1.There was inefficient management of the Indian economy in the 1980s. The govt expenditure was more than the govt. revenue. Govt. was not able to generate sufficient revenue from internal sources such as taxation. 2.To finance the deficit the government borrowed heavily from banks, people of the country and international financial institutions. 3.Development policies required that even though the revenues were low, govt. still had to spend to solve the problems like unemployment, poverty and population explosion. Such programmes did not generate additional revenue. 4.Prices of many essential goods rose sharply.
5.The income from PSUs was also not high enough meeting additional expenditure. Many PSUs were suffering losses.
1.Imports grew at a very high rate without matching growth of exports. 2.Sufficient attention was not paid to boost exports to pay for the growing imports. 3.Scarce foreign exchange was spent on meeting consumption needs. 4.Foreign exchange reserves dropped to levels that were not sufficient for even a fortnight. 5.The government was not able to make repayments on its borrowings from abroad. 6.There was not sufficient foreign exchange to pay the interest on international loans.
Govt. approached IBRD (International Bank for Reconstruction & Development commonly called World Bank) and IMF (International Monetary Fund) for long term loans. While granting the loan, the World Bank and IMF insisted on major changes in development policies. In this way the idea of New Economic Policy (NEP) germinated. NEP included three main polices namely, Liberalisation, Privatisation and Globalisation (LPG).
Liberalisation means freeing the economy from govt. control. It put an end to all the rules and laws which were aimed at regulating the activities of private sector. Following are the major changes taking place in important areas under the liberalisation policy:
1.Deregulation of Industrial Sector
•Industrial licensing was abolished for almost all industries except alcohol, cigarettes and hazardous chemicals. Private sector was allowed in the industries which were earlier reserved for public sector. Only industries now reserved for public sector are atomic energy, defence equipments and railways. •Many goods reserved for SSI have been de-reserved.
•In most of the industries market has been allowed to determine the prices. 2.Financial Sector Reforms
•The role of RBI changed from regulator to facilitator.
•Financial sector was allowed to take decisions on many matters independently. •The government allowed establishment of private sector banks, Indian as well as foreign. •Freedom was given to banks to set up new branches without the prior approval of RBI •Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest. 3.Tax Reforms
•The government reduced the Income tax and corporation tax rates. Higher taxation rate was thought to be causing tax evasion. •The government tried to broaden the tax net in various ways in order to raise the tax revenue. •Simplification of tax procedures was done to remove the hassles for the tax payers. 4.Foreign Exchange Reforms
•Devaluation of Rupee in 1991 led to increase in the inflow of foreign exchange •The exchange rates were allowed to determine by the market forces. The govt. intervention in the matter was progressively removed. 5.Trade and Investment Policy Reforms
Liberalisation of trade and investment policies was initiated to promote the efficiency of the local industries and the adoption of modern technologies. The reforms included: •Removal of quantitative restrictions on exports and imports •Reduction of tariff rates
•Import licensing was abolished except in case of hazardous and environmentally sensitive industries.
Reserve Bank of India and Financial Institutions...