ECONOMIC REFORMS 1991 : LIBERALISATION Class 12 Indian Economic Development #bestnotes

 

ECONOMIC REFORMS SINCE 1991: NEW ECONOMIC POLICY

 

NEED FOR NEW ECONOMIC POLICY

(A background story)

a)Earlier, the public sector had a dominant role and the private sector was under controls and checks.

b)Import substitution policy implied minimum possible international trade,

c) It was realized that GDP growth did not increase to the level desired.

d)Economy was slipping into crisis.

e)India was granted a loan of US $7 billion from the World Bank and IMF.

f) Our economy was compelled to announce NEP. (New Economic Policy)

 

ELEMENTS OF NEP (NEW ECONOMIC POLICY) AND ECONOMIC REFORMS

(i)Liberalisation

(ii)Privatisation

(iii)Globalisation

Thus, LPG was set to replace LQP in 1991.

 

LIBRALISATION

·      Freedom of producing units from direct controls of the government.

·      Why Liberalization?

·      Before 1991, private enterprises faced licensing system, foreign exchange control, restriction on investment by big business houses. Such control did not allow private sector to grow to the extent possible which resulted in low GDP  and public sector was leading to corruption, undue delays, inefficiency.

·      Keeping this in mind, liberalization relied on market forces (of supply and demand) rather than government intervention.

 

ECONOMIC REFORMS UNDER LIBERALISATION

a)INDUSTRIAL SECTOR REFORMS:

Liberalization virtually implied de-regulation of industrial sector of the economy.

I Abolition of industrial licensing-

Licensing was not required except the following industries- liquor, cigarette, defence equipments, industrial explosives, dangerous chemicals.

II Contraction of Public Sector- Industries reserved for public sector was reduced from 17 to 8 further in 2010-11 from 8 to 3.

III De-reservation of Production areas- Many production industries earlier reserved for SSI were de-reserved. Market forces were allowed to determine the allocation of resources.

IV Expansion of Production Capacity- Freedom from capacity constraints came into being.

V Freedom to import capital goods- Freedom for industrialists to import capital goods with a view to upgrading their technology was accorded.

b)FINANCIAL SECTOR REFORMS

Financial sector reforms include:

(i)banking and non banking financial institutions.

(ii)stock exchange market

(iii)foreign exchange market

·      In India, financial sector was regulated and controlled by RBI.

·      Role of RBI was replaced from regulator to a facilitator.

As a regulator earlier, RBI used to fix the rate of interest whereas after NEP, RBI would help the free forces and allow commercial banks to decide their interest rate.

Changes in the wake of liberalization

§  Free play of market forces led to emergence of private and international banks

§  It allowed FII(Foreign Institutional Investors) to invest in Indian financial markets.

§  The FII limit was raised up to 74%

§  Banks fulfilling conditions were allowed to set up their branches

§  Financial sector has shown a multi dimensional growth which further encouraged growth and development of the economy

 

c) TAX REFORMS

Tax reforms are important part of revenue and expenditure policy of the government.

Classification of taxes:

(i)Direct Tax- Direct Taxes are those where the burden of tax cannot be shifted onto others. Examples- Income Tax, Corporation tax, Wealth tax etc.

(ii)Indirect Tax- Indirect Taxes are those taxes where the burden of tax can be shifted onto others. Examples- GST(Goods and Service Tax).

Before liberalization- Tax structure was complex, tax rates were high which resulted in tax evasion, causing loss of revenue to the government,

After liberalization- Income tax and Corporation tax has been reduced and Indirect Tax structure has been simplified. GST was enacted in 2016. The tax compliance increased resulting in higher tax collection.

d)FOREIGN EXCHANGE REFORMS

To resolve Balance of Payment (BOP) crises, foreign exchange reforms were introduced. Devaluation was the first step in this regard in 1991.

Fall in value of rupee implied more of goods can be purchased with the given foreign currency. It resulted in rise in exports leading to higher inflow of foreign currency.

Floating exchange rate was opted for international trade. Exchange value was determined by free play of market forces that is, supply and demand.

 

e)TRADE AND INVESTMENT REFORMS

The reforms in this area focused on

(i)bringing efficient foreign technology into the economy

(ii)encouraging foreign investment in the domestic economy

(iii)increasing international competitiveness of the domestic industry

Trade and investment reforms were carried out in the form of:

I Removal of Quantitative restrictions on imports and exports

II Reduction in tariff rates

III Abolition of Import licensing

IV Removal of Export duties

 

DEMONETISATION

Demonetization was introduced in 2016, as a financial sector reform.

Concept- It was a policy to withdraw the status of ‘legal tender’ from the existing 500 and 1000 rupee notes so that they lose their acceptance as a medium of exchange. The people were required to deposit the demonetized notes with the banks within a period of 2 months which were replaced by new currency notes of 500 and 2000 rupees.

Demonetization was announced on November 8, 2016.

Merits of demonetization-

(i)It helped in finding out black money.

(ii)Shrinking of shadow economy.

(iii)Tax evasion is reduced, government revenue increased.

(iv)As people were compelled to deposit their money with banks so financial base expanded.

(v)It helped to check funding of anti-social activities like terrorism.

(vi)People were driven to digital mode of transactions.

Demerits of demonetization-

(i)People were deprived to cash in hand.

(ii)It hindered production activity in shadow economy.

(iii)Decreased production activity lead to slowdown of the economy.

(iv)A huge cut in liquidity lead to cash crunch for wages.

(v)People had to stand in queues at bank and felt hurt when they found it difficult to use their own money.

In brief, demonetization was a gain and loss of opportunities and its impact was over a short period of time.

 

GST

GST (Goods and Service Tax) is one tax in place of all taxes on goods and services and it is a uniform tax across all states of the country. Thus, GST carries the slogan of ‘one tax, one nation, one market.’

The purpose of GST was to generate additional tax revenue for the government.

Structure of GST

·      Goods and services have been classified into different categories.

·      Each category carries a different rate of taxation and there is category of goods which is tax exempt for the needs and means of poorer section of the society.

CHARACTERISTICS

(i)GST is levied at each stage of value addition.

(ii)Tax is levied as and when goods are supplied.

(iii)GST paid by the producers on the purchase of input is allowed to be deducted by the producers in their payment of GST to the government.

MERITS

(i)It has a simplified tax structure.

(ii)Refund of GST inputs is available to the producers.

(iii)It is a uniform tax across all states.

(iv)It has increased government revenue.

DEMERITS

(i)GST is still to cover all the goods and services in the country.

(ii)GST rates are not permanently fixed which hampers decision making and investment in production activity.