What were the features of the liberalization of the Economy under the New Economic Policy?

1. Deregulation of the Industrial sector.

2. Reduction in the role of RBI from the regulator to facilitator of the financial sector.

3. Increment in Corporate Tax.

4. To resolve the balance of payments crisis, the rupee was devalued against foreign currencies

5. Import licensing was abolished except in case of hazardous and environmentally sensitive industries.

The correct answer is 1, 2, 4, and 5.

Key Points

• Liberalization was introduced to put an end to restrictions and open up various sectors of the economy.
• Though a few liberalization measures were introduced in the 1980s in areas of industrial licensing, export-import policy, technology up-gradation, fiscal policy, and foreign investment, reform policies initiated in 1991 were more comprehensive.
• Deregulation of the Industrial Sector: Hence, Statement 1 is correct.
  • In India, regulatory mechanisms were enforced in various ways
    • industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm, or to decide the number of goods that could be produced, and the private sector was not allowed in many industries.
    • some goods could be produced only in small-scale industries and controls on price fixation and distribution of selected industrial products.
  • The reform policies introduced and after 1991 removed many of these restrictions. Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes, hazardous chemicals industrial explosives, electronics, aerospace and drugs, and pharmaceuticals. Hence statement 5 is correct.
  • The only industries which are now reserved for the public sector are defense equipment, atomic energy generation, and railway transport.
• Financial Sector Reforms: Financial sector includes financial institutions such as commercial banks, investment banks, stock exchange operations, and the foreign exchange market.
  • One of the major aims of financial sector reforms is to reduce the role of RBI from the regulator to facilitator of the financial sector. Hence, Statement 2 is correct.
• Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion.
  • The rate of corporation tax, which was very high earlier, has been gradually reduced. Hence, Statement 3 is incorrect.
  • Efforts have also been made to reform the indirect taxes, taxes levied on commodities, to facilitate the establishment of a common national market for goods and commodities.
  • To encourage better compliance on the part of taxpayers many procedures have been simplified and the rates have also been substantially lowered.
• Foreign Exchange Reforms: 
  • In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. Hence, Statement 4 is correct.
  • This led to an increase in the inflow of foreign exchange. 
• Trade and Investment PolicyReforms:
  • Liberalization of trade and investment regime was initiated to increase the international competitiveness of industrial production and also foreign investments and technology into the economy.
  • The aim was also to promote the efficiency of the local industries and the adoption of modern technologies.