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Flashcards in Ch 6 New Economic Reforms Deck (7)
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The basic components of the NEP

Liberalisation (Freedom for producing goods)
Privatization (Involving private sectors in ownership or operation of state owned enterprises)
Globalization (increasing openness to the world)


Need for NEP

High Fiscal Deficit
BOP crisis
Fall in foreign exchange reserve
Inflationary spiral
Poor performance of PSU


Economic reforms under liberalization

Industrial sector
Abolition on licensing
Contraction of public sector
Freedom to import capital goods

Financial sector
RBI became facilitator(let’s commercial bank decide interest rate) rather than regulator (decides interest rate for the country )
Foreign Institutional Investment was now allowed in Indian Financial Market

Fiscal Reforms
Taxation structure was modified to make it more simple and moderate so that tax evasion is reduced

External sector Reforms
Foreign Exchange reforms - 1991 devaluation was conducted so that supply of foreign exchange is increased in the Indian economy.
Foreign Trade Policy Reforms - tariff restrictions were moderated, import quotas and import licensing was abolished


Need for privatization

Industrialization was completely dependent upon PSU according to IPR 1956 but they couldn’t give industrialization a push, so private players were needed for industrialization
Dead weight of non profitable PSU on other PSU (NAVRATAN)
Inefficiency and corruption in PSU


Gains and losses of privatization

Social justice would be neglected
Goods for weaker portion of the society would be discontinued (non profitable)

Increased efficiency (self interest over social interest)
Would increase competition for PSU (would lead to growth of PSU)
Promotes diversification of production ( increased profits)


Strategies for Globalization

Increase in Equity limit for FDI ( from 40% to 50%-100%)
Long term trade policy
Reduction in tariffs
Withdrawal of Quantitative restrictions (2001)


Merits and demerits of the NEP

Neglect of agriculture
Urban concentration of growth process
Economic Colonialism (MNC took over the domestic producers)
Lopsided growth process (only service sector)

Shift from monopoly to competitive market
Recognition of India as an emerging economic power
Increase in foreign Exchange reserves ( enhances economic confidence of global investors)
Flow of private foreign investment (FDI)
A check on inflation and fiscal deficit