We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Critical Analysis of New Indian Economic Policy

The whole doc is available only for registered users

A limited time offer! Get a custom sample essay written according to your requirements urgent 3h delivery guaranteed

Order Now

The economy of India as per the GDP is the eleventh largest economy in the world and by purchasing power parity the fourth largest. Following strong economic reforms from the socialist inspired economy of Indian nation before the time of independence, the country began to develop a fast-paced economic growth, as free market principles were initiated in 1990 for international competition and foreign investment. India is an emerging economic power with a very large amount resources both natural and human resource and a growing large pool of skilled professionals. Economists predict that by 2020, India will be among the leading economies of the world. Pre independence era the average annual growth rate of Gross Domestic Product which is commonly known as G.D.P. was around 0.9% and real per capita income was 11% within the geographical boundaries of the present day India.

From the foregoing data it is clear that while the average annual growth rate between the first plan and the fourth plan was between 3%, to 4% growth during the 80’s was at an annual average rate of 5.9%. This was higher than the world output growth rate of 3.3% and that of developing countries at 4.3% during the same period.The average population growth rate of 2.0% in spite of annual growth rate in per capita GDP in the Nineteen Eighties was over 3.5%. However the aim of doubling the per capita income in the country in 25 years of planning – i.e. by 1975 could be achieved only by the end of 1980’s. Further the percentage of population that could not get an average intake of 2100 calories in urban areas 2400 calories per day in rural areas and 2400 calories per day in rural areas remained at 38.9% even in 1987-88. Thus if we examine the impact of 40 years of planning from 1950 to 1990, we find that the economy was at its best in 1980’s.

The high fiscal deficit also was reflected in the emergence of current account deficit in the external sector, which was around 3.2% of the GDP in 1991. Further external debt of short duration on commercial terms also increased. The high growth of 1980s that was largely financed by internal and external debt shook the confidence of the creditors. In 1991 foreign exchange reserves just Rs.5, 541 crores and imports of Rs.43, 196 crores against exports were valued at Rs.32, 553 crores in July 1990. The economy was in deep crisis along with weakening of international confidence. But this adversity had its own uses.

From 1947 to 1991 India was under social democratic-based policies. The economy was characterized by protectionism, public ownership extensive regulation, slow growth, pervasive corruption. Since 1991, continuing economic liberalization has moved the country toward a market-based economy. Due to the fall of the Soviet Union and the problems in balance of payment accounts, the country faced economic crisis and the IMF asked for the bailout loan. The adverse economic situation made the Government of India review the polices followed in the preceding four decades, take a “U” turn and try to pull the economy from the brink of disaster and the verge of bankruptcy. In fact the per capita NNP – 1.5% and growth rate of NNP (at factor cost in 93-94 prices) in 1991-92 was just 0.5%. Dr. Manmohan Singh who was the Finance Minister in the Government of Prime Minister Mr. P.V. Narsimharao presenting the Budget for 1991-92 asserted – there is no time to lose. Neither the Government nor the economy can live beyond its means year after year. The room for man oeuvre, to live on borrowed money or time does not exist anymore. Macroeconomicstabilization and fiscal adjustment alone cannot suffice. This must be followed by essential reforms in economic policy and economic management.

The terms liberalization, privatization and globalization (the new LPG) amply summaries the crucial aspects of the reforms started in 1991. The statement of the Union Finance Minister, made on the floor of the Parliament on 16/12/1991 highlighted the problems that confronted the Nation and the steps taken or to be taken by the Govt. of India. The Finance Minister claimed that the new Govt. moved swiftly, to the task of pulling the economy back from the brink of disaster and setting it once more on the path of rapid and sustainable growth. Confidence of the creditors was restored and the fear of default was dispelled. The exchange rate was adjusted in July 1991 to a new level deemed credible. While ensuring competitiveness of exports without the need for large export subsidies trade policy witnessed major changes which included schemes for strengthening of incentives for exports and moving away from the system of import control. Export subsidies were abolished, fertilizer subsidy was reduced and defense expenditure was restrained.

Monetary policy was also tightened reflecting the urgent need to control inflationary pressure in the economy. The statement added that these measures of short term economic management were accompanied by far reaching structural reforms in the area of industrial policy aimed at enhancing productivity and strengthening competitiveness in the industrial sector and promoting an employment oriented pattern of industrialization. The policy towards foreign investment was restricted to attract foreign investment especially in priority areas including critical infrastructure sectors such as power. Government also proposed to use supply management in critical commodities and accordingly Government of States, were allowed direct import of edible oils for supply to the public distribution system.


Liberalization refers to relaxation of previous govt. restrictions usually in areas of social and economic policies. Thus, when government liberalizes trade it means it has removed the tariff, subsidies and other restrictions on the flow of goods and services between countries. The removal or reduction of restrictions or barriers on the free exchange of goods between nations. This includes the removal or reduction of both tariff (duties and surcharges) and non-tariff obstacles (like licensing rules, quotas and other requirements). The easing or eradication of these restrictions is often referred to as promoting “free trade.”

Measures taken of liberalization
•Liberalization for industrial policy
•Concession from monopolies act.
•Freedom for expansion and freedom to industries
•Liberalization in taxation policy
•Liberalization in capital market
•Liberalization in banking sector

•Increase the foreign investment
•Increase the foreign exchange reserve
•Increase in consumption
•Control over price rice
•Reduction in dependence on external commercial borrowing

•Increase in unemployment
•Loss to domestic unit
•Increase dependence on foreign nations
•Increase in imbalance

There is several definition of privatization it can be defined in terms of three kinds of rights from the state to the private sector: ownership rights, operating rights and development rights depending on the form of privatization. Privatization is the incidence or process of transferring ownership of a business; enterprises; agency or public service from the government to the private sector. In the broader sense, privatization refers to transfer of any government into the private sector including government function like law enforcement and revenue collection. Privatization could, therefore be defined as the transfer of ownership, operating and/ development rights from the public to the private sector; and the application of private sector objectives and discipline in the operation and management of public enterprises, combined in most cases with the transfer of commercial and financial risks to their management. Privatization is to be understood no merely in the structure sense of who owns an enterprise, but in the substantive sense of how far the operations of enterprises are brought within the discipline of market forces through measure such as liberalization and deregulation. Privatization encompasses a broad spectrum of possibilities, between denationalization at one end and market discipline at the other. Broadly, it may consist of Divestiture and non-divestiture options.

Measures adopted for Privatization
•Sick public sector industries
•National renewal fund
•Memorandum of understanding
•Sales of share of public sector to the private sector
Advantages of Privatization
•Increase in responsibility
•In line with international trends
•Increase the industrial growth
•Increase the foreign investment
•Reduction in public sectors
•Encouragement to new innovations
•Increase in efficiency
•Professional management
•Reduction in economic burden of government
•Increase in competition
•Reduction in public sectors

Limitation of Privatization
•Increase in unemployment
•Ignore the weaker sections
•Ignores the national importance
•Political pressure
•Increase in inequality
•Problem of financing
•Industrial sickness
•Lack of welfare
•Class struggle
•Opposition by employees

Globalization is a process of interaction and integration among the government, companies, and people of different nations, a process driven by investment and international trade aided by information technology. This process has effects on the environment, on economic development on culture, and prosperity, on political systems, and on human physical well-being in societies around the world.

Globalization is a term that includes very vast range of economic and social variations. It can encompass topics like global market expansion, finance trends, the cultural changes and economics. Globalization helps in creating new markets and wealth, at the same time it is responsible for extensive suffering, unrest and disorder… There ought to be positive and negative effects of globalization – it all comes as a package the great financial crisis that just happened is the biggest example of how negative globalization can turn.

India’s economy opened up during the early nineties. The policy measures on the domestic front demanded that there was a requirement of multinational organizations to set up their offices here. The market became more open and the economy started responding to the external (global) market. Due to globalization, contacts have been developed all across the globe, with the pace of integration increasing dramatically.

Gains and losses from Globalization
The gains and losses from globalization can be analyzed in the context of the three types of channels of economic globalization identified earlier. Trade in Goods and services
According to the standard theory, international trade leads to allocation of resources that is consistent with comparative advantage. This results in specialization which enhances productivity. The new trade theory talks of dynamic gains from international trade. It is accepted that international trade, in general, is beneficial and that restrictive trade practices impede growth. That is the reason why many of the emerging economics which originally depended on a growth model of import substitution have moved over to a policy of outward orientation. Movement of Capital

Capital flows across countries have played an important role in enhancing the production base. The inflow of foreign capital has played a significant role in the development in the recent period of the East Asian countries. In fact at peak, the foreign capital inflow into Malaysia in 1993 was 17.4 percent of the GDP, while in Thailand in 1995 it was 12.7 percent of the GDP. For developing countries the preferred alternative is foreign direct investment. It may do so, however, at one step removed. Recent events have shown that portfolio investment can be volatile particularly in times of loss of confidence. That is why countries want to put restrictions on portfolio investment. As recent events in India have shown while foreign direct investment is beneficial, public policy will have to be extremely careful in setting the conditions under which private capital is invited. Seeking guarantees and providing guarantees are inconsistent with an open system. Risk taking is the basic element of entrepreneurial spirit. Financial Flows

The rapid development of the capital market has been one of the important features of the current process of globalization. While the growth in capital and foreign exchange markets have facilitated the transfer of resources across borders, the gross turnover in foreign exchange markets has been extreme large. It is estimated that the gross turnover is around $1.5 trillion per day worldwide. Currency trade has become an end in itself. When an economy becomes more open to capital and financial flows, there is even greater compulsion to ensure that factor relating to macroeconomics stability are not ignored. Concerns and Fears

On the impact of globalization, there are two major concerns. These may be described as even fears. Under each major concern there are many related anxieties. The first major concern is that globalization leads to more iniquitous distribution of income among countries and within countries. The second is that globalization leads to loss of national sovereignty and those countries are finding it increasingly difficult to follow independent domestic policies. These two issues have to be addressed both theoretical and empirically. The argument that globalization that leads to inequality is based on the premise that since globalization emphasizes efficiency; gains will accrue to countries which are favorably endowed with natural and human resources. The second concern relates to the loss of autonomy in the pursuit of economics. In a highly integrated world economy, it is true that one country cannot pursue which are not in consonance with the world wide trends. Capital and technology are fluid and they will move where the benefits are greater.

Performance of Indian Economy under L.P.G.
In the political circle as well as in the economic arena of India, the New Economic Policy (NEP) has been much debated, highly pronounced and globally acclaimed right since the formation of the government of Mr. P. V Narshima Rao in June 1991. It is an outcome of a syndrome of unprecedented crisis in the balance of payments, exchange rate management, fiscal and monetary policies, domestic reserve allocation trends and public sector management. The NEP stands for the maximization of economic efficiency and competitiveness of Indian industries without hampering the interests of the labor community on human face value with a view to capture the economics gains accrued from structural reform initiated in the economics. According to Dr. Manmohan Singh, “The process of macroeconomics adjustment which is being initiated with the budget for 1991-92 would take at least three years to complete. Of course, this reform package made some improvement in the field of balance of payments crisis but other segments of Indian economy did not respond to positively as claimed by the then FM as well as the driver of the automobile of reform package. A.Globalization of Indian agriculture

Agriculture today holds a third position in India’s GDP, the highest proportion in the developed and developing world, and without fail, it will continue to be the backbone of the economy for years to come. The record production of 181 million tons of food grains during 1992-93 is a testimony to the resilience of Indian agriculture. It is a remarkable recovery from the previous year’s performance which was about 171 MT and it has bettered the previous best production of 176.4 MT in1990-91.The sterling performance on the farm front and the reforms have helped the boost of Rs. 7600 crores in 1992-93, as against the previous year’s Rs 6200 crores. For instance we have sold rice worth Rs. 900 crores in the international market during 1992-93. Beside the share of agriculture export in the overall foreign exchange earnings of the country is just 15 per cent now and this can be pushed to 30 percent by the end of the Eight five year plan. Foodgrains production of 191.1 million tons in 1994-95 was a record in the country’s history and was higher (3.7percent) than the previous year.

Foodgrains account for about 63 percent of country’s agriculture output and hence even marginal declines in foodgrains production had a ‘ripple effect’ on rest of the economy. The most unexpected development was the late realization in 1996 that the wheat harvest was just about 62.6 million tons, lower by about 3 million tons over the preceding year. The reasons for decline in production of Rabi foodgrain crops. Thus, 1996-97 emerged as one of the best years in respect of food grain production pushing up the overall growth of agriculture production to a record level of 9.3 percent. Major setback was seen in wheat whose production was lower by 3.5 million tons and coarse whose production had dropped by over 3 million tons. Table 15.1 shows the trend of growth in agriculture should however; be seen over a large time span order to even out annual seasonal effects on growth. The country’s performance in agriculture during the last two decades has been reasonable satisfactory. Pre-reform and Post-reform Growth in Agriculture

Agriculture and allied 3.93.6
Agriculture (all crops, animal husbandry, dairying) 4.23.7 Forestry -0.10.8
Fishing 5.45.5

With the initiation of NEP the Indian agriculture is poised to enter the wonderland of global markets. It has made good strides in the past years. It has shown remarkable resilience due to concession given to the allied segment of agriculture under the LGP B.Industrial response to reform package

A good response of industrial sector can be visualized since the inception of reform package with regards to its production scenario. Overall index of industrial production during April –August 1993 was 1.8 percent higher than the index for the same period of the previous year. The growth of manufacturing sector was lower at 1 percent, electricity generation increased by 8.4 percent and mining declined by 2.5 percent. A number of factors acting on both the demand and supply sides constrained the growth of manufacturing. Many of fiscal and monetary restraints which had a hampering effect on industrial production in 1991-92 were removed. The capital market were freed from the Government control and the liberalized by removing the conditionality of dividend balancing for the non-consumer goods. Industrial production in 1991-91 was almost stagnant at the previous years with the general index of industrial production (IIP) showing a nominal decline of 0.1%. The stagnation was due to the poor performance of the mining and manufacturing sectors.

The general Index of industrial production (IIP) recorded a growth of 4.1 percent during 1993-94, aided by a growth of 2.5 percent in mining and quarrying, 7.4 percent in electricity and 3.6 percent in manufacturing. All the major sectors performed better during 1993-94 compared to 1992-93. An analysis of IIP at the disaggregated level shows that only 4 group, viz food products, other textile products, electrical machinery and miscellaneous industries of the 17th major industries group in the manufacturing sector recorded negative growth rates during 1993-94. The slow progress in industrial growth in 1993-93 was attributed to various factors such as inherent adjustment lag in the process of restructuring, slowdown in investment and imports, still high rate of interest and corporate tax and utilization of inventories.

Pre and post reform period
Parameter Weight (base:1993-94 =100)Average annual growth rate (1980-81 to 1991-92)Average annual growth rate (1992-93 to 1999-2000) Index of industrial production


But the above growth performance in industrial sector is not as satisfactory as expected by policy makers. The Economic Survey of 1993-94vis very much concerned with slow growth of industrial sector. Under the LPG regime Indian industries have to compete the race of global competition at the level of quality orientation otherwise its condition would become economically worthless.

C.Containment of inflationary potential
Since the implementation of structural adjustment programmers, one of the biggest, immediate and single achievements of the Narshima Rao government had been the consequent of inflation. The annual rate of inflation had been reduced from the peak of 17 percent in August 1991 to below 7 percent. The price rose during 1992-93 had been of the order of 9.9 percent as against over 13 percent in the year 1991-92. However, the rise in price of essential commodities had caused considerable hardship to the common man and by knowing this fact it still increased to 11.97 percent for the week ending April 30, 1994.

The index for primary articles increased by 0.6 percent to 265.9 from 264.3 for the previous week of April 30, 1994. Under primary articles, the index for food articles rose by 0.9 percent to 289.9 from 287.4 during the same period. On the other hand, the index for non-food articles group rose by 0.3 percent to 285.9 from 285 due to higher price of raw silk and cotton seeds, coir fibers and fodder and raw tobacco. The index for manufactured products appreciated by 0.2 percent to 256.1 in the same period. The index of fuel, power, light and lubricants remained unchanged and that of textile declined by 0.1 percent. The renewed inflammatory pressure observed in the last quarter of 1993-94, when the inflation rate rose from 9.1% in January 1994 to 10.5% in March 1994-95., further reflecting the effect of administered price revision in respect of rice, sugar, petroleum, wheat and other energy inputs in the last quarter of 1993-94. Scenario during post-reform Period

YearEnd of the year52 weeks average

Above table shows that the, inflation which has reached exceptional high level in 1991, decline considerably in 1992-93 by January 1993 it was lower than the previous year on account of the efforts taken by the Government to restore fiscal stability by reducing the fiscal deficit which has reached an unsustainable level in 1991. D.Performance of external sector under NEP

The unprecedented payments crisis which emerged in the first quarter of 1991-92 was overcome by the concerted policy reforms initiated by the government in July 1991. As a result of these policy reforms and successful mobilization of exceptional financing there was marked improvement in the external payment situation. This was reflected in the build-up of foreign exchange reserve by an additional amount of US $ 3.57 billion during 1991-92. The increase in reserve continued with stabilization and structural reforms restored international confidence and also provided the basis for further liberalization of trade tariff, export credit and foreign investment policies during 1992-93. Foreign currency assets which had plummeted to US $ 1.1 billion in June 1991 rose to US $ 6.9 billion in the middle of the July 1992 and were US 5.0 billion on 12th February 1993.Exports have increased at 3.4 percent during the 1st nine month of 1992-93 compared to decline 3.7 percent in 1991. This disguised a faster rate of growth at 11.4 percent to the general currency area because exports to the Rupee payment area declined by 64.4 percent in dollar term.

The balance of payment continued to be under pressure in 1993-94, but there was a foreign distinct improvement compared the crises situation prevailing in the middle of 1991. The severe import restriction introduced in 1991-92 which has produced a highly disruptive import sequence, were relaxed in the second half of 1991-92as the foreign exchange situation improved and international confidence was gradually restored. By the end of 1991-92, foreign exchange reserve has been built upto a respective level of $5.63 billion from a low of $1.29 billion at the end of July 1991. The year 1993-94 was remarkable turnaround in India’s external sector. Foreign currency assets of RBI more than double during the year, increasing from US$ 6.4 billion at the end of March 1993 to US$ dollar 15.1 billion at the end of March 1994.Export responding to reforms in trade and balance of payment policy 1993-94 taking the export term to the growth of 20%in terms of dollar. The capital amount was bolstered by sharp increase in foreign direct investment and portfolio investment which was from less than $600 million in 1992-93 to over $ 4 billion in year 1993-94. Critical Appraisal

The industries demand for level playing field vis-a vis MNC, particularly in regard to raising of equity without losing control has yet to be met. The devices such as nonvoting shares, pledging of shares and buying back of own shares as discounted prices, the facilities available to foreign investors have been denied to Indian companies. As regard agriculture development in India under the package of reforms, it can be said boldly that the food situation is no doubt comfortable. Many challenges are still knocking the door of farm industries like low productivity, crop imbalance, flight of agriculture labor, heavy post-harvest losses, problem of adequate inputs timely irrigations and credit facilities and so on. Only 30 percent of the cultivated area is having irrigation facilities. What is worse, even the limited irrigation potential created at a very high cost is not properly utilized causing reduction in yields.

The government is not taking interest in the frequent development of minor irrigation. It is neglected in rural areas due to erratic supply of power. People are dying still in the age of LPG. The public distribution system, a job of the government, should be overhauled and strengthen. We should also take into account the changing food habits of the people because the non-foodgrain items like edible oils, milk, meat eggs and vegetables now account for over 60 percent of the consumer expenditure on food. Industrial development in India during the decadal period of reform is neither comfortable nor satisfactory. During period of 1885-90 the annual growth rate was 8.5% as against the 7%recorded in 19810-85. However, in the 1990’s, i.e. the reform period the growth of industrial production widely fluctuated. It was 4.1% in 1998-99 though it was quite high at 13% in 2001. The policy of liberalization has not given stability and failed to help in steeping up industrial production. The Indian industrial system has real threat from growing MNC’s under the system of LPG. They allow them to enter into such areas which ought to be left by Indian firms. In a situation, if a large role is assigned to MNC’s in our step up, domestic capabilities are underestimated and the production also become worthless.

The disinvestment of policy of Government has become controversial under new economic order of LPG in India. The basic finding of the study is that the growth of inflationary potential has been reduced to below the double digit by the application of the policy of reform. Consequently, baring measures like the cash reserve ratio (CRR) reduction in export refinance and increase in margins on commodities covered by selective credit control whose price have shown an increase during the decadal period of SAP. The wisdom of decision to keep interest rate unchanged is not undisputed, given the lake of scope for adjustment in deposits rates. However, the one percent and more reduction in statutory liquidity ratio (SLR), though in keeping in the broad policy objectives of the government is disappointing. The removal of sub-limit of 1.5 percent of incremental deposits for investment in shares, while providing banks with a welcome new avenue to boost profit, will also come to the risqué of a foundering stock market.

In this way, by implementing such policy prescription to contain regular inflationary pressures, the RBI is hopeful for the stability of prices in near future. One of the most difficult problems of balance of payment has been very ably tackled through the free floating system of rupee. Trade deficit has been lowered down by $ 5.9 billion in 1990-91 to $ 3.7 billion in 1992-93. During 1991-92 deficit was reduced to $ 1.6 billion due to several very restrictive import compression measures which were relaxed later. Export of copper, yarn and fabric has been very buoyant and now account of almost one- third import if India. A number of industries have shown large potential for export due to greater competitiveness in the world market and price advantage.

During three months of 1993 February, March and April, India has enjoyed president trade surplus due to Free Floating of Rupee. But sorry to place a critical comment that at the time of independence, India’s share in the world trade was 2% and which came down to 0.5% in 1980’s and up to 1990 it was to negligible point. We cannot unduly depend on foreign investment portfolio investments because of the uncertainties associated with them. The vague policy of the Government is also responsible for slow growth of direct foreign investment in the country. Conclusion

We do agree with the critics that there are a lot of challenges ahead in successful implementation of the SAP but at the same timeit gives positive signals for smooth running of this reform package such as agricultural production increased,inflation remained well under control,exports start boosting up, upward swing in Foreign Exchange reserves, they are in progress. The economy has marched towards recovery and advancement, though the speed is quite slow. The question has been raised about its political acceptability, impact, scope, speed and sustainability. Despite the controversies regarding the so called exist policy and related issues, apprehension about pressure emanating from multilateral financial institutions and the various instances of different political parties so natural in democracy, it quite fairto support that there is a broad acceptability of most of the reforms initiated so far.The Indian stabilization program appears to be more satisfactory. If we only observe GDP, growth and changes in the rate of inflation compared to the year 1992-93.

However, if it is compared to the experience of Latin American and East European countries, we have done well because the growth rates have not been scaled down to negative levels and inflation rates have certainly not doubled compared to the recent past as of the first year of stabilization we are waiting for a day by which the NEP would provide safe drinking water, adequate food, clothing, housing, employment, education and medical facilities.But one thing is quite convincing that success of any scheme of development rests upon hard work culture, dry honesty and strict discipline for which we both, the policy-makers and the policy holders are responsible. Thus, the success of the policy cannot be judged only on economic considerations. To conclude, it must be asserted that it has succeeded on the front of external sector management but it has to cover the long distance of success also in the field of internal sector management.


“Impact of New Economic Policy Indian Society” by G. Nageshwara Rao “Indian Economy since Independence” by Uma Kapila
“Indian Economy” by S.K. Mishra and V.K. Puri
“Indian Economy” Today by B.N.P. Singh

Related Topics

We can write a custom essay

According to Your Specific Requirements

Order an essay
Materials Daily
100,000+ Subjects
2000+ Topics
Free Plagiarism
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access

Your Answer Is Very Helpful For Us
Thank You A Lot!


Emma Taylor


Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?

Get access to our huge, continuously updated knowledge base

The next update will be in:
14 : 59 : 59