NEW ECONOMIC POLICY

1991
PROF.V.R.KISHORE KUMAR
M.A., MPhil(Int. Eco.)

NEW ECONOMIC POLICY1991

OBJECTIVES
TO

pull the country out of economic crisis

Accelerating

the rate of growth

Reasons for NEP

Fiscal deficit was 5.4% of GDP in 1981-82 which

rose up to 8.4% in the year 1990-91.

In 1991,amount of interest liabilities rose further

to 36.4% of total governmental expenditure.

Country was moving towards debt trap.

Mounting adverse BOP

Fall in foreign exchange reserves

Raise in prices

Poor

performance

of

public

sector

undertakings

First Gulf war caused spike in oil prices which

caused a major balance of payment crisis for
India.

Fiscal Imbalance

Fiscal

situation

growing

burden

has
of

detoriated

due

to

non-development

expenditure. Indicators of fiscal imbalance

reflect that throughout the eighties it was on
the rise. Indicators like budgetary deficit,
revenue deficit and gross fiscal deficit.

Fiscal imbalance in % share of GDP

1981-82

1990-91

Budgetary deficit

0.9

2.1

Gross Fiscal
Deficit

5.4

6.6

Revenue Deficit

0.2

3.3

Internal Debt of
Government

35

49.8

Interests payments as % share of GDP

1980-81

1990-91

Interests
Payments

3.8

Central
Government
Expenditure

10

22

Frigile Balance of Payments

The BOP situation was highly

precarious in 1991. But this
was not unexpected.

The balance of payment was

on the brink of disaster as in
mid-January 1991 and again
in late June 1991.

The

level

of

foreign

exchange

reserves dropped to levels which are

not sufficient to finance imports of
even ten days.

BOP

The
Curren
t
accoun
t
Deficit
Extern
al

1980-81
1990-91
Amoun % GDP Amoun % GDP
t in$
t in$
Billion
Billion
2.1
1.35
9.7
3.69

12

23

India asked for $1.8 Billion bailout

loan from IMF, in return IMF instead
reforms

This

New

Economic

inaugurated by

Policy

was

SAILENT FEATURES

LIBERALIZATION

PRIVATIZATON

GLOBALIZATION

LIBERALIZATION

Liberalization

means

minimizing

the

government role and giving freedom to

the industries.

In pre-reform period there are number of

restrictions and controls on industry. In
the new economic policy , several types of
controls like licensing, price controls and
financial controls have been removed.

The controls on economic activity

lead to corruption, undue delays and
inefficiency

of

public

sector

organizations.

New economic policy made a bid to

reduce

restrictions

on

(based on market economy).

economy

Economic reforms under

Industrial Sector

Abolition of licensing, Dereservation of

production areas, expansion of production
quantity, freedom to import capital goods

Ex

MRTP

2002,2007)

Act1969,

competition

Act

Financial Sector
Role of RBI shifted from a regulator
to

facilitator,

FII

(Foreign

Institutional Investments) allowed to

invest

in

India,

domestic

international banks emerged.

and

Fiscal Reforms

Tax

reforms like

lowering tax revenue

Broadening
Reducing

of the tax base

the loopholes with expected rise

tax ratio
Deliberate
Efforts

reduction in customs duties etc.,

to ensure VAT

External
Sector

Foreign exchange reforms(viz., Rupee

convertibility). Foreign trade policy
reforms like free exports and imports,
rationalisation

of

decentralization,

tariff

structures,

convertibility

of

rupee on current account ,trading

houses and SEZs etc.

PRIVATIZATION

PRIVATIZATION is the general process of

involving

the

private

sector

in

the

ownership, operations of state owned

enterprise.

Privatization is having two dimensions like

Outright

sale of government enterprise,

Withdrawal

of

govt.,

ownership

management from mixed enterprise.

and

Why Privatization ?

Statement In New Industrial Policy

1991: After initial exuberance of the
public sector entering new areas of
industrial and technical competence,
a number of problems have begun to
manifest themselves in many of the
public enterprise . Serious problems
are observed in the insufficient
growth in productivity, poor project
management

over manning, lack of continuous

technological
up
gradation,
and
inadequate attention to R&D and human
resource development. In addition,
public enterprises have shown a very
low rate of return on the capital
investments. This has inhibited their
ability to regenerate themselves in
terms of new investments as well as in
technology development. The result is
that many of the public enterprises have
become a burden rather than being an
asset to govt..

For
purpose
of
privatization
government has adopted the route of
disinvestment which involves the sale
of the public sector equity to the
private sector and the public at large

The ownership of public sector

units(PSU) is being gradually sold off
to private entrepreneurs.
Gains from privatization :

100%
Commitme
nt and
efficiency

Promotes
consumer
s
sovereign
ty

GAIN
S

Diversifica
t-ion of
production

Competitio
n
Upgradatio
n
And
modernizati
on

Losses due to privatization

Self

interest supersede social interest

Corruption
Profit

oriented

Weaker

section suffers

Unemployment
Public

sector monopoly was replaced

by private monopoly

GLOBALIZATION

GLOBALIZATION process associated with

increasing openness growing economic
interdependence

and

deepening

integration in the world economy.

Unrestricted flow of goods and services,

technology

and

enterprise

different countries in the world.

among

POLICY STRATAGIES PROMOTING

GLOBALIZATION
Increase
Partial

in equity limit of foreign investment

convertibility and full convertibility of

rupee
Long

term

trade

policy(

new

trade

policy1991)
Reduction

in tariffs (export import tariffs and

restrictions)

Positive impact of New Economic

Policy
Economic activities has picked up and
the growth rate of GDP has shown an
impressive increase.
Stimulated industrial production
Significant increase in govt., revenues
and subsequent decrease in fiscal deficit

Greater flow of goods and services

checked inflation rate.
Consumers sovereignty has widened.
Substantial increase in forex reserves.
Flow of pvt., foreign investment
increased.
India has been recognized as
emerging super power.
Monopoly markets has been
converted in to competitive markets.

NEGATIVE IMPACT OF NEP

Agriculture is totally neglected
Concentration of growth process in
urban areas
Resulting in to economic colonism
Consumerism has been increased
Lopsided growth process
Cultural erosion

REFERENCES
INDIAN

ECONOMY

---

DUTT

AND

SUNDARAM
INDIAN ECONOMY --- MISHRA AND PURI
ECONOMIC

ENVIORNMENT

BUSINESS MISHRA AND PURI

OF