CHAPTER-III {New economic Reforms (LPG)}

CHAPTER -3

NEW ECONOMIC REFORMS

MEANING OF ECONOMIC REFORMS 

(OR)

 NEW ECONOMIC POLICY(NEP) :

The new economic policy started by the government since 1991 in order solve the Economic crisis and to accelerate the rate of economic growth is called Economic Reforms. It is also known as new economic policy which consists of Liberalization, Privatization and Globalization (LPG). This aims at the rendering the economy more efficient, competitive and developed.

NEED FOR ECONOMIC REFORMS / RESONS WHY ECONOMIC REFORMS WERE INTRODUCED:

1. Mounting fiscal deficit:

Fiscal deficit of the government had been mounting year after year on continuous increase in

non-development expenditure. Due to persistent rise in fiscal deficit there was corresponding

rise in public debt and interest payment liability there was possibility that the economy might

lead to debt-trap situation. Thus it becomes essential for the government to reduce its non development  expenditure and restore fiscal discipline in the economy.

2. Adverse balance of payment: When receipts of foreign exchange fall short of their payments, the problem of adverse balance of payment arises. Despite the restrictive policy adopted by the government till 1990 import substitution and export promotion the desired result could not be meet. Our export could not compete in terms of price and quality in the international market. As a result there was slow growth of export and rapid increase in imports. Accordingly the burden of foreign debt services increased tremendously and leading to depletion of foreign exchange reserves.

3. Gulf Crises: On account of Iraq war in 1990-91 prices of petrol shot-up . Besides India used to receive huge amount of remittances from gulf countries in terms of foreign exchange.

4. Poor performances of PSU’s:

Due to poor performances of public sector undertakings degenerated in to a liability. Most of

public sector undertakings were incurring loss and their performance was quiet satisfactory. On account of these factors, it becomes imperative for the government to adopt new economic policy or to initiate economic reforms.

5 .Rise in price: Due to rise in prices of food grains there was pressure of inflation prior to 1991. Which deepen the economic crisis from bad to worse.

6. Fall in foreign exchange reserves: In 1990-91 India’s foreign exchange reserves fall to such a low level that there was not enough to pay for an import bill of even10 days. In such situation the government had to helplessly resort to policy of liberalization as suggested by the World Bank.

ELEMENTS OF NEW ECONOMIC POLICY-

1.    Liberalization

Meaning: It means to free the economy from the direct and physical control imposed

by the government.

Measures adopted for Liberalization:

1  1.Financial sector reforms

Ø  Financial sector includes banking and non-banking financial institutions stock exchange market and Foreign exchange market

Ø   India financial sector is regulated and controlled by the RBI (reserve bank of India) before 1991 but after Liberalization, substantial shift in role of the  RBI from ‘a regulator’ to ‘a facilitator’  of the financial sector.

Ø  It has also allowed FII (foreign institutional investors) to invest in Indian financial markets.

2. Fiscal reforms

Ø  It refers to revenue and expenditure policy of the government. It is a policy that seeks to achieve stability in the economy by way of increasing and decreasing the revenue or expenditure of the government.

Ø  Tax reforms are the principal component of fiscal reforms.

Ø  Taxes are classified as (a) direct taxes and (b) indirect taxes.

Ø  Direct taxes are those taxes, the burden of which cannot be shifted onto others

Ø  Indirect taxes (levied on goods and services) are those taxes, the burden of which can be shifted onto others.

3. Foreign exchange reforms

Ø  Foreign exchange reforms were triggered in 1991 with the devaluation of Indian rupee against foreign currencies.

Ø  This accelerated the flow of foreign currency into the Indian economy

Ø  Devaluation implies lowering the value of our currency in relation to other currencies of the world.

4. Trade and investment policy reforms

Ø  India was following a regime of quantitative restrictions, by keeping the tariffs very high and tight control over imports.

Ø  These policies reduced efficiency and competitiveness which led to slow growth of manufacturing sectors.

Ø  Trade policy reforms aimed at

a) Dismantling of quantitative restrictions on imports and exports

b) Reduction of tariffs rates and

c) Removal of licensing procedures for imports

d) deservation of Production areas.

e) Freedom to import capital goods

2. Privatisation

Meaning :

It refers to general process of involving the private sector in the ownership or management of state owned enterprises. It imply partial or full ownership and management of public sector enterprises by the private sector.

“Privatization is the general process of involving the private sector in the ownership or operation of a state owned enterprise.”

•         It may happen in two ways

                                i.            Outright sale of government enterprises to the private entrepreneurs or

                              ii.            Withdrawal of government ownership and management from the mixed enterprises.

•         Disinvestment refers to a situation when a government sells off a part of its share capital of PSUs (Public Sector Undertaking) to the public.

•         The government has also made attempt to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions.

Measures adopted for Privatization:

(i) Contraction of public sector

(ii) Disinvestment of public sector undertaking

(iii) Selling of shares of public enterprises

                                                         

3. Globalization

Meaning :

It mean’s integrating the economy of a country with the economies of other countries under condition of free flow trade and capital and movement of persons across borders.

•         Outsourcing

Ø  This is an important outcome of the process of globalization.

Ø  It refers to a system of hiring business services from foreign countries.

Ø  These services include: call centres, transcription, clinical advice, teaching/ coaching, etc.

Measures adopted for Globalization:

(i) Increase in equity limit of foreign investment

(ii) Partial convertibility of Indian rupees

(iii) Long –term trade policy

(iv) Reduction in tariffs.

World trade organization (WTO)

Ø  WTO is supposed to promote free trade in the international market by market by reducing tariff  and removing non-tariff barriers

Ø  It is focusing on the competition in the international market and free access to markets across different countries of the world.

Ø  It is facilitating bilateral as well as multilateral trade agreements.

Ø  Tariff barriers refer to barriers on imports through high import duty

Ø  Non-tariff barrier refers to quota-barriers, implying quantitative restrictions on imports.

Ø  Bilateral trade agreements are trade agreements between any two countries of the world.

Ø  Multilateral trade agreements are trade agreements among many countries of the world  

IMPACTS OF REFORM PROCESS /LPG POLICIES IN INDIAN ECONOMY

Reforms in agriculture

Ø  Public investment in agriculture sector especially in infrastructure, which includes irrigation, power, roads, market linkages and research and extension, has been reduced in the reform period.

Ø  Since the commencement of WTO, this sector has been experiencing a number of policy changes.

Ø  Such as reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative restrictions on agricultural products.

Ø  These have adversely affected Indian farmers as they now have to face increased international competition.

Reforms in Industries

Ø  Industrial growth has also recorded a slowdown.

Ø  This is because of decreasing demand of industrial products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc.

Ø  A developing country like India still does not have the access to developed countries markets because of high non-tariff barriers.

Other Impacts:

Positive Impacts of LPG Policies

1. a vibrant Economy

2. Stimulant to Industrial production

3. Check on fiscal deficit

4. Check on inflation

5. Improvement in consumer’s sovereignty

6. A substantial increase in foreign exchange reserves.

7. Flow of private foreign investment.

8. India as an emerging economic power

9. Shift from monopoly market to competitive market

Negative impact of LPG polices.

1. Neglect of agriculture

2. Urban concentration of growth process

3. Economic colonialism

4. Spread of consumerism

5. Lopsided growth process

6. Cultural erosion

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