New Economic Policy of India Since 1991 (Reforms)

The following points highlight the four major economic reforms under new economic policy of India since 1991.

Reform 1# De-Reservation of Industries of the Public Sector:

The new industrial policy 1991 has been adopted under which far-reaching structural reforms have been initiated to lift excess direct controls and regulations on industries and to ensure a free-market oriented economic system.

The list of industries reserved for the public sector has been pruned. Now, only 6 industries remain reserved for the public sector.

Among the industries reserved earlier for the public sector were many core industries like iron and steel, electricity, air transport, ship building, heavy machinery industries such as heavy chemical plants and telecommunication cables and instru­ments. The new industrial policy of 1991 threw open all these industries for the private sector for investment and growth.

Thus the new policy indicates the Government’s intention to invite a greater degree of participation by the private sector in important areas of the economy. The six industries which continue to be reserved for the public sector are in areas where security and strategic consid­erations predominate. According to the new policy, the resources in the public sector will now be used for the development of strategic, high-technology industries and essential infrastructure areas and for social sectors such as education, public health and poverty alleviation programmes.

Reform 2# Liberalisation: Abolition of Industrial Licensing System:

Until 1991 the Indian industrial sector had functioned under a system of tight controls and regulations represented by industrial licencing which meant to allocate the scarce resources towards building the industrial base of the economy. By the year 1991 the Indian industrial economy had a quite wide and diversified base, the new policy abolished all industrial licencing irrespective of the level of investment except for 15 industries for which licence was still required.

These industries are those which are essential for security and safety purposes and for protection of environment. For granting of licence for even these 15 industries procedure has been greatly simplified. For getting licences only certain locational guidelines are to be fulfilled so that polluting industries should not cluster around the major urban centres. Besides, restrictions by Monopolistic and Restrictive Act (MRTPA) for expansion of big firms were also relaxed.

Reform 3# Privatisation of Public Sector Enterprises

An important aspect of new industrial policy of the Government is that it should not operate commercial enterprises. With that end in view the Government decided to disinvest the public enterprises. The Government can sell its enterprises completely to the private sector or disinvest a part of its equity capital held by it to the private sector companies or in the open market.

Therefore this policy of public sector disinvestment has also been called the policy of privatisation. Through disinvestment or privatisation, the Government can mop up a good amount of resources which can be used for various purposes. The released resources can be used to restructure and strengthen the public sector enterprises which are potentially viable. These resources can also be used to pay back a part of public debt. These resources can also be used to finance budget deficits.

What are the reasons for the policy of privatisation or public sector disinvestment. First, resources available with the Government are scarce. The Government needs resources to reduce its budget deficit. The Government urgently requires resources to make investment in infrastructure, education, public health and for poverty alleviation programmes. Resources released through disinvestment can be used for investment in these crucial sectors. Second, a good number of existing public enterprises are working inefficiently and incurring huge losses.

Accordingly, a part of the economic reforms policy, the Government started reforms in public sector enterprises.

The main elements of Government policy towards Public Sector Enterprises (PSU) are:

(1) Disinvestment of Government equity in all non-strategic Public Sector Undertakings (PSU) to 26 per cent or lower if necessary.

(2) Those public sector enterprises which are potentially viable have to be restructured and revived.

(3) Those Public Sector Undertakings (PSU) which cannot be revived would be closed down.

The Government has now evolved a fair, transparent and equitable procedure for disinvestment in selected public sector enterprises. The achievement made with regard to disinvestment of Public Sector Undertakings which started in 1991-92 with the sale of minority stakes in some public sector undertakings are given in Table 5.1. From 1999-2000 to March 2003 the disinvestment of public enterprises was mainly through sale of Government equity to strategic private partners.

Under this policy of disinvestment through strategic sales, 100 per cent equity of Modern Food was sold to Hindustan Lever. 51 per cent of Government equity holding of BALCO was sold to private sector firm Sterlite Industries, 51 % of Government equity holdings in CMC was sold to TATA, 25% of Government equity in VSNL was sold to TATA. 25 per cent of Government Equity in IPCL was sold to Reliance Industries at Rs. 1490 crores.

However, in the year 2003-04 policy of disinvestment through public sale of government shares in market of various public enterprises was adopted. Under it in August 2003 Government raised Rs. 900 crores by selling its equity in Maruti Udyog Ltd. to the general public in the open market. Similarly, in 2003-04 public sale of a part of government equity shares of public sector undertakings; IBP Ltd., DCIL, GAIL, ONGC was made and a good amount of resources was raised.

As a result in 2003-04, Government’s disinvestment receipts of Rs.15, 545 exceeded the target. After 2003-04, under UPA in 2003-04 Government process of disinvestment slowed down due to the opposition by Left Parties which were then alies of the government. In 2004- 05 only Rs.2765 crores and in 2005-06 t 1568 crores were raised through public sector disinvestment, 2006-07 public sector disinvestment was kept on hold due to stiff opposition by the left parties except that disinvestment in Maruti-Udyog Ltd was undertaken and Rs.2367 crores were raised.

Reform 4# Globalisation:

The following measures for globalisation of the Indian economy were taken:

(i) Welcoming Private Foreign Investment and Foreign Technology:

Till 1991, foreign investment and import of foreign technology was regulated tightly in India. In the case of foreign technology agreements sought by Indian firms as well as foreign investment, it was necessary to obtain specific prior approval from the government for each project. This involved delays and hampered business decision making in the import of technology by Indian firms.

Under the new economic policy for a selected list of high technology and high investment priority industries, firms receive automatic approval to make foreign technology agreements within certain guidelines. This policy measure is expected to remove the delay and uncertainty which earlier clouded the relationships between Indian and foreign firms.

Further, the government has liberalised its policy regarding foreign investment. To attract private foreign investment, it has been decided to grant automatic permission to private foreign investors to invest up to 51 per cent of the total equity shares in 34 high priority industries if certain norms are fulfilled. This facility will be available to those firms which are able to finance their capital equipment imports through their foreign equity.

This is a major departure from the previous policies which required case-by-case approval of foreign investment normally limited to 40 per cent equity participation. The priority sector includes power generation and petroleum refining. Further, the government has given a guarantee of 16 per cent return on foreign investment in priority sectors. There is also proposal to allow automatic clearance for foreign financial and technical collaboration with Indian firms.

(ii) Trade Liberalisation:

In a bid to open up the economy, under the new economic policy quantitative restrictions, that is, import licencing for imports of goods have been removed. Further, to promote competitiveness, efficiency and globalisation of the Indian economy import duties have been reduced to the 20 per cent (excluding agricultural and dairy products) with effect from Jan. 9, 2004.

The new thinking is that with the cheapening of imported goods, the Indian firms will try to increase their efficiency and reduce costs so that their products can compete with the foreign products. In this way they will be able to expand their exports.

(iii) Currency Convertibility and Floating of Indian Rupee:

Another major step taken towards liberalisation of the Indian economy has been to make the Indian rupee fully convertible on current account since March 1993. This implies that for the purpose of foreign trade and travel you can convert the rupees into dollars and dollars into rupees in the foreign exchange market at the market determined exchange rate.

That is, the foreign exchange rate of rupee is now not fixed but liable to change as demand for and supply of foreign exchange change. In July 1991, the Indian rupee was devalued by about 20 per cent. But now with market-determined exchange rate, the Indian rupee can depreciate or appreciate depending upon demand and supply conditions.