03_INDIAN ECONOMIC REFORMS – class 11

 

 

 

CLASS-XI

Chapter-3

INDIAN ECONOMIC REFORMS

 

NEP (New Economic Policy)

Economic reforms or structural adjustment is long term multi-dimensional package of various policies and programme for further economic development.

OBJECTIVES

1. To reduce the inflation rate in the country.
2. To put the economy back on the path of sustainable development.
3. To improve the productivity of the economy.
4. To improve the balance of payment situation.

NEED OF NEW ECONOMIC POLICY

(A)       ECONOMIC CRISES : India met with economic crises

(i)         Balance of foreign debt.

Accumulation on of huge foreign debt weakened our balance of payment position.  It was to the extent of 10,000 crores. India was highly indebted. It was paying 3000 crores interest charges every year.

(ii)        Inward looking policy

The inward looking policy focuses on industrialization, the excessive protection to industries through licensing and input tariffs discouraged the competition and efficiency in the economy. Trade relation with Soviet had been down.

(iii)       Foreign exchange

Foreign exchange was dropped to a level that was not sufficient for even a fortnight. India sold large amount of gold to the Bank of England.

(iv)       The national income was growing at the rate of 0.5%. Inflation reached at the rate of 16%. Fiscal deficit was more than 7.5%. Deficit financing was around 3%. Price of petroleum product was around 3%. Which was very high. Remittances from non-resident Indians are stopped due to war in Arab countries.

(B)       In order to overcome the above crises the government of India approached WORLD BANK and IMF (International monetary Fund) for help. They gave the loan to manage the crises but imposed the condition that India should liberalise the economy and private sector should be given more freedom to operate. India accepted and announced NEP. To overcome the crises. India received
$ 7 billion as a loan.

LIBERALISATION

An economic policy which gives relaxation to enable the entrepreneur to make their decision themselves and open freedom to economic activities at all levels is termed as Liberalisation.
It means removal of all unnecessary control and restrictions like license, duties, quotas etc. imposed by the government. Before 1991,government was enforcing controls in many ways, like foreign exchange control restriction on investment by business houses. Import license i.e. license has to be taken for imports. But these controls resulted in –

(a)        Consumption delays.

(b)        Inefficiency

(c)        Losses

(d)        High cost economy

 

OBJECTIVE OF LIBERALISATION

(i)         To raise internal competitiveness of industrial production.

(ii)        To raise foreign investment and technology.

(iii)       To reduce debt burden of the country.

(iv)       To get an opportunity to expert to the developed countries and to import capital goods and machinery from abroad.

 

(1) INDUSTRIAL POLICY REFORMS

The main industrial reforms were as follows

(i)         Industrial Licensing

It had been abolished for all the items except related to security, strategic and environmental concern e.g. alcohol, hazardous, chemicals, explosive, electronics etc.

(ii)        De-reservation of industries for public sector

Areas reserved for public sector were reduced and greater participation by private sector is permitted.Industrieswhich continued to be in public sector are defense, atomic energy & railway transport.

(iii)       Reforms in small scale sector

Many goods produced by small scale sector has now been reserved. Investment limit of the small scale industries has been increased to one crore with a view to modernize them.

 

(2) FINANCIAL SECTOR REFORMS

Financial sector includes financial institutions such as commercial banks, industrial banks stock exchange operations, foreign exchange market etc. The financial sector in India is controlled by RBI

AIM OF FINANCIAL SECTOR REFORMS

The major aim of the financial sector reforms is to reduce the role of RBI from regulations. This means that financial sector may be allowed and take decisions on money matters without consulting RBI.

Measure Taken

(i)         Capital market development.

(ii)        Foreign institutional investors to be allowed to invest in Indian financial market.

(iii)       Both CRR and SLR were reduced to increase the availability of funds to commercial banks to advance more credit.

(iv)       Bank rate was reduced. It lowered the interest rate charged by the commercial bank thus encouraging credit.

(v)        There was establishment of private. Sector banks in Indian as well as in foreign. This increases foreign investment limit in bank.

TAX REFORMS

Tax Reforms are also known as fiscal policy reforms. Main tax reforms are : –

1. Reduction in the rates of income tax and corporate tax, so that tax revenue can be reduced and people can be encouraged for better consumption.
2. Indirect taxes were also reduced so that common national market of goods and services can be established.
3. Tax structure and procedure to be simplified.

 

TRADE POLICY REFORM

Before 1991, India followed protectionist trade policy by quantitative restrictions and high tariff. This reduced efficiency and competitiveness. This reduced the growth of industries.

AIM

1. To increase the international competitiveness of industrial producers and foreign      investment and technology in the economy.
2. to promote the efficiency of local industries and adoption of modern industries.

Measures

1. Abolition of import licensing except in case of hazardous product.
2. Removal of Quantitative restrictions on imports          .
3. Reduction in the tariff rates.
4. Steps towards export promotion.

FOREIGN EXCHANGE REFORM

In 1991, as an immediate measure to reduce the balance of payment crises rupee was devalued against foreign currencies. This led to an inflow of foreign exchange.

Thus made Indian goods cheaper in the foreign market and increased the inflow of foreign exchange, after 1991.

• Approval was given for direct foreign investment upto 51% foreign equity.

(b)        Automatic permission was given for foreign technology.

PRIVATISATION

Privatisation is the transfer of function, activity and organization from the public to the private sector.

OBJECTIVE OF PRIVATISATION

• Improving the government financial position by raising funds from the sale of enterprises or their assets. Making the enterprises raise the internal resources and form capital markets.
• Improving the performance of enterprise through licensing efficiency, requiring enterprises to meet performance objective, relief from public sector financial constraints.

WHY PRIVATISATION IS REQUIRED?

• It will introduce efficiency and profitability in public sector undertaking.
• It will reduce budgetary deficit which results from loss making public sector undertaking.
• It will use modern technique of production.
• It will increase accountability and responsibility in PSU’s.

DISINVESTMENT

It means the sale of part of equities held by the government in any public sector undertaking to the private investor. Two main methods of disinvestment are : –

• Minority Sale:In thismethods, equity is offered to investors through domestic public
• Majority Sale:In this method, government offer sales above 51% in majority sales.

Selling off the part of the equity of PSU’s to the public for the privatization of public sector undertaking is known as disinvestment.

 

GLOBALISATION

Globalisation is the outcome of liberalization and privatization. It is the outcome of the rest of various policies that are aimed at transforming the world towards greater interdependence and integration. Globalization attempts to establish limits in such a way that the happening in India can be influenced by events happenings miles away.

Causes of Globalisation

1. Deregulation of money market.
2. The major improvements in media, information technology and communication.
3. Rapid growth of research and development.
4. Removal of official banners on trade.

OUTSOURCING

It implies obtaining goods and services by contact from an outside source with the growth of informational technology (IT), outsourcing has acquired an international dimension.

The main services which has been outsourced from India are voice-based business process (known as BPO or call centre), banking etc. Companies of developed countries find it profitable to contact services in developing countries in India. The cost of these services is much lies here. India has become an important destination for global outsourcing because of Low wage rates and availability of s killed manpower.

 

WORLD TRADE ORGANISATION

FORMATION

The WTO was founded in 1995 as the Successor Organisation to the general agreement on Trade & Tariff (GATT). The Head office of W.T.O. is located at Geineva. The total membership of W.T.O. is 158.

PURPOSE

1. WTO is expected to establish rule based trading in which nations cannot place arbitrary restrictions on trade.
2. To enlarge production and trade of services to ensure optimum utilization of world resources and save the environment.
3. To fascillate international trade through tariff and non-tariff barriers and providing greater market access to all member countries.

INDIA & WTO

India being an important member of WTO as kept its commitment towards the liberalization of trade made in the WTO by removing quantitative restrictions on imports and reducing tariff rate.

FUNCTIONS OF WTO

1. Acting as a medium for multilateral trade organization.
2. To reduce the trade disputes.
3. To frame the economic polices along with other international institutions.
4. To implement multilateral trade agreement.

POSITIVE IMPACT OF THE LPG  POLICIES

1. A Vibrant Economy :

After the introduction of liberalization privatization and Globalisation, there was an increase in the growth rate of GDP.

2. Industrial Production :

LPG policies have worked as a great help to industrial production in the Indian economy. There has been increase of 10% in the industrial production from 1881 till today.

3. Fiscal Deficit :

            With the help of LPG policies there has been a significant increase in the Govt. revenue.

4. Checkon Inflation :

Because of the greater flow of goods and services in the economy, there has been a check on the rate of inflation.

5. Increase in foreign exchange resources :

Reduction on foreign exchange resource is one of the compulsions on the government to introduce LPG policies. Now, the foreign exchange is at the comfortable level, India being the sixth largest country of foreign exchange holder.

6. Flow of private foreign investment :

Private foreign investment means inflow of capital and technology in the domestic economy. After the adoption of LPG policies, there has been a significant increase in private foreign investment.

NEGATIVE IMPACTS

1. Neglected Agriculture :

Reforms were not able to benefit the agriculture sector. This was because

• Public investment in the agricultural sector has been reduced in the reform period.
• The removal of the fertilizer subsidy has increased the cost of production.
• Changes in the WTO policies, such as removal of min. support prices, reduction in the import duties.

 

2. Reform in Industry :

There was a slowdown in the India Industry because of the decreasing demand as due to cheaper imports and inadequate investment in infrastructure.

3. Disinvestment :

Every year of the government fixes the target of disinvestment of PSU’s. It was found that the assets of the PSU’s has been undervalued and sold to the private sector. There was a substantial loss of the government the proceeds from the disinvestment as used to offset the shortage of government revenue.

4. Reforms & Fiscal Policies :

(i)         The tad reduction in the reform period aimed at yielding larger revenue and to curb tax evasion has not resulted in increase in the tax revenue for the govt.

(ii)        Reform policies involving tariff reduction have reduced the scope for raising revenue through custom duties.

• Tax incentives to the foreign investors further reduced the scope of the tax revenues.