NEW ECONOMIC

POLICY
Economic policy

 Economic policy refers to the actions that governments take in the

economic field.
 It covers the systems for setting levels of taxation, government
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.
Objectives of the New Economic
Policy, 1991
 The main objective of the NEP was to open the Indian economy into
the Globalization arena and provide a new direction to the Indian
market.
 The NEP focused on reducing the rate of inflation and building up
foreign exchange reserves to accelerate the economic growth of the
country.
 The NEP aimed at increasing the participation of the private sector in
economic growth by reducing the number of sectors reserved for the
government.
 The NEP was intended at permitting a global movement of goods and
services, capital, human resources, and technology by reducing trade
restrictions.
 The NEP aimed at attaining economic stability and an economic
market by eliminating all the unessential trade and tariff restrictions.
Components of the New
Economic Policy, 1991
 The New Economic Policy has been divided into three broad concepts
that are: Liberalization, Privatization, and Globalization, or the LPG
Model. The LPG Model was introduced to replace the LQP Model, i.e.,
Licensing, Quotas, and Permits. The main aim of introducing the
reforms was to attain a high rate of economic growth, reduce the rate
of inflation, reduce the fiscal deficit, and overcome the Bop (Balance
of Payment) crisis.
Liberalization

 Liberalization of an economy is considered a key component of NEP.

Before the New Economic Policy of 1991, the private sector was in
control of the government. Because of this, the domestic industries
were not allowed to take any decisions regarding the industry’s work
without the government’s interference. This resulted in a fall in
professionalism and inefficiency of work within the industry. With the
introduction of the liberalization policy, this sector gained the
freedom of decision-making without any interference from the
government.
 The government also decided to abolish the licensing system. Before
1991, a business needed to get a license from the government to
start any industrial activity. This resulted in a delay in getting a
license, as there was a long queue of people before the window of the
government department, seeking authorization to get a license. This
also resulted in corruption as the officers started taking bribes to
make the process faster. To end this, the government abolished the
licensing system and permitted individuals to start their industrial
activities without any permission (however permission is still required
in industries, such as medicine, defense equipment, etc.).
 Under the Liberalization Policy, the government of India introduced
various economic reforms. These reforms are:
Reforms
 Industrial Sector Reforms: This reform included policies like
Reduction in Industrial Licensing, Decrease in the Role of the Public
Sector, De-reservation under Small-Scale Industries, and the
Monopolies and Restrictive Trade Practices (MRTP) Act.
 Financial Sector Reforms: This reform included policies like
Change in the Role of RBI, Origin of Private Banks, Increase in limit of
Foreign Investment, and Ease in the Expansion Process.
 Tax Reforms: There are generally two types of taxes, Direct and
Indirect Taxes. This reform included policies like the Rationalization of
Direct Taxes, Reform in Indirect Taxes, and Simplification of Process.
 Foreign Exchange Reforms: This reform included policies like the
Devaluation of Rupee and Market Determination of Exchange Rate.
 Trade and Investment Policy Reforms: This reform included
policies like the Removal of Quantitative Restrictions on Import and
Export, Removal of Export Duties, Restriction in Import Duties, and
Relaxation in Import Licensing System.
Privatisation
 Privatisation refers to the partial or full ownership and operation of
public sector enterprises by the private sector. It implies the
withdrawal of government ownership from the public sector. It can be
done in two ways:
 Outright sale of part of the equity of Public Sector Undertakings
(PSUs) to private entrepreneurs (also known as Disinvestment), or
 Withdrawal of ownership and management of the public sector
companies from the government to the private sector.
 The need for privatization was felt mainly because of the poor
performance of the Public Sector Undertakings. As a result, the
consumers were facing a major loss, as they did not receive quality
products, and other services, such as poor delivery systems, etc. With
the introduction of the privatisation policy, this factor was eliminated.
 Unlike PSUs, Privatization promoted the diversification of production.
 Unlike PSUs, the Privatization of enterprises generated higher profits.
 It also promoted customer superiority.
 Unlike PSUs, Privatization provides high productivity.
 Unlike PSUs, Privatization promoted growth and development by
working in a competitive environment.
Globalization
 Globalization refers to the integration of the economy of a country with
the economies of other countries. The process of globalization is associated
with the free flow of trade, capital across borders, increasing openness,
growing economic independence, and deepening economic integration in
the world. The Globalization of the economy is considered to be a complex
phenomenon as it is a result of a set of various policies that aim at
integrating an economy with the world and transforming it towards greater
interdependence.
 The main aim of globalization was to integrate the Indian economy with the
global economy. As a result, there will be an unrestricted flow of
information, goods and services, technologies, and even people within
countries, which will eventually enhance the development of the country.
The government allowed foreign companies to hold 51 percent or more
shares of the Indian companies in the case of collaboration so that they can
function freely and as the owner. This also promoted the transfer of the
latest technologies into Indian territory due to collaboration with MNCs. The
reduction of the tariff and non-tariff barriers, adoption of policies to
promote exports, increase in Foreign Investments, increase of foreign
currency in the country (Forex), growth of the IT industry in India, and
several other features came under the globalization policy.
Measures of the LPG Policy
 Due to the Liberalization of the economy, the market got opened up
to more foreign investments and import and export of goods.
 The Liberalization Policy helped in reducing the dependence on
foreign loans and expand the banking sectors and capital markets.
 Privatization Policy helped in opening up the industries, that were
reserved for the public sector, to the private sector.
 Privatization Policy helped in reducing the monopolies of the
government by increasing competition.
 Privatization of PSUs resulted in the promotion of efficient and
improved quality of goods and services for the consumers.
 The Globalization Policy helped in opening the local market to the
global market which helped India in connecting with the global
financial markets.
 It helped in opening up the economy to foreign direct investment and
reducing international trade restrictions.