Grade 12 Cbse Economics notes

1. CHAPTER 6
ECONOMIC REFORMS SINCE 1991 / NEW ECONOMIC POLICY
INTRODUCTION
BATTLING THE ECONOMIC CRISIS OF 90’S, THE GOVT. OF INDIA INITIATED A SERIES OF ECONOMIC
REFORMS, WHICH CAME TO BE KNOWN AS New Economic Policy (NEP) THREE BROAD
COMPONENTS OF NEP ARE:
i) THE POLICY OF LIBERALISATION (L) in place of licensing (L) for the industries and trade.
ii) THE POLICY OF PRIVATISATION (P) in place of quotas (Q) for the industrialists, and
iii) THE POLICY OF GLOBALISATION (G) in place of permits (P) for exports and imports. THUS,
LPG WAS SET TO REPLACE LQP IN 1991.
WHAT ARE ECONOMIC REFORMS?
ECONOMIC REFORMS REFER TO A SET OF ECONOMIC POLICIES DIRECTED TO ACCELERATE THE PACE
OF GROWTH AND DEVELOPMENT.
NEED FOR ECONOMIC REFORMS
• Launching its 1st
five-year plan (1st
April 1951-56), India started its journey to economic
development treading the path of socialistic pattern of society.
• So far, India has completed 11 five-year plans and 6 one-year plans.
• During the period b/w 1st
and 6th
plans, public sector was assigned the primary role in the
process of growth and development.
• Private sector was to play only a secondary role.
• Industry and trade were subjected to many restrictions including quotas of production and
permits of export and import.
• The situation was so alarming that our reserves of forex almost dried up. New loans were
not available.
• Large amounts were withdrawn from the accounts of NRI’s.
FOLLOWING OBSERVATIONS HIGHLIGHT THE SERIOUSNESS OF THE SITUATION AND NEED FOR
ECONOMIC REFORMS:
• Fiscal deficit: it refers to borrowings by the govt. On account of the excess of its expenditure
over revenue during a year. It is measured as a percentage of GDP. It indicates poor
financial health of the economy. High fiscal deficit triggers inflation, leading to (I) high cost
of living for the people, and (ii) high cost of inputs for the producers.
• Balance of payment (bop) deficit: bop deficit is the difference b/w total receipts and total
payments of a country on account of its economic transactions with rest of the world.
Payments for imports and receipts for exports are the two principal items of bop. Bop
accounts are split as (I) current account and (ii) capital account. Current account covers
investment and borrowings. In Indian economy, current account balance has often been in

2. the negative (indicating cad- current account deficit). High borrowing was the consequence
of high cad. And high cad was the consequence of high imports and low exports.
• Gulf crisis: on account of Iraq war in 1990-91, prices of petrol shot up. India used to receive
huge amount of remittances from gulf countries in forex. In the wake of war, this took a
serious hit. Gulf crisis thus further deepened the bop crisis.
• Fall in forex reserves: in 1990-91, India’s forex reserves fell to such a low level that these
were not enough to pay for an import bill of even 10 days. Forex reserves that were rs.8151
crore in 986-87, declined sharply to rs.6252 crore in 1989-90. This situation became so
grave that the govt. Had to mortgage country’s gold reserves with the world bank to
discharge its foreign debt. In such crisis, the govt. Had to resort the policy of liberalization as
advised by the world bank.
• Price spiral (inflation): price spiral has assumed alarming proportions. At one stage, average
annual rate of inflation was found to be 16.7%. Prior to 1991, despite good monsoon for
three consecutive years, prices of food grains had tended to rise. Inflation was triggered
largely by increase in money supply. Slow-down crisis were compounded in the economy.
POOR PERFORMANCE OF PUBLIC SECTOR UNDERTAKINGS:
In 1951, there were just 5 enterprises in public sector in India but in march 1991, their
number multiplied to 246. Several thousand crores of rupees were invested in their
expansion. Initial stages performance was encouraging but later shows great losses. To
manage the crisis, India was granted 7 billion $ from world bank and compelled India to
pursue liberalization, privatization and globalization – three basic elements of economic
reforms of nep (new economic policy)
• RBI reserves 557.75 tons of gold in 2018.
• 265.49 tons of gold are stored at bank of England.
• 607 tones in march – 2019
• Which is equal to 23.253 billion us dollars
ELEMENTS OF NEW ECONOMIC POLICY (NEP)
i) LIBERALISATION
ii) PRIVATISATION
iii) GLOBALISATION
I) LIBERALISATION: liberalization of the economy means its freedom from direct or
physical controls imposed by the govt. Prior to 1991, govt. Had imposed layers of controls
on private enterprises in the domestic economy. These include industrial licensing system,
price control or financial control on goods, import license, forex control, restrictions on
investment by big business houses, etc.
ECONOMIC REFORMS (with liberalization as its key component) were based on the
assumption that market forces would steer the economy towards the path of competitive
growth and development. Examples of other underdeveloped countries like Korea, Thailand
Singapore had achieved rapid economic development as a result of liberalization.
ECONOMIC REFORMS UNDER LIBERALISATION
1. Industrial sector reforms
2. Financial sector reforms
3. Fiscal reforms

3. 4. External sector reforms
INDUSTRIAL SECTOR REFORMS
1) Abolition of industrial licensing: in July 1991, a new industrial policy was announced. It
abolished the requirement of licensing except for the following five industries: liquor,
cigarette, defense equipment, industrial explosives and dangerous chemicals.
2) Contraction of public sector: under the new industrial policy, no. Of industries reserved for
public sector was reduced from 17 to 8. In 2010-11, industries reduced to two: atomic
energy and railways.
3. De-reservation of production areas: many production areas which earlier reserved for SSI
(small sector industries) were deserved.
4. Expansion of production capacity: earlier production capacity was linked with licensing.
Now, freedom from licensing implied freedom of “what to produce and how much to
produce” was now a matter of producer’s choice.
5. Freedom to import capital goods: permission was no longer required from the govt. To
enter into international agreement for the import of technology for upgrading their
technology.
FINANCIAL SECTOR REFORMS
It includes: I) banking and non-banking financial institutions. Ii) stock exchange market and
iii) forex. In India financial sector is regulated and controlled by RBI.
So, liberalization becomes a shift in the role of RBI from a regulator to a facilitator of the
financial sector.
FISCAL REFORMS:
It relates to revenue and expenditure of the govt. Tax reforms are classified into I) direct
taxes and ii) indirect taxes.
Direct taxes are those taxes, the burden cannot be shift on others: Eg: income tax, wealth
tax, this tax payee himself bears the burden of it.
Indirect taxes are those taxes, the burden can be shift on others: Eg: sales tax on goods,
service tax.
Prior to liberalization, tax structure in the country has been highly complex. Now tax
structure has been simplified and moderated.
Now, GST (goods and service tax) introduced to make balanced regional growth.
EXTERNAL SECTOR REFORMS:
It includes forex reforms & foreign trade policy reforms.
1. Forex reforms: were initiated in 1991, with devaluation of Indian rupee against foreign
currencies.

4. FOREIGN TRADE POLICY:
Liberalization brought change. Tariff restrictions have moderated from many items of export and
import. Market competition has replaced the policy of quotas and tariffs.
SALIENT FEATURES OF TRADE POLICY AFTER LIBERALISATION
1. Import quotas abolished.
2. Policy of import licensing.
3. Moderate import duty
4. Export-duty has been withdrawn.
PRIVATISATION
It is a process of involving the private sector in the ownership or operation of a state-owned
enterprise.
Withdrawal of govt. Ownership/management from the public sector enterprises.
1. Withdrawal of govt. Ownership and 2. Outright sale of the govt enterprises.
CASE FOR PRIVATISATION
• It is poor performance of plus, then there is a call for privatization.
• This initiated in 2nd
five-year plan assigns a key role in plus.
• Industrial policy of 1956 clearly stated the importance of plus in process of growth and
development.
• So, people started shifting from agriculture to industrial for better livelihood.
• In the context of plus in India, navratnas refer to nine profit making companies:
➢ IOC
➢ BPCL
➢ ONGC
➢ SAIL
➢ BHEL
➢ IPCL
➢ VSNL
➢ NTPC
➢ HPCL
IN 2009, THE govt. STATED MAHARATNA STATUS FROM NAVRATNAS
GLOBALISATION
Globalization means integrating one’s economy with another economy of a country under
conditions of free flow of trade and capital across borders.
Globalization may be defined as a process associated with increasing openness, growing
economic independence and deepening economic integration in the world economy.
Particularly, it is expected that capital and technology will flow from the developed countries
of the world towards India.
India is emerging as an important destination of outsourcing particularly BPO (business
process outsourcing, also called call centers) because of two important reasons:
1. Availability of cheap labor in India for skilled workers,
2. A revolutionary growth of its industry in India.

5. POLICY STRATEGIES PROMOTING GLOBALISATION OF THE INDIAN ECONOMY:
1. Increase in equity limit of foreign investment: equity limit of foreign capital investment has
been raised from the initial 40 percent. It now ranges b/w 51 to 100%. FDI has been
allowed 100% without any restrictions. Foreign exchange management act (FEMA) has been
enforced.
2. Partial convertibility: to achieve the objective of globalisation, partial convertibility of indian
rupee has been allowed. This convertibility is allowed for following transactions:
i) Import & export of goods and services.
ii) Payment of interest or dividend on investment.
iii) Remittances to meet family expenses.
It does not allow capital transactions.
3. Long-term trade policy: foreign trade policy is engorced for a longer duration (nearly 5
years) with liberal policy. All restrictions were removed. Open competition is encouraged.
4. Reduction in tariffs: in order to encourag competitiveness, tariff barriers withdrawn on most
of indian goods traded with rest of the world.
5. Withdrawal of quantitative restrictions: since 2001, restrictions on all import items have
been totally withdrawn. This is india’s commitment to WTO.
AN APPRAISAL OF LPG POLICIES
Reforms initiated since 1991.
Appraisals of log or nep requires understanding the merits and demerits of this policy with
reference to Indian economy.
MERITS OF LPG POLICIES:
• A vibrant economy: Indian economy becomes a more vibrant economy. The growth of GDP
shot up to 8% high per annum.
• A stimulant to industrial production: LPG policies have worked as a great stimulant to
industrial production in the Indian economy. Its industry in India achieved global
recognition.
• A check on fiscal deficit: this has become a serious threat to the process of investment in
Indian economy. It was as high as 8.5% of GDP prior to 1991. Now fiscal deficit has been
around to 4% of GDP, it is lower than before.
• A check on inflation: LPG policies brought a check on the rate of inflation. Till 2007-08, it
ranged b/w 4-5% which is not a serious threat. But in 2016-17 inflation estimated to 3.39%
which is a serious problem in economy.
• Consumer’s sovereignty: it is expanded over time to time. Producers are widely responding
to the consumers choice and preference. Overall level of expenditure of households tends
to rise.
• A substantial increase in forex reserves: depletion of forex-reserves was one of the
compelling reasons for the govt. Of India.
• Flow of private foreign investment: after adoption of LPG policy, private foreign investment
quantity jumped. It is a relief to the govt:
i) Domestic economy for reinvestment.
ii) Development of technology
iii) Innovative techniques of production.

6. • Recognition of India as power: this recognition not only raises India’s economic ranking in
the world, but it is a boost to confidence of global investors.
DEMERITS OF LPG POLICIES
• Neglect of agriculture: growth of GDP has primarily triggered to secondary or tertiary
sectors. Agricultural sector has suffered a serious neglect and reduce the growth rate.
• Urban concentration of growth process: LPG policies have resulted in growth process.
MNC play an important role in urbanization. This has further widened the gap b/w urban-
rural gulf.
• Spread of consumerism: spread of MNCs is the result of LPG policy. A variety of global
brands in the market. Indian society adapted to western culture. This may expand the
size of the market for traders and manufacturers.
• Lopsided growth process: LPG has accelerated the growth process. The growth process
does not exist all the sectors. Its focused growth neglecting the farming sector. LPG
policies are almost neglecting the farming sector of the economy.
• Cultural erosion: globalization also led to cultural erosion in the society. Economic
prosperity has taken a lead in daily life. Everybody wants to be economically independent
towards the family or the society. Loyalty towards the family and loyalty towards the
society strongly holds Indian culture.