Assignment on New Economic Policy:

Submitted by Prakash Kumawat Aegis School of Business & Telecommunication

Q1. What are different aspects of new economic policy? Ans: Main aspects of New Economic Policy of India 1991 The main aspects of the new economic reforms/policy that were implemented are stated below: Liberalization. Liberalization means to free the economy from the direct and physical controls imposed by the government on the private sector. Prior to 1991, the Government had imposed several types of controls on the Indian economy. The various types of controls were Industrial licensing system, import license, foreign exchange control, restrictions on investment by big business houses, etc. The rules and laws aimed at regulating the economic activities, in the previous policies became major hindrances in the growth and development of the private sector. These controls had given rise to corruption, undue delays and inefficiency. Liberalization was introduced to put an end to the restrictions and open up various sectors of the economy. Privatization Privatization means contracting the role of the public sector and encouraging the expansion of the private sector. The New Economic Policy centers on the following major measures to reform the public sector enterprises. Privatization in India is still low key. Privatization for ownership transfer is limited to disinvestment of public sector enterprises (PSEs) for raising non-inflationary resources. Privatization for shifting the divide between public and private sector is more active. This has been accomplished by removing barriers to entry. At the same time there is gradual withdrawal of budgetary support to PSEs resulting in a gradual dilution of equity as enterprises tap the capital market. Simultaneously, economic liberalization policies have emphasized a level-playing field for the public sector. Despite an obvious policy for a redivide there is as yet no comprehensive policy on privatization. Perhaps the approach is politically expedient. In terms of economic management and more so public sector management lack of a comprehensive policy on privatization can result in unexpected outcomes which may not be all that expedient. This paper analyses some of the impact of a non-policy on privatization. Globalization Globalization is a process of integration of nations. Nations are linked together economically and socially by trade, investments and governance. It means opening up of an economy to the other economies of the world. In simple words, it is the expansion of economic activities across political boundaries. As a result of globalization efforts taken by India we find all types of goods available here. For example, Lee cooper shoes, Reebok T shirts, Coca-Cola and Pepsi, Intels Pentium etc., have flooded the Indian market. Following policy measures have been taken since 1991 towards globalization.

4. Market Friendly State: The roles of the state were confined to selected non-market areas and were largely to ensure a smooth functioning of the market economy. As compared to past, the ownership of some selected enterprises had been transferred to private sector. Its activities as owner of resources have been confined to two types of activities. One covers the activities which are badly needed for the operation of the economy and the other pertains to social services such as education, health, etc. However, more importantly, the states were to ensure a smooth functioning of the market. For this, the state had to ensure stability in the market through the use of macro-economic policies. The state will also intervene in the market when it fails.

5. Modernization: New economic Policy accorded high priority to modern techniques. It aims at to augment the growth rate of sunrise industries. In order to import technical dynamics to Indian industry, the Govt, decided to clear all foreign collaborations. Private entrepreneurs will be free to settle the terms of such collaborations on their own behalf. Moreover, Govt had also been trying to stimulate private entrepreneurs to establish their own research and development centers by offering them various tax concessions. Efforts are also being made to revive and modernize the sick industrial units both within the public and private sectors. 6. New Public Sector Policy: Public sector attracted priority. In the words of Dr. Manmohan Singh, Finance Minister in Congress Govt. The priority was given to the public enterprises in the hope that it will help to accumulate capital, industrialization, economic growth and removal of poverty.

Q2. What do you mean by Liberalization? What are the features of Liberalization? Ans: Liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. 1. The process of making policies less constraining of economic activity. 2. Reduction of tariffs and/or removal of nontariff barriers Features of Liberalization: In the industrial sector, the following reforms were undertaken. i) Abolition of industrial licensing Private sectors have been freed, to a large extent, from the clutches of licenses and other restrictions. Initially, industrial licensing was abolished for all projects except 18 industries coal and lignite, petroleum and its

distillation products, motor cars, paper etc. With the passage of time most of these industries have also been delicensed. As of now, with the exception of 6 industries related to security and strategic concerns, (liquors, defense equipment, dangerous chemicals, cigarettes, electronic aerospace and drugs and pharmaceuticals) the new Policy has abolished all industrial licensing, irrespective of the level of investment. In fact, the industrial licensing was the main source of corruption and bureaucratic delays earlier. There are certain locational guidelines designed to discourage the clustering of industries, particularly the polluting industries in the periphery of major urban areas. ii) Abolition of phased manufacturing system Phased Manufacturing Programme (PMP) has been abolished for all new industries and subsequently for all existing projects. Earlier, this programme intended to force indigenization in manufacturing. The abolition would remove a major irritant that a large no. of firms felt, i.e., discretionary power and govts interference in business decisions. iii) Removal of Investment control and restructure of the MRTP Act. Under the Monopolies and Restrictive Trade Practices Act, all firms with assets above a certain size (100 crores since 1985) were classified as MRTP firms. The principal objective of the Act was prevention of concentration of economic power and control of monopolies. There were many restrictions on such firms as they were permitted to enter into selected industries. In addition to control through industrial licensing, separate approvals were required by such firms for any investment proposal. This restricted the growth and diversification of Indian industries. Companies like TISCO, TELCO, HINDALCO, AND Ranbaxy, which though having the capacity to become global players, remained confined to India, producing sub-standard goods. In 1991, the MRTP Act was restructured and restrictions were removed with respect to new undertakings, expansion, amalgamation, merger, takeover etc. The capital investment limit (100 crores) has been removed. Thus the constraints imposed on growth and restructuring of large business houses were removed. iv) Removal of Mandatory Convertibility Clause Under the convertibility clause, the financial institutions financing the industrial project had an option of converting their loans into equity, if they wanted to do so. Although this option was not often exercised, it was considered to be a hanging threat of takeover by the financial institutions. The new economic policy has removed the convertibility clause from the lending conditions of the financial institutions.

Q3. Define Globalization. Explain the emergence of Globalization? Ans: Globalization refers to the worldwide phenomenon of technological, economic, political and cultural exchanges, brought about by modern communication, transportation and legal infrastructure as well as the political choice to consciously open cross-border links in international trade and finance. It is a term used to describe how human beings are becoming more intertwined with each other around the world economically, politically, and culturally. Although these links are not new, they are more pervasive than ever before.

Emergence of Globalization: The emergence of new global economic system has entirely changed the concept of regional peace and security at the global level. In the last decade of the twentieth century, a very powerful international lobby has built a strong public opinion through electronic and print media that there was a universal need for more and more liberalization in the field of trade, commerce, and industries. This process of globalization culminated in the formation of World Trade Organization. More than one hundred and seventy nation-states have come to globalize their approach in the field of economic activities. In the form of WTO, cutting across geo-political boundaries and political ideologies. Apparently, this new phenomenon of economic globalization appears to be very lofty. The idea of WTO was floated by the rich countries, in the name of so-called universal progress and development. The WTO brought a diabolical change in global politics. Until recent past, it used to be the political powers that have been influencing the economic policies of a particular nation-state. With the emergence of GATT and WTO, the economic powers have taken the upper hand by acquiring the power to decide, direct, and dictate the political leadership of its member countries at the nation-state as well as the overall global situation. The WTO has virtually become the deciding as to which economic policy has to be adopted in order to serve a particular economic interest. Before the emergence of GATT and WTO, the economic powers at the national level had been influencing the policies and political of the nation-state from behind the scene. But now these forces have come to the fore and have sidelined the political power by taking over the decision-making authority on the economic politic. The nation-state agencies are being forced to act as a corolla of the WTO in economic matters. For example, it is the WTO, which is dictating what is to be produced and how much is to be produced, how much a country can import, and how much it can export. No individual nation, which has signed the GATT agreements, can henceforth decide its economic policies unilaterally. It has to go through the WTO.The New Global Economic System has overtaken the existing political system for a ride. Therefore it has become imperative that the vital issues like the Emerging Order for Regional Peace and International Security the New Economic Order, "The New Information Order, and the Emerging Social and Cultural Order, must be analyzed in the light of the changing global scenario. The existing political system will hereafter be controlled, influence, and ultimately forced to accept the policies, decided by the New Global Economic System, which currently is being dominated by the capitalist forces. In this changed situation a New Global Political System has become a dire of the hour. Whether the international agency like the United Nations has the political will power and moral support from its dominant member-nations is a milliondollar question. It is a must, in order to keep checks and balances on the emerging NGES paradigm. Main stages of globalization emergence: Our history has witnessed following dominant themes or the stages of globalization: 1. The Social Globalization: With the arrival of homosepians on this earth, the Social Globalization appears to have been the First dominant theme with the spread of our ancestors all over the globe.

2. The Political Globalization: The next dominant theme in our history seems to be the Political Globalization with our ancestors having settled down in small rural and urban set-ups. The emergence of the community life prompted the establishments of small and big political entities which sought expansion across different parts of the globe. For example, Alexander the Great unwittingly attempted political globalization by marching into the Indian subcontinent 3. The Cultural Globalization: The Political Globalization was closely followed the primacy of the Cultural Globalization in terms of diffusion over the whole world of new technologies/inventions and spread of cultural aspects like religions and languages, etc. For example, Islam/Christianity and the English language. 4. The Economic Globalization: Since the industrial revolution of 1757, the Economic Globalization became the most dominant theme. Empires were established and wars fought mainly for economic gains rather than any political glorification despite seemingly political overtones/ideologies. 5. The Integrated Globalization: The 21st century is likely to witness the emergence of Integrated Globalization whereby no single theme is likely to emerge on the top. In fact, the Globalization of all aspects of our lives is likely to continue in an integrated manner with near equal importance to each.

Q4. Describe briefly the salient features of new economic policy? Ans: Salient Features of the New Economic Policy The economic reforms (First Generation Reform) introduced the following policy changes: Delicensing: Industrial licensing system has been abolished for most of the industries. Dereservation: The industries which were exclusively reserved for the public sector were dereserved except for a few. Deregulation: The industrial laws like Monopolies and Restrictive Trade Practices (MRTP) Act were amended to ease restrictions on economic units. Disinvestment: The government proposed to sell the government equity (share capital) in certain public sector units (PSUs) to the private sector.

Easing of trade barriers: The restriction on imports and exports were removed and tariffs were lowered. Encouragement to foreign capital and technology: Restriction on the operations of the (FERA) was relaxed to allow freer inflow of foreign investments. Taxation Reforms: The tax rates and tax slabs were rationalized, taxation system was simplified and the loopholes in the administration were plugged. Fiscal Reforms: The government proposed to reduce the non-plan expenditure in order to reduce budgetary deficits Banking Reforms: The interested rate structure was deregulated and greater autonomy was provided to the banks.

Q5. What are the main features of industrial licensing policy? Ans: NATURE/CHARACTERISTICS/FEATURES OF NEW INDUSTRIAL POLICY 1991 Meaning: -The Government of India announced the new industrial policy (NIP) on 24th July, 1991. The NIP aims at liberalization of Indian industry. The main objectives of the NIP are: Attainment of international competitiveness. Development of backward areas. Encouraging competition within Indian industry. Efficient use of productive resources. Full utilization of plant capacities to generate employment. Revival of weak units, etc.

Following are some of the main features of the industrial policy 1991 1. Dereservation of Public Sector: -The role of public sector has been reduced to a great extent. The number of industries reserved for public sector was reduced to 8 industries. There was further Dereservation. At present, there are only three industries reserved for public sector which include. (A) Atomic energy (b) Railways, and (c) specified Minerals. 2. Delicensing: -The most important features of NIP, 1991 was the abolition of industrial licensing of all industries except six industries. The six industries are of social and strategic concern. The six industries are 1. Hazardous Chemicals. 2. Alcohol 3. Cigarettes 4. Industrial Explosives 5. Defense Products, and 6. Drug and pharmaceuticals.

3. Disinvestment of public sector: -The NIP 1991 permitted disinvestment of public sector units. Disinvestment is a process of selling government equity in PSUs in favour of private parties. Disinvestments aim at certain objectives. (1) To provide better customer Service. (2) To make effective use of disinvestment funds. (3) To overcome the problem of political interference. (4) To enables the government to concentrate on social development. Etc, 4. Liberalization of Foreign Investment: -Prior to this policy, it was necessary to obtain approval from the government in respect of foreign investment. At present, 100% foreign equity participation is allowed in select industries. 5. Liberalization Foreign Technology: -The NIP 1991 liberalized foreign technology to bring about technological improvement in Indian industry. (1) No Permission is required for hiring foreign technicians and foreign testing of indigenously developed technologies. 6. Liberalization of Industrial Location: -The IP 1991 stated that there is no need to obtain approval from Central Government to locate industries in areas (other than cities of more than one million populations). However, industries subject to compulsory licensing, approval need to be obtained. In cities with a population of more than one million, polluting industries were required to be located outside 25 Kms of the city area. 7. Removal of Mandatory Conversion Clause (MCC): - In India, banks and FIs provide a large part of industrial finance. The banks and FIs have the option to convert the loans into equity. This may create a threat of takeover by FIs. Therefore, the IP 1991 abolished MCC. 8. Abolition of phased Manufacturing Programme: - The IP 1991 has suggested for the abolition of PMP, which was in force in engineering and electronic industries.

Q6. What are the aims of new economic Policy? Ans: Aims of new economic policy: The main aims or objectives of the new economic reforms/policy are stated below: 1. Liberalization: The fundamental feature of the new economic policy is that it provides freedom to the entrepreneurs to establish any industry/trade/ business venture. The entrepreneurs are not required to get prior approval for any new venture. What they need is that they have to fulfill certain conditions to get into a line of one's choice. The procedure involving a case by case examination of the proposals for new ventures has been wiped off. Apart from this the entrepreneurs no longer need licenses to come into business. The capital markets have also been freed and opened to the private enterprises. A new company can now be floated with new issue of shares, debentures etc. In case the entrepreneurs require imported equipment, they are no longer required to approach the central authority for foreign exchange. The area of liberalization is (i) licensing business, (it)

Foreign Investment (iii) Foreign Technology (IV) Establishment, Merger, Amalgamation and taken over, and (v) Simple Exit policies. 2. Extension of Privatization: Another feature of the new economic policy is the extension in the scope of privatization. Now, the majority of economic activities will be conducted by the private sector. In the wave of privatization, out of 17 industries reserved for public sector, 11 industries have been given to the private sector. Moreover, Govt has also privatized the ownership of some public sector undertakings by the sale of capital of some selected enterprises to the private sector. The field of privatization has further been extended by offering greater opportunities of investment to the foreign private investors. Economic Policy seeks to accord priority role to the private sector. Tendency to expand private sector is evident from the following facts: (i) Number of industries reserved for public sector has been reduced from 17 to 6. Private sector can now set up its units in the field of iron and steel, energy, air transport, etc. (ii) Till the end of 6th Plan, share of public sector in total investment continued to be greater than that of the private sector. It is intended to be reduced to 45% in the 8th Plan. Thus 8th Plan aims at raising the share of private sector investment to 55% of the total. (iii) Shares of public enterprises are to be increasingly sold to the workers and general public, with a view to increasing the participation of private individuals. (iv) A large part of industrial investment of the private sector to be financed by; National Industrial Finance Institutions. These institutions, while sanctioning loans for the new projects, used to exercise their right of 'Conversion' invariably. It implied the right of converting the loans into share capital by the Financial Institutions. Thus, the private firms were always under the constant threat of conversion. According to the New Industrial Policy, the Financial Institutions will not insist on the conversion clause. With the expansion of privatization there is every possibility of increase in productivity and efficiency. 3. Globalization of Economy: The new economic policy has made the economy outwardly oriented. Now, its activities are to be governed both by domestic market as also the world market. It means unification of the domestic economy with the world, economy. In fact, this has become possible by various policy initiatives taken by the Govt. For instance, devaluation of rupee in June 1991 was intended to do away with the artificially controlled overvalued exchange rate of the rupee. Now, the rupee has been made fully convertible on current account of the balance of payments. Moreover, elimination of licensing of a large number of import items has enabled the importers to import anywhere in the world. The reduction in custom duties on imports has also been done to bring them in line with the duties in other countries of the world.

In short, globalization means (a) Reduction of trade barriers with a view to allowing free flow of goods to and from the country. (b) Free flow of foreign capital in terms of investment i.e., direct and portfolio for ensuring conducive atmosphere. (c) Free flow of technology, and (d) Free movement of labor and manpower. 4. Market Friendly State: The role of the state is one that is confined to selected non-market areas and is largely to ensure a smooth functioning of the market economy. As compared to past, the ownership of some selected enterprises has been transferred to private sector. Its activities as owner of resources have been confined to two types of activities. One covers the activities which are badly needed for the operation of the economy and the other pertains to social services such as education, health, etc. However, more importantly, the state is to ensure a smooth functioning of the market. For this, the state has to ensure stability in the market through the use of macro-economic policies. The state will also intervene in the market when it fails. 5. Modernization: New economic Policy accorded high priority to modern techniques. It aims at to augment the growth rate of sunrise industries. In order to import technical dynamics to Indian industry, the Govt, decided to clear all foreign collaborations. Private entrepreneurs will be free to settle the terms of such collaborations on their own behalf. Moreover, Govt has also been trying to stimulate private entrepreneurs to establish their own research and development centers by offering them various tax concessions. Efforts are also being made to revive and modernize the sick industrial units both within the public and private sectors. 6. New Public Sector Policy: Public sector attracted priority. In the words of Dr. Manmohan Singh, Finance Minister in Congress Govt. that this priority was given to the public enterprises in the hope that it will help to accumulate capital, industrialization, economic growth and removal of poverty. But none of these objectives were achieved. Thus, new economic reforms are trying to shift the emphasis from public to the private sector.

Q7. Explain in Details Globalization, Privatization and Liberalization? Ans: Globalization: Name for the process of increasing the connectivity and interdependence of the world's markets and businesses. This process has speeded up dramatically in the last two decades as technological advances make it easier for people to travel, communicate, and do business internationally. Two major recent driving forces

are advances in telecommunications infrastructure and the rise of the internet. In general, as economies become more connected to other economies, they have increased opportunity but also increased competition. Thus, as globalization becomes a more and more common feature of world economics, powerful pro-globalization and anti-globalization lobbies have arisen. The pro-globalization lobby argues that globalization brings about much increased opportunities for almost everyone, and increased competition is a good thing since it makes agents of production more efficient. The two most prominent pro-globalization organizations are the World Trade Organization and the World Economic Forum. The World Trade Organization is a pan-governmental entity (which currently has 144 members) that was set up to formulate a set of rules to govern global trade and capital flows through the process of member consensus, and to supervise their member countries to ensure that the rules are being followed. The World Economic Forum, a private foundation, does not have decision-making power but enjoys a great deal of importance since it has been effective as a powerful networking forum for many of the world's business, government and not-profit leaders. The anti-globalization group argues that certain groups of people who are deprived in terms of resources are not currently capable of functioning within the increased competitive pressure that will be brought about by allowing their economies to be more connected to the rest of the world. Important anti-globalization organizations include environmental groups like Friends of the Earth and Greenpeace; international aid organizations like Oxfam; third world government organizations like the G-77; business organizations and trade unions whose competitiveness is threatened by globalization like the U.S. textiles and European farm lobby, as well as the Australian and U.S. trade union movements. Privatization: Privatization is the implementation of a decision to sell companies owned by the State to private individuals/ companies. Benefits of privatization are making the erstwhile public sector commercial enterprise survive in competitive markets through better efficiency, higher productivity, improved product quality and customer service, and reduction of waste and leakages due to State ownership. There are no limitations of privatization except that hitherto unproductive or less productive labor would have learn afresh the art of serving through hard work and excellence. Advantages of Privatization 1. Increase in efficiency and Profitability Most Govt. industries and services are inefficient and running in losses, when these will be transferred to private sector, their administration will improve and non-development expenditures will be reduced, their efficiency will increase and will be converted into profitable ventures.

2. Increase in Foreign Investment and Export Earnings Privatization will increase foreign investment when foreigners will purchase them. Their production will increase which will more foreign exchange for Pakistan and if these enterprises are set up by foreign loans, these loans will be repaid out of the sale proceeds, which will reduce the burden of foreign loans. 3. Broaden the Base of Share Capital and Stock Market Sale of enterprises through stock exchanges will broaden the base of share capital hence stock market will develop, because general public will be in position to purchase their shares and investment opportunities for general public will increase. 4. Decrease in Political Pressure There are always political pressures on Govt. owned industries, banks and other institutions for employment of political workers and loan facilities from banks. When these enterprises will go in the hands of private owners then these illegal pressures will be reduced to a great extent. 5. Use of Latest Technology and Know-How Private domestic investors and foreign investors will adopt latest technology and know-how for the increase in output and their profits. This will result in the increase in national product, thus national income of the country will grow. 6. Decrease in Deficit Budgeting and Increase in Infrastructure Govt. enterprises usually run into losses and to keep them going. Govt. provides funds every year. After privation, Govt. need not to resort to deficit financing and the funds provided to these enterprises will be utilized for construction of social infrastructure of the economy. Liberalization: In general, liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation. Liberalization of autocratic regimes may precede democratization (or not, as in the case of the Prague Spring).In the arena of social policy it may refer to a relaxation of laws restricting for example divorce, abortion, or drugs and to the elimination of laws prohibiting same-sex sexual relations or same-sex marriage. Most often, the term is used to refer to economic liberalization, especially trade liberalization or capital market liberalization. Although economic liberalization is often associated with privatization, the two can be quite separate processes. For example, the European Union has liberalized gas and electricity markets, instituting a system of competition; but some of the leading European energy companies (such as EDF and Vattenfall) remain partially or completely in government ownership.

Liberalized and privatized public services may be dominated by just a few big companies particularly in sectors with high capital costs, or high such as water, gas and electricity. In some cases they may remain legal monopoly at least for some part of the market (e.g. small consumers). Advantages of Liberalization: In the medium and long term lower cost services provided to users Overall the quality of service is improved due to competition Avoid drawbacks of natural monopolies Freeing up government funds for other social expenditures / investments Creation of new revenue streams for governments through PPP in investments commonly undertaken with private sector Transfer of risk to private operators through PPP or BOT Increase entrepreneurship in country Attract foreign capital by potential investors, better suited to carry out investment, (example in road construction projects)

Disadvantages of Liberalization: Government has rushed to get rid of operation or investment in anticipation of high fee offered by bidder and soon discovers the incapacity-inability of bidder to respect contract terms Transfer of risk not sufficiently covered in contract, therefore reverting the operation or investment to state Renegotiation of contract required due to insufficient financial feasibility study or due to rushed government decision Just before the transfer of investment or operation to state, its proper maintenance is forgotten Investment is a Trojan Horse (serves other purposes).Liberalization can be excessive, both in its extend and in the absolute level of privatization selected