Impact of New Economic Policy 1991

Custom Student Mr. Teacher ENG 1001-04 30 November 2016

Impact of New Economic Policy 1991

Industrialization through import substitution and public sector production with emphasis on heavy industry has been a very important objective of our planning for development. In particular an important distinction was made among industries to be developed exclusively by the public sector, those reserved for the private sector, and those open to development by either or both sectors. The reforms of 1991 abolished industrial licensing, except in a few industries for locational reasons or for environmental considerations, and import licensing, except in the case of most consumer goods. Restrictions under the Monopolies and Restrictive Trade Practices Act were eased. Entry requirements (including limits on equity participation) for foreign direct investment were relaxed, private (domestic and foreign) investment were allowed into sectors such as power which had been reserved for public sector investment only. Disinvestment of equity in the public sector was also initiated.

The reforms, by focusing primarily on the private sector and not addressing the problems of PSEs, have exacerbated them. Industry accounts for 28% of the GDP and employ 14% of the total workforce.[20] In absolute terms, India is 12th in the world in terms of nominal factory output.[77] The Indian industrial sector underwent significant changes as a result of the economic reforms of 1991, which removed import restrictions, brought in foreign competition, led to privatization of certain public sector industries, liberalized the FDI regime, improved infrastructure and led to an expansion in the production of fast moving consumer goods.[78]

Post-liberalization, the Indian private sector was faced with increasing domestic as well as foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, and relying on cheap labour and new technology. However, this has also reduced employment generation even by smaller manufacturers who earlier relied on relatively labour-intensive processes.[


Over the decades. the Indian model of development has created what is called the dual economy. On the one hand an enclave of large urban industries based on modem technology was created both in the private and public sectors. uhich rernain tied to foreign aid and technology. On the other hand, there was the rest of the economy of the poor which was left to fend for itself. I’he fiscal and trade systems were also designed to enclave the economy. rhe new economic policy will certainly strengthen this duality and do something wasteful also, which is obviously anti-poor. On behalf of the new industrial policy it is claimed that it will release the Indian industry from unnecessary bureaucratic shackles by reducing the n~lmber of clearances required from the Government.

Mainly, there are two concession~s: The proposed policy allows foreign investment up to 1 per cent to 100 per cent equity on automatic basis subject to some restrictions on imports of capital goods. This concession is meant only for the foreigners or those who collaborate with Indian counterparts. In other words this provision will strengthen the hold of the foreign companies on Indian Industry. I h e second concession is for the Indian entrepreneurs and relates to technological imports. The policy provides no defense against adverse impact on the domestic capital goods industry. There is no selectivity in the policy i n the sense that import should not be allowed in those cases where domestic market is in a position to supply capital goods in adequate quantity and quality. There is no appropriate industry plan with appropriate industrial mix, technological selection on the basis of priorities.

22 The sudden shift from import substitution to export promotion misses both the co~nplementarity and the sequence. It also misses the need to remove massive distortion:j, dependency and the ruptures between the two. The basic criterion determining import substitution and choosing industrial projects has so Ear aimed at saving foreign exchange in the short and medium periods. Some projections were made for long-term foreign exchange requirements but there was Little consideration given to the fact that short-tenn gains in ioreign exchange secured through setting up of all kinds of priority as well as non-priority industries either for limited export or import substitution cnight lead to greater dependence on the world market and foreign capital imd this push India into a more serious external financial crisis. Of course, not all industries set up were that kind.

Quite a few, particularly the basic and raw material producing projects, had long term beneficial effects but a still larger number did not fall in this category. Indeed, reliance on foreign collaboration and capital and technology as well as world market and world monopolies have led both to greater dependence on outside as well as greater and expanding influence of external capital on Indian industry, particularly the new industries, which were set up with the avowed purpose of creating economic independence. What came as an unintended consequence of old policy will now be accentuated as a consequence of N E I ‘ . ~ ~ The new policy is totally silent on employment. During the eighties, when the industrial growtli increased from five per cent to eight per cent, employment elasticities uniformly declined in all, except in the services sector. Unemployment is no& becoming politically unacceptable and already leading to massive social unrest.

One expected of the Government to make a clear statement on the employment objective, particularly when there is going to be a massive shift towards inviting foreign capital which will be invested only in capital- intensive industries. Modemisation and export promotion will intensify capital intensity as well as import-intensity which is also biased in favc~ur of capital and against labour. The agricultural sector of the economy is adversely affected by the New Economic Policy. Our farming community is now at the mercy of multinational corporations. They were now facing two types of problems. On one side the cost of cultivation is increasing as a result of withdrawing subsidy by the government to farm inputs, and the other side they were not getting remunerative price for their products.

The neglect and problems of a sector which provide livelihood to more than 60% of the population is disastrous to the Indian economy. Most of the agricultural crops shows a declining growth rate after the adoption of the New Economic Policy. The economic or. more specifically financial crisis is not fully autonomous. I t is linked, both as a cause and effect with many other crisis. The whole society is caught with Inany fold social convulsions. The NEP is a desperate plunge to rneet some immediate economic threats. It may or may not succeed. It has positive aspects which are welcome but there are many others which may deepen the crisis.

If massive investment in the public sector and import substitution failed to make lndia self-reliant how can private sector. including foreign investors and export promotion achieve self-reliance under imposed external constraints? So it is logical to concludes that the direction of the economy has to change. There ought to be paradigm shifts towards a more self reliant, sustainable and just development model whose goal will also be basically different: not more production of material affluence but the creation of a new individual and society- a contented prosperous community based on a set of values Gandhi propagated and worked for viz., co-operation sharing participation mutual empowerment non-violence and peace prior to the mid-1960s India relied on imports and food aid to meet domestic requirements. However, two years of severe drought in 1965 and 1966 convinced India to reform its agricultural policy, and that India could not rely on foreign aid and foreign imports for food security. India adopted significant policy reforms focused on the goal of foodgrain self-sufficiency.

This ushered in India’sGreen Revolution. It began with the decision to adopt superior yielding, disease resistant wheat varieties in combination with better farming knowledge to improve productivity. India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 15.7% of the GDP in 2009–10, employed 52.1% of the total workforce, and despite a steady decline of its share in the GDP, is still the largest economic sector and a significant piece of the overall socio-economic development of India.[94] Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the Green Revolution in India.

However, international comparisons reveal the average yield in India is generally 30% to 50% of the highest average yield in the world.[95] Indian states Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, Andhra Pradesh, Bihar, West Bengal, Gujarat and Maharashtra are key agricultural contributing states of India. India receives an average annual rainfall of 1,208 millimetres (47.6 in) and a total annual precipitation of 4000 billion cubic metres, with the total utilisable water resources, including surface andgroundwater, amounting to 1123 billion cubic metres.[96] 546,820 square kilometres (211,130 sq mi) of the land area, or about 39% of the total cultivated area, is irrigated.[97]

India’s inland water resources including rivers, canals, ponds and lakes and marine resources comprising the east and west coasts of the Indian ocean and other gulfs and bays provide employment to nearly six million people in the fisheries sector. In 2008, India had the world’s third largest fishing industry.[98] India is the largest producer in the world of milk, jute and pulses, and also has the world’s second largest cattle population with 175 million animals in 2008.[99] It is the second largest producer of rice, wheat, sugarcane, cotton and groundnuts, as well as the second largest fruit and vegetable producer, accounting for 10.9% and 8.6% of the world fruit and vegetable production respectively.[99] India is also the second largest producer and the largest consumer of silk in the world, producing 77,000 million tons in 2005.[100]


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