define new economic policy

 The new economic policy of India would refer to the economic reforms and liberalisation that have been undertaken by the Government of India since 1991. The reforms were precipitated by a balance of payments crisis faced by the Indian economy due to dwindling foreign exchange reserves in the aftermath of the Gulf War in 1990. This left India in danger of defaulting on its loans. The reform measures that were adopted included the following;

  • Progressive lowering of tariffs, duties and taxes.

  • State monopoly over certain sectors was ended and private participation was encouraged in many new sectors.

  • Regulations governing foreign investment were liberalised allowing for inflow of funds into the country through institutional investors.

  • Protectionist policies were abandoned and globalisation was embraced.

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Starting around 1991, some far- reaching changes in policy were made in India called as new economic policies:

  • The government decided that the time had come for Indian producers to compete with producers around the globe.
  • It felt that competition would improve the performance of producers within the country since they would have to improve their quality.
  • This decision was supported by powerful international organisations.
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The governments main economic aims are:

Economic growth more goods and services produced in the economy.

Low inflation prices that are not rising too fast.

Low unemployment as many people employed as possible.

Fairdistribution of income

The main policies used by government to achieve these aims are:

Fiscal policy government spending and taxation. Government spending is also known aspublic expenditure.

Monetary policy interest rates (the cost of borrowing money and rewards for saving).

Legislation laws that affect the way that a person or business can act.

The UK Government spends over £400bn a year and takes about the same in taxes. It also passes legislation. These affect the way business can act, e.g. what it can produce, how much it costs and who it can employ. It also affects the way that consumers spend their money.


Taxation comes in two forms:

Direct taxation taxation on income and profits (income tax, National Insurance and corporation tax).

Indirect taxation taxation on spending (VAT, excise duty).

Some examples of UK taxation are shown in the table below:


Type of tax/how it works

Effects on business if the tax rises

Income tax

A percentage of an individuals income is taken in tax.

A reduction in disposable income (money available to spend after tax); therefore households will not be able to spend as much, reducing sales.


A percentage (17.5% currently in the UK) is added to the price of the item. It does not apply to all goods, e.g. childrens clothes.

Increases the cost of the product, leading to fewer sales.

Tax on beer (exciseduty)

An amount is added to the cost of beer.

Increases the cost of the product, leading to fewer sales.

Corporation tax

A tax on profits made by businesses.

Reduces the amount of profit available at the end of the year to be either distributed to the shareholders or to pay for more investment.

National insurance

A tax on incomes (like income tax).

BUT also a tax on businesses who have to pay a portion of the tax on behalf of the worker

The same as income tax and corporation tax but added to together.

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