Annual Plans in India (1990-92) – UPSC

The Eighth Five-Year Plan could not take off in 1990 due to the rapidly changing economic and political situation at the Centre in India. The Government adopted the two Annual Plans for the years 1990-91 and 1991-92 for the country’s economy to back on track. It was the Second Plan Holiday after the first Plan Holiday in 1966-69.

New Economic Policy 1991

In 1991, P. V. Narasimha Rao became the Prime Minister of India with Dr. Manmohan Singh as Finance Minister. In July 1991, the Government launched the economic reforms, also known as the New Economic Policy, 1991. Therefore, P. V. Narasimha Rao, also known as the father of Economic Reforms in India. The New Economic Policy was introduced by Dr. Manmohan Singh on 24 July 1991.

This New Economic Policy refers to the Liberalization, Privatization, and Globalization (LPG) reforms. It was the beginning of liberalization and privatization in India. The features of the New Economic Policy (or LPG reforms) were:

  • Liberalization or relaxation of the import tariffs.
  • Deregulation of markets or opening the markets for private & foreign players.
  • Reduction of taxes to expand the economy of the country.
  • Industrial location policy liberalized.
  • To bring down the rate of inflation.
  • To build sufficient foreign exchange reserves.
  • To achieve economic stabilization and convert the economy into a market economy by removing unnecessary restrictions.
  • To increase the participation of private players in all sectors of the economy.
  • To permit the international flow of goods & services, human resources, capital, and technology.

Scope of LPG Reforms

Liberalization refers to the relaxation or removal of government restrictions placed upon economic activities.

Privatization refers to the transferring ownership of business or property from a government to a privately owned entity.

Globalization refers to the expansion of economic activities across the political boundaries of nation-states.

Reforms under Liberalization

  • Deregulation of the Industrial Sector:
    • Removal of Licences, removal of price controls, deregulation of sectors for private entry, de-reservation commodities meant for small scale industries.
  • Tax reforms:
    • Lowering the rates for direct and indrect taxes.
  • Financial Sector Reforms:
    • The reduced role of RBI from the regulator to facilitator, removal on foreign borrowing limits, allowing foreign investment.
  • Foreign Exchange Reforms:
    • Devaluation of rupee, market determined exchange rates.
  • External Sector Reforms.
  • Trade and Investment Policy Reforms.
  • Foreign Trade Policy Reforms.

Reforms under Privatization

  • Sales of shares of Public Sector Undertakings (PSUs).
  • Disinvestment in PSUs.
  • Minimisation of Public Sector.

Reforms under Globalization

  • Reducing the custom duties and tariffs imposed on imports and exports.
  • Partial Covertibility of Indian Currency.
  • Increase in Equity Limit of Foreign investment.

National Renewal Fund (NRF)

In 1991, the Indian Government announced the establishment of the National Renewal Fund (NRF) as a part of measures announced in the New Economic Policy 1991. The National Renewal Fund was set up in February 1992 for a period of 10 years for the protection of PSU employees’ interests. NRF aimed to provide a social safety net to those workers who are likely to be affected by the up-gradation and modernization of the Indian industry.

  • The Government included two schemes under NRF:
    • Voluntary Retirement Scheme (VRS) for Central Public Sector Undertakings (PSUs);
    • Re-training scheme for rationalized workers in the organized sector.
  • The objectives were to be achieved as follow:
    • By providing funds for compensation to the employees affected by restructuring or closure of the industrial units, both in the private and public sectors.
    • By providing assistance to firms to cover the retraining costs and redeployment of employees arising from modernization & technology up-gradation of existing capacities and industrial restructuring.
    • By providing funds for employment generation schemes in organized and un-organized sectors to provide a social safety net for labour.

However, the Government abolished the National Renewal Fund (NRY) in 2000. The administration of the Voluntary Retirement Scheme (VRS) shifted to the Department of Public Enterprises.

Liberalised Exchange Rate Management System (LERMS)

In March 1992, the Government of India introduced the Liberalised Exchange Rate Management System (LERMS). Dr. Manmohan Singh announced this new system in the 1992 budget.

An Exchange Rate is the value of a country’s currency versus the currency of another country. Exchange rates can either be fixed or floating. The Central Bank decides the fixed exchange rates, while the floating exchange rates get decide by the market demand & supply.

With the LERMS, India moved from a fixed to dual exchange rate system. Under this system, all foreign exchange transactions up to 40% were to be at the official exchange rate by the Reserve Bank of India (RBI) and while the remaining 60% were at the market rate. In other words, LERMS opened up the way for exporters to realized 60% of their proceeds or earnings at the market rate, whereas 40% of the proceeds of exports & inward remittances at the official rate.

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