Characteristics of New Economic Policy
1] Abolition of Industrial licensing
The ‘license- permit raj’ as well as ‘Subsidy State’was dismantled. The only industries which are now reserved for public sector are, defence equipment, atomic energy generation and railway transport. Industries reserved for the small scales sector continue to be so reserved. Privatisation of industries was to be consciously promoted.
In the above context, industrial licensing will henceforth be abolished for all industries, except for 18 industries specified, irrespective of levels of investment. These specified industries will continue to be subject to compulsory licensing for reasons related to security and strategic concerning social reasons, problems related to safety and overriding environmental issues, manufacture of products of hazardous nature and articles of elitist consumption. At present there are only 6 industries under compulsory licensing eg alcohol, tobacco, hazardous chemicals, industrials explosives, electronics, aerospace and pharmaceuticals. As a result other industries are made fee from bureaucratic control.
In projects where imported capital goods are required, automatic clearance is given.
The exemption from licensing will be particularly helpful to the many dynamic small and medium entrepreneurs.
In many industries, the market has been allowed to determine the prices. The policy of liberalisation thus marks a qualitative departure from the past.
Thus 85% industries now are delicensed. It means they need not wait for the government approval to set up new projects or for expanding existing ones.
As a whole the Indian economy will benefit by becoming more competitive, more efficient and modem and will take its rightful place in the world of industrial progress.
2] Encouraging foreign investment
Foreign investment brings advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports. This is particularly necessary in the changing global scenario of industrial and economic cooperation marked by mobility of capital. The Government has therefore, welcomed foreign investment, which is in the interest of the country’s industrial development.
In order to invite foreign investment in high priority industries, requiring large investments and advanced technology, industrial policy of 1991 approved foreign direct investment [FDI] to encourage foreign investment in high priority industries requiring high investment and technology. Initially FDI was permitted upto 51%. Later this was raised to 74% and then 100% for many industries without bottlenecks of any kind in this process. Such clearance is available if foreign equity covers the foreign exchange requirement for imported capital goods.
A special empowered board is constituted to negotiate with a number of large international firms and approve direct foreign investment in select areas. This is expected to attract substantial investment that would provide access to high technology and world markets.
This change will go a long way in making Indian policy on foreign investment transparent. Such a framework will make it attractive for companies abroad to invest in India.
3] Entry of foreign technology agreements
The Indian industry no longer needs bureaucratic clearances for commercial technology relationships with foreign technology suppliers. Indian industry can scarcely be competitive with the rest of the world if it is to operate within such a controlled environment. Therefore with a view to injecting the desired level of technological dynamism in Indian industry, Government has provided an automatic approval for technology agreements related to high priority industries within specified parameters. Indian companies are free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgement.
The predictability and independence of action that this measure is providing to Indian industry will induce them to develop indigenous competence for the efficient absorption of foreign technology. Greater competitive pressure will also induce our industry to invest much more in research and development than they have been doing in the past.
In order to help this process, the hiring of foreign technicians, and foreign testing of indigenously developed technologies, will also not require prior clearance as prescribed so far, individually or as a part of industrial or investment approvals.
Therefore NEP also liberalized the import of foreign technology in high priority industries to improve quality of goods and services and also bring down the cost. Its main objective is to obtain international competitiveness.
4] Reducing the role of the public sector/Public sector policy
The public sector has been central to our philosophy of development and has played an important role in preventing the concentration of economic power, reducing regional disparities and ensuring that planned development serves the common good.
After the initial exuberance of the public sector entering new areas of industrial and technical competence, a number of problems like insufficient growth in productivity, poor project management, over-manning, lack of continuous technological upgradation and inadequate attention to R&D and human resources development etc have begun to manifest themselves in many of the public enterprises. In addition, public enterprises have shown a very Low rate of return on the capital invested. The result is that many of the public enterprises have become a burden rather than being an asset to the Government.
Therefore, that the Government has adopted a new approach to public enterprises. Measures were taken to make these enterprises more growth oriented and technically dynamic. The priority areas for growth of public enterprises in the future will be the in essential infrastructure goods and services and exploration and exploitation of oil and mineral resources
Many changes were made in the public sector policy with the objectives
a) Ending state monopoly
b) Improving efficiency of the public sector
c) Releasing capital blocked in sick public sector enterprises.
The state monopoly was ended in many areas. Privatization reduced the number of industries reserved. Earlier 17 industries were in public sector. The NEP has reduced this number to 8 industries and now there are only 3 industries reserved for public sector. Those are railways, atomic energy and mineral industry.
5] Removal of Monopolies and Restrictive Trade Practices Act (MRTP Act)
The principal objectives sought to be achieved through the MRTP Act of June 1970 were
prevention of concentration of economic power to the common detriment, control of monopolies, and Prohibition of monopolistic and restrictive and unfair trade practices.
According to the MRTP [Monopoly and Restrictive Trade Practice] Act, it was compulsory for large industrial houses to take the approval of central government for establishment, expansion, merger etc.
With the growing complexity of industrial structure and the need for achieving economies of scale for ensuring higher productivity and competitive advantage in the international market, the interference of the Government through the MRTP Act in investment decisions of large companies has become deleterious in its effects on Indian industrial growth. This was responsible for slow growth of industries.
With removal of MRTP Act after Amendment in 1991 it was restructured by eliminating the legal requirements for prior governmental approval for expansion of present undertakings and establishment of new undertakings, provisions relating to merger, amalgamation and takeover and appointment of certain directors.
The pre-entry scrutiny of investment decisions by so-called MRTF companies was no longer being required. Instead, emphasis will be on controlling and regulating monopolistic, restrictive and unfair trade practices. The thrust of policy will be more on controlling unfair or restrictive business practices.Therefore industrial growth was encouraged.
Given an increasingly competitive environment on the back of private enterprises gaining ground on several parameters, makes it difficult for many PSUs to operate profitability. As a result of a rapid erosion of the value of the public assets, it becomes extremely important that the Government disinvests Central PSUs early in order to realize a high value.
The most important step undertaken to reform the public sector is disinvestment. It means the government decides to sell the equity capital of public sector undertakings to private individuals, private corporate bodies and financial institutions. In India disinvestment is undertaken as a fiscal need. It means money is raised through disinvestment to reduce fiscal deficit.
Disinvestment means withdrawal of invested funds from a public sector company. to raise funds for meeting certain general and specific needs. The government’s disinvestment policy was identified as an active tool to reduce the burden of financing the PSUs. The primary purpose of the government’s disinvestment initiative was a tool to reduce the burden of financing the PSUs and to utilize the funds that become available post disinvestment, for several purposes. The important among them are: the disinvestment of loss making public sector units was planned to ensure quality and reduce cost, to create more useful assets such as schools hospitals and other rural and other infrastructural facilities. To undertake expenditure on social programs such as health and education, to finance the increasing fiscal deficit, retiring government debt, since almost 40-45% of the Central Government’s revenue goes towards repaying public debt/interest etc. Disinvestment also ensures autonomy, flexibility and competition.
7] Encouraging Small Scale Industries
To encourage small scale industries the investment limit in small scale industries has increased from Rs 1 crore to Rs 5 crores to encourage competitiveness and technology up gradation.
Since 1991 small scale industries in India find themselves in an intensely competitive environment due to globalization, domestic economic liberalization, and dilution of sector specific protective measures. It is estimated that this sector has been contributing about 40% of the gross value of output produced in the manufacturing sector and the generation of employment by the small-scale sector is more than five times to that of the large-scale sector.
8] Entry of new private and foreign banks
The Indian banking industry is measured as a flourishing and the secure in the banking world. India’s banking industry is a mixture of public, private and foreign ownerships. The major dominance is of commercial banks.
India’s financial sector had been highly regulated and financially repressed. This has adversely affected the country’s financial resource mobilization and allocation. Although the Indian banks have contributed much in the Indian economy, certain weaknesses, i.e. turn down in efficiency and erosion in profitability had developed in the system
The efficient, dynamic and effective banking sector plays a decisive role in accelerating the rate of economic growth in any economy. Due to economic changes in the world economy and domestic crises like adverse balance of payments problem, increasing fiscal deficits our country too embarked upon economic and financial sector reforms in 1991 and banking sector reforms were part and parcel of financial sector reforms.
These aimed at making Indian banking sector more profitable, efficient, strong and dynamic, and to encourage operational self-sufficiency, flexibility and competition in the system and to increase the banking standards in India to the international best practices .
This reform has not only influenced the productivity and efficiency of many of the Indian Banks, but has left everlasting footprints on the working of the banking sector in India
In the end the key to banking reform lies in the internal bureaucratic reform of banks, both private and public. In part this is already happening as many of the newer private banks (like HDFC, ICICI) try to reach beyond their traditional clients in the housing, consumer finance and blue-chip sectors.
Therefore, under NEP because of liberalization, Government has permitted the entry of new private banks. Thus a number of new private banks like HDFC, ICICI etc have already started working. Similarly foreign banks like Citi Bank, HSBC etc have become popular in India.
9] SEBI as a statutory body
SEBI, established in 1988 and became a fully autonomous statutory in 1992 with defined responsibilities to cover both development & regulation of the market SEBI is authorized to regulate the working of mutual funds and stock exchanges in India.In April, 1998 the SEBI was constituted as the regulator of capital markets in India under a resolution of the Government of India.
The SEBI is managed by a chairman who is nominated by central government two members, i.e. officers of central ministry, one member from the RBI and five members nominated by the central government, out of whom at least three shall be whole-time members.
The basic objectives of SEBI is to protect the interests of investors in securities, to promote the development of Securities Market, to regulate the securities market and for matters connected therewith or incidental thereto
10] Online trading and Dematerialised Trading
SEBI introduced online and demat trading. This is expected to save time and cost and reduce risk associated with paper based or physical settlements.
The term “demat“, in India, refers to a dematerialised account for individual Indian citizens to trade in listed shares, stocks or debentures are held in electronic form rather than paper (ie instead of the investor taking physical possession of certificates), as required for investors by the Securities and Exchange Board of India (SEBI).
A demat account is opened by the investor while registering with an investment broker (or sub-broker). The demat account number is quoted for all transactions to enable electronic settlements of trades to take place. Access to the demat account requires an internet password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the demat account are automatically made once transactions are confirmed and completed.
After the introduction of the depository system by the Depository Act of 1996, the process for sales, purchases and transfers of shares became significantly easier and most of the risks associated with paper certificates based on physical settlements were mitigated.
Advantages of demat
1] Benefit to the company
i) A demat account also helps avoid problems typically associated with physical share certificates, for example: delivery failures caused by signature mismatch, postal delays and loss of certificate during transit.
ii) The depository system helps in reducing the cost of new issues due to lower printing and distribution costs.
iii) It increases the efficiency of the registrars and transfer agents and the secretarial department of a company.
iv) It provides better facilities for communication and timely service to shareholders and investors.
v) It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors.
2] Benefit to the investors
i) It eliminates the risks involved in holding physical certificates eg theft, loss, theft, mutilation,forgery and due to damaged stock certificates.
ii) It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors.
iii) It helps avoid bad delivery problems due to signature differences, etc.
iv) It ensures faster payment on sale of shares.
v) No stamp duty is paid on transfer of shares.
vi) It provides more acceptability and liquidity of securities.
vii) Demat account holders also avoid stamp duty and filling up of transfer deeds
3] Benefits to brokers
i) It reduces risks of delayed settlement.
ii) It ensures greater profit due to increase in volume of trading.
iii) It eliminates chances of forgery or bad delivery.
iv) It increases overall trading and profitability. It increases confidence in their investors.
Disadvantages of demat
1] Trading in securities may become uncontrolled in case of dematerialized securities.
2] It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors.
3] For dematerialized securities, the role of key market players such as stock-brokers needs to be supervised as they have the capability of manipulating the market.
4] Multiple regulatory frameworks have to be conformed to, including the Depositories Act, Regulations and the various By-Laws of various depositories.
5] Agreements are entered at various levels in the process of dematerialization. These may cause worries to the investor desirous of simplicity.
11] Reforms in insurance sector
Life Insurance Corporation of India (LIC) (Hindi: भारतीय जीवन बीमा निगम) The slogan of LIC is “Yogakshemam Vahamyaham” which translates from Sanskrit to “Your welfare is our responsibility”.
In 1955, parliamentarian Amol Barate raised the matter of insurance fraud by owners of private insurance companies. In the ensuing investigations, one of India’s wealthiest businessmen, Ram Kishan Dalmia, owner of the Times of India newspaper, was sent to prison for two years.
19/06/1956 -the Parliament of India passed the Life Insurance of India Act
01/09/1956 -Life Insurance Corporation of India was created by consolidating the life insurance business of 245 private life insurers and other entities offering life insurance services. It is state-owned where Government of India has 100%stake.
IPR 1956-Nationalization of the life insurance business in India
1999- The IRDA Act was passed by the government of India
2000 April- It was incorporated as a statutory body
2002-IRDA was amended to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.”
The IRDA Act, 1999 also allows private players to enter the insurance sector in India besides a maximum foreign equity of 26 per cent in a private insurance company having operations in India.
Indian insurance industry is regulated by the terms and conditions of the IRDA
Insurance sector was the monopoly of central government till recently. In 1999 Insurance Regulatory and Development Authority [IRDA] Act was passed to introduce reforms in this sector. The IRDA has given licenses to many private sector companies to do insurance business. This has ended monopoly of the government in this sector.
IRDA is a ten member body consisting of, A Chairman, Five whole-time members and Four part-time members. All members are appointed by the Government of India.
IRDA regulates private insurance companies in India such as, Royal Sundaram Alliance Insurance Company Limited, Reliance General Insurance Company Limited, TATA AIG General Insurance Company Ltd, Bajaj Allianz General Insurance Company Limited, ICICI Lombard General Insurance Company Limited etc.
12] Liberalisation of imports
The Government of India has liberalized the import regime from time to time. At present, practically all controls on import have been lifted.
The short list of banned items that cannot be imported in India includes beef and tallow, fats and oils, animal rennet and wild animals, including their parts and ivory.
List of items that are canalised can only be imported by the government of India or its designated agencies or under special license. Canalised list of items include petroleum products, fertilisers, pulses, cereals and spices. Items on the restricted list (requiring special licence) include safety and security related products, plants and animals, insecticides and pesticides, and other items that could have an impact on security, health and environment.
Import liberalization – the removal of quantitative restrictions, reduction and simplification of tariffs – contributes by reducing the price of importables (which, due to protection, were above the relative world level).
Import licensing controls have been abolished except for imports of consumer goods. Almost all capital goods, raw materials, intermediaries and components were made freely importable.
The tariff structure had been rationalized and customs duty has been reduced. Import duties, which were earlier prohibitively high at levels of 180% or even more, have been now decreased to as low as 15% for some items.
This confers two types of general benefit.
1] It promotes greater efficiency as it encourages the reallocation of domestic resources, away from relatively inefficient production of importables towards increased production of exportables.
2] It reduces the price and increases the variety of imported goods available to consumers. In this way trade expands the consumption possibilities of a country.
13] Export promotion
Export promotion is a strategy for economic development for a country based on encouraging domestic producers to export production [or foreign nations to purchase exported goods], with a view to enhance the export of the country.
In order to achieve this objective they are given numerous incentives and facilities, like offering help in product and market identification and development, pre-shipment and post-shipment financing, training, payment guaranty schemes, trade fairs, trade visits, foreign representation, etc.
The goal of this policy is to encourage domestic production, which subsequently increases domestic income and consumption.
Several incentives have been given through the EXIM [Export Import] policy announced periodically. Established exporters are allowed to maintain a foreign currency account. They are also allowed to raise external credit to finance their trade account. Special Economic Zones [SEZs] are set up to promote exports. The government has also introduced the concept of Agri Export Zones [AEZs] to encourage agricultural exports.
A contrasting economic development is import substitution.
14] Current account convertibility
Rupee convertibility means the system where any amount of rupees can be converted into any other currency without any question asked about the purpose for which the foreign exchange is to be used.
Current account convertibility refers to freedom in respect of Payments and transfers for current international transactions. In other words, if Indians are allowed to buy only foreign goods and services but restrictions remain on the purchase of assets abroad.
Rupee was made fully convertible on the current account in 1994 and the stringent controls of pre-nineties over the foreign exchange have also been relaxed to a great extent. This has increased availability of foreign exchange to exporters, importers, medical expenses travel and tourism, education abroad interest payment, amortization, family expenses etc.They can also receive and make payments in foreign currencies on trade account
The stringent Foreign Exchange Regulation Act (FERA) was replaced by a relaxed Act called Foreign Exchange Management Act (FEMA), making the movement of foreign exchange easier. Resident Indians and companies now have access to foreign exchange for various purposes.
15] Abolition of FERA
The Foreign Exchange Regulation Act [FERA] of 1973 which was passed by the government of Mrs. Indira Gandhi was repealed in 1999 and replaced by Foreign Exchange Management Act [FEMA] which was passed by the government of Mr. Atal Bihari Vajpayee.
According to FEMA Indian companies can raise funds from foreign market and encourages flow of goods and services in the global market.
FERA had become incompatible with the pro-liberalisation policies of the Government of as it emphasized strict exchange control on everything that was specified, relating to foreign exchange, it consisted of 81 sections. FEMA has made the movement of foreign exchange easier. Resident Indians and companies now have access to foreign exchange for various purposes. FEMA is much simple, and consist of only 49 sections
The Reserve Bank of India and central government would continue to be the regulatory bodies.