New Economic Policy (LPG)

3
New economic reforms in India refers to the neo-liberal policies introduced
by the government in 1991 and in the later years.
The central point of the reforms was liberalization of the economy, simplifying
regulations, giving more role to the private sector and opening up of the
economy to competition. The condition of Indian economy was very poor in
1990’s. So new economic policy was a good decision to combat that crises.
REASONS FOR ECONOMIC REFORMS
These are the following reasons which shows why economic reforms in
1991.
(i) Rise in prices:  Price rise continuously in India. The inflation rate
increased from 6.7% to 16.7%.
Due to inflation country’s economic position became worse. Main reason
for inflation was rapid increase in money supply. It was due to deficit
financing which means borrowings from Reserve Bank of India by Govt.
to meet its deficit.
RBI provide this loan by printing new currency notes which leads to
increase in money supply.
(ii) Rise in fiscal deficit: Due to increase in government expenditure.
Indian government has to borrow money so there was rise in public debt
and interest. In 1991 interest liability became 36.4% of total government
expenditure. This leads to increase in fiscal deficit.
Fiscal deficit is the difference between total expenditure and total receipts
excluding borrowings.
(iii) Poor performance of public sector: In the 40 years period (1951-
1990), public sector was assigned on important role to work for the
economic deelopment of India. However except few enterprises the overall
performance was very dissappointing. Many public enterprises showing
losses. Then government recognised the need for making necessary
reforms.
(iv) Deficit in Balance of Payment: The difference between total exports
and total imports are negative and this had been rising continuously.
To cover this deficit large amount of foreign loans had to be obtained
so liability of loan and its interest payment goes as increasing. It made
balance of payment adverse.
(v) Fall in foreign exchange reserve:  India’s foreign exchange reserve fell
too low in 1990-1991 and it was insufficient to pay for an import bill for
2 weeks. Then Chandershekhar government had to sell gold to meet the
import liability. So government had to think about policy of liberalisation.

(5)
6 Indian Economic Development

ELEMENT OF NEW ECONOMIC POLICY

1. L-Liberalisation
2. P-Privatisation
3. G-Globalisation
1. Liberalisation
It means end of license and restrictions previously imposed by the
government.
Liberalisation of the Indian industry has taken place with respect to:
• No requirement of license except five industries
• No restriction on expansion of business activities and scale of business.
• Freedom of fixing the price of goods and services.
• Reduction in Tax Rates and lifting of unnecessary controls over the
economy.
• Simplifying procedures for imports and exports.
Impact of Liberalisation on Industrial Sector
(i) Abolition of Industrial Licensing:  The new industrial policy abolishes
the system of industrial licensing for most of the industries.
Under this policy no licenses are required for setting up new industrial
units or for expansion of existing units. To begin with, 18 industries
were require licenses. Through later amendment to the policy, this list
was reduced to five. These were liquor, cigarette, defence equipments,
industrial explosives and dangerous chemicals.
(ii) Decrease in role of public sector:  The number of industries, exclusively
reserved for the public sector, reduced from 17 to following 3 industries;
(i) Defence equipments; (ii) Atomic enery generation; and (iii) Railway
transport.
(iii) De-reservation under small-scale industries: Under new economic
policy many goods produced by small scale industries have now been
de-reserved. Increased investment limit for small scale industries to one
crore.
(iv) Freedom to Import of Capital Goods: Due to liberalisaion industries
are free to import capital goods for upgrading their technology.
(v) Abolition of Restrictive Trade Practices:  According to monopolies and
restrictive trade practices (MRTP) Act 1969, all those companies having
assets worth ` 100 crore or more were called MRTP firms and were
subjected to several restrictions. Now these firm’s have not to obtain
prior approval of the government for taking investment decision. Now
MRTP Act is replaced by the Competition Act 2002.
Impact of Liberalisation on Financial Sector Reforms
(i) Change in Role of RBI:  Now Commercial Banks are free to take decisions
on many matters, without consulting RBI. Role of RBI was reduced from
NEW ECONOMIC POLICY (LPG) 7

regulator to facilitator of financial sector. Banks are free to set up new

branches.
(ii) Increase in Private Sector Banks: This policy led to establishment
of private sector banks Indian as well as foreign. It leads to increase
in competition among Commercial Banks. Now people can get better
banking services and lower interest rates.
(iii) Increase in limit of foreign investment:  The limit of foreign investment
in Banks was raised to 51%. Many financial institutions, mutual funds
and pension funds were now allowed to invest in Indian financial markets.
Impact of Liberalisation on foreign exchange sector foreign exchange
reforms were initiated in 1991 with the devaluation of the Indian rupee
against foreign currencies.
Devaluation means fall in value of Indian rupee in terms of foreign
currency. Now more Indian rupee is required for one unit of US dollar
or UK pound. This led to increase in inflow of foreign currency in to our
country.
Impact of Liberalisation on Trade & Investment Policy
Before 1991 various restrictions were imposed on import of goods and
services to protect domestic industries but this restriction reduced the
competition among domestic industries and caused slow growth so to
promote domestic industries, government take the following decisions.
(i) Removal of Quantitative Restrictions on Exports & Imports: Under
new economic policy, various quantitative restrictions were removed.
(ii) Removal of Export duties:  To promote domestically produced goods in
international market export duties were removed.
(iii) Relaxation in import licensing system:  Many import restrictions were
abolished except few industries. This decision was taken to import raw
material at better prices.
2. Privatisation
Privatisation means giving greater role to the private sector and reducing
the role of public sector.
Privatisation can be done in two ways: 
(i) Transfer of ownership and management of public sector companies from
the government to private sector.
(ii) Privatisation of the public sctor undertaking (PSU) by selling off part of
the equity of PSUs to the public. This process is called Disinvestment.
3. Globalisation
Globalisation means integrating our economy with world economy.
Before 1991 government of India had followed a strict policy to reduce
the volume of imports these are in form of import licensing, tariff and
taxes, quantitative restrictions etc. in globalisation all these barriers
were removed to promote international trade.
8 Indian Economic Development

Policy Strategies Promoting Globalisation

These are the following points promotes globalisation of the Indian
economy.
(i) Increase in limit of foreign investment: Foreign Direct investment
share raised to 100% in few sectors without any restrictions introduction
of foreign exchange management act (FEMA).
Foreign capital investment has been raised from 40 to 51%. In few sectors
it reached to 100%.
(ii) Long Term Trade Policy: To promote long term trade policy all the
restrictions and controls on foreign trade have been removed.
Open competition is incouraged. Except some specific goods, most goods
are traded free of restrictions.
(iii) Reduction in Tariffs: Tariff barriers have been withdrawn on most
goods traded between India and rest of the world. It leads to increase in
competition.
(iv) Withdrawl of Quantitative Restriction:  Earlier quantitative restrictions
are imposed but it was withdrawn. This is conformity with India’s
commitment to the WTO (World Trade Organisation).
[Outsourcing:  Outsourcing is a business practise in which a company hires
another company or an individual to perform tasks or handle operations.
This service include: Call centres, clinical advice, teaching or coaching,
Accountancy, film editing etc. Outsourcing is one of the important outcomes
of the globalisation process. India has become a favourable destination of
outsourcing for most of the MNC’s because of availability of cheap labour
even low wage rate for the skilled workers and a revolutionary growth of
IT industry in India.
BPO (Business process outsorucing is quite popular in India. It is also
called Call centres.)]
WORLD TRADE ORGANISATION (WTO)
The World Trade Organisation is an intergovernmental organisation that
is concerned with the regulation of international trade between nations.
The WTO officially commenced on 1st January 1995 replacing the
General Agreement on Tariffs and Trade (GATT), which commenced in
1948. It is the largest international economic organisation in the world.
Its headquarter is in Geneva, Switzerland and Presently there are 164
member countries of WTO and all the members are required to abide by
laws and policies framed under WTO rules.
The WTO agreemnets cover trade in goods as well as services, to facilitate
international trade.
Functions performed by WTO are:
(i) It helps in international trade through removal of tariff as well as non-
tariff barriers.
(ii) To implement rules and provisions related to Trade Policy.
NEW ECONOMIC POLICY (LPG) 9

(iii) To ensure optimum utilisation of world resources.

(iv) To protect the environment.
(v) To provide a framework for dispute settlement.
An Appraisal of LPG Policies (Merits)
1. Increase in rate of economic growth: The growth in GDP was 5.6%
during 1980-91. During 2018-19 growth in GDP is estimated at 7.2% due
to economic reforms country’s GDP increased. Liberalisation provides
job opportunities and helps to reduce unemployment.
2. Increased in industrial production:  LPG policies have worked as a
great stimulant to industrial production in the Indian Economy. Due to
LPG policies Indian IT industry has achieved global recognition.
3. Increase in Foreign Investment:  By ending up restrictions on foreign
investors in Economic Reforms govt of India increase its Foreign Direct
Investment (FDI) and foreign institutional investment. It was US $100
million in 1990-91 but in 2014-15 it increased to US $73.5 billion.
Mission “Make in India” has started in September 2014, in which foreign
direct investment policy was further liberalised to increased investment
in Indian economy due to this FDI in India increased by 48%.
4. Rise in Foreign Exchange Reserves: Due to increase in investment,
supply of foreign exchange increased its foreign exchange reserve was US
$6 billion in 1990-91 but in 2014-15 it was US $321 billion. India is one
of the largest foreign exchange holders in the world.
5. Rise in Exports: India’s export increased after New Economic Policy
because many industries were established in India. Who are involved in
export Govt. also provide various facilities to exporters.
6. A check on Inflation:  Inflation rate has been reduced due to tax reforms.
7. A check on fiscal deficit: Due to new economic policy government
revenue increased hence there is a less need of borrowings from rest of
the world.
8. Employment opportunieis provide by private sectors: Due to
delicensing policy there is an increase in role of private sector, they
increase their area of production which provides employment to mass
people.
DEMERITS OF LPG POLICIES
1. Neglect of Agriculture:  Growth of GDP was seen only in secondary
and tertiary sector. Agriculture sector has suffered a serious neglect and
its growth rate was slow down. Neglect of agricutlure implies spread of
poverty. It also create a hurdle for growth process of industrial sector.
This is because agricutlure is an important source of raw material for the
industrial sector.
10 Indian Economic Development

2. Neglect rural area in growth process:  LPG policies have resulted in

the concentration of growth process in urban areas. All multinatioal
companies are focusing only an urban areas where they find good
infrastructural facilities. This cause the growth of urban sector only and
rural area’s are neglected this is the main reason of migration of people
from urban to rural area.
3. Ineffective Tax Policy:  Govt. reduce tax rates so that people will pay their
tax honestly but this policy of Govt. failed. Reduction in tariff decrease
govt. revenue through custom duties. Many tax incentives provided to
foreign investors to attract foreign investment this also reduced govt.
revenues.
4. Spread consumerism:  The new economic policy encourages the purchase
of goods and services in increasing amounts. Due to this people spend
more on material items. Aggressive advertisements play a vital role to
promote sale of Dubious goods.
5. Unbalanced growth: We already studied that their is no meaning
of growth if it is unbalanced. Due to LPG policy only few sectors are
developed such as telecommunication, information technology, finance,
entertainment, travel and hospitality services but agricutlure sector and
other industrial sectors are neglected which provide livelihood to millions
of people in the country.