New Economic Policy

Economic policies are the outcomes of economic planning: the decisions made by governments to influence the production, consumption, and distribution of wealth. This article has examined economic policies at all levels, from the local to the international, including their effects on international trade and foreign relations, their relationship to public health and environmental policies, and their impact on economic growth and recessions.

New economic policy of 1991

The government faced a financial crisis in 1991, which acted as a catalyst for economic reforms. The crisis was caused by a number of factors, including the Gulf War, which pushed up oil prices and reduced remittances from the Gulf, foreign reserves at an all-time low, and hyperinflation occurring at the same time.

To combat this, the government was forced to implement a new set of economic policy measures. The government requested a loan from the International Bank for Reconstruction and Development [I.B.R.D.] aka World Bank and the International Monetary Fund [I.M.F]. The financial assistance came with a condition that the economy be opened up and restrictions on the private sector be lifted. This set of policies was known as the New Economic Policy when it was announced in 1991.

Objectives of new economic policy 1991

1.) Introduce ‘globalisation’ into the economy and make it more market-oriented.

2.) Reduce the inflation rate and correct payment imbalances.

3.) Increase the economy’s growth rate and accumulate sufficient foreign exchange reserves.

4.) By removing unwelcome restrictions, the economy can be stabilised and converted into a market economy.

5.) Allow unrestricted international trade in goods, capital, services, technology, human resources, and so on.

6.) Increase private sector participation in all sectors of the economy. The government’s reserved sectors were reduced to just three as a result.

Goals of economic policy

Economic policy has four major goals: stable markets, economic prosperity, business development, and job protection.

Economic policy refers to government actions in the economic field. It covers the interest rate and government budget systems, as well as the labour market, national ownership, and many other areas of government intervention in the economy.

To achieve these objectives, governments employ policy tools that are under their control. These generally include interest rates and the money supply, taxes and government spending, tariffs, exchange rates, labour market regulations, and a variety of other government policies.

What is macroeconomic policy?

Macroeconomic policy is concerned with the overall operation of the economy. In broad terms, macroeconomic policy seeks to create a stable economic environment conducive to strong and sustainable economic growth, upon which job creation, wealth creation, and improved living standards rely. The three main pillars of macroeconomic policy are fiscal policy, monetary policy, and exchange rate policy. This brief describes the nature of each of these policy instruments and the various ways in which they can aid in the promotion of stable and sustainable growth.

What is monetary policy?

Monetary policy decisions are implemented by changing the cash rate (the interest rate on overnight loans in the money market).The forces of supply and demand for overnight funds determine the cash rate in the money market. The RBI(Reserve Bank of India) can target the cash rate through open market operations by increasing or decreasing the supply of funds used by banks to settle transactions among themselves. For example, if the RBI wishes to reduce the cash rate, it can provide more exchange settlement funds than commercial banks wish to hold. In this case, banks will respond by offloading funds, lowering the cash rate.

The RBI can influence interest rates throughout the financial system by changing the cash rate.

Exchange rate policy definition

If a country has a fixed or semi-fixed exchange rate, changing the exchange rate is a macroeconomic policy. Even in a floating exchange rate system, the government may attempt to influence the exchange rate unofficially by changing interest rates or buying/selling currency.

Devaluation

A devaluation is intended to increase export demand and economic growth. Inflation may rise as a result of devaluation. Raising the value of the exchange rate may be pursued in order to reduce the rate of inflation.

Conclusion

Therefore, we can finally conclude that The New Economic Policy has emphasised the importance of creating a more competitive environment in the economy as a means of increasing the system’s production and efficiency. Economic liberalisation or tariff reductions, market deregulation or opening markets to private and foreign actors, and tax reductions are all examples of new economic policies used to spread the country’s economic wings. Since mid-1991, the government has implemented significant policy changes in areas such as foreign trade, foreign direct investment, exchange rate, industry, budgetary discipline, and so on. When the various aspects are combined, they form an economic policy that is vastly different from what has come before.