For ensuring well-being and economic development, Indian Parliament in 1954 accepted ‘the socialist pattern of society and projected a “mixed economy” where the public and the private sectors were not only to co-exist but to be complementary to each other.
The broad agenda was:
- Focus on self-reliance.
- Rapid industrialization based on import-substitution including capital goods industries.
- Prevention of imperialist or foreign capital domination.
- Land reforms involving tenancy reforms.
- Abolition of Zamindari system.
- Introduction of cooperatives especially of service cooperatives like marketing, credit, etc
New Economic Policy 1991
In the late 1980’s government expenditure began to exceed its revenue by such large margins that it became unsustainable. Inflation was soaring, imports grew in excess to the export to such a level that foreign exchange reserves declined to a level that it was not adequate to finance imports for more than two weeks.
- Foreign exchange was insufficient to pay the interest to international lenders.
- To ward off this precarious situation of economy, India approached the World Bank and IMF and received $7 billion as loan.
- In return, these institutions wanted that the Indian should open up the economy by removing restrictions of the several sectors and reduce the role of government in many areas and remove trade restrictions.
- India announced the New Economic Policy.
- The Crux of the policy was to remove the barrier to the entry of private firms and to create more competitive environment for the economy.
- Government initiated a variety of policies which fall under three heads viz. Liberalization, Privatization & Globalization, “LPG Policy”.
- Industrial licensing was abolished for almost all except – alcohol, cigarettes, hazardous chemicals industries, expensive electronics, aerospace drugs and pharmaceuticals.
- The only industries now reserved for the public sector are defence equipment, atomic energy generation and railway transport.
Financial sector reforms – Establishment of private sector banks & entry of foreign banks with certain conditions on FII.
Tax Reforms – Reduction in the taxes on individual incomes and corporation tax
Foreign Exchange Reforms – Initially the rupee was devalued against foreign currencies. This led to the increase in the inflow of foreign exchange. Now usually, markets determine exchange rates based on the demand and supply of foreign exchange.
- Government had shed off the ownership and management of various government owned enterprises.
- Government started disinvestment by selling off equity of PSU’s.
- The purpose behind such move was to improve financial discipline and to facilitate modernization.
- The government also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions.
- Globalisation is the outcome of liberalisation & privatisation.
- Globalisation implies greater interdependence & integration.
- Globalization is mix bag of results. On one hand it has provided greater access to global markets, imports of high Technology etc. on the other hand developed countries expands their markets in other countries.
- It has also been pointed out that markets driven globalization has widened the economic disparities among nations and people.
Third Generation Reforms
Third generation reforms deal with administrative and judicial reforms, labour market and FDI reforms. Moving further, cottage industry, small entrepreneurs, artisans, etc., are encouraged for skill development. They are being financially educated to develop the banking habit. Greater employment opportunities are created through institutional mechanism.
The first generation reforms were aimed at institution building for macroeconomic stabilization and structural adjustments. The second generation reforms focused on liberalization and privatization. Third generation a reform is aimed at mobilizing technology, skill development and creating knowledge based infrastructure.
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