NEW ECONOMIC POLICY 1991

PRESENTED BY:

1. AARTI
2. AMAN MAURYA
3. GARVIT ANAND
4. JASMINE MADAN
5. NIHARIKA PARASHAR
6. SHREYAS SHISODIA
1. Economic Policy
2. NEP 1991
CONTENT
3. Reasons for NEP

4. Objectives of NEP

5. Branches of NEP

a) Liberalisation

b) Privatisation

c) Globalisation

7. Impacts of NEP

8. Impacts on
different sectors
9. Achievements
 WHAT IS AN ECONOMIC POLICY ?

The economic policy of governments covers the systems

for setting levels of taxation, governments budgets, the
money supply and interest rates as well as the labour
market, national ownership, and many other areas of
government interventions into the economy.
Most factors of economic policy can be divided into
either fiscal policy, which deals with government actions
regarding taxation and spending, or monetary policy,
which deals with central banking actions regarding the
money supply and interest rates.
 New Economic Policy 1991
NEW ECONOMIC POLICY OF INDIA-1991. 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, AND
REDUCTION OF TAXES TO EXPAND THE ECONOMIC WINGS
OF THE COUNTRY.

LAUNCHED - 1991
INTRODUCED – JULY 24 1991
UNDER - P. V. NARASIMHA RAO
FATHER OF NEP - FORMER PRIME MINISTER
DR.MANMOHAN SINGH
 Reasons for NEP 1991

 Rise in Prices: Prices were rising continuously in India. Main

reason for inflation was rapid increase in money supply. It was
due to deficit financing. Deficit financing means borrowing from
Reserve Bank of India by Government to meet its deficit.

Rise in Fiscal Deficit: Due to increase in non-

development expenditure fiscal deficit of the Govt. had been
increasing. Fiscal deficit means difference between total
expenditure and total receipts minus loans. To cover the fiscal
deficit, the Govt. has to raise loans and pay interest on it. In 1991
interest liability became 36.4% of total govt. expenditure. So,
Govt. has to resort to economic reforms.
 Increase in Adverse Balance of Payments: In 1980-81
it was Rs. 2214 crore and rose in 1990- 91 to Rs. 17,367 crores. So,
liability of loan and its interest payment went on increasing.

 Iraq War: The crude oil and other Petroleum products became
costly during the Gulf-war and the import of those products were
even burden for the country and this made trade deficit to reach at
its record high.

 Dismal Performance of PSU’s: PSU’s are enterprises

wholly owned by Govt. have invested crores of Rs. in these
enterprises. These became big liability for Govt.
 Fall in Foreign Exchange Reserves: India’s foreign
exchange reserve fell to low ebb in 1990-91 and it was insufficient
to pay for an import bill for 2 weeks. In 1986-87 foreign exchange
reserves were Rs. 8151 crores and in 1989-90, it declined to Rs.
6252 crores.

 India ran into a state of economic crisis and was also bankrupt. It
was this time the newly elected PM announced the liberalisation
of Indian Economy and allowed FDI and other major economic
reforms for the country.
 OBJECTIVES OF NEP 1991

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

‘Globalization and to give it a new thrust on market orientation.
2. The NEP intended to bring down the rate of inflation
3. It intended to move towards higher economic growth rate and to
build sufficient foreign exchange reserves.
4. It wanted to achieve economic stabilization and to convert the
economy into a market economy by removing all kinds of un-
necessary restrictions.
5. It wanted to permit the international flow of goods, services, capital,
human resources and technology, without many restrictions.
6. It wanted to increase the participation of private players in the all
sectors of the economy. That is why the reserved numbers of sectors
for government were reduced.
DIVERSIFICATION of NEP
1991
 LIBERALISATION
Liberalisation is the process or means of
 elimination of
control of the state over economic activities. It provides
greater autonomy to the business enterprises in decision-
making and eliminates government interference.

Liberalisation is understood to be the situation of the


political economy where the means of production will be
in the hands of the market and the economic efficiency is
measured in terms of market defined objectives.
 
 LIBERALISATION

In the Indian context, Economic Liberalisation includes the

following:
 
Dismantling of industrial licensing system
Reduction in physical restrictions on imports and import duties
Reduction in controls on foreign exchange, both current and
capital account
Reform of financial system
Reduction in levels of personal and corporate taxation
Softening of MRTP Regulations.
Partial privatisation of public sector units.
 ADVANTAGES OF LIBERALISATION

1.Lower Prices- The removal of tariff barriers can lead to lower

prices for consumers. E.g. removing food tariffs in West would
help reduce the global price of agricultural commodities. This
would be particularly a benefit for countries who are importers of
food.
2. Increased Competition- Trade liberalisation means firms
will face greater competition from abroad. This should act as a
spur to increase efficiency and cut costs, or it may act as an
incentive for an economy to shift resources into new industries
where they can maintain a competitive advantage. For example,
trade liberalisation has been a factor in encouraging the UK to
concentrate less on manufacturing and more on the service sector.
3. Economies of Scale- Trade liberalisation enables greater
specialisation. Economies concentrate on producing particular
goods. This can enable big efficiency savings from economies of
scale.

4.Inward Investment- If a country liberalises its trade, it will

make the country more attractive for inward investment. For
example, former Soviet countries who liberalise trade will attract
foreign multinationals who can produce and sell closer to these
new emerging markets. Inward investment leads to capital
inflows but also helps the economy through diffusion of more
technology, management techniques and knowledge.
 Disadvantages of liberalisation

 Destabilization of the economy: Tremendous

redistribution of economic power and political power leads to
Destabilizing effects on the entire Indian economy.
 Impact of FDI in Banking sector: Foreign direct
investment allowed in the banking and insurance sectors resulted
in decline of government’s stake in banks and insurance firms.
 Technological Impact: Rapid increase in technology forces
many enterprises and small scale industries in India to either
adapt to changes or close their businesses.
 Mergers and Acquisitions: Acquisitions and mergers are
increasing day-by-day. In cases where small companies are being
merged by big companies, the employees of the small companies
may require exhaustive re-skilling. Re-skilling duration will lead
to non-productivity and would cast a burden on the capital of the
company.
 Threat from Multinationals: Prior to 1991 MNC’s did not
play much role in the Indian economy. In the pre-reform period,
there was domination of public enterprises in the economy. On
account of liberalisation, competition has increased for the
Indian firms. Multinationals are quite big and operate in several
countries which has turned out a threat to local Indian Firms.
 Liberalisation in India

Since the adoption of the New Economic Strategy in 1991, there

has been a drastic change in the Indian economy. With the arrival
of liberalisation, the government has regulated the private sector
organisations to conduct business transactions with fewer
restrictions.
For developing countries, liberalisation has opened economic
borders to foreign companies and investments. Earlier, Investors
has to encounter difficulties to enter countries with many barriers.
These barriers included tax laws, foreign investment restrictions,
accounting regulations, and legal issues. The economic
liberalisation reduced all these obstacles and waived few
restrictions over the control of the economy to the private sector.
 Privatisation

• Privatization means permitting the private sector to set up

industries which were previously reserved for the public
sector. Under this policy many PSU’s were sold to private
sector
• Privatization is the process of involving the private sector-in
the ownership of Public Sector Units (PSU’s).
• The main reason for Privatization was in currency of PSU’s
are running in losses due to political interference.
•  The managers cannot work independently. 
• Production capacity remained under-utilized. To increase
competition and efficiency Privatization of PSUs was
inevitable.
ADVANTAGES OF PRIVATISATION

Save taxpayers' money :By applying a variety of privatization

techniques to state services, infrastructure, facilities, enterprises,
and land, comprehensive state privatization programs can reduce
program costs.
Increase flexibility :Privatization gives state officials greater
flexibility to meet program needs. Officials can replace the private
firm if it isn't meeting contract standards, cut back on service, add
to service during peak periods, or downsize as needed.
Improve service quality :A number of surveys have indicated
that public officials believed service quality was better after
privatization. In a survey of 89 municipalities conducted in 1980,
for example, 63 percent of public officials responding reported
better services as a result of contracting out
 Increase efficiency and innovation :Private
management can significantly lower operating costs through the
use of more flexible personnel practices, job categories,
streamlined operating procedures, and simplified procurement.
Improved maintenance :Private owners are strongly
motivated to keep up maintenance in order to preserve the asset
value of the investment in the facility. Public owners often defer
maintenance due to political considerations, increasing overall
long-term costs.
 Disadvantages of privatisation

 Inflexibility :There is also the issue of inflexibility that can

come with privatization. Typically, governments sign lengthy
contracts with private service providers. These contracts can
span for decades, locking residents into one service provider
for lifetimes.
 Higher Costs to Consumers :Although privatization is
usually promoted on the basis that it will reduce consumers'
costs, it can also drive costs up. According to nonprofit
consumer advocacy group Food & Water Watch, a proposed
private water service for Milwaukee would cost residents 59
percent more than they were paying for public water service.
Problem of regulating private monopolies
:Privatization creates private monopolies, such as the water
companies and rail companies. These need regulating to prevent
abuse of monopoly power. Therefore, there is still need for
government regulation, similar to under state ownership.

 Public interest :There are many industries which perform an

important public service, e.g., health care, education and public
transport. In these industries, the profit motive shouldn’t be the
primary objective of firms and the industry. For example, in the
case of health care, it is feared privatizing health care would mean
a greater priority is given to profit rather than patient care.
 Privatisation in India
1. Sale of shares of PSUs: Indian Govt. started selling
shares of PSU’s to public and financial institution e.g.
Govt. sold shares of Maruti Udyog Ltd. Now the private
sector will acquire ownership of these PSU’s. The share of
private sector has increased from 45% to 55%.

2. Disinvestment in PSU’s: The Govt. has started the

process of disinvestment in those PSU’s which had been
running into loss. It means that Govt. has been selling out
these industries to private sector. Govt. has sold
enterprises worth Rs. 30,000 crores to the private sector.
Minimization of Public Sector: Previously Public
sector was given the importance with a view to help in
industrialization and removal of poverty. But these PSU’s could
not able to achieve this objective and policy of contraction of
PSU’s was followed under new economic reforms.
 Number of industries reserved for public sector was
reduces from 17 to 2.
 (a) Railway operations
 (b) Atomic energy
Globalization
 Globalization

Globalization refers to the integration of markets in the

global economy, leading to the
increased interconnectedness of national economies. 
Markets where globalization is particularly significant
include financial markets, such as capital
markets, money and credit markets, and insurance
markets, commodity markets, including markets for oil,
coffee, tin, and gold, and product markets, such as markets
for motor vehicles and consumer electronics. The
globalization of sport and entertainment is also a feature of
the late 20th and early 21st centuries
 Advantages of globalization
 Providing an incentive for countries to specialize and benefit
from the application of the principle of comparative
advantage.
 Access to larger markets means that firms may experience
higher demand for their products, as well as benefit
from economies of scale, which leads to a reduction in
average production costs.
 Globalization enables worldwide access to sources of cheap
raw materials, and this enables firms to be cost
competitive in their own markets and in overseas markets.
Seeking out the cheapest materials from around the world is
called global sourcing.
 Avoidance of regulation by locating production in countries
with less strict regulatory regimes, such as those in
many Less Developed Countries (LCDs).
 Globalization has led to increased flows of inward
investment between countries, which have created benefits
for recipient countries. These benefits include the sharing
of knowledge and technology between countries.
 In the long term, increased trade is likely to lead to the
creation of more employment in all countries that are
involved.
 Disadvantages of globalization

1. The over- standardisation of products through global

branding is a common criticism of globalisation.
2. Large multinational companies can also suffer
from diseconomies of scale.
3. The increased power and influence of multinationals is also
seen by many as a considerable disadvantage of
globalisation.
4. Globalisation can also increase the pace of de-
industrialisation
5. Jobs may be lost because of the structural changes arising
from globalisation.
 Globalization in India

Growth - Globalization is likely to increase growth

in the long term.
Employment - Jobs may be destroyed in the
manufacturing sector
Prices - Increased competition is likely to reduce
the price level.
Trade - The volume of both imports and exports is
likely to increase
Impact of nep 1991 on Indian
economy
 IMPACT OF Nep1991 ON INDIAN
ECONOMY:-

 India’s post-independence development strategy showed all

the sign of recovery in the early nineties when the
government adopted the new economic model known as
LPG to meet a grave economic crisis.

 The objective of the economic reforms adopted by the

Indian Government was to transform a backward and
predominantly agrarian economy, lacking in basic
infrastructure, into a modern developed economy.
Thanks to prudent macroeconomic stabilization policies
including devaluation of rupee and other structural reforms,
the BoP crisis was over by the end of March 1994 and foreign
exchange reserves rose to USD 15.7 billion. Inflows of both
FDI and FII into India have increased massively.
India also increasingly integrated its economy with the global economy.
The ratio of total exports of goods and services to GDP in India
approximately doubled from 7.3 percent in 1990 to 14 percent in 2000.
This rise was less dramatic on the import side but was significant, from
9.9 percent in 1990 to 16.6 percent in 2000. Within 10 years, the ratio of
total goods and services trade to GDP rose from 17.2 percent to 30.6
percent.
The post 1991 era also saw an expansion of the automobile sector, easy
availability of motor vehicles, increased competition in the sector and
reduction in prices of motor vehicles.
This sector has been one of the biggest beneficiaries of economic
reforms. Once heavily shackled by regulation and government
monopoly, the sector now has several competing service providers.
The telecom policy evolved from the National Telecom Policy in 1994
to open up all the sectors to private players.
 IMPACT OF NEP 1991
POSITIVE IMPACT
Increase in GDP growth rate
Increase in FDI
Extension of Privatization
Increase in Foreign
Exchange
Increase in per capita
Income
Increase in mobility of
factor of production
Restrictive attitude
NEGATIVE IMPACT
Neglect of Agriculture
No relief of poverty
No success of removing
unemployment
Adverse effect on saving
Competition from MNCS
Indian small scale
industries badly effected
IMPACT OF NEP ON
DIFFERENT
SECTORS
 impact on labour sector
 New Economic Policy not only created desirable effects on fiscal,
finance, trade and commerce sector but also on the labour class of
small-scale industries. During the post period of New Economic
Reforms, the Govt, has reduced the intervention in the labour class and
trade unions. Hence, the approach of the trade unions and labour
leaders has been changed sharply after 1991. The employment rose due
to automation and closers of SSIs. Sick SSIs become first victims of
NEP. The flow of Multi-National companies are coming in India, where
labour is very cheap and unorganized. The role of trade unions is
withering to protect and safeguard the interest of labour class.
Therefore, the NEP particularly in industrial sector affected adversely.
However, the minimum wages, insurance working hours,
compensation etc. influenced partially.
 Impact on small scale sector
 Since 1991, due to various economic reforms, under the LPG.-
The impact on different Sector was continuously reflected.
The effects were wider and deeply rotated in almost all sectors
very fast during the last decade. The post reforms scenario
indicates that the rate of inflation from (17 to 8 %), the fiscal
deficit from (8.2 % to 6. 4%) and foreign trade deficit from
(1.5 % to 0.3 %) came down immediately during the period
from 1991 to 1996. Similarly, foreign exchange reserve,
foreign capital, industrial production and export growth also
increased during the same period as compared to the earlier.
Thus, the impact of NEP reached in each sector of Indian
economy no doubt.
 IMPACT ON AGRICULTURAL SECTOR
Economic liberalization and reform policy has far reaching acts on
agricultural exports and imports

investment in new technologies and on rural infrastructure

patterns of agricultural growth

agricultural prices

food security.

Reduction in Commercial Bank credit to agriculture led to a fall in farm

investment and impaired agricultural growth. Liberalization of agriculture
enhanced competition in “resource use” and “marketing of agricultural
production”, which forced the small and marginal farmers (who constitute
76.3% of total farmers) to resort to “distress sale” and seek for o-farm
employment for supplementing income.
IMPACT ON INDUSTRIAL SECTOR
 Impact on Trade and Commerce
Economic liberalization into the trade and commerce is an important
aspect of the economic reforms programme in the New Economic Policy.
The Govt of India launched the various reforms such as devaluation of
the rupees more liberalization in export and import policy, freedom of
gold import upto 5 and abolishing export subsidies , de-licensing policy,
abolishing MRTP Act, freeness to the infrastructure facilities from
foreigners and protection to investors and rupee convertibility etc.
created fayourable atmosphere in foreign trade and commerce. The
intention was to make exporters more competitive and self-reliant. The
Govt, also decided to reduce gradually the tariffs i.e. reduction in
quantative restriction in the way of foreign trade. Tariff rates on the most
of the commodities have been brought down except for 40 commodities.
The country has made commitment to the WTO for phased removal of
balance of payment related quantative restructions by 2003.
ACHIEVEMENTS OF NEW
ECONOMIC POLICY 1991
 Achievements of NEp
GDP Growth: GDP rose from 0.8 percent in 1991 to 7 percent for the
period from 1994 to 1997.
Increase in Gross rate of return (ROR) on Capital: In 1995, the
gross rate of return was recorded at a high of 16.1 percent.
Decline in inflationary trend of Wholesale Price Index: The
WPI declined to 4.6 percent in 1995-96 from 13.7 percent level in 1991.
Rise in foreign reserves: The foreign exchange reserves increased
to US. $ 25.4 billion (July 4, 1997) from US $ 2.24 billion in 1990.
Improvement in Index of Industrial Production: The industrial
production index rose to 11.8 percent, in 1995 from merely 0.6 percent
in 1991.
Export growth: Exports rose to 20.8 percent in 1995 from 3.8
percent in 1992 (in US Dollars).
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