Business

Environment

B.N. Ghosh

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 Chapter 34
CURRENT INDUSTRIAL POLICIES
New Economic Policy and
Liberalization in India

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 Learning Objectives
• The Indian economic crisis of 1990–91

• The impact of the new economic policy (NEP)

• Why the second-generation reforms are required in India

• The economic reform proposals introduced by the Government of

India in 2012

• The interrelationship between economic liberalization and the

business environment in India

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India’s economic crisis of 1990-91
• Macroeconomic crisis in a country is the result of weak macro
fundamentals. The weak fundamentals may arise out of wrong policy,
inappropriate implementation of policies, mismanagement of an
economy, and a host of politico-economic factors.
• Weak macroeconomic fundamentals may include high capital–
output ratio, high short term debt/reserve ratio, high RER, slowdown
in export growth, large current account deficits, high inflation rate,
and fall in external reserve .

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Macroeconomic Vulnerability and
the Crisis
• Escalating current account deficit
• Dwindling foreign exchange reserve
• Incidence of hyperinflation
• The appreciation of RER and fall in export
• Rise of development-induced import
• Mounting foreign debt and debt servicing
• Juxtaposition of twin deficits
• Huge losses in the public sector
• Remittances reduced
• Inefficiency and high-cost economy
• The negative contagion effect
• Growth rate moving up but non-sustainable

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 The new economic policy
(economic reforms)
Reforms under Narasimha Rao Government

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 Major Policy Reform Proposals
• The inefficient, loss-making, and vulnerable public sector
enterprises were privatized.
• Both domestic and foreign investments were deregulated.
• Marginal tax rates were reduced in many cases.
• Inflation controlling measures were introduced.
• In the industrial sector, industrial licensing was abolished except 18
nationally important industries that were subjected to licensing.
Industrial regulation was rationalized.
• New laws were introduced for security market intermediaries.
• The Controller of Capital Issues that decided the prices and
number of shares that a firm could issue was abolished.

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 Impact of new economic policy
• The impact of the NEP was not clearly all positive and favourable
or negative and unfavourable.

• The immediate impact of the NEP in many ways was not very
perceptible and remarkable.

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 Second generation reforms: the
suggestive trajectory
• The rate of inflation must be brought down to the minimum level
possible.
• One of the reasons why capital inflow is low in India is that the real
rate of interest is trivial (may be between zero and one) and much
lower than the world average rate of interest.
• India cannot attract as much FDI as China because of political and
economic instability in policy making and its implementation.
• Indian labour is mostly boisterous, sensitive, and potentially
violent in nature.

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 Second generation reforms: the
suggestive trajectory
• The second-generation reforms should also try to initiate the
change in the occupation structure of the labour force.
• The creation of more jobs for the unemployed and underemployed
people will be a real challenge.
• Poverty reduction is still a critical area where the second-
generation reforms must seriously work.
• Second-generation reforms must address the issue of deteriorating
environment and ensure pollution-free environment.

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Economic reform proposals of 2012
• Permission of 51 per cent FDI in multi-brand retails.
• Foreign direct investment will also be allowed in the Indian
aviation sector to the extent of 49 per cent.

• Foreign investment is also now allowed to the extent of 49 per

cent (proposed) in the insurance and pension sectors that are
suffering from lack of adequate finance and resilience.
• Plan to introduce further disinvestment to some of the public
sector units (PSUs).

• One of the most critical areas of reform will be fiscal corrections.

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 Liberalization and business
environment in India
A free world provides a congenial environment to innovate and interact
with the business leaders of the world for the following reasons:

• New goods and services for the consumption of the people in India
and abroad
• New method or technique of production
• New market and contacts for the expansion of business
• Exploration of new sources of raw materials and technology
• New method of organization of industries to enhance efficiency and
profit

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