Economic Policy of India Since 1991
Introduction
In the early 1990s, India faced a severe economic crisis:
- Foreign currency reserves were so low in June 1991 that they could only cover two weeks of imports.
- Inflation rate soared to 16.7% by August 1991.
- Government spending exceeded its revenue due to high costs on defense, subsidies, and loan interest.
- The socialist economic model was losing its positive impact, creating a need for change.
To address this, the Government of India introduced the New Economic Policy (NEP) in 1991. This policy aimed to modernize the economy by reducing government control and encouraging private and foreign participation.
Main Objectives of NEP 1991
- Integrate India into the global economy (Globalization).
- Reduce inflation.
- Fix the imbalance in the balance of payments (difference between exports and imports).
- Achieve higher economic growth.
- Build sufficient foreign exchange reserves.
- Stabilize the economy and reduce the fiscal deficit (gap between government income and spending).
- Promote free international trade with fewer restrictions.
- Increase the role of the private sector.
Features of NEP 1991
Delicensing:
- Removed the need for government licenses for most industries, except for four strategic ones:
- Electronic aerospace and defense equipment.
- Industrial explosives.
- Hazardous chemicals, drugs, and pharmaceuticals.
- Cigarettes.
Abolition of MRTP Act:
The Monopolies and Restrictive Trade Practices Act required large companies to get government approval for expansion or mergers. Its removal encouraged faster industrial growth.
Support for Small-Scale Industries:
Increased investment limit for small industries from ₹1 crore to ₹5 crore to boost production, jobs, and exports.
Encouraging Foreign Investment:
Allowed Foreign Direct Investment (FDI) up to 51% initially, later increased to 74% and 100% in specific industries to attract technology and capital.
Reducing Public Sector Role:
- Reduced industries reserved for the public sector from 17 to 2 (railways and atomic energy by 2014).
- Focused on improving efficiency and privatizing sick public sector units.
Trade Liberalization:
- Removed import licensing for most goods.
- Established Special Economic Zones (SEZs) and Agro Export Zones (AEZs) to boost exports.
Insurance Sector Reforms:
Ended government monopoly by passing the Insurance Regulatory and Development Authority Act (IRDA) in 1999, allowing private companies to enter.
Financial Sector Reforms:
Permitted private and foreign banks to operate, increasing competition and efficiency in banking.
Components of NEP 1991
The NEP is built on three pillars: Liberalization, Privatization, and Globalization.
A) Liberalization
Meaning: Giving economic freedom to producers, consumers, and businesses to make decisions based on their interests, reducing government restrictions.
Measures:
- Flexible Interest Rates: Banks can set interest rates based on market demand and supply.
- Freedom for Industrial Expansion: Industries can now decide production capacity without government limits.
- Abolition of MRTP Act: Large firms can make investment decisions freely.
- Reforms in FERA: Replaced Foreign Exchange Regulation Act (FERA) with Foreign Exchange Management Act (FEMA) to ease international trade.
- Infrastructure Investment: Opened rail, road, and power projects to private and foreign investors.
- Foreign Technology: Allowed use of advanced foreign technology in key industries.
- SEBI: Established Securities and Exchange Board of India in 1992 to regulate and protect the stock market.
B) Privatization
Meaning: Transferring ownership or management of public sector units to private companies to reduce government involvement.
Measures:
- Disinvestment: Selling shares of public sector units (e.g., Maruti, VSNL) to private companies.
- Dereservation Policy: Reduced industries reserved for the public sector from 17 to 2.
- Board of Industrial and Financial Reconstruction (BIFR): Decides the fate of sick public sector units.
- National Renewal Board (NRB): Compensates workers affected by the closure of public sector units.
- Navratna Status: Granted financial and managerial autonomy to top-performing public sector units like IOC, ONGC, and SAIL.
- Miniratna: Public sector companies with consistent profits (Category I: ₹30 crore+ pre-tax profit; Category II: positive net worth).
- Maharatna: Large public sector companies with global expansion potential, introduced in 2009.
C) Globalization
Meaning: Integrating India’s economy with the world by allowing free flow of goods, services, capital, and technology across borders.
Measures:
- Removal of Quantitative Restrictions: Eliminated limits on imports and exports and reduced import duties.
- Encouragement to Foreign Capital: Attracted foreign investment in various sectors.
- Rupee Convertibility: Made the rupee flexible for international transactions.
- Foreign Collaboration: Allowed Indian companies to partner with foreign firms (e.g., Maruti-Suzuki).
- Long-Term Trade Policy: Introduced liberal trade policies to encourage foreign trade.
- Export Incentives: Created SEZs and provided benefits through the EXIM policy to boost exports.
Achievements of NEP 1991
- IT Sector Growth: Indian IT professionals are in demand globally, contributing to GDP.
- Improved Financial Services: Private and foreign banks offer faster services like e-banking and credit cards.
- Better Education Standards: Students access global education through loans and scholarships.
- Increased Exports: Exports of machinery, chemicals, and computers have grown, improving the balance of payments.
- Diversified Agriculture: Farmers now grow horticulture, floriculture, and medicinal plants for global markets.
- Reduced Scarcity: Liberal imports help address shortages, controlling inflation.
Failures of NEP 1991
- Loss of Self-Sufficiency: Focus on exportable goods reduces food production capacity.
- Harm to Domestic Markets: Cheap imported goods flood markets, hurting local industries.
- Neglect of Poor Farmers: Rich farmers benefit, while small farmers struggle with debt and poverty.
- Unfair Competition: Indian businesses struggle against multinational companies, leading to closures.
- Neglect of Welfare: Privatized services like health and education prioritize profit over public welfare.
- Unemployment: Closure of local industries causes job losses, increasing poverty.
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