Question

Write short notes

1. Need for NEP (New Economic Policy) of 1991

2. Liberalisation.

Answer 1

1. The following points highlight the need for NEP in India.

1. India was experiencing a rising fiscal deficit since 1980’s because of the fact that while the expenditure of the government grew continuously (due to interest payments, defence expenditure, etc.), the revenue could not rise much. As a result there was instability in the economy.
2. Prior to the reforms the exports and imports as well as the foreign exchange transactions were highly restricted. This resulted in adverse BOP situation.
3. The Gulf war in 1991 that resulted in the rise in the prices of oil further worsened the BOP situation.
4. The foreign exchange reserves fell to an extremely low level.
5. India was caught in a situation of debt trap wherein total debt amounted to 62.5% of the GDP of India.
6. Due to high restrictions and controls the industrial sector suffered from inefficiency and lack of competitiveness.
7. The growth rate was extremely low and even reached negative in 1991.
8. Collapse of the Soviet Union that was the major trading partner of India also affected the Indian economy.
9. Inflation rose to extremely high levels.

To overcome such situation the Indian Government approached IMF and World bank for short-terms loans. However, the institutions agreed to grant loans on the conditions that India would introduce structural reforms in the country and remove restrictions on trade, thereby, open up the economy. In accordance with this New Economic Policy was introduced in 1991.

2. Liberalisation refers to the freedom of an economy from direct or physical controls (such as industrial licensing, price control, import licensing, etc) imposed by the government. It implies greater dependence on the market for taking various economic decisions. In other words, it refers to a gradual move from a planned socialist economy towards a market economy. As part of its liberalisation policy, India has adopted a delicensing policy, encouraged inflow of FDI and foreign technology, passed FEMA, established SEBI and abolished the MRTP Act.