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new economic policy
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After independence, the country’s slogan of ‘self reliance’ proved to be ostentatious in no time. The evolution of post-Independence economic policy had three basic features: autarchic trade policy, extension of public sector, and direct, discretionary and quantitative controls on the private sector. These features interacted in the institutional environment of functioning markets and private ownership of means of production to generate perverse incentives that constricted the operation of the market forces and private economic agents and resulted in a low rate of economic growth of 3.5 per cent per annum despite the doubling of the rates of domestic savings and investment over the thirty year period 1950-80. Public sector units were expected to operate efficiently and generate resources for further investment. Instead, they were saddled with multiplicity of often-conflicting objectives; they had to accept politically driven inappropriate administered prices for their products and services, and were subjected to bureaucratic and political interference, which made their efficient operation difficult. They also faced the 'soft-budget constraint' with neither penalty for losses nor rewards for efficient functioning. Poor performance of public sector units had multiplier effects through inefficient, low quality and often irregular and fluctuating supplies of infrastructure services and universal intermediate inputs (like iron and steel and financial services), which partly contributed to the inefficiencies of the private sector units. At the macro level, they became a drain on the exchequer through their recurring losses instead of generating resources for investment. At the same time, complex structure of differential indirect tax rates as also administered interest rates and labor legislation led to distortions in relative product and factor prices and resulted in not only inefficient allocation but also misallocation of resources out of line with relative scarcities of capital and labor. In spite of rigorous exercise of control over imports and release of foreign exchange, the imports, particularly from the nations of imperialism, grew at an ever-increasing rate.
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