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CHAPTER:3, ECONOMIC REFORMS 1991, (NEW ECONOMIC POLICY 1991), LIBERALISATION,PRIVATISATION AND GLOBALISATION, Background of the economic reforms, India introduced economic reforms in 1991. It was due to several reasons., Important among them are:, •Increasing fiscal deficit, •Adverse balance of payment, •Gulf crisis, •Fall in foreign exchange reserves ( foreign exchange reserves declined to, a level that was not adequate to finance imports for more than two weeks), •Rise in prices, •Political instability., So India approached the International Bank for Reconstruction and, Development (IBRD), popularly known as World Bank and the International, Monetary Fund (IMF) and received $7 billion as loan to manage the crisis., For availing the loan, these international agencies expected India to, liberalise and open up the economy by removing restrictions on the, private sector, reduce the role of the Government in many areas and, remove trade restrictions between India and other countries. India agreed, to the conditionality’s of World Bank and IMF ., •This set of policies can broadly be classified into two groups:, i) The stabilization measures:, Stabilization measures are short-term measures, intended to correct some, of the weaknesses that have developed in the balance of payments and to

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bring inflation under control. In simple words, this means that there was a, need to maintain sufficient foreign exchange reserves and keep the rising, prices under control., , ii) The structural reform measures., Structural reform policies are long-term measures, aimed at improving the, efficiency of the economy and increasing its international, competitiveness)., The NEP consisted of wide ranging economic reforms The government, initiated a variety of policies which fall under three heads viz.,, liberalisation, privatisation and globalisation., , Liberalisation, Liberalization implies liberating trade from unwanted government controls and, restrictions., , Economic Reforms Under Liberalisation, (i) Industrial Sector Reforms, • Abolition of industrial licensing., • De-reservation of production areas., • Expansion of production capacity., • Freedom to import goods., (ii) Financial Sector Reforms, * Liberalisation implied a substantial shift in the role of the RBI from a, regulator to a facilitator of the financial sector., * This means that the financial sector may be allowed to take decisions on, many matters without consulting the RBI., *This reform policies led to the establishment of private sector banks,, (iii)Tax reforms:

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Tax reforms are concerned with the reforms in the government’s taxation, and public expenditure policies, which are collectively known as its fiscal, policy., •There are two types of taxes: direct and indirect., •Direct taxes consist of taxes on incomes of individuals, as well as profits, of business enterprises., •Since 1991, The rate of corporation tax, which was very high earlier, has, been gradually reduced., (iv) External Sector Reforms, The first important reform in the external sector was made in the foreign, exchange market., • In 1991, as an immediate measure to resolve the balance of payments, crisis, the rupee was devalued against foreign currencies., • (Devaluation means purposive reduction in the value of a currency by, the government). This led to an increase in the inflow of foreign, exchange ., V)Trade and Investment Policy Reforms:, • Liberalisation of trade and investment regime was initiated to increase, international competitiveness of industrial production and also foreign, investments and technology into the economy., •The trade policy reforms aimed at, (i) dismantling of quantitative restrictions on imports and exports, (ii) reduction of tariff rates and, (iii) removal of licensing procedures for imports. Import licensing was, abolished except in case of hazardous and Environmentally sensitive, industries.

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Privatisation, Privatisation refers to any process that reduces the participation of the, state/public sector in economic activities of a country., In other words the conversion of ownership or management of a governmentowned enterprise into private enterprise is known as privatization or, denationalization., India started privatisation as part of the Structural Adjustment Programme, (SAP)., Disinvestment, The process of privatisation can take place either by the withdrawal of, government ownership and management of public sector companies or by, outright sale of public sector companies., Aims of disinvestment:, •Better performance of public sector units (PSUs) through better, management techniques, •Enforcing financial discipline and improving financial performance, •Enhancing the ability of companies to raise financial resources from, market, •Raising revenue of the government from sale of equity, •Enable the flow of FOI (Foreign Direct Investment), , Globalisation, The term globalisation indicates the opening up of domestic economy for the, world market, or integration of an economy with global economy., It involves creation of network and activities transcending economic, social and, geographical boundaries., Integration of economies is possible through interlinking domestic market with, world market through foreign trade.

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Therefore, it is treated as a very complex phenomenon., , The important features of globalization are, 1.Outsourcing, It is practice where a company hires regular service from external sources, mostly from other countries which previously provided internally or within the, country., , Most multinational corporations, and even small companies, are utsourcing their, services to India where they can be availed at a cheaper cost with reasonable degree, of skill and accuracy., The low wage rates and availability of skilled manpower in India have made it a, destination for global outsourcing in the post-reform period., 2.World Trade Organisation (WTO), WTO was founded in 1995 replacing GATT. GATT was established in 1948., Aims of WTO:, •Provides equal opportunities to all participating nations in international, trade., •To ensure optimum utilization of world resource and protect the, environment., •Remove of tariffs (tax) and non-tariffs (quota). This leads to removal of, restrictions on trade thereby facilitating free-entry and free exit of goods, •To encourage multi-lateral trade (more than two nations) rather than, bilateral trade (two countries)., •Extension of trade by including trade in services like banking, insurance, communication., •To include Trade-Related Intellectual Property Rights (TRIPs), commonly, known as Patent Rights and Trade-Related Investment Measures (TRIMs), within the span of international trade.

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INDIAN ECONOMY DURING REFORMS:, AN ASSESSMENT OF NEP, Positive Impact of the LPG (Liberalisation, Privatisation and, Globalisation) Policies, •A vibrant economy, •Rapid growth in GDP, •The growth of the service sector has gone up., •A stimulant to industrial production, •A check on fiscal deficit, •A check on inflation, •Consumer’s sovereignty, •Flow of private foreign investment, Negative Impact of LPG (Liberalisation, Privatisation and, Globalisation) Policies, •Neglect of agriculture, •Urban concentration of growth process, •Economic colonialism, •Spread of consumerism, •Unbalanced growth process, •Cultural erosion

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• Industrial growth has also recorded a slowdown, •Jobless growth :(It is a situation when the level of output in the economy, , tends to rise without a proportionate rise in the opportunities of employment.), • Limited the growth of public expenditure, especially in social sectors., •The tax reductions in the reform period has a negative impact on, developmental and welfare expenditures., , GST:(Goods and Services Tax), *In 2016, the Indian Parliament passed a law, Goods and Services Tax Act 2016, to, simplify and introduce a unified indirect tax system in India. This law came into, effect from July 2017., *This is expected to generate additional revenue for the government, reduce tax, evasion and create ‘one nation, one tax and one market’., , F