NEW ECONOMIC POLICY-NEW ECONOMIC POLICY-19911991

Prepared by:Prepared by:

Supreti Tyagi Supreti Tyagi

Economic BackgroundEconomic Background

1948 - 1956.1948 - 1956. Public sector dominance.Public sector dominance. Limited private participation. Limited private participation.

1956-1980.1956-1980. Industry classification.Industry classification. Industrial licensing policyIndustrial licensing policy..

Economic background Economic background (cont..)(cont..)

1980 – 1991. 1980 – 1991. Growth rate of 5.4 percent per annum. Growth rate of 5.4 percent per annum. Limited liberalization measures were Limited liberalization measures were

initiated. initiated. Steps were taken to modernize some Steps were taken to modernize some

of the most important industries, such of the most important industries, such as cement, steel, aluminum and as cement, steel, aluminum and power generation equipment.power generation equipment.

Cause of the Crisis-1990 Cause of the Crisis-1990

From 1950 to 1980, the Indian economy From 1950 to 1980, the Indian economy grew at a slow rate of 3.6 percent.grew at a slow rate of 3.6 percent.

This gave rise to foreign borrowing on a This gave rise to foreign borrowing on a small scale. small scale.

The result was increase in foreign debt The result was increase in foreign debt and repayment liability. and repayment liability.

Cause of the Crisis-1990 Cause of the Crisis-1990 (cont..)(cont..)

Foreign debt increased from US$23.5 Foreign debt increased from US$23.5 billion in 1980 to $63.40 billion in billion in 1980 to $63.40 billion in 1991. 1991.

Nearly 28% of total export revenue Nearly 28% of total export revenue went to service the debt.went to service the debt.

Lead to Fiscal deficit (expenditure Lead to Fiscal deficit (expenditure exceeds the revenue)exceeds the revenue)

Cause of the Crisis-1990 Cause of the Crisis-1990 (cont..)(cont..)

Reasons of fiscal deficitReasons of fiscal deficit

Exorbitant expenditures were incurred Exorbitant expenditures were incurred by the central government's by the central government's subsidies. subsidies.

The inefficient functioning of many of The inefficient functioning of many of the central and state public sector the central and state public sector enterprisesenterprises..

Cause of the Crisis-1990 Cause of the Crisis-1990 (cont..)(cont..)

The multilateral agencies such as IMF The multilateral agencies such as IMF and the World Bank insisted that the and the World Bank insisted that the policymakers undertake structural policymakers undertake structural reforms.reforms.

Internal debt liability increased to Internal debt liability increased to 53% of GDP.53% of GDP.

Features of the new policyFeatures of the new policy

Liberalization.Liberalization. Integration with world economy with. Integration with world economy with.

dismantling of tariff wall.dismantling of tariff wall. Protection of foreign direct investment.Protection of foreign direct investment. upgrading the technology of production.upgrading the technology of production. Financial stability.Financial stability. Outward looking policies.Outward looking policies. Deregulation of domestic market.Deregulation of domestic market.

Components of New Economic Components of New Economic policypolicy

Short term (immediate stabilization)Short term (immediate stabilization)

Correcting the disequilibrium in foreign Correcting the disequilibrium in foreign exchange market through demand reduction.exchange market through demand reduction.

Reform in trade policyReform in trade policy Reduction in fiscal deficitReduction in fiscal deficit Dismantling of barrier to free flow of capital.Dismantling of barrier to free flow of capital. Depreciation of exchange rate. Depreciation of exchange rate.

Components of New Economic Components of New Economic policy (cont..)policy (cont..)

Medium term structural adjustment:Medium term structural adjustment: Exchange rate.Exchange rate. Trade and industrial policy.Trade and industrial policy. Policies concerning the public sector.Policies concerning the public sector. financial sector.financial sector. Capital market.Capital market.

(deregulation of prices and investment, change (deregulation of prices and investment, change in structure of taxation & public expenditure, in structure of taxation & public expenditure, privatization of public enterprise).privatization of public enterprise).

Outcome of New Economic Outcome of New Economic policypolicy

LiberalizationLiberalization

PrivatizationPrivatization

GlobalizationGlobalization

Liberalization Liberalization

Except the six industries , all other kinds Except the six industries , all other kinds of industrial license have been of industrial license have been abolished.abolished.

Amendment in MRTP act.Amendment in MRTP act.

Privatization Privatization

Disinvestment Disinvestment selling of govt. equity, partially or selling of govt. equity, partially or

wholly, to private parties.wholly, to private parties. MergersMergers acquisitionacquisition

GlobalizationGlobalization

Free flow of technologyFree flow of technology Free movement of labor capital among Free movement of labor capital among

different countries.different countries. Reduction in trade barriers.Reduction in trade barriers. Outsourcing Outsourcing

Impact on industrial sector Impact on industrial sector

Multinational products was Multinational products was dominating local industrial production.dominating local industrial production.

Shortage of electricity and other Shortage of electricity and other essential raw materials adversely essential raw materials adversely affect the quality of goods. affect the quality of goods.

India lifted all control & quota India lifted all control & quota restriction on export but America is restriction on export but America is not ready to except the import. not ready to except the import.

Effect of new economic policy Effect of new economic policy (positive)(positive)

Increase in GDP growth rateIncrease in GDP growth rate Increase in foreign direct investmentIncrease in foreign direct investment Increase in foreign exchangeIncrease in foreign exchange Outsourcing Outsourcing

Effect of new economic policy Effect of new economic policy (negative)(negative)

Growing unemploymentGrowing unemployment Neglect of agricultureNeglect of agriculture Growing personal disparitiesGrowing personal disparities Infrastructural inadequaciesInfrastructural inadequacies Wide spread poverty.Wide spread poverty. Demonstration effect (luxury goods)Demonstration effect (luxury goods)