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Report On New Economic Policy in India
Report On New Economic Policy in India
Report On New Economic Policy in India
REPORT
ON
NEW ECONOMIC POLICY IN INDIA
Submitted to:
Dr. S R Dash
PROF. SANJAY MANGLA
(Faculty of IMS)
Submitted by:
GROUP MEMBERS
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CONTENTS
Declaration
Certificate
Acknowledgement
1. INTRODUCTION
6. FINDINGS
7. CONCLUSION
8. REFERENCE
2
DECLARATION
Vaibhav Bhatnagar(BM-010160)
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CERTIFICATE
This is to certify that Mr. Abhay Singh Solanki, Mr. Abhinandan
Mehrotra, Mr. Daya Shankar Rai, Mr. Dhritiman Das, Mr. Vaibhav
Bhatnagar students of PGDM MM Ist year have completed their
project under our guidance with full honesty and integrity and
submitted this project report towards partial fulfillment of Post
graduate diploma in management at IMS Ghaziabad.
Signature : Signature :
4
ACKNOWLEDGEMENT
Vaibhav Bhatnagar(BM-010160)
5
INTRODUCTION
Several major economic and political changes occurred during the 1970s and
1980s, which affected the developing countries and paved the way for the
implementation of IMF-sponsored Structural Adjustment Policies (New
Economic Policy) in India in 1991. This was due to a combination of factors
such as stagnant agriculture, low levels of industrial growth and
diversification, inadequate capital formation, adverse terms of trade in
international markets, limits to domestic resource mobilization due to a
fairly narrow tax-base, loss making public sector enterprises, over regulated
and controlled economy, poor industrial productivity, huge amount of fiscal
deficit, huge amount of public debt, poor rating of Indian economy by
international agencies, foreign exchange crisis etc.
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• Industrial licensing was abolished for all projects except for a list of
15 industries related to security, strategic or environmental concerns
and certain items of luxury consumption that had a high proportion of
imported inputs.
• The Monopolies and Restrictive Trade Practices (MRTP) Act applied
in a manner, which eliminated the need to seek prior government
approval for expansion of present undertakings and establishment of
new undertakings by large companies.
• The set of activities henceforth reserved for the public sector was
much narrower than before, and there would be no ban on the
remaining reserved areas being opened up to the private sector.
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8 per cent of export sales or for lump sum payments of Rs.10 million.
Automatic approval for all other royalty payments will also be given
if the projects can generate internally the foreign exchange required.
• Abolished MRTP Act and FERA and instead of FERA, FEMA Act
was passed in the Parliament.
• The threshold (Minimum) asset limit for companies under MRTP Act
was raised from Rs.20 crores to Rs.100 Crores.
The Government was of the view that public sector had not generated
internal surpluses on a large scale. On account of its inadequate exposure to
competition; the public sector was subject to a high cost structure. To
provide a solution to the problems of the public sector, Government decided
to adopt a new approach, the key elements of which were:
• The number of industries reserved for the public sector was reduced
from 17 to 8. Even in these areas, private sector participation was
allowed selectively. Joint ventures with foreign companies would be
encouraged.
• Public enterprises that were chronically sick and unlikely to be turned
around would be referred to the Board for Industrial and Financial
Reconstruction (BIFR) for rehabilitation or restructuring.
9
The expenditure approach calculates the total value of the products bought
by an individual that should be equal to the expenditure of the things bought.
The expenditure approach calculates the sum of all the producers' incomes
where the incomes of the productive factors are equal to the value of their
product.
In 2007, the Indian economy GDP crossed over a trillion dollar that made it
one of the twelve trillion dollar economy countries in the world. There has
been excellent progress in knowledge process services, information
technology, and high-end services. But the economic growth has been sector
and location specific.
The trend for India's GDP growth rate are given below
1960-1980 - 3.5%
1980-1990 - 5.4%
1990-2000 - 4.4%
2000-2009 - 6.4%
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Below are the contributions of different sectors in the India's GDP for 1990-
1991
Agriculture: - 32%
Service Sector: - 41%
Industry: - 27%
Below are the contributions of different sectors in the India's GDP for 2005-
2006
Agriculture: - 20%
Service Sector: - 54%
Industry: - 26%
Below are the contributions of different sectors in the India's GDP for 2007-
2008
Agriculture: - 17%
Service Sector: - 54%
Industry: - 29%
The service sector contributes more than half of India's GDP. Earlier
agriculture was the main contributor to the GDP. To improve the GDP and
boost the economy, the government has taken various steps like
implementation of FDI policies, SEZ's and NRI investments.
The GDP growth rate slowed down to 6.1% in 2009. In 2006, the country's
trade contributed to around 24% of the GDP from 6% in 1985. According to
Goldman Sachs, India's GDP in current prices may overtake France and Italy
by 2020, Russia, Germany and UK by 2025 and Japan by 2035. It is also
predicted that Indian economy will be the third largest after US and China
by 2035.
In 2007, agriculture contributed around 16.6% of the GDP. Even though its
share has been declining, agriculture plays a major role in the India's socio
economic development. Industry contributes around 27.6% of the GDP
(2007 est). The services sector contributed to 55% of the GDP in 2007. The
IT industry contributed around 7% of the GDP in 2008 that was 4.8% in
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12
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REVIEW OF LITERATURE
As said by Lawrence Saez, the adoption of NEP has led to shift in the inter
governmental cooperation between the central government and the states to
inter jurisdictional competition among the latter.
The rise of the regional parties and presence of coalition government have
brought the states into national arena as the new economic policies are being
influenced by state level leadership.
Williams and Laumas (1984) found that there were considerable economies
of scale in India’s manufacturing sector although they were more
predominant in some industrial groups than in others. They found that
shortage of capital and skilled labour was not a serious constraint on the rate
of growth in output. Increase in the supply of raw materials could help
stimulate further growth of manufacturing sector. They also found that the
Cobb-Douglas production function was largely unsuitable to understand the
working of Indian manufacturing sector.
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industries revealed that consumer durable industries had some of the highest
average efficiency indexes and relatively smaller coefficient of variations. It
could be due to greater diffusion of technical knowledge and more uniform
demand for the products across the states. On the other hand, the
intermediate product industries and the consumer non-durables industries
had wider variations in their relative efficiency indexes across states. Nath
found that relative efficiency was positively correlated with relative size in
some industries. The efficiency index had positive correlation with the level
of capacity utilization in most of the industry groups studied by him.
Nikaido (2004) observed that the industrial policies in the past discriminated
in favour of SSI through regulating and restricting economic activities of all
firms including not only domestic large firms and foreign firms, but also
small-scale firms, which might have invoked invisible cost and
disadvantage.
The New Economic Policy of 1991 removed many of those restrictions and
regulations. Consequently, one may expect, therefore, capital to be
substituted for labour, firm sizes to grow, small scale industries to be pushed
behind, increasing returns to scale to vanish and, in turn, production to grow
in size and variety.
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Chand and Sen (2002) found that post-reform trade liberalization in Indian
manufacturing raised total factor productivity growth. Their results also
support a key postulate of the new growth theories, that liberalization of the
intermediate-good sectors has a larger favorable impact on total factor
productivity growth than that of the final-good sectors.
Kalirajan and Bhide (2004) observed that the economic reforms of the early
1990s did not lead to sustained growth of the manufacturing sector. After
acceleration in the mid-1990s, growth slowed in the decade's second half.
They found that manufacturing-sector growth in the post-globalization
period has been "input driven" rather than "efficiency driven," with
significant levels of technical inefficiency.
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OBJECTIVES
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RESEARCH METHODOLOGY
To achieve the objectives of the study, secondary data have been used. The
major sources of secondary are Annual Economic Surveys of Government of
India, relevant RBI publications, research journals like, Economic and
Political Weekly, Icfai University journal, book and Internet search engines
like Google.
The study period is 1981-2006. This period has been further divided into
three sub-periods, 1981-1990, 1991-2000, and 2001-06. This classification
has been done in order to make an in depth analysis. The data have been
analyzed by using various statistical tools like percentage, Compound
Annual Growth Rate (CAGR) and independent sample t-test.
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DATA ANALYSIS
Table
1:
Contribution
of
SSI
Sector
to
Total
Exports(in
Rs.
Cr)
%
Share
in
Year
Total
Export
SSI
Export
Total
Exports
1980-‐81
6711
1643
24.5
1981-‐82
7806
2071
26.5
1982-‐83
8803
2045
23.2
1983-‐84
9771
2164
22.1
1984-‐85
11744
2553
21.7
1985-‐86
10895
2773
25.5
1986-‐87
12452
3631
29.2
1987-‐88
15674
4535
28.9
1988-‐89
20232
5681
28.1
1989-‐90
27658
7990
28.9
1990-‐91
32553
9763
30.0
1991-‐92
44042
13883
31.50
1992-‐93
53350
17785
33.30
1993-‐94
69546
25307
36.40
1994-‐95
82674
29068
35.20
1995-‐96
106353
36470
34.30
1996-‐97
117525
39250
33.40
1997-‐98
126286
44442
38.20
1998-‐99
139753
48979
35.19
1999-‐00
159561
54200
35.06
2000-‐01
202509.7
69797
33.83
2001-‐02
207745.6
71244
34.47
2002-‐03
255137
86013
33.71
2003-‐04
293367
97644
33.28
2004-‐05
357077
124417
34.84
CAGR
19.23
21.44
-‐
Source:
www.smallindustryindia.com
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With the aim of observing the impact of liberalization process on the
SSI exports of India, we apply the t-test . The result of the test as
indicated by Table 2 reveal that, the average percentage share of
SSIs in total export during 1981-1990 is 25.86% and during 1991-
2000 is 34.26%, and the difference between these two means is
significant at 1% level of significance. The mean share of SSI in total
exports during 2001-06 is found to be 34.02% and it is not found to
be significant different from the mean share obtained during 1991-
2000 (i.e., 34.26).
Table2:
Average
Percentage
Share
of
SSI
Sector
in
Total
Exports
During
Pre-‐
and
Post-‐
Liberalization
Period
Time
Period
for
Time
Period
for
Statistics
Comparison
Comparison
1989-‐1990
1991-‐2000
1991-‐2000
2001-‐2006
Mean
25.8600
34.2550
34.2550
34.0260
SD
2.8976
2.3551
2.3551
0.6234
t-‐test
-‐7.1100
-‐
0.2100
-‐
N
10
10
10
5
Df
18
-‐
13
-‐
Sig.
(2-‐
0
-‐
0.8370
-‐
tailed)
Note:
df
=
Degree
of
Freedom,
SD
=
Standard
Deviation
,
and
N
=
No.
of
Observation
Source:
Calculated
from
the
Data
from
table
1.
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Table
3:
CAGR
of
Percentage
Share
of
SSI
Sector
in
Total
Exports
During
Pre-‐
and
Post-‐
Liberalization
Periods
Statistics
Pre-‐Liberalization
Post-‐Liberalization
R2
0.413
0.1140
df
8
13
F-‐
value
5.6300
1.6700
Sig.
Level
0.0450
0.2190
bo
(y-‐
intercept)
22.5072
32.9803
CAGR
2.45%
0.43%
Note:
R
is
the
coefficient
of
determination
,
bo
is
the
value
of
constant
2
on
the
basis
of
linear
equation
and
df
=
Degree
of
Freedom.
Source:
Calculated
from
the
Data
from
table
1.
The study further brings out the impact of liberalization on growth in
number of units, employment level, production (at constant prices),
fixed investment, and the value of plant and machinery, in the SSI
sector, during the period 1981-2006. The CAGR concerning these
aspects are given in Table 4.
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Table 4 clearly indicates that the growth rate of number of SSI units
was quite higher in the pre-liberalization era. The number of SSI units
has increased at an average rate of 8.5% during 1081-1990, but after
1991 it declined to 5.1%. Same is the case with employment,
investment, production, and value of plant (P) and Machinery (M).
The CAGR has decreased significantly. This implies that growth in all
the variables has taken place only in absolute terms, but in reality the
SSI sector is facing tough competition, that is why the growth rates of
all variables are falling.
Table4:
Growth
in
SSI
Sector
in
Pre-‐
and
Post-‐Liberalization
Period(in
%)
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FINDINGS
24
25
26
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CONCLUSION
The process of NEP not only opened up the economy and accelerated cross-
border mobility of persons, goods, capital, data and ideas but also opened up
the society to infections, diseases and pollution, drugs, criminalization, etc.
(UNESCO).
The mixed picture that emerges on economic performance and on changes in
employment, inequality and poverty make it extremely difficult to generalize
on what the impact of NEP has been. In part, this is because NEP is a
complex phenomenon. Observed outcomes such as changes in the level of
unemployment and of poverty reflect the combined results of a complex of
factors of which globalization, however broadly defined, is but one.
Domestic structural factors such as the degree of inequality in the
distribution of income and wealth and the quality of governance are often
important fundamental influences on these outcomes. It is important to avoid
the common error of attributing all observed outcomes, positive or negative,
entirely to globalization.
The SSI sector has been contributing enormously to the Indian economy in
the liberalization era. Its share in total exports from India is above 34%, and
it also contributes significantly in employment generation. However, the
industry has suffered a lot during the last 15 years in terms of lower growth
rate of the number of units established, employment level, investment and
production. Further, SSI’s share in total bank credit has also declined
alarmingly. The sector is in dire need of financial, marketing, training and
other facilities at reasonable price. In this age of institutions must
realizations must realize their responsibilities so as to ensure the survival,
growth and promotion of the SSI sector in India.
Finally, irrespective of the degree of support extended by the amount of
effort put in by small industries and their associations, India is going to
experience the emergence of the small industry sector, which is
quantitatively superior, technologically vibrant and internationally
competitive, in the next 5-10 years because the ‘inefficient ones’ are likely
to vanish gradually. The objective of the policymakers as well as small
industry associations should be to enable the sector to be vibrant and
competitive without any reduction in its size and thereby enable it to make a
sustainable contribution to national income, output and exports.
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REFERENCES
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