IMPACT OF NEW ECONOMIC POLICY

IMPACT OF NEW ECONOMIC POLICY

India’s post-independence development strategy showed all the signs of stagnation, but the economy started showing the sign of recovery in the early nineties when the government adopted the new economic model known as Liberalization, Privatization and Globalization (LPG) to meet a grave economic crisis; characterized by unprecedented adverse balance of payment problem, inflation, decline in the foreign exchange reserve and the Gross Domestic Product (GDP) growth rate. The objective of the economic reforms adopted by the Indian Government was to transform a backward and predominantly agrarian economy, lacking in basic infrastructure, into a modern developed economy.

New Economic Policy 1991

India opened up the economy in the early nineties following a major crisis that led by a foreign exchange crunch that dragged the economy close to defaulting on loans. The credibility of country’s economy reached the sinking level and no country was willing to advance or lend to India at any cost. The country ran out of foreign exchange reserves. To face the crisis situation, the government decided to bring about major economic reforms to revive Indian economy. These reforms were popularly known as ‘structural adjustments’ or ‘liberalization’ or ‘globalization’.

The government announced a New Economic Policy on July 24, 1991. The new policy deregulates industrial economy in a substantial manner.

New Economic Policy of India-1991

The major objective of the new policy is to make Indian economy a part of the world economy. The policy aimed at:

1. Utilizing fully the indigenous capabilities of entrepreneurs.
2. Fostering research and development efforts for the development of indigenous technologies.
3. Raising investments.
4. Improvement in efficiency and productivity.
5. Controlling monopolistic power.
6. Assigning the right areas for the public sector undertakings.
7. Ensuring welfare as also skills and facilities to the workers to enable them to face new technologies.
8. Retaining the capacity to earn our own foreign exchange through exports.
9. To achieve self-reliance.

Some of the steps taken to liberalize and globalize Indian economy were:

1. Devaluation: The first step towards globalization was taken with the announcement of the devaluation of Indian currency by 18-19 percent against major currencies in the international foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis
2. Disinvestment: In order to make the process of globalization smooth, privatization and liberalization policies are moving along as well. Under the privatization scheme, most of the public sector undertakings have been/ are being sold to private sector.
3. Dismantling of the Industrial Licensing Regime: Industrial licensing was abolished for almost all product categories. The only industries which are now reserved for public sector are defence equipment, atomic energy generation and railway transport on account of environmental safety and strategic considerations.
4. Allowing Foreign Direct Investment (FDI)across a wide spectrum of industries and encouraging non-debt flows. The Department has put in place a liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership. Some of the recent initiatives taken to further liberalize the FDI regime, inter alias, include opening up of sectors such as Insurance (upto 26%); development of integrated townships (upto 100%); defense industry (upto 26%); tea plantation (upto 100% subject to divestment of 26% within five years to FDI); enhancement of FDI limits in private sector banking, allowing FDI up to 100% under the automatic route for most manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to 100% foreign investment subject to 26% divestment condition; etc. The Department has also strengthened investment facilitation measures through Foreign Investment Implementation Authority (FIIA).
5. Non Resident Indian Schemethe general policy and facilities for foreign direct investment as available to foreign investors/ Companies are fully applicable to NRIs as well. In addition, Government has extended some concessions especially for NRIs and overseas corporate bodies having more than 60% stake by NRIs
6. Throwing Open Industries Reserved for the Public Sector to Private Participation. Now there are only three industries reserved for the public sector
7. Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion
8. The removal of quantitative restrictions on imports.
9. The Reduction of the Peak Customs Tarifffrom over 300 per cent prior to the 30 per cent rate that applies now.

10 Wide-ranging Financial Sector Reforms in the banking, capital markets, and insurance sectors, including the deregulation of interest rates, strong regulation and supervisory systems, and the introduction of foreign/private sector competition has been introduced.

Let us now discuss all the three processes-globalization, liberalization and privatization separately and their impact. Due to various controls, the economy became defective. The entrepreneurs were unwilling to establish new industries (because laws like MRTP Act 1969 de-motivated entrepreneurs). Corruption, undue delays and inefficiency raised due to these controls. Rate of economic growth of the economy came down. So in such a scenario economic reforms were introduced to reduce the restrictions imposed on the economy.

Globalization

Broadly speaking, the term ‘globalization’ means integration of economies and societies through cross country flows of information, ideas, technologies, goods, services, capital, finance and people. Cross border integration can have several dimensions – cultural, social, political and economic.

The Policies and developments in many countries including India are influenced by the globalization. Globalization is not only a movement of ideas, information, capitals, people, technologies, goods and services, and labour across the nation-states but has serious implications on socio-economic and political sphere of life.

Limiting ourselves to economic integration only, one can see the three channels of globalization (a) trade in goods and services, (b) movement of capital and (c) flow of finance and (d) movement of people. The globalization through economic integration has been presented as the best, natural and universal path towards development of mankind.

Process of Globalization

(a) The integration of the national economy with that of the global economy.

(b) The conversation of a national market into an international one, which facilitates the international mobility of factors like production or commodities.

(c) An economic as well as a political, social, and cultural integration with rest of the world, though it varies greatly from country to country, which in turn depends on the development of means and modes of communication in a particular country.

In current economic literature, the term ‘globalization’ is used to mean liberal “outward oriented” policy, which includes eliminating anti export biases, lowering of a very high import tariffs, placing lesser reliance on quantitative restrictions on imports. This is the aim of the liberalization policy adopted by India. However, the “outward-looking” policy does not mean that government would completely abandon all forms of control and place the entire economy to remove certain imbalances and restrictions, which hamper free flow of trade. Globalization also aims at making greater number of goods and services available to the people, at relatively cheaper prices. Thus, it is believed, globalization would generally improve the economic performance of the nation.

Main Features of Economic Globalization

From about the end of 19th century, key technological developments in transportation and communication as well as of trade have contributed to the increasing economic integration of the world. Some fundamental aspects of globalization include:

1. Post Industrialism: According to David Harvey, there has been a transition (shift) from ‘fixed’ industrial system to regime of ‘flexible accumulation’ characterized by flexibility in labour processes, products and patterns of consumption; and increasing mobility of capital and labour. This ‘post industrial’ system is marked by increasing centralization of capital in the hands of big corporations at one end, and flourishing of small business at the other, with the former dominating the latter. Capitalism is becoming more tightly organized. Since there is more centralized control over trade enabled by growth of information technology and reorganization of global financial system.
2. World Trade: World trade links geographically dispersed produces and consumers. While USA became the largest trading nation in 20th century, GATT established in 1947, aimed at freer trade through agreed reduced tariffs, led to the growth of world trades and reduction in relative share of major industrial powers in world trade. Major push is towards globalization of markets.
3. Multinational Corporations: Integration of global economy has given raise to MNC’s which are powerful not only economically but politically also. Overall, 51 of the largest economies in the world are corporations. According to the UN Development Programme, 500 corporations now control 70% of the world’s trade and 80% of its foreign investment.
4. New International Division of Labour: Internalization of capital since the 1970’s had led to economic restructuring reflected in deindustrialization of developed countries and a shift to tertiary (service) sector activities such as banking, finance, specialized administrative services, etc. while manufacturing and assembly operations are exported to less developed countries where labour is cheap and laws are lax. But it was noticed
   Join Our Telegram Channel
   that with technological innovations such as automation, computerization, the question of cheap labour does not arise; labour productivity can be enhanced with lesser number of workers. Hence major shift in industrial organization is to new systems of flexible specialization, just-in-time delivery TQM, etc. Rather than direct investment by first world MNC’s in third world through local subsidiaries, there is now a wide variety of negotiated agreements: joint ventures, marketing agreements, secondary sourcing, subcontracting various kinds of limited alliances. MNCs look at less developed countries mainly not as a source of cheap labour and raw materials but as expanding local markets and potential industrial partners.
5. Financial Markets: IMF has started controlling the finance aspect. As a result of debt crisis, countries turn to IMF, which then imposes devaluation of currency, structural adjustment programme and other conditions. Global financial institutions exert enormous control over the domestic policies of member countries and in 1980’s, they started advocating liberalization, privatization and globalization. MNC’s have started demanding free capital movement and opening of capital and other markets.

Positive Impact of Globalization

1. Multilateral agreements in trade, taking on such new agendas as environmental and social conditions.
2. New multilateral agreements for services, Intellectual properties, communications, and more binding on national governments than any previous agreements.
3. Market economic policies spreading around the world, with greater privatization and liberalization than in earlier decades.
4. Growing global markets in services. People can now execute trade services globally — from medical advice to software writing to data processing that could never really be traded before.
5. Physical and geographical boundaries are crumbling and the world is becoming a global village. Nation states today no longer have to play market-making role, so wool, wine, perfumes can belong to any market anywhere in the world.
6. With nation states and nationalities disappearing, ethnicities and national loyalties are fading out. Customers are only concerned about the products quality, price, design, value and appeal.
7. Globalization has created an economically interdependent international Environment. Each country’s prosperity is interlinked with the rest of the world and no nation can exist in isolation solely dependent on its domestic market. The Interlinked Economy (ILE) of the Triad (the US, Europe and Japan) joined by aggressive economies such as Taiwan, Hong Kong and Singapore have become a successful union and has become so powerful that it has swallowed most consumers and corporations, made traditional national boundaries disappear and pushed bureaucrats, politicians towards that status of declining industries.
8. In an interlinked global economy, the key success factor shifts from resources to the market place, in which one must participate in order to prosper. People are the only true means to create wealth and therefore governments everywhere have to only ensure access to the best and the cheapest goods and services from anywhere in the world. This implies less interference in the business decisions. There is lowering of trade tariffs and custom barriers and deregulation of certain sectors to increase abundant supply of goods and market place competitiveness.
9. There has been an increasing trend towards privatization of the manufacturing and service sectors. Government owned and managed businesses suffered from an attitude of complacency, lack of enterprise and so were performing poorly. To get rid of loss making units especially public sectors, business were handed over to private entrepreneurs who were given greater access and freedom and were able to show better results. Thus privatization becomes the result of economic compulsion.

Globalization in Brief

The government announced a New Economic Policy on July 24, 1991. The context of huge fiscal deficits, crisis in the balance of payment situation, falling foreign exchange reserves and conditions imposed by IMF led to the announcement of the New Economic Policy by the Government of India, in 1991.

The new economic policy resulted in radical change in the structure and direction of Indian economy. The direction tends towards the market economy and globalization of the country. The major objective of the new policy is to make Indian economy progressive and also to make Indian economy a part of the world economy. Globalization, a new key word of the 21st century to an economic event, a unifying process that has drawn lives all around that world into its fold. Globalization is best understood in terms of developing markets, deregulating business activities, privatizing state enterprises, lowering national barriers and expanding world trade and investment, all creating world community.

      Advantages                                                                                 Disadvantages

1. Borderless world                                                  1. Low growth of agriculture sector
2. Powerful corporations                                        2. Rise in rural-urban divide
3. Global citizens                                                     3. Adverse impact on autonomy of state
4. Interlinked economies                                        4. Adverse impact on culture
5. Global legal regimes                                           5. Adverse impact on environment
6. Deregulation and lowering of trade                 6. Bankruptcy of many employments

    and tariff barriers                                                      generating firms

7. Privatization and                                                  7. Change in structure of trade
8. Efficient technological innovations                 8. Unemployment
9. Human rights violation

Negative Impact of Globalization

1. Low Growth of Agriculture Sector Agriculture has been and still remains the backbone of the Indian economy. It plays a vital role not only in providing food and nutrition to the people, but also in the supply of raw material to industries and to export trade. In 1951, agriculture provided employment to 72 per cent of the population and contributed 59 per cent of the gross domestic product. However, by 2001 the share of agriculture in the GDP went down drastically to 24 per cent and further to 22 per cent in 2006-07. This has resulted in a lowering the per capita income of the farmers and increasing the rural indebtedness.

The agricultural growth of 3.2 per cent observed from 1980 to 1997 decelerated to two per cent subsequently. The Eleventh Five Year Plan aims at four per cent growth rate in agriculture.

The reasons for the deceleration of the growth of agriculture are given in the Economic Survey as: Low investment, imbalance in fertilizer use, low seeds replacement rate, a distorted incentive system and low postharvest value addition continued to be a drag on the sectors performance. With more than half the population directly depending on this sector, low agricultural growth has serious implications for the inclusiveness of growth.

The number of rural landless families increased from 35 per cent in 1987 to 45 per cent in 1999, further to 55 per cent in 2005.

2. Rise in Rural-Urban Divide [/lockercat]Impact is clearly visible on urban life but rural life in India has not changed much. People are still living in houses made of mud barring houses of few rich and progressive farmers. Government has initiated several developmental programs for uplift of living standards of people but full benefits have not reached to the targeted population due to corruption prevalent in administrative and political systems. Pradhan Mantri Gramin Sadak Yojna has resulted in road connectivity in rural India but roads are of poor quality and without drainage support. Toilet and lavatory systems are not of standard quality and not even constructed in all houses of the village. Life in rural India is miserable due to non-availability of electricity. Several states in India claim that 40, 50 or even 100 percent villages have been electrified. But supply of electricity to villages that have been electrified is not more than 3-4 hours per day.

Globalization has widened the gap between the rich and poor, rises inequalities and mounts debt of developing countries. The World Commission report found unequal distribution of growth and disparities across the nations and increasing unemployment and poverty. According to the report, the per capita income of the 20 richest capitalist countries went up to 121 times during 1985-2001. The inequality was increased in a large number of countries; while in 16 countries inequality has static and only in case of nine countries the inequality has declined. The Human Development and the ILO studies found increase in unemployment worldwide. Globalization leads to widening income gaps within the countries.

Globalization benefits within a country only to those who have the skills and the technology. The higher growth rate achieved by an economy can be at the expense of declining incomes of people who may be rendered redundant. In this context, it has to be noted that while globalization may accelerate the process of technology substitution in developing economies, these countries even without globalization will face the problem associated with moving from lower to higher technology.

3. Adverse Impact on Autonomy of StateGlobalization is also known to constrain the authority and autonomy of the state. Free trade limits the ability of states to set policy and protect domestic companies. Capital mobility makes generous welfare states less competitive; global problems exceed the grasp of any individual state; and global norms and institutions become more powerful.

4. Adverse Impact on CultureGlobalization leads to cultural homogeneity: and diminish difference; global norms, ideas or practices overtake local mores. Many cultural flows, such as the provision of news, reflect exclusively western interests and control; and the cultural imperialism of the United States leads to the global spread of American symbols and popular culture.

5. Adverse Impact on EnvironmentGlobalization has also contributed to the destruction of the environment through pollution and clearing of vegetation cover. With the construction of companies, the emissions from manufacturing plants are contributing to environmental pollution which further affects the health of many individuals. The construction also destroys the vegetation cover which is important in the very survival of both humans and other animals. Chemical Pesticides and herbicides have created health hazards, animals were pumped full of hormones and antibiotics, which has resulted in diseases among them. Such commercial, agriculture and animal raising have proved dangerous to human life. In India, Chlorine, petro-chemicals, caustic soda and such other chemical industries have sprang up in large number since 1991-92. This has encouraged import of chemicals polluting the environment.

6. Change in Structure of TradeIndia’s share in trade of agriculture products with developed countries has declined. These countries are getting many subsidies by WTO. On the other hand, developing countries are rejected on the bans of sanitary and phytosanitary consideration.

7. Bankruptcy of many Employment Generating FirmsGlobalization has rendered many companies and their operations redundant. So either they are closed, wholly or partly, or are hived off or their ancillary units are declared sick. For example, the decision of Hindustan Organic Chemicals to cease its benzene operations has caused closure of many related units. This in turn adversely affected the lives of its employees.

8. UnemploymentA blackish of globalization has been widespread unemployment either due to technological innovations or diversifications or relocations or closure of companies. Employees have also been retrenched because of the companies’ cost cutting measures due to the recent global slow down.

9. Human Rights ViolationAs the supremacy of many states decline and that of corporations rise, capacity of the latter to violate the rights of people or to create conditions in which rights becomes harder to exercise or protect, has increased tremendously. Against this backdrop it is not surprising that shocking reports surface about MNCs making considerable profits at the expense often people. The Bhopal gas tragedy of December 1984 killing over 8000 people was the most corporate human rights violations and the MNC involved was none other than the chemical giant Union Carbide.

Liberalization

Liberalization is understood to be the situation of the political economy where the means of production will be in the hands of the market and the economic efficiency is measured in terms of market-defined objectives. Major economic activities are opened for private participation keeping only key issues of welfare and other regulatory mechanism with the state. This opening up of various sectors for private participation and allowing them to manage the businesses for maximizing the profits will clearly underline the freedom available for the market to have their own labour participation practices and deployment of human resources. Liberalisation thus aims minimizing the labour participation and downsizing the workforce in the industry in the name of removing the dead wood to maximize efficiency.

In the Indian context, economic liberalization includes the following:

1. Dismantling of industrial licensing system
2. Reduction in physical restrictions on imports and import duties
3. Reduction in controls on foreign exchange, both current and capital account
4. Reform of financial system
5. Reduction in levels of personal and corporate taxation
6. Reduction in restrictions on foreign direct and portfolio investments
7. Opening up public sector domains like power, transport, banking etc
8. Partial privatization of public sector units
9. Change in approach towards industrial sickness
10. Softening of MRTP regulations

Effects of Liberalization

The economic reforms of the 1990s swept away the oppressive licensing controls on industry and foreign trade, allowed the market to determine the exchange rate, drastically reduced protective customs tariffs, opened up to foreign investment, modernised the stock markets, freed interest rates, strengthened the banking system and began privatisation of public enterprises.

Airline, telecom, TV broadcast and insurance were opened for private players. The consequences have been far-reaching.

First, the opening up of foreign trade and investment (and a competitive exchange rate) boosted exports, services and inward remittances enormously; today they account for 20 per cent of the GDP compared to 10 per cent in 1990.

Flourishing external commerce and rising foreign investment dethroned the baleful deity of “foreign exchange scarcity”, which had justified four decades of dreadful economic policy and draconian, corruption-spawning controls.

Today’s open economy is more productive and more resilient to shocks like high oil prices. With over $140 billion of forex reserves, strong exports and low external debt, the recent surge in global oil prices has not derailed the economy’s forward momentum.

Second, the mix of industrial decontrol, greater foreign competition and a modernised capital market fostered the rise of strong Indian firms, built by unshackled entrepreneurs able to compete globally. Today’s household brands like Infosys, Jet, Airtel and Videocon hardly existed a decade ago.

Established companies like Tata, Reliance and HLL reinvented themselves to meet competition. This led to larger advertising budgets, which sustained the media explosion (print and TV) of the past decade that has helped to mould a new mindset.

Third, the post-crisis reforms of the early 1990s restored (then improved) the growth momentum of the 1980s and ensured a quarter century of nearly 6 per cent economic growth. With average living standards rising at almost 4 per cent a year, the poverty ratio dropped below a quarter of the population and the catch phrase of “a rising middle class” gained substance. Today, over a 100 million Indians live in households with incomes between Rs.2 lakh and Rs.10 lakh a year.

Subscribe on YouTube