. to suffer from a number of shortcomings which are identified below very briefly. No government financial backing. employs of PSEs. apart of governments share holdings in its enterprises will be offered to the mutual funds.has been to withdraw the public sector investment from the activities which can successfully be taken up by the private sector enterprises. 6. BENEFITS OF PRIVATIZATION It is expected that privatization will ensure the following benefits: 1. Better industrial relations management. Recovery of government fund which could more productively be used in development activities. The sick PSEs which can be revived will be referred to Board for Industrial and Financial Reconstruction for the formulation of revival packages. Substantial reduction in government¶s budgetary support resulting in reduction in budgetary deficit. 4. Further. With a view to mobilize the resources and to have a wider public participation. and therefore. (c) Crucial areas in the interest of the economy in the long run and where the private sector investment is inadequate (d) Defence equipment. Increasing overall efficiency: 2. the policy also proposes to close down the PSEs which have become sick and which cannot be rehabilitated. financial institutions. even today. etc. SHORTCOMINGS Though the PSUs have contributed heavily to develop the industrial base of the country. Reduction in political and bureaucratic interferences. The New Industrial Policy also proposes selective privatization of PSEs. The emphasis of PSEs in future will be on: (a) Basic and essential infrastructural facilities. they continue. .

Ineffective and widespread inefficiency on management. A number of sick companies (40 companies) which were in the private sector was taken over by public sector mainly to protect the employees. Consequently. and 8.1. etc. Many PSUs are operating without the leader (i. un-remunerative pricing policy. A sizable number of PSUs have been incurring and reporting losses on a continual basis. Multiplicity of authorities to whom the PSUs are accountable. (b) Privatizing non-strategic units by (1) Gradual disinvestment. It could only disinvest 1% to 35% shares of PSUs on an average. The Finance Ministry has also explained that the government is consciously not offloading larger chunks of its holding. The Rangarajan Committee has suggested that government holding in public sector undertaking must be less than 50%. more number of people. many PSUs are overstaffed resulting in lower labour productivity. With a view to provide opportunities for more and more unemployed youths. 7. than required. were recruited and therefore. 3. 6. 4. a large number of PSUs have already been referred of BIFR. bad industrial relations. They are: (a) Franchising (b) Contracting (c) Leasing (d) Disinvestment 39 companies have been proposed for disinvestment till 1995-96.e. The disinvestment percentage is also not much in loss-making and inefficient units. These sick units are causing a big drain on the resources of the state. 5. chief executive or chairman). It is also observed that the shares of efficient and profit-making companies are disinvested more than the companies which are potentially sick or sick companies. 2. METHODS OF PRIVATIZATION There are four important modes of privatization.. No state level PSU has been proposed for disinvestment.. and . Future Plans of Government The following are the future plans of government: (a) Strengthening strategic units. Delay in implementation of projects leading to cost escalation and other consequences. thereby defeating the purpose. etc. and (2) Strategic sale. All the companies proposed for disinvestment are central PSUs. But partial disinvestment will be of no avail to change the culture in the public sector undertaking.

GLOBALISATION The expansion of economic activities across political boundaries of nation states is called Globalisation . For capital goods. i.(c) Devising suitable rehabilitation package for weak units. raw materials and intermediates. The manifestation of production includes spatial reorganization of production the interpenetration of industries across borders. 1991 was a failure. Before the reforms. .e. Imports of manufactured consumer goods were completely banned.border movement of goods. trade policy was characterized by high tariffs and pervasive import restrictions. services. An important attribute of Globalization is the increasing degree of openness. which has three dimensions. capital technology information and people but also with an organization of economic activities which straddles national boundaries. though the pace has been slower than in industrial liberalization. Globalization is a process of reaffirmation of faith in the markets. It is associated not only with an increasing cross. retaining the character of independence of a country. The market forces and the laws of economics will have greater importance than the political ideology. Here.. This process is driven by the lure of profit and threat of competition in the market. it refers to a process of increasing economic integrated and growing economic interdependence between countries in the world economy. the government must play a complimentary role.TRADE POLICY Trade policy reform has also made progress. but . The state must accept this and take necessary steps either to privatize or to improve the efficiency and performance of PSUs. certain lists of goods were freely importable. INSTRUMENT TO IMPROVE GLOBALIZATION. According to World Development Report. perhaps. international trade. and the diffusion of identical consumer goods to distant countries and massive transfer of population across national frontiers. the country follows a pragmatic policy with a shift in decision making from government to business. international investment and international finance. Globalization reflects the progressive integration of world¶s economies. the spread of financial markets. To make a country a successful partner in Globalization. CONCLUSION The privatization process launched with all seriousness after the announcement of New Industrial Policy. More important.

As shown in Table 3. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were finally removed on April 1. However. and that in part because of a ruling by a World Trade Organization dispute panel on a complaint brought by the United States. Although India¶s tariff levels are significantly lower than in 1991. 2001. Removing quantitative restrictions on imports of capital goods and intermediates was relatively easy. The criteria for issue of licenses were nontransparent.i In February 2002. simultaneously with the switch to a flexible exchange rate regime. imports were only possible with import licenses. a number of duty rates at the higher end of the existing structure were lowered. but even if this is implemented. Import licensing was abolished relatively early for capital goods and intermediates which became freely importable in 1993. delays were endemic and corruption unavoidable. The government has announced that average tariffs will be reduced to around 15 percent by 2004. Import licensing had been traditionally defended on the grounds that it was necessary to manage the balance of payments. It was much more difficult in the case of final consumer goods because the number of domestic producers affected was very large (partly because much of the consumer goods industry had been reserved for small scale production). The peak duty rate was reduced to 30 percent. the weighted average import duty rate declined from the very high level of 72. has been even slower and not always steady. but the shift to a flexible exchange rate enabled the government to argue that any balance of payments impact would be effectively dealt with through exchange rate flexibility. because the number of domestic producers was small and Indian industry welcomed the move as making it more competitive. tariffs in India will be much higher than in China which has committed to reduce weighted average duties to about 9 percent by 2005 as a condition for admission to the World Trade Organization.6 percent in 1996-97. while many low end duties were raised to 5 percent.for most items where domestic substitutes were being produced. the second element in the trade strategy. .5 percent in 1991-92 to 24. Progress in reducing tariff protection. almost exactly ten years after the reforms began. The net result is that the weighted average duty rate is 29 percent in 2002-03. the government signaled a return to reducing tariff protection. The weighted average import duty in China and southeast Asia is currently about half the Indian level. The economic reforms sought to phase out import licensing and also to reduce import duties. the average tariff rate then increased by more than 10 percentage points in the next four years. they remain among the highest in the developing world because most other developing countries have also reduced tariffs in this period.

of electronic commerce is also a part of the new trade pattern. The East Asian meltdown has enhanced the attractiveness of long-term capital investment. According to World Development Report 1999-2000. more recently. Trade in components is one part of that new pattern. Countries have started to recognize that foreign direct investment brings with it not only capital but also technology market access and organizational skills.TRENDS IN GLOBALIZATION The important trends in Globalization are the following: (a) International Trade: Trade in goods and services has grown twice as fast as global GDP in the 1990¶s and the share attributable to developing countries has risen from 23 to 29 percent. (b) International Financial Flows: There has been increase in international capital flows of developing countries. the financial crisis of 1977-99 have put the growing interdependencies among countries in the spotlight and led to intense scrutiny. (c) International Migration: Along with goods. and ideas. ADVANTAGES OF GLOBALIZATION (a) Promise of Increase Productivity And Higher Living Standards: Globalization brings in new opportunities such as access to markets and technology transfer. Canada and Australia. At the end of the 20th century Globalization has already demonstrated that economic decisions. services. and investment. people are crossing borders in large numbers. There is a compositional shift in trade. Germany. An analysis of the period 1996-97 shows that foreign direct investment was less volatile than the commercial bank loans and foreign portfolio flows. The financial performance of emerging markets in the 1990s made capital account liberalization an attractive option for developing countries. The market for highly skilled workers will become even more globally integrated in the coming decades. . The tremendous growth of trade in services and. ideas and capital across nation borders. Advances in information technology helps to link firms from developing countries into global production networks. Such flows are started to rise again. each tear between 2 million and 3 million people emigrate. must take international factors into account. However. services. There is acceleration of goods. wherever they are made in the world. with majority of them going to just 4 countries: the United States. services. Many developing countries have begun to loosen controls on inflows and outflows of capital. which has created a new pattern in the international exchange of goods.

(e) Increased Flow Of foreign Market Capital: Globalization leads to increased flows of capital across countries. Trade gives forms access to improved capital inputs such as machine tools. Flows of foreign capital offer substantial economic gains to all parties. Imports bring additional competition and variety to domestic markets. ³Trade in goods and services has grown twice as fast as global GDP in the 1990s and the share attributable to developing countries has climbed from 230to 29 percent´. providing new opportunities for growth. creates new financial instruments. improves allocative efficiency. trade is the primary vehicle for realizing the benefits of Globalization. (d) Globalization of Financial Markets: Globalization of finance markets affects development because finance plays an important role in economic growth and industrialization. When there is foreign investment it is generally accompanied by management expertise. Foreign investors diversify their risks outside their home market and gain access to profitable opportunities throughout the world.These opportunities hold out the promise of increased productivity and higher living standards. -volatility in financial market and environmental deteriorations -another negative aspect of globalization is that a great majority of developing countries remain removed from the process. Trade encourages the redistribution of labour and capital too relatively to more productive sectors. DISADVANTAGES OF GLOBALIZATION Globalization has also thrown up new challenges:-growing inequality across and within the nations. (c) Provide New Opportunities For Growth: For developing countries. it promotes domestic financial development and hence. Economies receiving inflows raise the level of investment. Both industrial and development economics will gain by opening their markets. Exports. First. Financial Globalization affects growth in two ways. which benefit consumers. which boosts productivity. This will increase the competitiveness of downstream industries. Second. It has contributed to the ongoing shift of some manufacturing and services activities from industrial to developing countries. it increases the global supply of capital. Further trade exposes domestic firms to the best practices of foreign firms and encourages greater efficiency. on the other hand. and raises the quality of baking services. enlarge foreign markets and benefit business. (b) Increase In Trade In Goods And Services: There is tremendous growth in trade in goods and services. training programs and important linkages to suppliers and international markets. Increased international competition in services will lead to reduction in prices and improvements in quality. .

basic and heavy industries MRTP Act restriction on entry and growth of large companies Foreign investment allowed only in select industries that too subject to normally. . including up to 100% or equity in many of them. Automatic route available subject to specified conditions. Very liberal policy towards foreign technology Reservation list is being pruned. a ceiling of 40% of total equity and prior permissions Restrictive policy towards foreign technology Reservation of large number of products for small scale sector Current policy Licensing is an exception All but two industries are open to the private sector No such restrictions Foreign investment allowed in a large number of industries.COMPARISON OF CURRENT POLICY WITH PRE-ECONOMIC POLICY OF 1991 Pre 1991 policy Industrial Licensing was the new rule Public sector monopoly/dominance in strategic.

hazardous. motor cars. pharmaceuticals and some luxury items  Business houses intending to float new companies or undertake substantial expansion were not required to seek clearance from the MRTP Commission  Bottlenecks created by the bureaucracy were struck down by this singular decision of the Government  NIP unshackled many of the provisions. petroleum.POSITIVE AND NEGATIVE ASPECTS OF THE NEP POSITIVE ASPECTS  Fulfilled a long-felt demand of the corporate sector for declaring in very clear terms that licensing was abolished for all industries except 18 industries which included coal. cigarettes. chemicals. which acted as brakes on the growth of large private corporate sector  Overall relief in the dismantling of industrial licensing and regime of controls NEGATIVE ASPECTS  Policy regarding Foreign Capital:  Assertions by critics assert that the welcome foreign capital may lead us to selling of our sovereignty to multinationals  Prudence demanded that utmost care to be taken to invite foreign capital in high priority industries only  Monitoring of payment of dividends by RBI  Public Sector Policy:  The govt. sugar. should concentrate on improving the performance of the redeemable and surplus generating public sector enterprises which constitute 85% of the investment  Social Security Policy .

 Industrial Policy sidetracked issues and generated a fear in the mind of the workers that the govt. was not sincere in protecting the interests of the workers  Govt. of India could successfully go in for shedding its load of lossmaking enterprises and help the working class to assume the ownership role and nurse these enterprises to health  MRTP Policy  Failure of MRTP to break the monopolistic or Oligopolistic character of the Indian market .

in that sense. though some of the critical issues relating to government ownership of the banks remain to be addressed. providing a higher level of real wages. Reforms aimed at encouraging private investment in infrastructure have worked in some areas but not in others. over time. where numerous restrictions remain in place. and generating wider avenues for employment and re-employment. will help to garner the support of the Indian people. and employment. It should not be slogan-oriented but more result-oriented since it will likely be perceived and experienced as µpro-people¶. with a more human face. and allow much more freedom of choice by maximizing the benefits of healthy competition. though they need to be supplemented by labor market reforms which are a critical missing link. Second. the reforms must reduce prices of goods and services (including public goods). Visionary political statesmanship will be required for this. the outcome in the fiscal area shows a worse situation at the end of ten years than at the start. Two paradigm shifts in the reforms. will have to be drastically redesigned and politically µmarketed¶.CONCLUSION The impact economic reforms in India on the policy environment presents a mixed picture. However. the reforms must aim to directly benefit Indian consumers. . proving to be both good economics and good politics. Over a reasonable time span. Politicians and administrators need to display greater pragmatism while designing and implementing future economic reforms. However. output. These have strengthened the conviction that the broad direction of the reforms is right and. This will further expand the size of the market²both domestic and international² and provide incentives to entrepreneurs to raise their investment. Future economic reforms must be seen and experienced as not only good economics but also good politics. if it is to reap their full potential. improve their quality. India needs to launch a µsecond generation¶ of economic reforms. these reforms must aim to raise the productivity of Indian labor and improve the work culture and. Growth with employment is the most effective strategy for eliminating poverty and improving the quality of life of the people. These reforms. This has now been recognized and policies are being reshaped accordingly. provide significant rewards to the people of India by spurring growth. made the reform process irreversible. backed up by the effective fulfilment of the promises made. The industrial and trade policy reforms have gone far. The logic of liberalization also needs to be extended to agriculture. Progress has been made in several areas of financial sector reforms. The complexity of the problems in this area was underestimated. It will be of the utmost importance that all sections of society are educated as to the long-term benefits of reform in order to mobilize public support. First. the Indian economy has reaped several welcome rewards from its reforms. Within the constraints of democratic politics and the relatively µsoft¶ nature of the economic reforms implemented since 1991. therefore. especially in the power sector. A combination of more productive labor and pro-consumer economic reforms will be a win-win.

Ministry of Finance.nic. Department of Economic Affairs. . WADHVA1 Government of India.authorstream.answers. µEconomic Reforms : Two Years After and the Task Ahead¶.BIBLOGRAPHY We have gathered the requisite information from the following sourceshttp://siadipp. New Delhi : July 1993. Discussion Paper.in http://wiki.com ECONOMIC TIMES INDIA TRYING TO LIBERALISE:ECONOMIC REFORMS SINCE 1991 BY CHARAN D.com http://www.

Sign up to vote on this title
UsefulNot useful