Economic Reforms and New

Economic Policy-1991
 Economic Reforms-Meaning
The term economic reform broadly indicates necessary
structural adjustments to external events.
The reforms in India was initiated with the aim of accelerating
the pace of economic growth and eradication of poverty.
Economic Reforms provides a policy regime that facilitates
and fosters growth of Indian industry to let the entrepreneurs
make investment decisions on the basis of their own
commercial judgment.
This requires gradual reduction in import and increase in
export. These adjustments also requires market change in order
to make economy flexible.
The process of economic liberalization in India can be traced
back to the late 1970s. However, the reform process began in
earnest only in July 1991.
 The Crisis of June 1991
The present process of economic reforms
was born out of the crisis in the economy,
which climaxed in 1991. The crisis
compelled the government to adopt a new
path-breaking economic policy under
which a series of economic reform
measures were initiated with the objective
to deal with the crisis and to take the
economy on a high-growth path.
 Need of Economic Reforms
Increase in Fiscal Deficit
Increase in adverse balance of Payment
Gulf Crisis
Fall in foreign Exchange Reserve
Rise in Prices
Poor Performance of Public Sector
 Main Features of Economic
Reforms-1991
PRIVATISATION

LIBERALISATION GLOBALISATION

ECONOMIC
REFORMS
 Liberalisation
It means to free the economy from direct or physical
controls imposed by the government.
Prior 1991, government had imposed several types
of controls on Indian economy e.g. industrial
licensing system, price control or financial
control on goods, import license, foreign
exchange control, restriction on investment by
big business houses, etc.
These controls leads to fall in economy growth.
Economic reforms were based on the
assumption that market forces could guide the
economy in a more effective manner than
government control.
 Meaning of Liberalisation
Dismantling of industrial licensing system and
dilution of MRTP Act;
Reduction in quantitative restrictions in imports as
well as rate of import duties;
Reductions in control on foreign exchange;
Financial and banking sector reforms;
Reductions in the level of corporate and personal
income taxes;
Reductions in restrictions on Foreign Investments
(Direct as well as Portfolio)
 Measures Taken For Liberalisation
Abolition of industrial licensing and Registration :
According to new industrial policy , with the exception
of 6 sectors, industrial licensing has been removed.
Concession from MRTP Act
Freedom from Expansion and Production to Industries
Increase in the Investment Limit of the Small Industries:
It has been raised to Rs 1crore & Investment limit has
been raised to Rs 25 lakh.
Freedom to import capital goods
Freedom to import technology
Action plan for information Technology and software
development.
 Privatisation
Privatisation means allowing the private sector to
set up more and more of industries that were
previously reserved for public sector.
It can take in three in forms:
a. Change in ownership: Degree of privatisation
judged by the extent of ownership transferred
from public to private sector. This can have four
forms:
i) Total Nationalisation
ii) Joint Venture
iii) Liquidation
iv) IV) Workers Co-operative
 Privatisation-Continue..
b. Organizational Measures: It includes variety
of measures to limit state control.
i) A holding Company Structure
ii) Leasing
c. Operational Measures: Autonomy to the
operators of the enterprise.
 Objectives of Privatisation
To increase efficiency & competitive power
of the enterprises
To strengthen industrial management.
To earn more & more Foreign currency.
To make optimum use of resources
To achieve rapid industrial development of
the country.
 Advantages of Privatisation
Reduction in economic burden
Increase in efficiency
Reduction in sense of irresponsibility
Scientific Management
Reduction in Political Interference
Encouragement of new Inventions
 Disadvantages of Privatisation
Lack of social welfare
Class struggle
Increase in inequality
Increase in unemployment
Exploitation of weaker section
 Measures adopted for privatisation
Contraction of Public sector
Disinvestment
Sale of shares of public enterprises
Increase in private sector
Conversion of loans into shares is not
necessary
Sick industries
Memorandum of understanding
 Globalisation

It is defined as a process associated with

increasing openness, growing economic
independence and Deeping economic integration
in the world economy.

Reduction of trade barriers

Free flow of capital
Free flow of technology
Free movement of technology
 Process of globalisation
Stage I: Domestic company exports to foreign countries
through the dealers or distributors of home country
Stage II: The domestic company exports to foreign
countries directly on its own.
Stage III: The domestic company becomes an international
company by establishing production and marketing
operations in various key foreign countries.
Stage IV: The company replicates a foreign company in the
foreign country by having all the facilities including R&D,
full fledged human resources, etc.
Stage V: The company becomes a true foreign company by
serving the needs of foreign customers just like the host
countrys company serves.
 Measures towards Globalisation
Expanding list of items for automatic approval of
foreign equity

1-Trade Reforms
Import liberalisation reduction of import
tariffs, replacing import licenses with import
tariffs, removing quantitative restrictions on
imports
Removing export subsidies, replacing licenses of
exports with export duties, low flat tax on export
income Decanalising oil and agricultural trade.
 Measures towards Globalisation-
Cont
2. Financial and Banking Reforms

Allowing FIIs to invest in Indian Capital Market;

Allowing Indian companies to procure capital from
foreign countries through Euro Issues and Global
Deposit Receipts Is to invest in Indian Capital Market;
Allowing Mutual Funds to invest in foreign companies
Interest Rate to be market Determined
Lowering SLR and CRR in banks
Allowing private sector into banking
 Measures towards Globalisation-
Cont
3. Exchange Rate Reforms
Move towards flexible exchange rate; LERMS
Liberalized Exchange Rate Management System
Flexible Exchange Regime or Managed float.
4. Fiscal Consolidation
Reduce Fiscal Deficit
Reduction in Public Expenditure
Tax reforms: VAT and Income tax and Corporate
taxes
Measures towards Globalisation-Cont
5. Industrial Reforms
De-Licensing;
De-reservation;
Broad banding;
Dilution of MRTP Act
6. Investment Reforms
Allowing entry of MNCs by scrapping restrictive
laws like FERA and changing into FEMA
Permitting Indian companies to collaborate with
foreign companies in the form of joint ventures
Liberalising inflow of foreign direct investment,
Incentives for MNCs and NRIs for investing in
India
 Measures towards Globalisation-Cont

7. Devaluation of currency

8. Encouragement of foreign investment

9. Reducing custom duty

 Types of Globalisation

Globalisation of markets

Globalisation of Production

Globalisation of Technology

Globalisation of Investment
 Impact of NEP (New Economic Policy) on
Industry
The external policies in 1960s, 1970s and 1980s were
guided by the principle of import substitution, which had
been prompted to some extent because of scarcity of
foreign exchange.
The strategy therefore involved, restricting imports
through quotas and high tariff rates as well as there being
restrictions on FDI, foreign collaborations, import of
technology.
The general trade and industrial policies that India
adopted till mid-80s and till 199os insulated the Indian
industry from competition, domestic as well as foreign.
 Impact of NEP on Industry
However, the environment has changed
drastically since New Economic Policies were
initiated in 1990s. Globalisation has led to
opening up of markets leading to intense
competition.
There is greater competition in domestic market
with imports of high quality goods from
developed countries and low priced goods from
developing countries. Competition has further
intensified with the arrival of MNCs as the
restrictions on FDI have been removed.
 Impact of NEP on Industry
Thus Indian enterprises, small and large have been
forced to improve their quality and productivity in
order to (i) compete with imported goods or with
goods produced by MNCs; (ii) export successfully
without government support.

A study, based on CMIE (Centre for Monitoring

Indian Economy) database to test competitiveness
of domestic private sector companies with respect
to foreign companies, show that competitiveness of
Indian companies; measured in terms of cost
management and profitability lag behind that of
foreign firms.
 Impact of NEP on Industry: Competitiveness
of Indian Industry
Raw materials expenses to net sales lower for foreign
companies by 5 per cent vis--vis Indian companies. Cost of
production to net sales too lower for foreign companies.

On the profitability side, Profit after Tax (PAT) to capital

employed was 5 per cent higher for foreign companies.

Return on Capital Employed (ROCE) for the Indian firms fell

from 6.3% in 1993-94 to 1.6 in 1999-2000. Foreign firms
ROCE too fell from 10 to 7 per cent in the same period.
However there has been increasing gap between the two set
of firms.
 Impact of NEP on Automobile Industry
The automobile industry, compromises of four segments, the
passenger car and jeep industry, commercial vehicles, two and
three wheeler industry and automobile components
First Automobile Policy in 1949, which banned import of
completely built automobiles but firms engaged in assembling
vehicles from completely knocked down units were permitted to
operate.
By late 1960s, bias against passenger car industry, which was
absent earlier came into play. In 1968, for the first time, Statutory
Price Control was imposed on the passenger car, segment as it
happened to be a luxury good.
Unlike the 50s and 60s, the period of 70s saw poor performance
by car manufacturers. Low demand, high prices, high input costs,
low scales of production and low profit were some of the
highlights. However, things didnt look up even after Statutory
Price Control was lifted in 1975.
 Impact of NEP on Automobile
Industry
1993: De-licensing of the automobile industry.
Removal of FERA and allowing 100% FDI, saw
host of joint ventures entered into by PA (with
Peugot), HML (with GM), TELCO (with Mercedes,
Daimler-Benz, Mitsubishi).
New entrants like DCM (with Daewoo), Kirloskar
(with Toyota). Hyundai has 100% owned
subsidiary in India.
Reduction of import duties on parts and
components, in alignment to ASEAN rates.
Completely Built Up (CBU) allowed since 2001
 Impact of NEP on Automobile
Industry
Currently domestic market size is to the tune of 7,55,771 cars.
Number of models has gone up from 4-5 in mid-1980s to 25-
26 in 2002-03. Over and above this, exports had been 1,30,000
in 2003. Exports projected to grow at 10-15% in the coming
years.
Manufacturing Hub for vehicles
Hyndai- Export base for small cars.
Ford exporting CKDs of Ikon to S. Africa and CIS countries
Tata Indica being sold in Europe under Rover brand.
M&M targeting S. Africa, China, Europe, Russia for export of
Scorpio and Bolero.
Maruti exports cars to EU.
 Impact of NEP on Electronics Industry
Electronics industry comprise of six categories. Of
them, consumer electronics contributes a major
proportion of the industrys production. The growth
of this industry has been primarily due to phenomenal
expansion of the consumer electronics segment,
especially Televisions (TV) and Audio systems
during the 80s and PCs during the 1990s.
Recent Developments:
The industry is undergoing rapid transformation due
to major changes
End