Economic Reforms – LPG Reforms

New Economic policy - 1991

LPG – Liberalization, Privatization, Globalization

1. India used to follow mixed economic system – Taking the advantages of

both the capitalist and socialist economic system.
2. India after independence started slowly maintaining its developmental
policies in agricultural sector and other sectors.
3. But in 1991 – India met with an economic crisis relating to its external
debt.
4. Indian government could not able to repay its debt which was taken from
abroad- due to minimal foreign exchange reserves left.
5. The foreign exchange reserves were left only for import payments for
fortnight.
6. This led to raise in price levels of the essential goods in the economy.
7. The reason behind such crisis was inefficient management of the
economy by the Indian government.
8. The Indian economy suffered with deficits and government need to
approach international financial institutions to resolve the issue.
9. Indian government could not able to generate enough income through
internal sources such as tax.
10.The income generated by the government was used in social sector and
defense, where there were no immediate returns.
11.Imports grew at a very high rate and the economy was suffering less
foreign exchange reserves.
12.Indian government approached IBRD – International bank reconstruction
and development (World Bank), IMF – International monetary fund and
received $7 billion.
13.The Financial institutions given loan with some conditions
• India needs to open its economy
• Restrictions on the private sectors need to be removed.
• The role of government need to be limited.
14. India agreed on the conditions and announced NEW ECONOMIC
POLICY -1991
New Economic Policy – 1991:
 1. NEP created competitive environment in the economy, as it removed the
barriers of entry of the firms.
2. NEP divided in to two groups:
• Stabilization measures – Short term
• Structural measures – Long term
3. Stabilization measures – to correct the measure s balance of payments, to
bring inflation under control, to maintain the foreign exchange reserves.
4. Structural measures: Liberalization , Globalization, Privatization
Liberalization:
• Industrial sector
• Financial sector
• Tax reforms
• Trade and Investment
• Foreign exchange reserves.

Deregulation of Industrial sector:

1. During the NEP, the liberalization policy enforced deregulation in various
ways in the industrial sector.
• Industrial licensing was removed.
• Allowing the private sector in to different industries.
• Removing restrictions on the small-scale industries
• Removed the control over the price fixation.
2. Licensing was not abolished completely it was implanted on a few
industries – Alcohol, drugs, pharma, chemical industry, explosives,
cigarattes.
3. Some industries were reserved to public sector like - railways, atomic
industries.
4. The small scale industries were allowed to do business in most of the
industries- which is called as deserving of small scale industries.
Financial sector Reforms:
1. Financial sector includes – commercial banks, stock market, foreign
exchange market, investment banks.
2. Financial sector is regulated by RBI in INDIA
3. Before the NEP RBI used to be the regulator of the financial sector,
but after NEP RBI role was reduced from regulator to the facilitator.
 4. Which means financial sector allowed to take their own decision on
their operations with out seeking permission from RBI.
5. This led to introduction of private institutions investment in the
financial sector.
6. Foreign investment raised to 74%
7. But still there are certain decisions are left in the hands of RBI which
made RBI as a facilitator – deciding the interest rate, ratio of amount
of deposits to keep with in bank.
8. NEP also introduced FII- Foreign institutional investment, where
various investors like, mutual funds, pension funds, foreign funds can
invest in Indian financial sector.
Tax Reforms:
1. Reforms on Taxation policy and public expenditure – Fiscal policy.
2. Taxes are of two types – Direct tax and indirect tax
3. Under the main reason of tax evasion was huge taxation, government
made sure it was moderated.
4. Government put a line on its expenditure.
5. Slowly government to improvise its taxation policy also introduced GST
– Goods and service tax.
Foreign exchange reserves:
1. Devalued the domestic currency (rupee)
2. Due to which the inflow of foreign exchange raised.
3. Imports becomes costlier and exports becomes cheaper
4. The domestic products in the foreign market becomes cheaper.
Trade and investment policy:
1. This step was taken to increase international competitiveness, to raise
foreign investment and the industrial production.
2. The aim was also to promote the efficiency of domestic industries by
adopting modern technology.
3. Removal of Quantitative restrictions on the imports
4. Reductions of import tariff rate
5. Removal of import licensing expect on hazardous products and
environmentally sensitive products.
Assertion: Foreign exchange reforms under liberalization policy focuses on the
stabilization measures.
Reason: Stabilization measures in the NEP introduced to resolve the BOP crisis
and to remove inflation.
Privatization:
1. Two ways (i) by the withdrawal of the government ownership and
management of the public sector companies (ii) by outright sale of the
public sector company.
2. Disinvestment – Liquification of assets.
3. When the part of equity is sold to the public of PSEs is known as
disinvestment.
4. Reason for the sale of equity:
• To get the financial discipline (More revenue and optimum
utilization of resources)
• To introduce modernization.
a. Encourage the inflow of FDI (Foreign direct investment)
5. Government made efforts to develop PSU’s – providing the status of
autonomy – Maharatnas, mini ratnas, Navratnas.
6. Profitable PSEs were originally formed during the 1950s and 1960s when
self-reliance was an important element of public policy.

Globalization:
1. Integrating the Indian economy with the global economy.
2. No geographical, social, and economic boundaries.
3. Objective: Borderless world.
4. Outsourcing: Company hires regular service, from external sources,
mostly from other countries, which was previously provided internally or
from with in the country.
5. World trade organization: (1995) (WTO)
• The successor of GATT – General agreement on trade and tariff
(GATT)- 1948
• Encourage multilateral trade agreements.
• Enlarges the production and trade of services.
• Ensures the optimum utilization of worlds resources and protect
the environment.
• To establish rule-based trading regime and avoid arbitrary
restrictions.
INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT
1. Growth and Employment:
 • The growth of the economy was not as per the expectations.
• Employment in all the sectors was not sufficiently generated in
the economy.
2. Reforms in the agricultural sector:
• Reforms could not provide any positive result to the sector.
• Decrease in the public investment.
• Removal of fertilizer subsidy – due to increase in the cost of
production.
• Removal of MSP – minimum support price.
• Removal of quantitative restrictions.
• Indian farmers were not ready to face international competition.
• Farmers in the process of gaining more profits, they shifted from the
production of food crops to cash crops and this led to the raise in the
price of food crops due to decrease in the supply of food crops.
3. Reforms in the industry:
• Growth of the sector is slow.
• Domestic industry products face lesser demand, due to cheaper imports
availability, lack of infrastructure and investment.
• Domestic producers facing greater competition in the foreign market.
• The domestic industry is not ready with to international platform.
4. Disinvestment:
• Every year government fixes the target for the disinvestment.
• Reasons for disinvestment was decrease in the revenues of the
government.
5. Reforms of fiscal policies:
• Tax rate was reduced.
• To encourage imports reduced to the tariff rates.
• Encourages the investments.
• This led to the decrease in the revenue of the government.

Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a value-added tax levied on most goods
and services sold for domestic consumption. The GST is paid by consumers, but
it is remitted to the government by the businesses selling the goods and services.
Main Features of GST
▪ Applicable On supply side: GST is applicable on ‘supply’ of goods or
services as against the old concept on the manufacture of goods or on sale
of goods or on provision of services.
▪ Destination based Taxation: GST is based on the principle of
destination-based consumption taxation as against the present principle of
origin-based taxation.
▪ Dual GST: It is a dual GST with the Centre and the States
simultaneously levying tax on a common base. GST to be levied by the
Centre is called Central GST (CGST) and that to be levied by the States is
called State GST (SGST).

o Import of goods or services would be treated as inter-state supplies

and would be subject to Integrated Goods & Services Tax (IGST)
in addition to the applicable customs duties.
▪ GST rates to be mutually decided: CGST, SGST & IGST are levied at
rates to be mutually agreed upon by the Centre and the States. The rates
are notified on the recommendation of the GST Council.
▪ Multiple Rates: Initially GST was levied at four rates viz. 5%, 12%,
18% and 28%. The schedule or list of items that would fall under these
multiple slabs are worked out by the GST council.
▪ Reforms Brought About by GST
o Creation of common national market: By amalgamating a large
number of Central and State taxes into a single tax.
o Mitigation of cascading effect: GST mitigated ill effects of
cascading or double taxation in a major way and paved the way for
a common national market.
o Reduction in Tax burden: From the consumers’ point of view,
the biggest advantage would be in terms of reduction in the overall
tax burden on goods.
o Making Indian products more competitive: Introduction of GST
is making Indian products more competitive in the domestic and
international markets owing to the full neutralization of input taxes
across the value chain of production.
 o Easier to administer: Because of the transparent and self-policing
character of GST, it would be easier to administer.
Advantages of GST
For the Government
▪ Create a unified common market: Will help to create a unified
common national market for India. It will also give a boost to foreign
investment and “Make in India” campaign.
▪ Streamline Taxation: Through harmonization of laws, procedures and
rates of tax between Centre and States and across States.
▪ Increase tax Compliance: Improved environment for compliance as all
returns are to be filed online, input credits to be verified online,
encouraging more paper trail of transactions at each level of supply chain;
▪ Discourage Tax evasion: Uniform SGST and IGST rates will reduce the
incentive for evasion by eliminating rate arbitrage between neighbouring
States and that between intra and inter-state sales.
For Overall Economy
▪ Bring about certainty: Common procedures for registration of
taxpayers, refund of taxes, uniform formats of tax return, common tax
base, common system of classification of goods and services will lend
greater certainty to taxation system;
▪ Reduce corruption: Greater use of IT will reduce human interface
between the taxpayer and the tax administration, which will go a long
way in reducing corruption;
▪ Boost secondary sector: It will boost export and manufacturing activity,
generate more employment and thus increase GDP with gainful
employment leading to substantive economic growth;
▪ Ultimately it will help in poverty eradication by generating more
employment and more financial resources.
For the Trade and Industry
▪ Simpler tax regime with fewer exemptions.
▪ Increased ease of doing business.
▪ Reduction in multiplicity of taxes.
 ▪ Elimination of double taxation on certain sectors.
▪ More efficient neutralization of taxes especially for exports
▪ Making our products more competitive in the international market.
▪ Simplified and automated procedures for registration, returns, refunds and
tax payments.
▪ Decrease in average tax burden on supply of goods or services.
For Consumers
▪ Transparent prices: Final price of goods is expected to be transparent
due to seamless flow of input tax credit between the manufacturer,
retailer and service supplier.
▪ Price reduction: Reduction in prices of commodities and goods in long
run due to reduction in cascading impact of taxation;
▪ Poverty eradication: By generating more employment and more
financial resources.
For the States
▪ Expansion of the tax base: As states will be able to tax the entire supply
chain from manufacturing to retail.
▪ More economical empowerment: Power to tax services, which was
hitherto with the Central Government only, will boost revenue and give
States access to the fastest growing sector of the economy.
▪ Enhancing Investments: GST being destination based consumption tax
will favour consuming States. Improve the overall investment climate in
the country which will naturally benefit the development in the States.
▪ Increase Compliance: Largely uniform SGST and IGST rates will
reduce the incentive for evasion by eliminating rate arbitrage between
neighbouring States and that between intra and inter-state sales
Exemptions under GST
▪ Custom duty will be still collected along with the levy of IGST on
imported goods.
▪ Petroleum and tobacco products are currently exempted.
▪ Excise duty on liquor, stamp duty and electricity taxes are also exempted.
Challenges Of GST
▪ SCGT and CGST input credit cannot be cross utilized.
▪ Manufacturing states lose revenue on a bigger scale.
▪ High rate to tax to compensate the revenue collected now from multiple
taxes i.e High Revenue Neutral Rate.
▪ The reduction in the fiscal autonomy of the States.
▪ Concerns raised by banks and insurance companies over the need for
multiple registrations under GST.
▪ The levy of additional cess.
▪ The capacity of State tax authorities, so far used to taxing goods and not
services, to deal with the latter is an unknown quantity.
▪ The success of GST depends on political consensus, technology and the
capacity of tax officials to adapt to the new requirements.
Questions:
1. “ The reason for economic reform is to bring change in the Indian economy.”
In the light of the above statement can you explain did we achieve what we
aspired for? 6M
2. “Out right sale of pubic sector to private sector is privatization.” According to
the above statement was it the only way to privatize? What are the reasons of
privatization? 6M
3. Why did the farmers during economic reforms shifted their cropping pattern?
4M
4. Did the foreign trading grew after economic reforms? How the unfair trading
in the world market is controlled? 4M