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INTRODUCTION Since independence, India followed the mixed economy. India has been able to achieve growth in savings , diversified industrial sector, ensured food security etc.

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In 1991, India met with economic crisis and govt. was not able to make repayments on its borrowings from abroad and foreign exchange reserves.

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All this led the govt. to introduce a new set of policy measures which changed the direction of our developmental strategies.


BACKGROUND The origin of financial crisis can be traced from the inefficient management of the Indian economy in 1980s For implementing various policies, the govt. generates funds such as taxation .

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. When expenditure is more than income, the government borrows to finance the deficit from banks and from people within the country and from international institution .

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At times, our foreign exchange, borrowed and international financial institutions, was spent on meeting consumption needs. India faced a crisis in Foreign Exchange ( Forex ) reserves, left with reserves of only about $1 billion (US)

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India approached International bank for reconstruction and development (IBRD) India agreed to the conditions of world bank and announced new economic policy.

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The set of policies were classified into two groups :- Stabilization measures and Structural reform measure .

Reasons for reforms:

Reasons for reforms License - permit - quota raj led to widespread corruption. The bureaucracy was the principal beneficiary of this system. The Government officials in collusion with the political bosses earned huge money via corruption . Hence, it was increasingly felt to dismantle the system of licensing and controls.

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Quite a large number of public entrepreneurs which played crucial role in setting up heavy and basic industries; S ocial and Economic infrastructural development were king problem of inefficiency and high cost of operation.

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Further, there was a high pressure of the World Trade Organisation (WTO) to expose Indian industry to face world competition. The performance of the Indian Economy was not up to expectations. All these factors made the Govt. to introduce the economic reforms.

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Thus, under pressure, the country took the risk of reforming the socialist economy. P.V. Narasimha Rao was the twelfth Prime Minister of India, led one of the most important administrations in India's modern history overseeing a major economic transformation and several incidents affecting national security.

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At that time Dr. Manmohan Singh (currently, Prime Minister of India) launched India's free market reforms that brought the nearly bankrupt nation back from the edge.

The industrial policy announced in 1991 provided following rationale for introducing economic reforms: :

The industrial policy announced in 1991 provided following rationale for introducing economic reforms: T o de-control the Indian industrial economy from unnecessary bureaucratic controls; To introduce liberalisation with a view to integrate the Indian Economy with the world economy ;

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To remove the restrictions on foreign direct investment; To remove the restrictions of MRTP Act To shed the load of public sector enterprises which have shown a very low rate of return and incurring losses over the years.

Objective For NEP :  :

Objective For NEP :

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3 Constituents of E conomic Reforms Liberalization Privatization Globalization


LIBERALISATION In the context of economic reforms, liberalisation refers to shifting of license dominated regime to de-licensing, deregulation and de-bureaucratisation. India has taken following measures towards liberalising the economy.

Removal of Industrial Licensing:-:

Removal of Industrial Licensing:- Except 18 industries relating to security and strategic concerns, social reasons, hazardous chemicals and over-riding environmental , all industrial licensing was abolished. Subsequently, this list was reduced to a small group of five industries.

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After Reforms Industrial licensing was Imposed Only For:- Industrial Explosives Hazardous Chemicals Alcohol Electronics Cigar And Other Tabaco Products.

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Central Public Sector Enterprises (CPSEs) were classified into two categories Strategic and Non-Strategic .

Strategic CPSEs were identified in the areas of::

Strategic CPSEs were identified in the areas of: Arms & Ammunition and the allied items of defence equipment's, defence air-crafts and warships Atomic Energy

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Railway transport All other public sector enterprises were considered as non-strategic.

Liberalization was mainly introduced in:-:

Liberalization was mainly introduced in:- Industrial licensing, Export import policy, Fiscal policy, Financial sector, Foreign exchange market etc. In order to put an end to various restrictions and open up various sectors of economy.

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Before Reforms Regulatory mechanism were enforced in various ways:-:

Before Reforms Regulatory mechanism were enforced in various ways:- Permission from govt. to start and close a firm. Private sector was not allowed in many industries . Some goods could be produced only in small scale industries . Controls on price fixation.



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Before Reforms It used to includes commercial banks, stock exchange etc. This sector in India was controlled by the reserve bank of India (RBI). RBI used to decide the amount of money that the banks can keep with themselves,

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The major aim of liberalisation was to reduce the role of RBI from regulator to facilitator of financial sector. Thereby It led to establishment of private sector banks .

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Certain aspects have been retained with the RBI to safeguard the interest of account holders and the nation.


TAX REFORMS These were concerned with the reforms in Government’s taxation and public expenditures policies known as fiscal policies.

There are two types of taxes:

There are two types of taxes Direct - Consist of taxes on incomes of individuals as well as profits of business enterprises. Indirect - Taxes levied on commodities to facilitate common national market for goods and commodities


FORIEGN EXCHANGE In 1991,as an immediate to resolve the balance of payment crisis, the rupee was devalued against foreign currencies. It led to increase in the inflow of foreign exchange. Now , more often markets determined exchange rates based on the demand and supply of foreign exchange.


TRADE & INVESTMENT Its aim was to promote the efficiency of local industries and the adoption of modern tech. India was following a regime of quantitative restrictions by imposing high tariffs.

It aimed at :-:

It aimed at :- Dismantling of quantitative restrictions on imports and exports . Reduction of tariff rates. Removal of licensing procedures for imports .


Import licensing was abolished in case of hazardous goods. Export duties have been removed to increase the competitive positions of goods.


PRIVATISATION It implies shedding of the ownership of a govt. owned enterprise . Govt. Companies can be converted into private companies in two ways : By withdrawal of govt. from ownership and management of public sector companies. By outright sale of public sector companies ..

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Privatization of PSU can be done by selling off part of the equity of PSUS to the public is known as disinvestments. Its main aim was to improve financial discipline and facilitate modernization.

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Out of the various forms of privatisation, the most acceptable is the joint venture in which the share of the private sector is kept at either 49 per cent or 74 percent . But simply a change of ownership is not sufficient to increase productivity and profitability .,

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For this purpose, other measures like linking wages to productivity, changing promotion policy based on the efficiency of the workers is needed so that a competitive environment is created in which efficiency pricing becomes a norm .

The following steps have been taken towards privatisation of the Indian economy :- :

The following steps have been taken towards privatisation of the Indian economy :- Permitting the entry of the private corporate sector in such core sectors as steel, telecommunications , ports, airlines and power; No fresh budgetary support for Public Sector Enterprises

Which will lead to:- :

Which will lead to:- Dilution of Govt. equity for most of the PSE which decide to go in new projects and expansion; N o new Central Public Sector undertakings (Ps Us) will be set up in the country. I ssue of equity to the public by the identified PSUs . Outright sale of identified PSU’s



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Globalisation means the economic integration of the country with the rest of the world . In other words, it is a process of integrating the various economies of the world without creating any hindrances in the flow of goods and Services, technology, capital and labour

This involves four components:- :

This involves four components:- Reduction of trade barriers in the form of custom duties or quantitative restrictions or quotas so as to permit free flow of goods and services among different economies; Creation of an environment in which free flow of capital (or investment) can take place between nation-states;

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Creation of an environment for free flow of technology; Creation of an environment in which free flow of labour or human resource can take place among different countries of the world

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PRE 1991 POLICY POST 1991 POLICY PUBLIC SECTOR MONOPOLY EXPECT FEW, ALL WERE OPEN FOR PRIVATE SECTOR MRTP restriction No such restriction Foreign investment in few industries Foreign investment in large No. of industries Restrictive policy towards foreign industries Very liberal policy towards foreign industries Reservation of large no of product for ssi Reservation was being pruned

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