Economic reforms or structural adjustment is a long term multi dimensional package of various policies (Liberalisation, privatisation and globalisation) and programme for the speedy growth, efficiency in production and make a competitive environment. Economic reforms were adopted by Indian Govt. in 1991.
Factor’s responsible for Economic reforms.
1. Fall in foreign exchange reserve : as imports grew faster than exports
2. Adverse balance of payments resulted repayment crisis
3. Mounting fiscal deficit as govt. expenditure grew faster than revenue
4. Rise in prices, which has the negative impact on Investment.
5. Failure of public enterprises:- very low return on high Investment
6. Gulf crisis increases crude oil prices which negatively affected BOP.
Economic reform is a way through which a falling and unstable economy is transformed to bring economic and financial growth.
Measures of New Economic policy
Stabilisation measures: These are short run measures introduced by Govt to control rise in price, adverse balance of payment and fall in foreign ex-change reserve.
Structural adjustment: These are long run policies, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidity in various segment of the Indian economy.
Three Major Components or Elements of New Economic Policy 1991 are:
Liberalisation, Privatisation, Globalisation.
1. LIBERALISATION
Liberalisation means, freedom from direct or physical control imposed by the government.
Indian industry got liberalisation in the following way:
Industrial sector reforms
1.Abolition of industrial licence
NEP1991abolish the requirement of licensing except for the five industries.
2. Contraction of public sector
Number of industries reserved for public sector was reduced.Now only 2 are reserve for public sector. It includes atomic energy and Railways.
3.De reservation of production areas
many production areas which earlier were reserved for small scale industries have now been de reserved .
4.Expansion of production capacity
What to produce and how much to produce was now a matter of producer choice.
5. Freedom to import capital goods
It also implied freedom to import capital goods with a view to upgrading there technology.
FINANCIAL SECTOR REFORM
1.Reduce the role of RBI from regulator to facilitator of financial sector.
2.These reforms led to the establishment of private banks.
3.FDI in banks was raised to 50%.
4.But certain managerial aspects have been retained with the RBI,to safeguard the interests of the account holders.
FOREIGN EXCHANGE REFORMS
1.The rupee was “devalued” against foreign currencies which led to an increase in inflow of foreign exchange.
2.Market has been allowed to determine the foreign exchange rates
FISCAL REFORMS
1.Corporate tax, which was very high earlier has been gradually reduced.
2. The tax procedures have been simplified and the rates also have been lowered.
2. PRIVATISATION
Privatisation means the transfer of assets from public sector to private sector.To execute policy of privatisation government took the following steps:
1.Entry to Private Sector The role of public sector was limited only to two industries; rest all the industries were opened for private sector also.
2.Disinvestment Disinvestment was carried out in many public sector enterprises.
3.Setting up of Board of Industrial and Financial Reconstruction (BIFR). This board was set up to revive sick units in public sector enterprises suffering loss.
4.Dilution of Stake of the Government In the process of disinvestments private sector acquires more than 51% shares then it results in transfer of ownership and management to the private sector.
3 GLOBALISATION
It refers to integration of various economies of world.
Government adopted policy of globalisation by taking following measures:
1.Increase in equity limit of foreign investment
It has now range between 51 to 100%.
2. Government removed many restrictions from import of capital goods.
3. Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange
4.Partial convertibility of Indian rupees has been allowed.
5. Long –term liberal trade policy
6.Withdrawal of quantitative restrictions
Quantitative restriction on all import have been totally withdrawn.
7.Reduction in tariffs
Tariff barriers have been withdrawn on most good traded between India and rest of the world.
Liberalization, Privatization and Globalization: Appraisal
Merits of The LPG Policies
Following observations highlight the merits of LPG policies:
1.A Vibrant Economy
Overall level of economic activity has trended up as indicated by GDP growth.
2.Stimulant to Industrial Production
LPG policies have worked as a great stimulant to industrial production in the Indian economy.
3.Curb on Fiscal Deficit
There has been a significant increase in government revenue. Consequently, fiscal deficit has been contained to around 4 per cent of GDP.
4.A Check on Inflation
Owing to a greater flow of goods and services in the economy, LPG policies brought a check on the rate of inflaton.
5.Consumer’s Sovereignty
Consumers’ sovereignty has definitely expanded over time. Large variety of goods and services from the diverse global markets are now available for the buyers.
6. A Substantial Increase in Foreign Exchange Reserves
Good amount of forex reserves enhances economic confidence of the global investors in the Indian markets.
7.Flow of Private Foreign Investment
Private foreign investment has taken a quantum jump after the adoption of LPG policies.
8.Recognition of India as an Emerging Economic Power
India is now being recognized as an emerging economic power in the world.
9.A Shift from Monopoly Market to Competitive Market
Indian markets are now increasingly shedding its monopolistic character, and becoming more and more competitive in nature.
Demerits of LPG Policies
Following observations highlight demerits or negative impact of LPG policies in India:
1.Neglect of Agriculture sector
Agricultural sector has suffered a serious neglect.
2.Urban Concentration of Growth Process
LPG policies have resulted in the concentration of growth process in urban areas. All MNCs are focusing only on urban areas, where they find conducive infrastructural facilities. This has further widened the ‘rural-urban divide’.
3.Economic Colonialism
Now, while MNCs are expanding their economic control, we might suffer a sort of economic colonialism.
4.Spread of Consumerism
LPG policies has resulted in a large-scale spread of consumerism
5.Lopsided Growth Process
LPG has accelerated the growth process of the Indian economy, but it is lopsided. It is not an inclusive growth process. It is a growth process that does not embrace all the sectors of the economy.
6.Cultural Erosion
Globalisation has also led to cultural erosion in the Indian society. Economic prosperity has taken a lead over all other parameters of life.
Conclusion
Should we or should we not subscribe to the LPG policies – is a debatable issue. But avoiding the intricacies of the debate, we can definitely make one concrete observation that LPG policies were the only way out to accelerate the pace of growth and development.
We must see to it that we do not surrender to big players in the international markets. We must see to it that we do not compromise with economic interest of our domestic producers. We must see to it that we do not become economically subservient to multinational corporations. We must be in a position to channelize FDI (foreign direct investment) more into areas of infrastructure rather than retail trading or fast-food junctions.
It's very good, chapter is complete
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