Ch 6 New Economic Reforms

Question 1

The basic components of the NEP

Answer 1

Liberalisation (Freedom for producing goods)
Privatization (Involving private sectors in ownership or operation of state owned enterprises)
Globalization (increasing openness to the world)

Question 2

Need for NEP

Answer 2

High Fiscal Deficit
BOP crisis
Fall in foreign exchange reserve 
Inflationary spiral
Poor performance of PSU

Question 3

Economic reforms under liberalization

Answer 3

Industrial sector
Abolition on licensing
Contraction of public sector
Freedom to import capital goods

Financial sector
RBI became facilitator(let’s commercial bank decide interest rate) rather than regulator (decides interest rate for the country )
Foreign Institutional Investment was now allowed in Indian Financial Market

Fiscal Reforms
Taxation structure was modified to make it more simple and moderate so that tax evasion is reduced

External sector Reforms
Foreign Exchange reforms - 1991 devaluation was conducted so that supply of foreign exchange is increased in the Indian economy.
Foreign Trade Policy Reforms - tariff restrictions were moderated, import quotas and import licensing was abolished

Question 4

Need for privatization

Answer 4

Industrialization was completely dependent upon PSU according to IPR 1956 but they couldn’t give industrialization a push, so private players were needed for industrialization
Dead weight of non profitable PSU on other PSU (NAVRATAN)
Inefficiency and corruption in PSU

Question 5

Gains and losses of privatization

Answer 5

Losses
Social justice would be neglected
Goods for weaker portion of the society would be discontinued (non profitable)

Profits
Increased efficiency (self interest over social interest)
Would increase competition for PSU (would lead to growth of PSU)
Promotes diversification of production ( increased profits)

Question 6

Strategies for Globalization

Answer 6

Increase in Equity limit for FDI ( from 40% to 50%-100%)
Long term trade policy
Reduction in tariffs
Withdrawal of Quantitative restrictions (2001)

Question 7

Merits and demerits of the NEP

Answer 7

DeMerits
Neglect of agriculture
Urban concentration of growth process
Economic Colonialism (MNC took over the domestic producers)
Lopsided growth process (only service sector)

Merits
Shift from monopoly to competitive market
Recognition of India as an emerging economic power
Increase in foreign Exchange reserves ( enhances economic confidence of global investors)
Flow of private foreign investment (FDI)
A check on inflation and fiscal deficit