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New Industrial Policy introduced on July 24, 1991.

1Reduction in Industrial Licensing

•Abolished for all projects except 18 industries → further reduced to 5 industries.
•The 5: (i) Distillation & brewing of alcoholic drinks, (ii) Cigars & cigarettes of tobacco, (iii) Electronic Aerospace & defence equipments, (iv) Industrial explosives, (v) Specified Hazardous chemicals.
•No licences needed to set up new units or expand/diversify existing manufacture.

2Decrease in Role of Public Sector

•Industries reserved for public sector reduced from 17 → 8 → 3 (Atomic Energy, Railways, Defence Equipments in 2010-11).

3De-reservation under Small-Scale Industries

•Many SSI goods were de-reserved; market allowed to determine prices.
•Prior approval for expansion, new undertakings, merger, amalgamations eliminated for large companies.
•MRTP Act replaced by Competition Act, 2002 (amended 2007, 2009) — more liberal.

Financial sector includes commercial banks, investment banks, stock exchange operations, and the foreign exchange market. Controlled by RBI (apex body).

1Change in Role of RBI

•From regulator to facilitator. Pre-liberalisation: RBI fixed interest rate structure. Post-liberalisation: free market forces act; greater autonomy for financial institutions.

2Origin of Private Banks

•Establishment of private sector banks (Indian: ICICI; foreign: HSBC). Increased competition → lower interest rates and better services for consumers.

3Increase in Foreign Investment Limit

•Raised to ~74%. Foreign Institutional Investors (FII) — merchant bankers, mutual funds, pension funds — allowed to invest in Indian financial markets.

4Ease in Expansion Process

•Banks free to set up new branches (after fulfilling conditions) without RBI approval.

Tax reforms = reforms in government's taxation and public expenditure policies = Fiscal Policy.

Direct Taxes

On incomes of individuals + profits of business enterprises. E.g., Income tax, Corporate tax.

Indirect Taxes

Affect income and property through consumption expenditure. Imposed on goods and services. E.g., GST.

1Rationalisation of Direct Taxes

•Continuous reduction in income and corporate tax since 1991 (high rates → tax evasion). Moderate rates encourage savings and voluntary disclosure.
•However, tax reductions negatively affected developmental and welfare expenditure.

2Reforms in Indirect Taxes

•To facilitate establishment of a common national market for goods and commodities.

3Simplification of Process

•Procedures simplified for better compliance.
•GST Act passed: March 29, 2017; effective July 1, 2017.
•Outcomes: Additional revenue, reduced tax evasion, "one nation, one tax, one market."

1Devaluation of Rupee

•Deliberate reduction in value of domestic currency vs foreign currency by government. Done in 1991 to overcome BOP crisis → increased inflow of foreign exchange.

2Market Determination of Exchange Rate

•Rupee value freed from government control. Market forces of demand and supply determine exchange value.

Pre-1991: Heavy restrictions (high tariffs, quotas) on imports to protect domestic industries. This reduced efficiency and competitiveness → slow growth.

Objectives

•Increase international competitiveness of industrial production
•Promote foreign investments and technology into the economy
•Promote efficiency of local industries and adoption of modern technologies

1Removal of Quantitative Restrictions on Imports & Exports

•Greatly reduced. Quantitative restrictions on manufactured consumer goods and agricultural products fully removed from April 2001.

2Removal of Export Duties

•To increase competitive position of Indian goods internationally.

3Reduction in Import Duties

•Considerably reduced — enabled imports of raw materials at better prices.

4Relaxation in Import Licensing System

•Abolished except for hazardous and environmentally sensitive industries.

Liberalisation

Notes

Liberalisation

Meaning and Purpose

The Five Reform Areas