New Economic Policy 1991

What is liberalization? Explain different policy measures undertaken to liberalize the Indian economy since 1991.

• Liberalization means reducing government regulations and restrictions for more participation by private sectors.
• Economic liberalization is reducing the role of the government sector in a country and to permit the private sector companies to run business transactions with relatively fewer restrictions.
• Liberalization refers to the end of license, quota, and many more restrictions and controls which were put on industries before 1991.
• The Objectives of liberalization is to extend the economic activities by removing the licensing policy and makes the easy process for an industrial step up, to encourage foreign trade i.e. export and import, sharing technology, FDI(Foreign Direct Investment), reduce the debt burden, promote the private sector for economic development and reduce the role of the public sector.



Different policy measures are undertaken to liberalize the Indian economy since 1991 was:

1. Industrial reform
2. Public sector reform and disinvestment
3. Trade ad capital flows reforms
4. Financial sector reform
5. Industrial sector reforms:

The industrial development of the country was because of the industrial policy resolution of 1948 and 1956. The government began to liberalize industrial policy measures since 1985. The momentum of industrial sector reforms increased with the announcement of the New Industrial Policy in 1991 (NIP). The important industrial sector reforms introduced in July 1991 the following:

1. Abolition of industrial licensing: The new policy abolished industrial licensing for all Industries except 18 Industries. At present, there are only a few Industries under compulsory licensing. They're alcohol, cigarette, hazardous chemical, and defense equipment, and industrial explosives.
2. Permitted foreign investment and foreign technology: The New Industrial Policy promotes direct investment and foreign Technology import in high priority industries. The number of industries eligible for foreign direct investment has been expanded due to FDI was allowed up to 51 percent.
3. Reduces the role of the public sector: The new economic policy reduces the number of the industry for the public sector from 17 to 3, at present the industries that are reserved for the public sector at present Are, Department of Atomic energy, railway transport, etc. Thus core Industries like Iron and Steel, electricity, air, transport, defense production are opened up for the private sector.
4. Removal of MRTP limit: The MRTP Act is now replaced by the Competition Act of 2002. The new policy removed the limit and eliminated the requirement of approval from the government for large Industries for expansion, the establishment of the new undertaking mergers, takeover, and amalgamation.

 Public sector reforms and disinvestment:

The public sector reforms consisted of disinvestment which means selling government equity to the private sector. Since 1991 there have been significant changes in the public sector policy in India. This creates competition by new private Enterprises and giving greater financial and to public Enterprises. It provides employment opportunities and increases foreign earnings.

 Trade and Capital Flows Reforms:

• The government took the subsequent reforms in the external factor to open up the Indian economy to foreign competition and foreign investment:
• Liberalization of Import helps in free trade by allowing imported input for the domestic market.
• Reduction in traffic structure: It means reducing taxes on imported products.
• Promotion of Export: Various incentives, deduction, and subsidies are provided to exporters within the foreign trade policies of the govt.
• Liberalized capital inflows: The government has liberalized capital inflows within the sort of foreign direct investment(FDI) and foreign portfolio investment FPI (foreign portfolio investors are permitted to invest in all types of securities traded within the primary and secondary markets.

 Financial Sector Reforms

• The financial sector reforms that were introduced by the govt. within the early 1990s are aimed to form the Indian financial sector strong and transparent. The Indian financial sectors include Banking, Insurance, and Capital Market.
• The banking sector reform leads to the entry of new private sector banks, reducing SLR, CRR, Introduction of rules and guidelines, Capital Adequacy Norms, etc.
• The capital market, where long term funds can be raised through equity and debt. SEBI is a Statutory Body to regulate the Securities market, online trading, and dematerialized trading, and the establishment of NSC.
• Reforms in the insurance sector start with the passing of the Insurance Regulatory and Development Authority (IRDA) Act of 1999. The IRDA Act ended the monopoly of the govt within the insurance sector. This is done by promoting private investment in the insurance sector. The IRDA gives license to the private sector to do insurance business.

What is Privatization? Explain different policy measures undertaken to Privatization the Indian economy since 1991.

• Privatization means a reduction in the role of the government sector and increases the role of the private sector in business and non-business activates. Privatization gained importance after economic reform since 1991. 
• Disinvestment of the public sector means the transfer of public sector enterprises to the private sector.
• Board of Industrial and Financial Reconstruction (BIFR) board was set up to strengthening sick units of public sector enterprises suffering a loss.
• Navratna Status is given to nine public enterprises based on performance. and they are allowed to full financial and managerial freedom to form them, global giants.
• National Renewal Board is set up to take care of retrenched workers the board also provides compensation to employees who take voluntary retirement.

• Reduces the role of the public sector: The new policy reduces the number of the industry for the public sector from 17 to 3, at present the industries that are reserved for the public sector at present are Atomic energy, railway transport, etc. Thus the public sector opens for the private sector to participate in the business like Iron and Steel, electricity, air, transport, etc. 
• Removal of MRTP limit: The MRTP Act is now replaced by the Competition Act 2002. The new policy removed the limit and eliminated the requirement of approval from the government for large Industries for expansion, the establishment of the new undertaking mergers, takeover, and amalgamation. 

Trade and Capital Flows Reforms:

The public sector reforms consisted of disinvestment which means selling government equity to the private sector. Since 1991 there have been significant changes in the public sector policy in India. This creates competition by new private Enterprises and giving greater financial and to public Enterprises. It provides employment opportunities and increases foreign earnings.

• The government took the subsequent reforms in the external factor to open up the Indian economy to foreign competition and foreign investment:
• Liberalization of Import helps in free trade by allowing imported input for the domestic market.
• Reduction in traffic structure: It means reducing taxes on imported products.
• Promotion of Export: Various incentives, deduction, and subsidies are provided to exporters within the foreign trade policies of the govt.
• Liberalized capital inflows: The government has liberalized capital inflows within the sort of foreign direct investment(FDI) and foreign portfolio investment FPI (foreign portfolio investors are permitted to invest in all types of securities traded within the primary and secondary market.

Financial Sector Reforms

• The financial sector reforms that were introduced by the govt. within the early 1990s are aimed to form the Indian financial sector strong and transparent. The Indian financial sectors include Banking, Insurance, and Capital Market.
• The banking sector reform leads to the entry of new private sector banks, reducing SLR, CRR, Introduction of rules and guidelines, Capital Adequacy Norms, etc.
• The capital market, where long term funds can be raised through equity and debt. SEBI is a Statutory Body to regulate the Securities market, online trading, and dematerialized trading, and the establishment of NSC.
• Reforms in the insurance sector start with the passing of the Insurance Regulatory and Development Authority (IRDA) Act of 1999. The IRDA Act ended the monopoly of the govt within the insurance sector. This is done by promoting private investment in the insurance sector. The IRDA gives license to the private sector to do insurance business.

Edited by: Imaduddin Khan (BMS, MA in Business Economics,M.Com)  

Reference: MHSB and Manan Prakashan