CHAPTER 3

NEW ECONOMIC REFORMS -1991

TOPICS

1. MEANING OF ECONOMIC REFORMS OR NEW ECONOMIC POLICY (NEP)

2. NEED FOR ECONOMIC REFORMS
3. POLICY MEASURES OF NEP
4. ELEMENTS OF NEP
5. REFORMS UNDER LIBERALISATION
6. PRIVATISATION – MEANING , POSITIVE IMPACT AND NEGATIVE IMPACT
7. GLOBALISATION – MEANING
8. POLICY STRATEGIES PROMOTING GLOBALISATION OF THE INDIAN ECONOMY
9. AN APPRAISAL OF LPG POLICIES

ECONOMIC REFORMS 1991

ECONOMIC REFORMS OR NEP – IT REFERS TO ECONOMIC REFORMS INTRODUCED SINCE 1991 TO

IMPROVE THE PRODUCTIVITY AND PROFITABILITY OF ECONOMY AND TO MAKE IT GLOBALLY
COMPETITIVE. OR IT IS A SET OF ECONOMIC POLICIES DIRECTED TO ACCELERATE THE PACE OF
GROWTH AND DEVELOPMENT.
NEED FOR ECONOMIC REFORMS

NEED FOR REFORMS WAS FELT OWING TO THE FOLLOWING REASONS:

1) HIGH FISCAL DEFICIT

2) FALL IN FOREX
3) RISE IN PRICE (INFLATION)
4) POOR PERFORMANCE OF PSUs
5) ADVERSE BOP
6) INEFFECIENT MANAGEMENT

MEASURES OF NEP

1. STABILISATION MEASURES: THESE ARE SHORT TERM MEASURES INTRODUCED BY THE GOVT.
TO CONTROL RISE IN PRICE, ADVERSE BOP, AND FALL IN FOREX.
2. STRUCTURAL ADJUSTMENT: THESE ARE LONG RUN POLICIES AIMED AT IMPROVING THE
EFFECIENCY OF THE ECONOMY AND INCREASING THE INTERBNATIONAL COMPETIVENESS BY
REMOVING THE RIGIDITY OF VARIOUS SEGMENT OF THE INDIAN ECONOMY.

IN THE NEW ECONOMIC POLICY 1991, STRUCTURAL REFORMS CAN BE SEEN WITHN RESPECT
TO:
a) LIBERALISATION
b) PRIVATISATION
c) GLOBALISATION
 LIBERALISATION
IT REFERS TO REMOVING ALL UNNESSARY CONTROL AND RESTRICTIONS LIKE PERMIT
LICENSES, PROTECTIONIST DUTIES, QUAOTAS ETC. IN OTHER WORDS, IT MAY BE DEFINED
AS LOOSENING OF GOVT. REGULATION IN A COUNTRY TO ALLOW FOR PRIVATE SECTOR
COMPANIES TO OPERATE BUSINESS TRANSACTIONS WITHN FEWER RESTRICTIONS.

NEP UNDER LIBERALISATION

A. INDUSTRIAL SECTOR REFORMS

1. ABOLITION OF INDUSTRIAL LICENSING

2. DECREASE IN THE ROLE OF PUBLIC SECTOR
3. DERESERVATION O PRODUCTION BY SSI
4. PRICE DETERMINATION BY MARKET FORCES
5. IMPORT OF CAPITAL GOODS

B. FINANCIAL SECTOR REFORMS

1. ROLE OF RBI
2. ESTABLISHMENT OF PRIVATE SECTOR BANKS
3. FOREIGN INVESTMENT
4. FISCAL/TAX REFORMS
5. FOREX REFORMS

C. TRADE AND INVESTMENT POLICY REFORMS

1. QUANTITATIVE RESTRICTION OF IMPORT AND EXPORT

2. REDUCTION OF TARIFF RATES
3. REMOVAL OF LICENSING PROCEDURES FOR IMPORTS
4. REMOVAL OF EXPORT DUTIES
 PRIVATISATION
It means transfer of ownership, management and control of PSE to the entrepreurours in the private
sector.
The selling a part or whole of shares of PSUs to the private sectors is known as Disinvestment.
The purpose of ‘P’ was mainly to improve fnancial discipline and facilitate modernizaton.

POSITIVE IMPACT OF PRIVATISATION

1. IMROVE THE EFFICIENCY OF MANAGEMENT :

a) It supports managerial efciency as there would be no politcal pressures and unnecessary

formalites.
b) It will make the entrepreneurs free to make quick decisions without interference by then
govt.
2. FINACIAL DISCIPLINE :

a) It maintains fnancial discipline by regular supply of funds.

b) Prior to 1991, there were undue delays in sanctoning of funds due to inefectve
administratve set up of govt.

3. DIVERCIFICATION OF PRODUCTION

a) Private sector will functon efciently to satsfy the unlimited wants of consumer’s in order to
create a market for its producton.
b) It will result in diversifcaton and expansion of producton.

4. INCREASE IN FDI :

a) It provides strong atack to the infow of FDI as fnancial discipline improves in the country
due to capital invested by the private sector.
b) Other countries would like to invest because of expanded domestc market.

NEGATIVE IMPACT OF PRIVATISATION

1. NEGLECT OF SOCIAL INTEREST

a) Private sector functons mainly with the objectve of proft maximizaton which may be
done at the cost of social welfare of people.
b) In reality, social interest is not a primary objectve of the private sector.

2. HIGHLY PRICED GOODS

a) It functons on the basis of market mechanism. When price rise, demand by those who cannot
pay this price, would fall but if it contnues, this may become a major problem of infaton.
b) If infaton is not controlled, it may afect the majority adversely.
 3. MONOPOLISTIC CONTROL

a) P if remains uncontrolled may turn into monopoly, where private owners may have monopoly
control over the market.
b) This situaton may also be characterized by concentraton of power in few hands.

4. HINDRANCE IN ACHIEVING THE OBJECTIVE OF FULL EMPLOYMENT

a) It does not work towards achieving the objectve of full employment as it is guided by proft
motve and due to this it has increased unemployment in the country.
b) P in many PSUs resulted in voluntary retrement of many workers because of unsatsfactory job
conditons laid by the private sector.

NAVRATNAS, MAHARATNAS AND MINIRATNAS

The term Navratnas meant a talisman or ornament composed of nine precious stones. Navratna
companies could invest up to Rs.1000crores without explicit approval.

1. LIST OF NAVRATNA
a) Indian oil
b) Bharat petroleum
c) ONGC
d) SAIL
e) HP
f) BHEL
g) IPCL
h) BSNL
i) NTPC

2. Maharatna up to Rs. 1000 to 5000crores are free to decide on investments upto 15% of their
net worth in a project.

LIST OF MAHARATNA

a) Coal India limited

b) Indian oil corporaton
c) NTPC limited
d) ONGC limited
e) SAIL
f) BHEL
g) GAIL
h) BPCL

3. MINIRATNAS: recently, yet another status called ‘MINIRATNAS’ has been created to
encourage PSUs to improve efciency and proftability. The investment up to Rs. 500crores. So
far 75 PSUs have been awarded miniratna status.
 GLOBALISATION

It refers to free interacton among all the countries of the world in various felds like trade,
technology, loans, investment and outsourcing. It is the outcome of liberalizaton and privatzaton. It
encourages integraton of the country with the world economy. It involves creaton of networks and
actvites in relaton to economic, social and geographical boundaries.

POLICY MEASURES UNDERTAKEN UNDER GLOBALISATION

1. RISE IN EQUITY LIMIT PARTICIPATION: prior to 1991, equity limit was restricted to only 40%
but after 1991, the limit has been increased from 40% to 51%.

2. DEVALUATION OF RUPEE: At the end of 1990, BOP situaton was adverse due to this there was
shortage of FOREX reserves as outlow was more than infow. Rupee was devaluated in July
1991 by nearly 20%.devalauton of rupee encouraged Exports and discouraged Imports.

3. FOREIGN TECHONOLFY AGREEMENTS: in respect of foreign technology agreement, automatc

permission is provided in high priority industry upto a sum of rupee 1 crore. No permission is
required for hiring foreign technicians.

4. MODIFICATION OF TARIFF: in conformity with the new economic policy, custom dutes and
tarifs imposed on imports and exports have been gradually reduced from 250% to 10%.

POSITIVE IMPACT ON GLOBALISATION

1. Greater access to global markets.

2. Advanced technology.
3. Beter future prospect for large industries of developing countries.

NEGATIVE IMPACT ON GLOBALISATION

1. A beneft of globalizaton goes more to developed countries as they are able to expand their
markets in other countries.
2. Globalizaton compromises the welfare and identty of people belonging to poor countries.
3. Market driven globalizaton increases the economic disparites among natons and people.

OUTSOURCING

It refers to contractng out some of its actvites to a third party which were earlier performed bb
organizaton. For example, many companies have started outsourcing security services to outside
agencies on a contractual basis.

It one of the important outcomes of the globalizaton process. As IT is growing faster, outsourcing has
become as important need of the present tmes in the internatonal market.
India has become a favouarble destnaton of outsourcing for most of the MNC’s because of low wage
rate and availability of skilled manpower.
Some of the services outsourced to India include:
1. Voice based business processes known as BPO or call centres.
2. Record keeping
3. Accountancy
4. Banking services
5. Music recording
6. Film editng
7. Clinical advice etc…

THERE ARE TOP 20 OUTSOURCING COMPANIES IN INDIA:

1. GENPACT
2. TATA CONSULTANCY SERVICES (TCS)
3. SERCO GLOBAL SERVICES
4. AEGIS LIMITED
5. WNS GLOBAL SERVICES
6. WIPRO
7. INFOSYS BPO LIMITED
8. ADITYA BIRLA MINACS
9. HCL BPO
10. FIRSTSOURCE SOLUTIONS LIMITED
11. MASTEK
12. HEXAWARE
13. EXL SERVICE
14. MPHASIS
15. iGATE
16. V CUSTOMER (US BASED COMPANY)
17. MINDSTICK SOFTWARE
18. KPIT TECHNOLOGIES
19. CAMBRIDGE TECHNOLOGY
20. ITC INFOSYS

WORLD TRADE ORGANISATION (WTO)

Prior to WTO, general agreement on trade and tarif (GATT) was established as global trade
organizaton, in 1948 with 23 countries. GATT was setup to administer all multlateral trade
agreements by providing equal opportunites to all countries in the internatonal market.
WTO was founded in January 1995 as a successor organisaton to the GATT.

Characteristcs of WTO
1. The WTO agreements cover trade in goods as well as services to facilitate internatonal
trade.
2. At present, there are 164 member countries of WTO and all members are required to
abide by laws and policies framed under WTO rules.
3. India has taken reasonable steps to liberalise trade by removing quanttatve restrictons
on imports and reducing tarif rates.

MAJOR FUNCTIONS OF WTO

1. To facilitate internatonal trade (both Bilateral and Multlateral trade) through

removal of tarif (tax) and non tarif barrier (quota).
2. To enlarge producton and trade of services.
3. To ensure optmum utlisaton of world resources.
4. To protect the environment.