LPG

 

Emergence of NEP after Economic crisis

·       India government sought financial aid from the International Bank for Reconstruction and Development (IBRD, popularly known as World Bank) and IMF due to an economic crisis.

·       The government received a $ 7 million crisis, with the condition to liberalise the economy.

·       India accept IMF and World Bank conditions and introduced the New Economic Policy (NEP)

·       NEP aimed to create a competitive economy and remove barriers for firm’s entry and growth.

·       Reform adopted in NEP are broadly classified as

           i.         Stabilisation Measures: Short – term measure to fix Balance of Payment (BOP) issues and control inflation.

          ii.         Structural Reform Measures: Long-term reforms to enhance economic efficiency and increase international competitiveness.

The various structural reforms are categorized under liberalisation, privatisation and globalisation 

Liberalisation

It is defined as allowing the private sector companies to operate business transactions in a country with fewer restriction. In developing countries, it also refers to opening the economy to multinationals and foreign investments.

The objectives of liberalisation are as follow

·       To increase competition among domestic industries.

·       To increase foreign capital formation and improve the technology.

·       To decrease the debt of the country.

·       To encourage cross border trade.

·       To expand the size of the market.

Economic Reforms under Liberalisation

Reforms were initiated in the 1980s in areas of industrial licensing, export- import policy, technology, fiscal policy and foreign investment.

In 1991, broader reforms under liberalisation were implement across various sector, as discussed below

Industrial Sector Reforms

Reform	Explanation
Abolition of Industrial Licensing	Removal licensing required for all industries, except for a sensitive sectors like alcohol, cigarettes, hazardous chemical, explosives, electronics, aerospace, drugs and pharmaceuticals
Contraction of Public Sector	The number of industries reserved for the public sector reduced to only three i.e. railways, atomic energy and defense.
De-reservation of Production of Goods	Removed restrictions on goods reserved for small scale industries (SSIs), allowing any scale of businesses to participate.
Price Fixation and Distribution of Products	Allowed the market to determine prices for many industrial products.

Financial Sector Reforms

Reform	Explanation
Competition from Private Banks	Opened banking to private (domestic and foreign) banks, increasing competition and expansion of services for customers.
Change in Role of RBI	Role of RBI shifted from regulator to facilitator, allowing financial institutions more autonomy i.e. they can take decision on certain matters without consulting RBI.
Increasing in foreign Investment Limit	Raised the limit on foreign  investment in banks to 74%, enabling greater FII involvement in financial markets

Fiscal / Tax Reforms

Reform	Explanation
Simplification of Direct Taxes	Lowered rate of income corporate taxes, encouraging saving and voluntary income. Disclosure simplifies many procedures for better compliance by tax payers.
Reduction of Indirect Tax Rates	Reduced rates on goods and services; introduced Goods and service Tax (GST) in 2017 to unify tax system.

 

Foreign Exchange Reforms

Reform	Explanation
Devaluation of Rupee	Devaluation in 1991 led to increased foreign exchange inflow, helping to resolve the balance of payments crisis.
Market Forces	After 1991, exchange rate in India was determine by market forces of demand and supply.

Trade and Investment Policy Reforms

·       Aimed to liberalise foreign trade and promote technological efficiency.

·       Abolished import quotas and reduced tariff rates.

·       Import licensing policy abolished except for hazardous and environmentally sensitive industries.

·       Export duties were eliminated to improve international competitiveness of Indian goods.

·       Quantitative restrictions on imports of manufactured consumer goods and agricultural products was also removed

Recent Reforms Introduced under Liberalisation

Recently the following reforms were introduced to encourage the process of liberalisation

Demonetisation

Refers to the process where the government removes the status of a currency note as a legal tender, meaning it is no longer accepted for transactions in the market.

India has experienced demonetisation three times

·       1946 First demonetisation.

·       1978 Second demonetisation,

·       2016 Third demonetisation (on 8th November, 2016), when 500 and 1,000 currency notes were banned by Prime Minister Narendra Modi.

Objectives of Demonetisation

·       To make India corruption free.

·       To control escalating price rise.

·       To curb black money.

·       To stop fund flow to illegal activity.

·       To make people accountable for every rupee they possess and pay income tax return.

·       To make a cashless society and create a Digital India.

Effects of Demonetisation

·       With banning of 500 and 1,000 notes, the country moved one step towards digitalisation. In the age where almost every person uses a mobile phone, the concept of online wallets came out to be very successful. Online wallet refers to an electronic device that allows an individual to make electronic transactions.

·       The announcement of the demonetisation of the currency has caused huge inconvenience to the people.

·       Cash crunch became a major problem due to the unavailability of small currency denominations of the last class cannot be determined

 

 

Goods and Services Tax (GST)

The term GST has been defined in Article 366 (12A) to mean 'any tax on supply of goods or services or both except taxes on supply of the alcoholic liquor for human consumption." It is a value added tax levied on most goods and services sold for domestic use.

It is a destination-based consumption tax, meaning the final seller passes the GST to the consumer, but businesses remit it to the government.

The purpose of GST is to generate revenue, reduce tax evasion and create a unified national market with a single tax structure 'one nation, one tax and one market'.

 

Objectives of GST

·       To eliminate classification dispute between goods and services.

·       To bring uniformity in tax rates and automated compliances.

·       To ensure availability of input tax credit across the value chain and avoid cascading effect.

·       To ensure simplification of registration, filing of return, tax administration and compliance.

·       To harmonise tax base, laws and administration procedures across the country.

·       To minimise tax rate slabs and prevent unhealthy competition among states.

·        To ensure free movement of goods across the country without any additional tax

Characteristics of GST

·       Applicable to whole of India, including Jammu and Kashmir

·       Applies to the supply of goods and services, not on sale of production of goods and services.

·       Based on destination-based consumption tax principle

·       Import of goods and services subject to IGST and custom duties. There are four tax slabs ie. 5%, 12%, 18%, 28% and also, a zero-rated tax for SEZ areas

·       Mandatory GST registration for businesses with turnover exceeding 20 lakh (10 lakh for North Eastern and hilly areas).

·       Subsumed 17 indirect taxes and 23 cesses.

·       Provides benefits of input tax credit, Le. to subtract taxes paid on inputs from taxes paid on outputs Includes anti-profiteering provisions enforced by the National Anti-Profiteering Authority (NAA)

Types of Taxes under GST

1. Central Goods and Services Tax (CGST) It is levied on intra-state transactions related to goods and services the centre.

2. State Goods and Services Tax (SGST) It is levied on intra-state transactions related to goods and services states.

3. Integrated Goods and Services Tax (IGST) It is levied on inter-state transactions related to goods and services and is collected by the centre. It is equivalent to the sum total of CGST and SGST.

Privatisation

 It is the process of transferring the ownership or management of the public sector units to the private sector.

 Objectives of Privatisation

·       Improving the financial condition of the government.

·       Raising funds through disinvestment.

·       Reducing the workload of public sector.

·       Increasing the efficiency of the government undertakings.

·       Providing better goods and services to consumers.

·       Encouraging healthy competition within an economy.

·       Making way for Foreign Direct Investment (FDI).

Globalisation

·       It means integrating the domestic economy with the world economy.

·       It involves creation of network to link up economic, social and geographical boundaries of the world.

·       The objectives of globalisation are as follows

·       To help the economy to adopt new and flexible methods of production.

·       To increase the flow of foreign capital into the country.

·       To improve the quality of goods produced in the economy.

·       To improve the working of the banking and the foreign sector.

·       To accelerate the rate of human development in the country.

·       To enhance global integration and create a new world order which encourages free trade between nations.

Steps to Promote Globalisation

Steps	Explanation
1. Increase in Equity Limit of Foreign Investment	The general equity limit for Foreign Direct Investment (FDI) has been raised from 40% to 51%. In 47 high-priority industries and export trading houses, FDI is allowed up to 100%.
2. Partial Convertibility	It means sale and purchase of foreign currency at a price determined by the market forces of demand and supply. In India, there is partial convertibility as there are restrictions on capital account transactions, though the rupee is fully convertible in the current account.
3. Liberal Foreign Trade Policy	A long-term liberal foreign trade policy has been implemented which encourages free trade among countries.
4. Reduction in Tariffs	Custom duties have been reduced drastically. Before 1991, custom duties were as high as 400%, but post 1991, maximum rate of duty is only 10%.

Outsourcing: An Outcome of Globalisation

Outsourcing refers to contracting out some of its activities, which were earlier performed by an organisation, to a third party.

·       Outsourcing involves hiring external sources for services previously provided internally, such as legal advice, computer services and advertising.

·       The practice of outsourcing has increased due to advancements in communication and the growth of Information Technology (IT).

·       Many services such as voice-based business processes (popularly known as BPO or call centres), record keeping. accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching are being outsourced by companies in film developed countries to India.

·       Multinational corporations and even small companies prefer outsourcing their services to India because

- Skilled workers are available at lower wage rates.
- There has been significant growth in India's IT industry in India.

International Organisations Promoting Globalisation

The following international organisations play a crucial role in the process of globalisation

Organisation	Key Points
World Trade Organisation (WTO)	Purpose Only international organisation concerned with international trade laws. Main Objective Ensure smooth and free trade, promote multilateral trade agreements. History Founded in 1995, as the successor to General Agreement on Trade and Tariff international markets. Functions Administers multilateral trade agreements, ensures equal opportunities in (GATT, established in 1948). Key Features Establishes a rule-based trading regime, preventing arbitrary trade restrictions, ensures optimum utilisation of world resources.
International Monetary Fund (IMF)	Foundation Conceived at the Bretton Woods Conference (1944), established in 1946, and began operations from March 1947. Main Objective Administer a code of conduct for international liquidity of its member countries, provide short-term loans to countries with temporary balance of payments deficit Functions Monitors global economic stability, offers policy advice and financial assistance to member countries.
International Bank for Reconstruction and Development (IBRD)	Foundation Established in 1944 at the Bretton Woods Conference alongside the IMF. Headquarters Commonly known as the World Bank, located in Washington DC. Membership Comprises 188 member countries. Main Focus Provides loans to government to rebuild and develop essential infrastructure (railroads, highways, etc.).

 

Assessment or Appraisal of LPG Policies

The reform process has completed three decades since its introduction. Let us now look at the performance of the Indian economy during this period. LPG (Liberalisation, Privatisation and Globalisation) policies have had both positive and negative effects on the economy of India.

Positive Effects	Negative Effects
Vibrant Economy ·       Significant GDP growth from 5.6% (1980-91) to 8.2% (2007-12). ·       Strong growth in the services sector-9.8% (2014-15).	Neglect of Agriculture -Decline in agricultural growth leading to rural distress. Reduced public investment in agricultural infrastructure. -Increased costs for small farmers due to subsidy removal and international competition. -Rise in foodgrains prices due to shift from production for domestic market to production for export market.
Flow of Private Foreign Investment ·       Rise in foreign investment (FDI and FII): from US $100 million (1990-91) to US $30 billion (2017-18).	Uneven Growth in Industrial Sector -Domestic manufacturers face competition from cheaper imports -Inadequate investment in infrastructure hampers industrial grow
Increase in Foreign Exchange Reserves ·       Reserves rose from about US 5 6 billion (1990-91) to US $ 413 billion (2018-19).	Less Employment Opportunities Despite GDP growth, job creation has not kept pace with economic expansion.
Stimulant to Industrial Production ·       Increased productivity and exports in sectors like auto parts, IT and textiles.	Failure of Disinvestment Policies -Disinvestment targets were not met and assets of PSEs were undervalued and sold to private sector. -Earnings from disinvestment used to cover revenue shortfalls n than for development of PSEs.
Role of Private Sector ·       Enhanced participation of the private sector after abolishing industrial licensing.	Failure of Fiscal Policies -High tax evasion still persists and reduction in custom duties reduced revenue generation. -Tax incentives for foreign investors further diminish tax revenues Concentration of Growth Process Growth concentrated only in selected areas in service sectors (telecommunications, IT, finance, etc.)