Indian New Economic Policy 1991 | Liberalisation, Privatisation And Globalisation | Detailed Review

New Economic Policy 1991

Economic Reforms - Economic reforms refer to a set of economic policies or economic decisions which is directed to accelerate the pace of 'growth and development' in the country's economy.

In 1991, the Government of India initiated a series of economic reforms to pull the economy out of the crises of 90's. These reforms came to be known as New Economic Policy (NEP).

Three broad components of NEP are:

1. The policy of liberalisation (L) in place of licensing for the industries and trade.
2. The policy of privatisation (P) in place of quotas (Q) for the industrialists, and
3. The policy of globalisation (G) in place of permits (P) for exports and imports in the country.

Thus, LPG was set to replace LPG in 1991.

ELEMENTS OF NEP (NEW ECONOMIC POLICY)

• Liberalisation
• Privatisation
• Globalisation

Let us discuss these elements in detail:

Liberalisation 

Liberalisation of the economy means freedom of the producing units from direct or physical controls imposed by the government. Following are some notable observations in this regard:

1. Prior to 1991, government had imposed several type of controls on private enterprises in the domestic economy. These included industrial licensing system, price control or financial control on goods, import licence, foreign exchange control, restrictions on investment by big business houses, etc.
2. It was experienced by the government that several shortcomings had emerged in the economy on account of these controls.
3. These controls had given rise to curruption, undue delays and inefficiency.
4. Growth rate of GDP had fallen sharply and high-cost economic system (rather than a low-cost competitive economic system) came into being.

In view of these facts, liberalisation of the economy was considered as a key component of NEP. Greater reliance was to be placed on market forces (of supply and demand) rather than checks and controls.

Examples of developing countries (Korea, Thailand, Singapore) that had achieved rapid growth due to liberalisation were considered as worthly of emulation.

Economic Reforms (with liberalisation as its key component) were based on the assumption that market forces would drive the economy towards the path of competitive growth and development.

Economic Reforms under Liberalisation:

1. Industrial Sector Reforms: Abolition of Industrial Licensing, Contration of Public Sector, De-reservation of Production Areas, Expansion of production Capacity, Freedom to Import Capital Goods.
2. Financial Sector Reforms: It includes Improvement in the Banking Sector, Non-Banking Financial Institutions, Stock Exchange Market, and Foreign Exchange Market.
3. Fiscal Reforms: Fiscal reforms relates to the revenue and expenditure of the government. Tax reforms are the principal component of fiscal reforms.
4. External Sector Reforms: External sector reforms includes the Foreign Exchange Reforms and Foreign Trade Policy Reforms.

Privatisation

Privatisation is the process of involving the private sector in the ownership or operation of a state owned enterprise.

It implies gradual removal or withdrawal of government ownership/management from the public sector enterprises. It may happen in two ways:

1. Outright sale of the government enterprises to the private entrepreneurs or
2. Withdrawal or removal of the government ownership and management from the mixed enterprises (the enterprises jointly owned and managed by the government and the private entrepreneurs in the country).

Under the economic policy 1991, in Privatisation government sells off its share capital of PSUs (Public Sector Undertakings) to the private investors. This is also known as disinvestment of the PSUs.

Disinvestment is a policy instrument to promote privatisation. Argument in favour of disinvestment is the same as in case of privatisation. Of course, disinvestment is also used as a means to manage fiscal deficit by the government.

Obvious Gains of Privatisation

1. Privatisation implies supremacy of 'self-interest' over 'social interest'. When 'self-interest' prevails, the entrepreneurs or management work with 100 per cent commitment, and 'efficiency' becomes the condition of survival for the workers. High productivity is the obvious result.
2. Privatisation expects private enterprises to work in a competitive environment - both at domestic as well as international level. Competition induces upgradation and modernisation. These are the essential conditions of growth and development.
3. Privatisation promotes diversification of production. Unlike PSUs, private enterprises invariably generate high profits. These are used for expansion and diversification of production. MNCs (Multinational Corporations) are a testimony to the fact that private sector enterprises are capable of redefining the benchmark of growth and development.
4. Privatisation promotes consumer's sovereignty. Higher degree of consumer's sovereignty implies wider choice and better quality of life.

Imperative Losses

1. Socialistic pattern of the society (in which 'social interest' is accorded top priority) is left to survive only as theoretical possibility. It loses its practical relevence once PSUs are sold off to the private entrepreneurs.
2. Privatisation encourages the free play of market forces. But in this process, goods are produced only for those peoples who have the means to buy them. When prices goes up (which is an obvious tendency in a system driven by the free play of market forces), weaker sections of the society suffer deprivation. Sircilla Tragedy is a notable evidence to this point.

Globalisation

Globalisation means integrating the economy of a country with the economies of other countries under the conditions of free flow of trade and capital across the different borders of a country.

Globalisation is also defined as a process which is associated with the increasing openness in the economy, growing economic interdependence and deepening economic integration in the world economy.

Economic reforms aim at integrating the Indian economy with the global economy.

As a result, there will be unrestricted flow of goods and services, technology and expertise between India and rest of the world.

Particularly, it is expected that capital and technology will flow from the developed countries of the world towards India.

Policy Strategies Promoting Globalisation of the Indian Economy

Following are some important policy strategies that have influenced the process of globalisation of the Indian economy:

• Increase in Equity Limit of Foreign Investment
• Partial Convertability
• Long-term Trade Policy
• Reduction in Tariffs
• Withdrawal of Quantitative Restrictions

In 1991, the LPG (Liberalisation, Privatisation and Globalisation) policy is framed to cope the economic downfall. However, after the New Economic Policy 1991, Indian economy instantly grown after few years.