New Economic Policy of India Since 1991

Introduction
India is the second largest populated country in the world. Now, India is considering as a
developing country and its economy as an emerging one. Since Indian geography and
population are large, the social system is more complicated one to manage. So many cultures,
traditions, languages, religious etc are uniting under the name of India. In such an
independent social system, its developmental progress is very vital. Because in this
globalized world, a country is recognized as good based on the developmental achievements
that it has achieved. To measure the progress of any country, its economic condition can be
taken as a tool. A country can be developed only with an efficient and stronger economic
functioning are there.
After the World War II, there were so many colonial new countries got freedom. India was
one of the largest colonies of British and India become independent in 1947. For getting
freedom, there developed many national movements in India. Anyway, after 1947 Indian
economic and social system were entirely changed from what India had before colonization.
Above all the 20th century shows a trend of rapid economic autonomy for every one
irrespective of considering domestic or foreign sectors
Initially India followed a system of administration with the influence of socialist economy
under Jawaharlal Nehru as the Prime Minister. So, there were many restrictions for foreigners
to interact with India. The foreign investment was totally restricted. This restriction was
influenced in the colonial experience. Anyhow after 16 years of rule of Jawaharlal Nehru,
there arose many leaders and Prime Ministers. By 1990s the Indian economy compelled to
open its economy and followed liberalization pattern.
Economic Reforms
As mentioned above, initially India kept an aloof from the globalization. At the same time
almost every country including China were entered in to the globalization path. From 1980,
India began to show some kind of economic liberalization. But which was not much
favorable for improving the competitiveness.
At last urgently India reformed its economy in 1991 under the leadership of Narasimha Rao
as the Prime Minister and Dr. Manmohan Singh as the finance minister. There were many
arguments for liberalizing Indian economy since 1960 onwards. But it was come in to reality
only in 1991. To make reforms in the Indian economy, there were many reasons.
The major causes which lead India to make an immediate reform in its economy were the
Balance of Payment crisis and the failure of fiscal policy. During that time the Gulf war was
going on. As a result of this, oil price increased rapidly. This was a great threaten for India,
because almost all the oil requirements of the country were satisfied by importing from gulf
countries. Oil resource was very essential for the working of Indian industries, agriculture etc.
Further Indian labors were worked in gulf countries. But as an impact of gulf war, the income
from foreign sector began to decline. This multiple reasons lead to the Balance of Payment
crisis.
Above all, there was an uncertainty in 1991 in the Indian economy. The foreign currency
reserve of India was just enough to meet the need of two weeks. That is the shortage of
foreign exchange resources. Finally these entire situation compelled India to launch a series
of reforms in its economy and also in its structure. On July 23rd of 1991, economic reforms in
India began to functions.
How India Tackled the Crisis of 1991
To meet the contingencies in the Balance of Payment, India contacted International Monetary
Fund (IMF). IMF was very favorable to give assistance based on agreeing with certain
conditions. Some of them are listed below.
I) Devaluation of Indian currency
II) Reduction in the government expenditure
III) Reduction in import tariff etc.
By the conditions, IMF looked to build a better India. For example: Indian economy of that
time was restricted the foreign products. To do this restriction, government imposed huge rate
of tariff on imported goods. This reduced the foreign competition in Indian domestic
industries. After liberalization, when import tariff become smaller many foreign products
began to reach in India. This gradually strengthened the competition and quality of products.
Even though it was an urgent matter for India, there were many experts and thinkers who
argued against foreign agreements and economic reformation. But India was in an emergency
condition, so India accepted the demand put forwarded by IMF and by to make reforms in its
economy. Any way today India benefited many things from this change adopted since 1991.

The LPG as the Products of Economic Reforms

Since the economic reforms of 1991, India witnessed wide and tremendous changes across
the country in different sectors especially in industrial sector. Then foreigners got more
autonomy over their investment. This gradually helped India to recover from its economic
crisis. For the simplicity, let us conclude every impact of economic reforms under three heads
like Liberalization, Privatization and Globalization. Each of them is briefly explained below.
Liberalization
Liberalization is generally considered as a political ideology. As the term itself disclose, it is
the process of removing barriers and restrictions in the economy for the private and foreign
sectors. In the case of India, it was an innovative idea since until 1990 India followed closed
economic model. By liberalization, India has removed trade barriers and investment
restriction to the foreigners. In short, liberalization was a welcoming policy of India towards
foreign investment and competition.
Privatization
Privatization is an innovative idea which came in to reality along with the impact of
liberalization. Privatization simply refers to the process of reducing regulations in the
economy for the private sector. By this, the role of state or government began to decline.
Privatization in India did the following two outcomes. They are disinvestment and
denationalization. Denationalization is the process of selling of the entire ownership to the
private sector. On the other hand disinvestment is the process of selling government or public
owned securities or stocks to the private sector. Here disinvestment never requires complete
selling of securities. If the majority of the ownership (above 51%) of a company transferred
to private sector, they can claim the ownership and domination.
Globalization
Globalization is a real phenomenon of today's world. Globalization is an ideology which
argues that all countries are under a single umbrella without borders or barriers. That means,
globalization makes the world as like a supermarket. Where every things are available which
may produce from any corner of the world. Further the globalization is activating every
country to participate in trade. In short globalization is an outcome of changes that occurred
all over the world. Now, it integrated all countries and it sees the world as a single economy.
In the case of India, all these innovative ideology improved its conditions even there exist
few drawbacks.

Conclusion
The economic reform in India of 1991 was happened as an emergency action. It entirely
changed the Indian economic structure. The main feature of this reform is nothing, but it
leads the Indian economy to be a market oriented one. Along with public the private
industrialists are also began to enjoy more autonomy. Compared to China, India is producing
output less than the Chinese. This may be because China adopted the economic reform in
1978, But India adopted the same only in 1991.

New Industrial Policy, 1991

The year 1991 witnessed a drastic change in the industrial policy governing industrial
development in the country since independence. This land mark change was entirely a new
chapter which was to enforce totally open economic system as compared to the earlier mixed
system. The country decided to follow the lines of capitalism. It is also said that there was
shift from imperative to indicative planning under new system.

Features of New Industrial Policy

1. Industrial licensing policy New industrial policy abolished all industrial licensing,
irrespective of the level of investment, except for a short list of 18 industries related to the
security and strategic concerns, social reasons, hazardous chemicals and over riding
environmental reasons and items of elitist consumption . However, of these 18 industries,
13 categories have been removed from the list gradually and currently only 5 category of
health, strategic and security considerations industries needs license viz. Alcohol,
cigarettes, hazardous chemicals, electronic, aerospace and all types of defense equipment.

2. Policy on Public Sector The 1956 Resolution had reserved 17 industries for the
public sector. The 1991 industrial policy reduced this number to 8. As of now only 3
industries are reserved for government 1) Atomic Energy 2) Mining of Atomic Minerals
 3) Railway Transport.

The policy also suggested that those public enterprises which are chronically sick and
which are unlikely to be turned around will, for the formation of revival/ rehabilitation
schemes, be referred to the Board for Industrial and Financial
Reconstruction (BIFR), or other similar high level institutions created for the purpose,
in order to protect the interests of workers likely to be affected by such rehabilitation
package, a social security mechanism will be created.
Privatization/disinvestment
Government announced its intention to offer a part of government shareholding in the
public sector enterprises to mutual funds, financial institutions, the general public and the
workers. A beginning in this direction was made in 1991-92 themselves by diverting part
of the equities of selected public sector enterprises.

3. Monopolistic and Restrictive Trade Practice limit

Under the Monopolistic and Restrictive Trade Practice Act, all firms with assets above a
certain size (Rs.100 crore since 1985) were classified as MRTP firms. Such firms were
permitted to enter selected industries only and this also on a case by case approval basis.
In addition to control through industrial licensing, separate approvals were required by
such large firms for any investment proposals. The New Industrial Policy removed the
threshold limit in assets in respect of MRTP companies.

4. Policy on Foreign investment and Technology agreements

The New Industrial Policy, prepared a specified list of high technology and high
investment priority industries, wherein automatic permission was to be made available
for direct foreign investment up to 51 percent foreign equity. The industries in which
automatic approval was granted included a wide range of industrial activities in the
capital goods and metallurgical industries, entertainment electronic, food processing and
the services sectors having significant export potential. List is being expanded since then.
Current situation of FDI norms will be discussed in next article.

5. Abolition of Phased Manufacturing Programs for New Projects These programs

was aimed at indigenization of technology. These were in force in a number of
engineering and electronic industries. The new policy abolished such program for future.

6. Removal of Mandatory Convertible Clause In pre liberalization era, there was a

mandatory convertible clause in loan agreement with borrower (industries in this case).
As per this clause, banks had right to convert their loan amount into equity whenever they
 feel so. This will make them owner from lender in that enterprise. This clause was
used by government as an instrument to nationalize private firms. This was removed
under new economic policy.

Conclusion:
New economic policy was culmination of long era of inefficient dominance of public sector.
Nevertheless, public sector by this time had built strong industrial base on which other
industries can thrive in future. This was one of the objectives of Nehruvian model.
Unsurprisingly, Industrial and economic growth remained dismal during this period. Process
of liberalization begun in 1980s which showed up in better performance of economy. Recent
high growth (as per some economists) cant be attributed to initiatives of New industrial and
economic policy as statistical evidence suggest better performance from early 1980s. So
much credit cant go to intervention of International Monetary Fund.

In post liberalization era, government took up the role of facilitator and regulator. Some
conclusive indications toward this are replacing Foreign Exchange Regulation
Act with Management Act, latter one being more liberal and less harsh. Similar, MRTP act
was replaced by competition Act. Now FDI is allowed in wide array of sectors, in many of
them through automatic route. However, post 1991 growth is accused of lopsided growth
with devastating social impact as government rolled back expenditure from social sectors too.