1. Need for a policy shift for
economic growth during
1991; performance of the
economy under LPG.
MADE BY-
SAURAV KISHORE & SONIYA KANCHAN
2. India after Independence
• On 14 August 1947, Nehru had declared: the country
that the tasks ahead included “the ending of poverty
and ignorance and disease and inequality of
opportunity”.
• The objective of India’s development strategy has
been to establish a socialistic pattern of society
through economic growth with self-reliance, social
justice and alleviation of poverty. These objectives
were to be achieved within a democratic political
framework using the mechanism of a mixed
economy where both public and private sectors co-
exist.
3. Trade and Development during
1947 to 1990
• India initiated planning for national economic
development with the establishment of the Planning
Commission. The aim of the First Five Year Plan
(1951-56) was to raise domestic savings for growth
and to help the economy resurrect itself from
colonial rule.
• The real break with the past in planning came with
the Second Five Year Plan (Nehru-Mahalanobis
Plan). The industrialization strategy articulated by
Professor Mahalanobis placed emphasis on the
development of heavy industries and envisaged a
dominant role for the public sector in the economy.
4. • The objectives of industrial policy were: a high growth
rate, national self-reliance, reduction of foreign
dominance, building up of indigenous capacity,
encouraging small scale industry, bringing about
balanced regional development, prevention of
concentration of economic power, reduction of income
inequalities and control of economy by the State.
• Doubts were raised in the early seventies about the
effectiveness of the approach to banish poverty. Further,
the growth itself generated by the planned approach
remained too weak to create adequate surpluses. Public
sector did not live up to the expectations of generating
surpluses to accelerate the pace of capital accumulation
and help reduce inequality. Agricultural growth
remained constrained by perverse institutional
conditions.
5. • A shift in policy was called for. The Fifth Plan (1974-79)
corrected its course by initiating a program emphasizing
growth with redistribution.
• Three important committees were set up in the early
1980s. Narsimhan Committee on the shift from physical
controls to fiscal controls, Sengupta Committee on the
public sector and the Hussain Committee on trade
policy.
• Two kinds of delicencing activity took place. First, thirty
two groups of industries were delicensed without any
investment limit. Second, in 1988, all industries were
exempted from licensing except for a specified negative
list of twenty six industries. Entry into the industrial
sector was made easier but exit still remained closed and
sealed.
6. Failure in Planning Process
• While the reasons for adopting a centrally directed
strategy of development were understandable
against the background of colonial rule, it, however
soon became clear that the actual results of this
strategy were far below expectations.
• Instead of showing high growth, high public savings
and a high degree of self-reliance, India was actually
showing one of the lowest rates of growth in the
developing world with a rising public deficit and a
periodic balance of payment crises. Between 1950
and 1990, India’s growth rate averaged less than 4
per cent per annum
7. LPG
• Liberalization : It refers to the relaxation of previous
government restrictions usually in areas of social
and economic policy. Thus, when government
liberalizes trade it means it had removed the tariff,
subsidies and other restrictions on the flow of goods
and services between countries.
• Privatization: It refers to the transfer of assets or
service functions from public o private ownership or
control and opening of the hitherto closed areas to
private sector entry. It can be achieved by leasing,
contracting, divesture and franchising.
• Globalization: Integrating domestic economy with
world economy.
8. NEED for LPG
• Foreign currency reserves had tumbled down to
almost billion.
• Inflation was at soaring high of 17% highest level
of fiscal deficit.
• Capital was on the verge of flying out of the
country and we were on the brink of becoming
loan defaulters.
• Foreign investors were losing confidence in
Indian Economy with all these factors.
9. SIGNIFICANCE OF LPG
• Making Indian economy as the fastest growing
economy and globally competitive.
• It marks the advent of the real integration of the
Indian economy into global economy.
• Globalization implies opening up the economy to
FDI by providing facilities to foreign companies
to invest in different fields of economic activity
in India.
10. Objectives of New Industrial Policy
• Self-reliance to build on the many sided gains
already made.
• Encouragement to Indian entrepreneurship,
promotion of productivity and employment
generation.
• Removing regulatory system and other
weaknesses.
• Enhanced support to the small-scale sector.
11. • Incentives for the industrialization of backward
areas.
• Increasing the competitiveness of industries for
the benefit of the common man.
• Insure running of public sector undertakings
(PSUs) on business lines and cur their losses.
• Development of indigenous technology through
greater investment and bringing in new
technology to help Indian manufacturing units
attain world standards.
12. PROVISIONS of New Economic policy,
1991
1. Trade and Capital Flow reforms:
• The Government devalued the rupee in early July
1991 which led to a fall in the value of the rupee
against the five major international currencies by
roughly 22 %.
• The budget for 1992-93 announced the liberalized
exchange rate mechanism. This system introduced
partial convertibility of rupee. A dual exchange
rate was fixed under which 40% of foreign
exchange earnings were to be surrendered at the
official exchange rate while 60% were to be
converted at market determined rate.
13. • The 1993-94 budget introduced full convertibility of
rupee on trade account. Thus the 60:40 ratio was
extended to 100% conversion.
• In 1994 the Reserve Bank of India undertook several
steps towards achieving full convertibility on current
account when it announced relaxation in payment
restrictions for a number of invisible transactions
and liberalization of exchange control regulations up
to specified limit relating to:
I. Exchange Earners Foreign Currency Account
II. Basic travel quota
III. Studies abroad
IV. Gift remittances and donations
14. • While convertibility on current account has been
accomplished convertibility on capital account is
being carried out slowly and cautiously. Some
important measures were taken in 2002-03 budget:
I. Full convertibility of deposit scheme for NRIs.
II. Freedom to NRIs to repatriate in foreign currency
their current earnings in India such as rent,
dividend, pension, interest etc.
III. Allowing Indian companies to make overseas
investment in joint ventures abroad up to 50% of
their net worth.
IV. Allowing Indian mutual funds to invest in rated
securities in countries in countries with fully
convertible currencies, within the existing limits.
15. 2. Rationalization of Tariff Structure
• The 1993-94 Budget reduced the maximum rate of
duty on all goods from 110% to 85% except for a few
items including passenger luggage and alcoholic
beverages.
• The 1994-95 Budget further brought down the
maximum duty from 85% to 65%.
• The 2000-01 Budget reduced the peak rate of basic
customs duty to 35%.
• 2002-03 the peak customs duty rate was reduced
from 35% to 30%.
• The Union Budget for 2003-04 has reduced it
further to 25%.
16. 3. Decanalisation
• A large number of exports and imports used to be
canalised through the public sector agencies in
India.
• The supplementary trade policy announced on
August 13, 1991 reviewed these canalised items and
decanalised 16 export items and 20 import items.
• The Exim Policy 2001-02 put 6 items under special
list- rice, wheat, maize, petrol, diesel and urea.
• Import of these items would be allowed only
through State Trading agencies. Not theoretically
canalised but for all practical purposes they would
be.
17. 4. Trading Houses
• Under the 1992-97 trade policy, export houses
and trading houses were provided the benefit of
self certification under the advance license
system, which permits duty free imports for
exports.
18. 5. Abolition of Industrial Licensing
• The 1991 Industrial Policy abolished industrial
licensing.
• Most of the industries have delicensed and now
licensing is compulsory for only 6 industries.
• These are alcohol, cigarettes, hazardous
chemicals, electronics aerospace and defense
equipment, drugs and pharmaceuticals and
industrial explosives.
19. 6. Dilution of Public Sector
• The new industrial policy states that the government
will undertake review of the existing public
enterprises in low technology, small scale and non-
strategic areas.
• Sick units will be referred to BIFR for advice about
rehabilitation and reconstruction.
• The government has also announced its intention to
offer a part of government shareholding in the
public sector enterprises to mutual funds, financial
institutions, general public and workers.
20. 7. MRTP Limit Scrapped
• The new Industrial policy scrapped the
threshold limit of assets in respect of MRTP and
dominant undertakings.
• These firms will now be at par with others, and
require prior approval from the government for
investment in delicensed industries.
• The amended MRTP Act gives more emphasis to
the prevention and control of monopolistic,
restrictive and unfair trade practices.
21. 8. Free entry to Foreign Investment
and Technology
• The 1991 Industrial Policy prepared a specified list
of high technology and high investment priority
industries wherein automatic permission was to be
made available for direct foreign investment up to
51% foreign equity.
• The industries in which automatic approval was
granted included a wide range of industrial activities
in the capital goods and metallurgical industries,
entertainment, food processing and the service
sector having significant export potential.
22. 9. Removal of mandatory convertibility
clause
• A large part of industrial investment in India is
financed by loans from banks and financial
institutions. These institutions have followed a
mandatory practice of including convertibility
clause in their loans into equity.
• Henceforth, this mandatory convertibility clause
will no longer be applicable.
24. Impact
• Liberalization and encouragement to foreign direct
investment are key areas of the economic reforms.
• Liberalization has opened Indian economy to extend
competition. Government truly believes that foreign
investment is crucial to development of nation.
• India’s policy of protectionism ie. Protecting the
domestic industries from foreign multinationals has
now changed to exposing the Indian enterprises to
the stormy gales of foreign competition.
25. • India's Export and Import in the year 2001-02 was
to the extent of 32,572 and 38,362 million
respectively. Many Indian companies have started
becoming respectable players in the International
scene.
• Agriculture exports account for about 13 to 18% of
total annual of annual export of the country. In
2000-01 Agricultural products valued at more than
US $ 6million were exported from the country 23%
of which was contributed by the marine products
alone.
• Our Foreign currency reserves had fallen barely to
one billion U.S. dollars in June 1991, rose to 180
billion U.S dollars in 2007.
• This era of reforms has ushered in a remarkable
change in the Indian mindset.
