10 Questions
What was the period of the 'early liberalization' or 'reforms by stealth' in India?
1981 to 1989
What was the main aim of the reforms in the 1980s?
To change the prevailing thrust on 'inward-oriented' trade and investment practices
What was the result of the public sector leading the manufacturing and service sectors?
Very low returns on investment
What was the reason for the private sector investments being inhibited?
Convoluted licensing policies and public sector reservations
What was the effect of import controls on the economy?
Insulated the economy from foreign competition
What was the change made to the asset limit of MRTP firms?
It was increased from 20 crore to 100 crore
What was the purpose of introducing the Modified Value-Added Tax (MODVAT)?
To simplify the tax system
What was the result of the government's controls and bureaucratic procedures on the public sector?
Inefficiency and low returns on investment
What was the effect of the restrictions on foreign trade and investments?
Insulated the economy from foreign competition
What was the purpose of establishing the Securities and Exchange Board of India (SEBI)?
To regulate the stock market
Study Notes
New Economic Policy Reforms
- Licensing restrictions were removed for all industries except 18 that related to security, strategic concerns, social reasons, and environmental issues.
- 80% of the industry was taken out of the licensing framework, which was later reduced to 5 industries: arms and ammunition, atomic substances, narcotic drugs, hazardous chemicals, and cigarettes and cigars.
- The public sector was limited to 8 sectors based on security and strategic grounds, which was later reduced to 2: railway transport and atomic energy.
Deregulation and Liberalization
- The Monopolies and Restrictive Trade Practices (MRTP) Act was restructured, eliminating the need for pre-entry scrutiny of investment decisions and prior approval for large companies for capacity expansion or diversification.
- Many goods produced by small-scale industries were de-reserved, enabling entry of large-scale industries.
- The public sector monopoly was ended in many sectors, with only 8 industries reserved for the public sector due to strategic and security concerns.
Foreign Investment and Trade
- Foreign investment was liberalized, and the license-raj and autarchic policies were eliminated.
- Import controls, tariffs, quotas, and quantitative restrictions were removed, opening the economy to foreign competition.
Pre-Reform Era
- The 1960s and 1970s were marked by decelerated growth, three wars, major droughts, and oil shocks.
- Government policies aimed at equitable distribution of income and wealth had anti-growth effects.
- The Monopolies and Restrictive Trade Practices (MRTP) Act restricted large firms' expansion and entry into new sectors.
- The policy of reservation of products for exclusive manufacture by the small-scale sector was initiated in 1967, excluding big firms from labor-intensive industries.
Early Liberalization
- The reform initiatives from 1981 to 1989, referred to as 'early liberalization' or 'reforms by stealth', aimed to change the prevailing thrust on 'inward-oriented' trade and investment practices.
- Key reforms included de-licensing of 25 broad categories of industries, broad-banding, increase in the asset limit of MRTP firms, introduction of modified value-added (MODVAT), and establishment of the Securities and Exchange Board of India (SEBI).
This quiz assesses your understanding of the economic reforms introduced in India, specifically the New Economic Policy and its impact on the licensing framework.
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