Economic policies

2. Economic policy:
Economic policy refers to the actions that
governments take in the economic field. It covers the
systems for setting levels of taxation, government
budgets, the money supply and interest rates as well
as the labor market, national ownership, and many
other areas of government interventions into the
economy.

3. Pre-1991 economic scenario in India:
● Indian economic policy after independence was influenced by the colonial experience
(which was seen by Indian leaders as exploitative in nature) and by those leaders'
exposure to Fabian socialism.
● Nehru, and other leaders of the independent India, sought an alternative to the
extreme variations of capitalism and socialism.
● In this system, India would be a socialist society with a strong public sector but also
with private property and democracy.
● As part of it, India adopted a centralised planning approach.
● Policy tended towards protectionism, with a strong emphasis on import substitution,
industrialisation under state monitoring, state intervention at the micro level in all
businesses especially in labour and financial markets, a large public sector, business
regulation.

4. New economic Policy of 1991 - Architects
P.V.Narasimha Rao
Dr.Manmohan Singh
Prime Minister

5. 1991 economic crisis:
● By 1985, India had started having balance of payments problems. This is
due to more expenditure by the government whereas the income
generated was less. In addition there was huge disparities between
income and expenditure.
● By the end of 1990, it was in a serious economic crisis. The government
was close to default, its central bank had refused new credit
● In 1991, India met with an economic crisis - relating to external debt. The
government was not able to make repayments on its borrowings from
abroad.
● The foreign exchange reserves, which we maintain to import petroleum
and other important items, dropped to levels that were not sufficient to last
even a fortnight.
● The crisis was further compounded by rising prices of essential goods.

6. Advent of IMF and World Bank:
● India approached the International Bank for
Reconstruction and Development(IBRD), commonly
known as World Bank and the International Monetary
Fund(IMF) for help.
● India received 7 billion dollars as loan from these
agencies to solve the crisis.
● It had to pledge 20 tonnes of gold to Union Bank of
Switzerland and 47 tonnes to Bank of England as
part of the deal with the International Monetary Fund
(IMF)
● In addition, as part of the bailout, IMF expected
India to liberalise and open up the economy and
remove trade restrictions between India and
other countries.

7. 1991 Economic reforms
Structural reforms Stabilisation measures
Privatisation Liberalisation Globalisation
Deregulation Financial sector Tax reforms ForEx reforms Trade policy

8. WHAT IS NEW ECONOMIC POLICY ?
 It refers to ongoing economic liberalisation or
relaxation started in 1991 of the countries
economic policies
 It was introduced with the goal of making the
economy more market- oriented and expanding
the role of the private and foreign investment.

9.  Specific changes include the reduction in import tariffs,
deregulation of markets, reduction of taxes, and greater
foreign investment.
 The liberalization has been credited by its proponents for
the high economic growth recorded by the country in the
1990s and 2000s.
 On the other hand, its opponents have blamed it for
increased poverty, inequality and economic degradation.

10. NEW ECONOMIC
POLICY
LIBERALISATION PRIVATISATION GLOBALISATION

11. LIBERALISATION
The first aspect of new economic policy
was liberalisation
Liberalisation of an economy means
removing or relaxing government controls
and restrictions on economic activities
Relief for foreign investors
Revaluation of Indian Currency
New Industrial Policy
New Trade Policy
Import Technology
Encouraging foreign tie-ups
Privatisation in Public Sector

12. POSITIVE EFFECTS
 Increase in foreign
investment
 Increase in Production
 Technological advancement
 Increase in GDP growth
rate
NEGATIVE EFFECTS
 Increase in
Unemployment
 Decrease in Tax Receipt

13.  According to World Bank, “Privatisation is the
transfer of state owned enterprises to the private
sector by sale of going concerns or by sale of
assets following their liquidation “
 Increasing inefficiency on part of public sector
led to privatization
 Forms of Privatization :-
 Denationalisation
 Joint Venture
 Leasing
 Franchising

14. POSITIVE EFFECTS
 Private companies cut cost
and be more efficient
 Increased competition
 More Responsive to
customer complaints
NEGATIVE EFFECTS
 Public service
 Job loses
 Privatisation is
expensive
IMPACTS OF
PRIVATISATION

15. GLOBALISATION
Globalisation means reduction or
removal of government restriction on
the movement of goods and service,
capital, technology and talent across
national boundaries.
It is the increasing interdependence,
among
various
integration and interaction
people and cooperation in
locations around the world.

16. POSITIVE EFFECTS
 Expansion of market
 Development of
infrastructure
 Higher living standards
 International cooperation
NEGATIVE EFFECTS
 Cut throat competitions
 Rise in Monopoly
 Take over of Domestic
Firms
 Increase in Inequalities
IMPACTS OF
GLOBALISATION

17. Impact of NEP 1991 on Indian Economy
23-09-
2014
11
Economic Policy
1991
a) Increasing Competition
b) More Demanding Customers
c) Rapidly Changing Technological
Environment
d) Necessity for Change
e) Need for Developing Human Resources
f) Market Orientation
g) Loss of Budgetary Support to Public
Sector
h) Export a Matter of Survival

18. Assessment of Economic reforms:
Increase in Foreign Exchange reserves

19. Growth of FDIs in India Criticism over FDI

20. Share of GDP over various sectors
● This graphs show that the New economic policy helped in the development of
service sector but was unable to develop both agricultural and industrial sectors.

21. Monetary Policy
Monetary policy is adopted by the monetary authority of a country that
controls either the interest rate payable on very short-term borrowing or the
money supply. The policy often targets inflation or interest rate to ensure
price stability and generate trust in the currency.
The monetary policy in India is carried out under the authority of
the Reserve Bank of India.

22. a. Full employment of all available resources
b. Price Stability
c. Economic growth
Objectives of Monetary Policy

23. Instruments of Monetary Policy
Some of the following instruments are used by RBI as a part of their monetary policies.
Cash Reserve Ratio (CRR): Cash Reserve Ratio is a specified amount of bank
deposits which banks are required to keep with the RBI in the form of reserves or
balances. The higher the CRR with the RBI, the lower will be the liquidity in the
system and vice versa. The CRR was reduced from 15% in 1990 to 5 % in 2002. As
of 31st December 2019, the CRR is at 4%.
Statutory Liquidity Ratio (SLR): All financial institutions have to maintain a
certain quantity of liquid assets with themselves at any point in time of their total
time and demand liabilities. This is known as the Statutory Liquidity Ratio. The
assets are kept in non-cash forms such as precious metals(Gold), bonds, etc. As of
December 2019, SLR stands at 18.25%.

24. Open Market Operations: An open market operation is an instrument which
involves buying/selling of securities like government bond from or to the public and
banks. The RBI sells government securities to control the flow of credit and buys
government securities to increase credit flow.
Bank Rate Policy: Also known as the discount rate, bank rates are interest charged by
the RBI for providing funds and loans to the banking system. An increase in bank rate
increases the cost of borrowing by commercial banks which results in the reduction in
credit volume to the banks and hence the supply of money declines. An increase in the
bank rate is the symbol of the tightening of the RBI monetary policy. As of 31
December 2019, the bank rate is 5.40%.
Credit Ceiling: With this instrument, RBI issues prior information or direction that
loans to the commercial bank will be given up to a certain limit. In this case, a
commercial bank will be tight in advancing loans to the public. They will allocate
loans to limited sectors. A few examples of credit ceiling are agriculture sector
advances and priority sector lending.

25. Fiscal policy in India:
Fiscal policy in India is the guiding force that helps the government decide how
much money it should spend to support the economic activity, and how much
revenue it must earn from the system, to keep the wheels of the economy running
smoothly. In recent times, the importance of fiscal policy has been increasing to
achieve economic growth swiftly, both in India and across the world. Attaining
rapid economic growth is one of the key goals of fiscal policy formulated by the
Government of India. Fiscal policy, along with monetary policy, plays a crucial
role in managing a country’s economy.

26. Usually relating to taxation and government
spending, with the goals of full employment,
price stability, and economic growth. By
changing tax laws, the government can
effectively modify the amount of disposable
income available to its taxpayers.
Fiscal policy

27. Instruments of Fiscal Policy
1.Taxation
2.Public Borrowing
3.Public Expenditures

28. Importance of Fiscal Policy in India:
 In a country like India, fiscal policy plays a key role in elevating the rate
of capital formation both in the public and private sectors.
 Through taxation, the fiscal policy helps mobilise considerable amount
of resources for financing its numerous projects.
 Fiscal policy also helps in providing stimulus to elevate the savings rate.
 The fiscal policy gives adequate incentives to the private sector to
expand its activities.
 Fiscal policy aims to minimise the imbalance in the dispersal of income
and wealth.

29. Fiscal Policy Instruments
• 1.Reduction of Govt. Expenditure
• 2. Increase in Taxation
• 3. Imposition of new Taxes
• 4. Wage Control
• 5.Rationing
• 6. Public Debt
• 7. Increase in savings
• 8. Maintaining Surplus Budget
Other measures
•1. Increase in Imports of Raw materials
• 2. Decrease in Exports
• 3. Increase in Productivity
• 4. Provision of Subsidies
• 5. Use of Latest Technology
• 6. Rational Industrial Policy