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DEFICIT FINANCING THE IMPAC India is a great country. It is said to be a rich country inhabited by the poor. This means that a proper economic planning can really do wonders. After the attainment of Independence, it was realized that in order to achieve self-sustained growth and selfgenerating economy, we must evolve, a strategy for economic growth. As a result, our country was oriented to an era of gigantic industrialization with the help of suitable technology, planning strategy, socio-economic policy and development programmes. The public sector was given an important role. The government regarded public sector, mixed economy and socialistic pattern of society as a panacea for all economic ills. More than four decades of economic planning witnessed a mixture of successes and failures. It was felt that all was not well with the public sector despite its high strides in many fields. There were rigorous controls on the functioning of the private sector. Foreign exchange reserves too were in a bad state. Industrial growth became regressive and inflation was assuming alarming proportions. All this forced the government to introduce a new economic policy. In order to redeem the economy from the clutches of the crises and to put it on the road of rapid development, the government of India made some radical changes in its policies in the year 1991 regarding foreign investment, trade, exchange rate, industry, fiscal affairs etc. The thrust of new economic policy was towards creating a more competitive environment in the economy as a means to improve the productivity and efficiency of the system. In a bid to achieve the objective of new economic policy, significant reforms were introduced in Industrial policy, Trade policy, Fiscal policy and monetary policy. The new economic policy provides freedom to the entrepreneurs to establish any industry/trade/business venture. The entrepreneurs are not required to get prior approval for any new venture. They no longer need licenses to come into business. The capital markets have also been freed and opened to the private enterprises. A new company can now be floated with new issues of shares, debentures etc. In case the entrepreneurs require imported equipment, they are no longer required to approach the central authority for foreign exchange. The scope of privatization has been increased. In the wave of privatization, out of 17 industries reserved for public sector, 11 industries have been given to the private sector. Another important feature of the new policy is the globalization of economy. It means unification of the domestic economy with the world economy. The rupee has been made fully convertible on current account of the balance of payment Moreover, elimination of licensing of huge import items has enabled the importers to import anything from anywhere in the world. The reduction in custom duties and imports has also been done to bring them in line with the duties in the other countries of the world, the new economic policy accords high priority to modern techniques. It aims to augment the growth rate of

sun-rise industries. In order to impart technical dynamics to Indian Industries, the government decided to clear all foreign collaborations. Private entrepreneurs are now free to settle the terns of such collaborations on their own behalf. The 1994-95 budget proposals carried industrial policy reforms further. The government reduced the peak rate of custom duty from 85% to 65% as well as the custom duty of key raw materials as steel and chemicals. To encourage investment in the domestic capital goods industries, custom duty on capital goods including project imports, the parts of equipment or spares etc, was reduced to 25%. The MODVAT benefits were also extended to capital goods so that the full credit excise duty paid on domestic capital goods on countervailing duty paid on imported capital goods be available. In order to attract new investment the minimum lending rate of bank loan was reduced by one per cent. Some other reforms have also been affected in order to promote international integration of economy. Excessive and often indiscriminate protection provided to industry has been diluted. The government is imposing strict fiscal and monetary discipline to control aggregate demand. Import restrictions on capital goods, raw material and components have been virtually eliminated. In some respects the New Economic policy yielded good results. The growth rate of import witnessed a rise from 11% to 23%. The foreign currency reserves which had fallen to the extent of Ri 4,388 crores have increased to more than 70,000 crores. Agriculture has also been favorably affected by new economic reforms. Liberal approach to new economic policy has also gradually given rise to foreign capital investment In 1990, proposals involving Rs. 128 crores worth of direct foreign investment were sanctioned by tin; government. Proposals worth Rs. 535 crore, Rs. 3888 crore, Rs. 885 crore & Rs. 8954 crore of foreign investment were sanctioned in the consecutive years of 1991, 1992, 1993, 1994 respectively. Investments continue to increase every year. The new economic reforms are not free from criticism. These reforms have been criticized on several grounds. Some economists go to the extent of calling the new economic policy a failure. The most serious criticism leveled against new economic reforms is that they have totally failed to control inflation. In 1995-96, the government measures to control the rate of inflation have started showing some results but these are far from satisfactory. Despite many efforts the fiscal deficit has not yet been controlled. The actual budgetary deficit in 1995-96 has reached the level of Rs. 760 crore as against the targeted amount of Rs. 5000 crore. Thus the economic reforms have failed to contain the growth of fiscal deficit and budgetary deficit in its budget and have encouraged inflationary tendencies. There has been large-scale retrenchment of workers. The National Textile Corporation alone has retrenched 5000 workers. Moreover, schemes of voluntary retirement are being pushed into quite a large number of public sector undertakings. This sort of unemployment arising out of structural adjustment is an acute problem that must be considered seriously. Also, there is a lack of proper coordination between RBI and the government. Both sometimes stand in the way of each other to thwart economic reforms. Another point of criticism raised in many quarters is that the new economic reforms are a complete surrender to the World Bank- IMF. The Government of India has surrendered its sovereignty in order to procure a huge amount of loan from such international agencies.

It is however, felt that it would be very premature to judge the impact of these policies in so short a time. Let us wait for a few more years to finally assess this policy.

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Posted In Essays - By Xtremend On Thursday, March 17th, 2011 With 0 Comments

When India became free, our top planners thought that socialism could be ushered in by centralizing production and setting up a large number of public sector units catering to the varied needs of the people. Huge investments were, therefore, made in public sector units and a number of autonomous or semi-government corporations were set up in the country. With the means of production and distribution under government control, it was thought, the economy of the country could be placed on a sound footing. Things, however, did not work out the way they should have. While public sector units performed well in some areas like water supply, defence services, postal and communication services, steel, oil and thermal power generation, they failed in several other areas. More than hundred public enterprises, for example, produced a loss of Rs. 3,06.o8 crore during the year 1990-91. The outstanding debt burden in different sectors also touched new heights in the year 1992 (coal 281 crore, Iron and Steel-3200 crore, Electricity-1081 crore, sugar-755 crore and so on). External debt burden of the country increased up to Rs. 2,97,413 crore in the year 1991-92. In such a sad situation, it became impossible for the country to bail out this large number of sick public sector units by giving more financial support. The only way to bring the loss making public sector units into profit was to privatise them in a phased manner. Many countries like the U.S.A., the United Kingdom, Germany, Korea and France had already tried privatization under similar circumstances with wonderfully encouraging results. India, therefore, took the cue and came out with a liberalized trade and economic policy. Privatization means transferring of power from the government to the private individuals. It is based on the principle of least governmental interference and maximum private responsibility. In order to convert public sector units into private enterprise, the government decided to sell, in phases, some selected P.S.U shares to private entrepreneurs or to the general public through capital market. In some cases, the government thought of disinvesting the P.S.U .s in the form of privatization of the management and the ownership. The government is aware that it has to establish legal and institutional frame-work to make the market economy enforce competition and attract investment. The government has also opened up

trade with the outside world together with currency control to ensure that domestic prices are related to the world market price. The private managed enterprises, it is expected, will show better results because of high managerial skills. It also brings about a social control over business, timely supply of goods and services and brings in belter competition. About 50 countries in the world have already taken to the process of privatization. The government of India has recently taken a big leap forward by signing the G ATT agreement. This agreement that has found favour with more than 125 countries, places the country in the open world market in respect of trade and commerce. We may have to face tough competition and initial problems but we are certainly on the road to a respectable place in the world market. We are not going to lag behind in the matter of quality or quantity of production. It is expected that the new liberal policy of the government of India would show better results in years to come.

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