The New Economic Liberalisation Policy was launched in India in July 1991.LPG, ie Liberalisation, Privatisation and Globalisation, are the three steps in NEP Syllabus of UPSC GS paper 3 has economics in it. And students should be clear with the concepts of economics. It is also very essential for the students to keep a track of current affairs related to economics. To read more articles on Economics click here.
- Need for New Economic Policy/ Economic reforms
- Balance of payments
NEED FOR ECONOMIC REFORMS
- Fiscal Deficit: Prior to 1991, on account of continuous rise in non-developmental expenditure of the government, fiscal deficit went on rising. In the year 1981-82, it was 5.4 per cent of gross domestic product (GDP) but in 1991-92, it rose to 8.4 per cent of GDP. In order to meet the fiscal deficit, the government had to raise loans and pay interest thereon. In 1980-81, interest payments on public debt amounted to 10 per cent of the total government expenditure. In 1991, the amount of interest payments rose to 36.4 per cent of the total expenditure of the Central Government.
- Increase in Unfavourable Balance of Payments: Deficit of balance of payments has been rising since 1980-81 in India. In the year 1980-81 the deficit of balance of payments on current account was 2,214 crore which in 1990-91 rose to 17,367 crore. So, to overcome the problem of unfavourable balance of payments, the need for new economic policy was realised.
- Gulf Crisis: On account of the Gulf War in 1990-91, prices of petrol shot up. Thus, India had to make huge payments to the Gulf countries so as to import petrol. The Gulf crisis, thus, further worsened already adverse India’s balance-of- payments position. This further increased balance-of- payments deficit.
The globalisation of Indian economy means that the Indian economy is having minimum possible restrictions on economic relations with other countries.
Measures Adopted for Globalisation
- Increase in Foreign Investment: In many industries foreign direct investment to the extent of 100 per cent has been allowed without any restriction and red-tapism.
- Partial Convertibility of Indian Rupee: Partial convertibility of Indian rupee was allowed. It was in conformity with economic Partial convertibility means to buy or sell foreign currencies like dollar and pound sterling for foreign transactions at a price determined by the market. This convertibility was valid for the following transactions: (i) Import and export of goods and services; (ii) Payment of interest or dividend on investment; (iii) Remittances to meet family expenses. It is called partial convertibility because it does not cover capital transactions. Recently, government is seriously thinking of making rupee fully convertible into other currencies.
- Foreign Trade Policy: In conformity with economic reforms, foreign trade policy was enforced for a long duration, , fiveyears. India’s present foreign trade policy 2009-14 is a liberal policy.
FDI Policy: The International Experience
Foreign direct investment is treated as an important mechanism for channelising transfer of capital and technology and thus perceived to be a potent factor in promoting economic growth in the host countries. Moreover, multinational corporations consider FDI as an important means to reorganise their production activities across borders in accordance with their corporate strategies and the competitive advantage of host countries. These considerations have been the key motivating elements in the evolution and attitude of EMEs (Emerging Market Economies) towards investment flows from abroad in the past few decades, particularly since the Eighties.
Sectors where FDI is banned
- Atomic Energy
- Lottery Business, including government/private lotteries, online lotteries, etc
- Gambling and betting, including casinos etc
- Business of chit fund
- Nidhi company
- Trading in Transferable Development Rights (TDRs)
- Activities/sectors not opened to private sectors investment
- Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and plantations (other than tea plantations)
- Real estate business, or construction of farm houses; manufacturing of cigars, cheroots, cigarillos, cigarettes, tobacco and its substitues.
Foreign Institutional Investors (FIIs)
On 14 September 1992, the Government of India, for the first time, permitted portfolio investments by Foreign Institutional Investors (FIIs) in the Indian capital market, and issued guidelines outlining the entry and investment norms for FIIs. FIIs were required to register with Securities and Exchange Board of India (SEBI) before making any investment in India. Since there were foreign exchange controls also in force, FIIs were required to seek Reserve Bank of India’s (RBI) permission through SEBI. Thus FIIs were provided with a single window at SEBI for registration and foreign exchange permissions.
Subsequently, in 1995, the SEBI notified SEBI (FII) Regulations, 1995, which became the primary regulation regarding FII registration and investment norms. In December 2003, RBI gave general permission under the Foreign Exchange Management Act (FEMA) to SEBI-registered FIIs/ sub-accounts. Thus the requirement of seeking separate approval from RBI at the time of FII registration was discontinued.
At present, the following acts / regulations / guidelines govern FIIs investments in India:
- SEBI Act, 1992
- SEBI (FII) Regulations, 1995
- Foreign Exchange Management Act, 1999
- Government of India Guidelines dated 14 September 1992
- Various circulars/instructions issued by SEBI/RBI from time to time
As defined in the SEBI (FII) Regulations, an FII means an institution established or incorporated outside India which proposes to make investment in India in securities.
Privatisation is the forecast of the removal of state interference in economic programme. In the context of economic reforms, privatisation means allowing the private sector to set up more and more of such industries as were previously reserved for public sector. Under it, existing enterprises of the public sector are either wholly or partially sold to private sector. It enhances the importance of private sector because private sector comes to play a significant role in the economic development of the country. Thus, transferring of public sector industries to private sector is called privatisation.
Liberalisation means free-market economy. It marks a change from a restrictionist regime to a free regime. It implies reducing, relaxing and dismantling of govt control and regulation in economic activities.
Measures Taken for Liberalisation
Liberalisation of Industrial Licensing: Under the New Economic Policy, private sector has been freed, to a large extent, from licences and other As per amendment in the new economic policy in the year 2006, with the exception of 5 industries, industrial licensing has been abolished for all other industries. Industries for which licences are still necessary are: (i) liquor, (ii) cigarette, (iii) defence equipment, (iv) industrial explosives, (v) dangerous chemicals. The entrepreneur can float in any new company except in the above 5 industries without any restriction.
- Concessions from Monopolies Act: According to the provisions of Monopolies and Restrictive Trade Practices Act (MRTPAct), all those companies having assets worth more than `100 crore and used to be declared MRTP firms, were subjected to several Now the concept of MRTP has been done away with. These firms are now no longer required to obtain prior approval of the government at the time of taking investment decisions. They are free to expand themselves. Large concessions have been granted to companies falling under MRTP Act. Capital investment limit, fixed earlier, has been removed. As a result, there would be no restriction on dominant companies and industrial houses for setting up new industries or expansion of industries, taking over and amalgamation. However, under this policy, more emphasis will be laid on checking unfair trade practices to safeguard the interest of the consumers. The newly empowered Monopoly Board will be authorised to investigate any matter suo motu (on its own) or on complaints received from individual consumers. In 2002, MRTPAct was abolished and in its place a much liberal Competition Act, 2002 has been enacted.
- Replacing FERA with FEMA: Earlier, for regulating foreign exchange transactions, government had enacted Foreign Exchange Regulation Act (FERA). This Act was very restrictive in It involved various checks and controls on transactions involving foreign exchange. Following the economic liberalisation and the changed attitude of the government towards foreign capital, FERA was replaced with Foreign Exchange Management Act (FEMA) in the year 1999. The provisions of FEMA are liberal.
- Devaluing the Indian Currency is considered a step towards liberalisation.
- Under Liberalised Exchange Rate Management System (LERMS), 16% of the foreign exchange reserves could be converted in the market.
Disinvestment is a process whereby the government withdraws a portion or the total of its equity in a public enterprise. In 1992, the government appointed a committee on disinvesment of shares in public sector enterprise under the chairmanship of Dr. C. Rangarajan to suggest measures with regard to disinvestment programmes. In order to expedite the process of disinvestment, the government established a new full-fledged ministry of disinvesment. The UPA government closed the ministry of disinvesment and converted it into a department under the Ministry of Finance.
The present disinvestment policy has been articulated in the recent President’s addresses to Joint Sessions of the Parliament and the Finance Minister’s recent parliament budget speeches.
The salient features of the policy are:
- Citizens have every right to own part of the shares of public sector undertaking
- Public sector undertakings are the wealth of the nation and this wealth should rest in the hands of the people
- While pursuing disinvestment, government has to retain majority shareholding, e. at least 51% and management control of the public sector undertakings.
BALANCE OF PAYMENTS
In India’s Balance of Payments (BoP), transactions are recorded in accordance with the guidelines given in the fifth edition of IMF’s Balance of Payments Manual (1993), with minor modifications to adapt to the specifics of the Indian situation. The Manual defines BoP as a statistical statement that systematically summarises, for a specific time period, the economic transactions of an economy with the rest of the world. Transactions between residents and non-residents consist of those involving goods, services, and income; involving financial claims on and liabilities to the rest of the world; and those classified as transfers, involving offsetting entries to balance one-sided transactions.
The data are received from the banking system as part of the Foreign Exchange Management Act (FEMA), 1999. The data are received by the Reserve Bank of India mainly from the banking system (authorised dealers) as part of the Foreign Exchange Management Act (FEMA), 1999. The basic structure of the Balance of Payments (BOP) of India consists of:
- Current account: Exports and imports of goods, services, income (both investment income and compensation of employees) and current transfers
- Capital account: Assets and liabilities covering direct investment, portfolio investment, loans, banking capital and other capital
- Statistical discrepancy
- International reserves and IMF transactions
The status of Maharatna empowers mega Central Public Sector Enterprises (CPSEs) to expand their operations and emerge as global giants. The policy of Maharatnas was started in 2010. It gives the mega CPSEs more financial and managerial autonomy. The Maharatnas include
- Coal India Limited
- Indian Oil Corporation Limited
- NTPC Limited
- Oil & Natural Gas Corporation Limited
- Steel Authority of India Limited
In 1997, the government identified nine leading, well- performing and high profit-making public enterprises as Navaratnas (Nine Precious Jewels). Later, in the same year, two more were added to the list. They were granted substantial enhanced autonomy and operational freedom in different fields (financial, commercial, managerial, organisational) to facilitate them becoming global players. The 16 public enterprises included in the category of Navaratnas at present are:
- Bharat Electronics Limited
- Bharat Heavy Electricals Limited
- Bharat Petroleum Corporation Limited
- GAIL (India) Limited
- Hindustan Aeronautics Limited
- Hindustan Petroleum Corporation Limited
- Mahanagar Telephone Nigam Limited
- National Aluminium Company Limited
- NMDC Limited
- Neyveli Lignite Corporation Limited
- Oil India Limited
- Power Finance Corporation Limited
- Power Grid Corporation of India Limited
- Rashtriya Ispat Nigam Limited
- Rural Electrification Corporation Limited
- Shipping Corporation of India Limited
In 1997, the Government identified another 97 profit-making public enterprises as Miniratnas (Small Precious Jewels) and granted them financial, managerial and operational autonomy. But these declared mini-gems will be awarded full autonomy only when they are not credit defaulters of the government. In May 2001, the government approved a proposal for periodic review of the Navaratnas and the Miniratnas on the basis of their performance over three years.
Economics is one of the most important part of UPSC syllabus. To read more articles on Economics click here