CONTENT

INTRODUCTION
BACKGROUND OF THE CRISIS
NEW INDUSTRIAL POLICY 1991
LIBERALIZATION
REASONS FOR IMPLEMENTING LIBERALIZATION
REFORMS TAKEN DURING LIBERALIZATION
FEATURES
MERITS OR ACHIEVEMENTS
CONCLUSION

INTRODUCTION
The economy of the India had undergone significant policy shifts
in the beginning of 1990s.So, then the government decide to
launch the New Economic Policy in 1991. This new model of
economic reforms is known as LPG or Liberalization, Privitization,
Globalization.
Liberalization refers to relaxation of previous government
restrictions usually in areas of social and economic policies. Thus,
when government liberalizes trade it means it has removed the
tariff, subsidies and other restrictions on the flow of goods and
services between countries.
Liberalization of the economy means to free it from direct or
physical controls imposed by the government. Economic reforms
were based on the assumption that market forces could guide the
economy in a more effective manner than government control.
Examples of one of other undeveloped countries like Korea,
Thailand, Singapore, etc. That had achieved rapid economic
development as a result of liberalization were kept in
consideration.
As to why the New Economic Policy 1991 or the Industrial Policy
1991 came into existence, the whole crisis is going to be
mentioned in this assignment. The reasons for implementing the
liberalization like the excess of consumption and expenditure over
revenue resulting in heavy govt. borrowings and inefficiency in
use of resources. Also we are dealing with important reforms
taken during liberalization in the New Economic Policy 1991 such

as Industrial licensing, Public Sector Policy, Financial sector

reforms, Tax reforms, etc.
Also the salient features, their objectives, merits and
achievements of this policy is going to be discussed in detail.

BACKGROUND OF THE
CRISIS
Since independence, India followed a mixed economic structure
which combined the advantages of both the socialist and
capitalist economies. Some economists are of the belief that the
mixed economy resulted in the advocation and framing of a set of
policies and laws which hampered the growth of the economy
though they were made with the purpose of aiding economic
growth. Other economists believe that india has managed to
attain a substantial economic growth.
During the year 1991, India was faced with an economic crisis
because of her external debt. The government was not able to
repay the money it had borrowed from abroad. The foreign
exchange reserves which are maintained to import petrol and
other important commodities dipped down alarmingly to levels
which were insufficient to last even a fortnight. The escalating
price of the essential goods further added to the problem. These
prompted the government to introduce a new set of policies which
changed the direction of our economic strategies.
Liberalization refers to relaxation of previous government
restrictions usually in areas of social and economic policies. Thus,
when the government liberalizes trade it means it has removed

the tariff, subsidies, and other restrictions on the flow of goods

and services between countries.
The inefficient management of the Indian economy in the 1980s
lead to the financial crisis. The government generates funds
through taxation, running of public sectors etc in order to
implement various policies and for the general administration .
When the income is less than the expenditure the government
borrows from banks to finance the deficit. It also borrows from
international financial institution. When we import goods, we pay
in dollars, which is earned when we export some other goods.
The development policies required lots of funds though the
revenues were low. the government had to overspend in order to
tackle problems like unemployment, poverty and population
explosion. Taxation and other sources of internal revenues were
low whereas the government had to spend on things like national
defence and the social sector. There was a need to utilize the
funds in ahighly efficient manner. The growing expenditure could
not be met by the incomes from the public sector undertakings
too. Our foreign exchange got from borrowing also got spent in
meeting the demands of consumption needs. The exports werent
given sufficient attention so that they could pay for the growing
expenses. The amount being spent was also not controlled.
In the late 1980s the government expenses rose and they were
larger than the revenue by huge margins. The prices of essential
commodities rose. Export rate was low while the import rates
were exceedingly high. All this resulted in the insufficient funds in
the foreign exchange reserves and we were not able to pay the
interest on the amount borrowed from international organizations.
In order to tide over the crisis India agreed to the conditions and
announce the new economic policy (NEP). NEP brought in a lot of

economic reforms. The basic aim of these reforms was to provide

more competition in the economy by removing the restrictions
imposed on foreign imports. The policies of NEP can be classified
into two categories namely
Stabilization measures
Structural measures

Stabilisation measures were short term in nature and where

introduced to control inflation and to overcome some of the
weakness that had developed and disrupted the balance of the
economy. In other words, they were introduced to maintain
sufficient foreign reserves and to bring inflation under control.
Structural measures reform measures were long term in nature
and were made with the aim of improving the efficiency of the
economy and increase international competitiveness by removing
the rigidity of the Indian economy. The government introduced
various policies which can be categorized as
Liberalization
Privitization
Globalisation
The first two are strategies and the last one is their outcome.

THE NEW INDUSTRIAL

POLICY, 1991
A number of significant economic changes introduced by many a
number of countries all the world over, the encouraging results of

the liberalization measures introduced in 1980s by the

Government of India, and the precarious economic situation that
prevailed during the later part 80s have encouraged and forced
the then Congress government, which came back to power at the
center, under the leadership of Shri. P. V. Narasimha Raoa non Nehru family member, to take some bold measures to rejuvenate
the economy and to accelerate the pace of development. In this
background, the Government of India announced its New
Industrial Policy (NIP or IP) on July 24, 1991. The important
objectives are: (a) to correct the distortions that may have crept
in, and consolidate the strengths built on the gains already made,
(b) to maintain sustained growth in the productivity and gainful
employment, and (c) to attain international competitiveness.
Therefore, the basic philosophy of the New IP, 1991 has been the
continuity with change. Because, the new policy represents a
renewed initiative towards consolidating the gains of national
reconstruction at this crucial stage. But what is more important is
the change (in continuity with change)change in the attitude of
the state towards the industrial society, change from centrally
planned economy to market led economy, change from excessive
government intervention to minimal intervention, change from
nationalization to privatization, change from subsidization and
cross-subsidization to gradual withdrawal of subsidy, etc. But
these changes, which the government has introduced, represent a
sharp departure from the earlier industrial policies.

LIBERALIZATION
As pointed out in the beginning, rules and laws which were aimed
at regulating the economic activities became major hindrances in

growth and development. Liberalization was introduced to put an

end to these restrictions and open up various sectors of the
economy. Though a few liberalization measures were introduced
in 1980s in areas of industrial licensing, export-import policy,
technology upgradation, fiscal policy and foreign investment,
reform policies initiated in 1991 were more comprehensive. Let us
study some important areas such as the industrial sector,
financial sector, tax reforms, foreign exchange markets and trade
and investment sectors which received greater attention in and
after 1991.

REASONS FOR
IMPLEMENTING
LIBERALIZATION
Excess of consumption and expenditure over revenue

resulting in heavy govt. borrowings.

Growing inefficiency on the use of resources.
Over protection to industries.
Mismanagement of the firm and the economy.
Increase in losses for public sector enterprises.
Various distortion like poor technological development.
Shortage of foreign exchange and borrowing from abroad.

 Low foreign exchange reserves.

Inflation.

REFORMS TAKEN
DURING
LIBERALIZATION
Deregulation of Industrial Sector: In India,
regulatory mechanisms were enforced in various ways (i)
industrial licensing under which every entrepreneur had to get
permission from government officials to start a firm, close a firm
or to decide the amount of goods that could be produced (ii)
private sector was not allowed in many industries (iii) some goods
could be produced only in small scale industries and (iv) controls
on price fixation and distribution of selected industrial products.
The reform policies introduced in and after 1991 removed many
of these restrictions. Industrial licensing was abolished for almost
all but product categories alcohol, cigarettes, hazardous
chemicals industrial explosives, electronics, aerospace and drugs
and pharmaceuticals. The only industries which are now reserved
for the public sector are defence equipments, atomic energy
generation and railway transport. Many goods produced by small
scale industries have now been dereserved. In many industries,
the market has been allowed to determine the prices.

Financial Sector Reforms: Financial sector includes

financial institutions such as commercial banks, investment
banks, stock exchange operations and foreign exchange market.
The financial sector in India is controlled by the Reserve Bank of
India (RBI). You may be aware that all the banks and other
financial institutions in India are controlled through various norms
and regulations of the RBI. The RBI decides the amount of money
that the banks can keep with themselves, fixes interest rates,
nature of lending to various sectors etc. One of the major aims of
financial sector reforms is to reduce the role of RBI from regulator
to facilitator of financial sector. This means that the financial
sector may be allowed to take decisions on many matters without
consulting the RBI.
The reform policies led to the establishment of private sector
banks, Indian as well as foreign. Foreign investment limit in banks
was raised to around 50 per cent. Those banks which fulfil certain
conditions have been given freedom to set up new branches
without the approval of the RBI and rationalise their existing
branch networks. Though banks have been given permission to
generate resources from India and abroad, certain aspects have
been retained with the RBI to safeguard the interests of the
account-holders and the nation. Foreign Institutional Investors
(FII) such as merchant bankers, mutual funds and pension funds
are now allowed to invest in Indian financial markets.

Tax Reforms: Tax reforms are concerned with the reforms in

governments 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, there has been a continuous reduction in the taxes on
individual incomes as it was felt that high rates of income tax

were an important reason for tax evasion. It is now widely

accepted that moderate rates of income tax encourage savings
and voluntary disclosure of income. The rate of corporation tax,
which was very high earlier, has been gradually reduced. Efforts
have also been made to reform the indirect taxes, taxes levied on
commodities, in order to facilitate the establishment of a common
national market for goods and commodities. Another component
of reforms in this area is simplification. In order to encourage
better compliance on the part of taxpayers many procedures have
been simplified and the rates also substantially lowered.

Foreign Exchange 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. This led to an increase in the inflow of foreign
exchange. It also set the tone to free the determination of rupee
value in the foreign exchange market from government control.
Now, more often than not, markets determine exchange rates
based on the demand and supply of foreign exchange.

Trade and Investment Policy

Reforms: Liberalization of trade and investment regime was
initiated to increase international competitiveness of industrial
production and also foreign investments and technology into the
economy. The aim was also to promote the efficiency of the local
industries and the adoption of modern technologies. In order to
protect domestic industries, India was following a regime of
quantitative restrictions on imports. This was encouraged through
tight control over imports and by keeping the tariffs very high.
These policies reduced efficiency and competitiveness which led
to slow growth of the manufacturing sector. 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. Quantitative restrictions on imports of
manufactured consumer goods and agricultural products were
also fully removed from April 2001. Export duties have been
removed to increase the competitive position of Indian goods in
the international markets.

FEATURES OF
LIBERALIZATION
Liberalization of the Indian economy contained the following
features:
a. The economic reforms that were introduced were aimed at
liberalizing the Indian business and industry from all unnecessary
controls and restrictions.
b. They indicate the end of the license-permit-quota raj.
c.Liberalization of the Indian industry has taken place with
respect to:
(i) Abolishing licensing requirement in most of the industries
except a short list,
(ii) Freedom in deciding the scale of business activities i.e., no
restrictions on expansion or contraction of business activities,

(iii) Removal of restrictions on the movement of goods and

services,
(iv) Freedom in fixing the prices of goods and services,
(v) Reduction in tax rates and lifting of unnecessary controls over
the economy,
(vi) Simplifying procedures for imports and exports, and
(vii) Making it easier to attract foreign capital and technology to
India.

MERITS OR
ACHIEVEMENTS
We can analyse it at following five levels:

Rate of Growth:
The rate of growth of GDP has increased. In 1991-92, it had fallen
to below 1 per cent whereas in the 1970s, it was about 3 per cent

and in the 1980s, it was 4-5 per cent. In 1994-95, it rose to over 7
per cent, in 1995-96 and 1996-97 to 7.8 per cent but came down
to 5 per cent in 1997-98 and again increased to 5.8 per cent in
1998-99 (India Today, March 1999: 43 and Hindustan Times,
February 25, 1999).

Inflation:
Inflation in the general price level has been controlled. While in
the 1960s, it was 11 per cent, it increased to 18.5 per cent
between 1972 and 1975, 15.5 per cent between 1979 and 1982,
11.36 per cent between 1990 and 1993, and then started
decreasing to 10.9 per cent in 1994-95, 8.8 per cent in September
1998, 3.9 per cent in April 1999 and only 1.7 per cent in the first
week of August 1999.
Inflation in the early 1990s and its quick control in 1995-96 could
be explained to some extent by the increase in the international
petroleum prices and later easing out the supply constraint. But
inflation after that could not be checked for two to three years
because there were no strong structural improvements.

Revenue and Expenditure:

After rationalising the structure of various taxes, neither the
revenue has increased nor have the expenditure and fiscal
deficits been reduced. In fact, there was a decline in the tax

revenue to GDP ratio from about 11 per cent in 1990-91 (prior to

reforms) to about 10 per cent in 1995-96, and around that range
in 1998-99. This revenue loss has not been made up.

Industrial Performance:
There has been no increase in industrial production due to the
impact of liberalization of economic forces of the 1990s. The fact
is that the upward shift in the growth of production is lacking. A
shadow of industrial recession emerged in 1996-97. The industrial
production which had increased in 1994-95 to 13 per cent fell
down to 6.7 per cent in 1996-97 (India Today, March 1, 1999:42)
and 3.5 per cent in 1998-99 (The Hindustan Times February, 25,
1999).

Exports and Foreign Capital Inflows:

There has been decline in exports from 1995-96 onwards. While
the export growth rate had increased to 18 to 21 per cent
between 1993-94 and 1995-96, it declined to 12.1 per cent in
1996-97 and 4.4 per cent in 1997-98 (The Hindustan Times,
February 25, 1997; India Today, March 1, 1991:42). Of course, the
foreign exchange reserves have increased greatly from 1990 to
1997-98, indicating investment flows.
It was expected that the liberalization policy would introduce
openness to external finance and trade, expose the country to
international competition and bring such benefits as technology

transfer, management know-how, export marketing access and a

diversified investor base.
Economic experts are of the opinion that these hopes are being
fulfilled only to a limited degree. It is true that the external
financing choices open to the country have increased but for a
country with market access, the renewal of private flows has to be
sustainable and volatile. India has yet to learn to meet the new
challenges presented by a new pattern of external finance and
growing integration with global capital market.
It may be said that today, on the one hand, the revenue
collections are low, fiscal deficit is high, the inflation rate has
risen, and the capital outflow from other countries has not
increased much; on the other hand, many schemes like the
streamlining of incentives to broaden the revenue base,
rationalism of the subsidy structure to reduce tax expenditure,
improving marginal cost pricing of public utilities such as
electricity and water, removal of infrastructural bottlenecks,
privatisation of loss-making public enterprises, and insurance
sector reform, have unfortunately got bogged down.
All this causes genuine concern to the more serious economists
and to sociologists regarding some important aspects of the
Indian economy, such as high poverty, unemployment, subsidy
policies, indebtedness, impact of factional politics and political
uncertainties. Some persons have even challenged the merits of
liberalization and interpreted it as undiluted globalisation. It is,

therefore, necessary to evaluate critically the overall economic

performance of the 1990 decade and examine the impact of the
liberalization policy.

CONCLUSION
The New Industrial Policy, 1991 certainly differs significantly from
the earlier philosophies, approaches, etc. of the government. For
instance, prior to 1991, scope of public sector was expanded by
reserving more number of industries for the public sector. But
now, its scope has been reduced drastically by reducing the
number of industries reserved for the public sector. Like this, a
large number of changes can be noticed in the new policy. This
process has been continuing even in post liberalization era.
Adding to this, the government has taken a number of steps to
give effect to its policy decisions included in the New Industrial
Policy, 1991. Though the economy has been benefited
significantly from these measures, the economy has not been
able to reap the full benefits of the Economic Reform Package
owing to the political instability, etc
The fruits of liberalization reached their peek in 2007, when india
recorded its highest GDP growth rate of 9 %. With this, India
became the second fastest growing major economy in the
world,next only to china. The growth rate as slowed significantly
in the first half of 2012. An OECD report states that the average
growth rate 7.5% will double in decade, and more reforms would
speed up the pace.

ACKNOWLEDGEMENT
I am using this opportunity to express my gratitude to everyone who supported me
throughout the course of this project. I am thankful for their aspiring guidance,
invaluably constructive criticism and friendly advice during the project work. I am
sincerely grateful to them for sharing their truthful and illuminating views on a
number of issues related to the project.
I express my warm thanks to Ms. Anjali Agrawal for her guidance for the
completion of this project as I believe it could not be possible without her support.
I would also like to thanks my professors and all the people who provided me with
the facilities being required and conductive conditions for my economics project.

Thank you,
Pavitra Shivhare
B.A. LLB.