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New Economic UPSC Notes for

Economy
Policy 1991
New Economic Policy 1991 was implemented by the administration of Narasimha Rao in
response to the economic crisis. The NEP reflected clearly a number of worldwide developments,
including the collapse of the socialist economy and the increasing acceptance of global economic
globalization.
In the Indian economy, the LPG reforms of 1991 transformed the nature of Indians themselves.
This subject is currently the basis of the Indian economy. It is vital for the Mains across the
disciplines to have a fair grasp of the shift that it brought in the Indian economy and world events.
This Article discusses the features and consequences of the New Economic Policy 1991. Study
this topic thoroughly because questions regarding it can be asked in both the UPSC Prelims and
Mains Exams.

New Economic Policy 1991

• Economic policy refers to government economic activity. It encompasses taxation, state
budgets, the supply of money, interest rates, labour market, national ownership and
numerous other economic areas of the government.

• India began its new economic policy in 1991, under the leadership of P. V. Narasimha
Rao. The first time the whole economy has been opened up using this method.
• This administration reduced import tariffs, freed up the private sector and reduced the
Indian rupee to encourage exports under the New Economic Policy P. V. Narasimha Rao.
Also known is the LPG growth model.

Objectives Of New Economic Policy: -

• The goal of the NEP was to reduce inflation rates and build up adequate reserves of
foreign money to increase its economic growth rate.
• The major aim is to plunge the Indian Economy into the 'globalisation' arena and provide
it with a new direction in the market.
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• It aimed at economic stabilisation and a market economy by eliminating all types of

unnecessary regulations.
• It urged private actors in all areas of the economy to expand their engagement. This is
why the reserved government sector numbers have decreased.
• Without many limitations, it aimed to enable the worldwide movement of products,
services, capital, people resources and technology.

Features of New Economic Policy

• Macroeconomic stabilisation and structural changes were part of the reform programme.
• Structural reforms are a medium- and long-term programme, address sector adaptations,
supply-side issues, and bring vitality to the economy and competitiveness.
• Macroeconomic stabilisation is a short-term macroeconomic crisis resolution programme
that regulates overall economic demand.
• It featured liberalised trade and investment policies that focused on exports, industrial
deregulation, disinvestment and public sector changes, as well as capital and financial
sector reforms.
• Focus areas of 1991 Economic Reforms were Liberalization, Privatization and
Globalisation.

What Factors Lead to 1991 Economic Reforms?

• Dismal PSU performance: This did not do well owing to political involvement and became
a major factor in government responsibility.
• Fall in the Reserves: India's foreign currency reserve decreased in 1990-91 to low ebb
and was not enough to pay for the import bill for 2 weeks.
• Price rise: the inflation rate grew from 6.7% to 16.7% as the money supply grew rapidly
and the economic condition of the country got worse.
• Fiscal Deficit Rise: The government's fiscal deficit has grown as a result of an increase
in non-development expenditures. The national debt and interest rose as a result of the
increased budget imbalance. Interest liability amounted to 36.4% of government total
spending in 1991.
• Iraq Conflict: The Iraq war broke out between 1990 and 1991 and contributed to higher
oil prices. The Gulf nations' flow of foreign money ceased, aggravating the issue further.

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1991 Economic New Policy Reforms

India's new economic policy, or the model of liberalisation, privatisation and globalisation, was
unveiled on 24 July 1991. India's new economic policy

Liberalization
• The process of making policies less restrictive of economic activity, as well as the lowering
of tariffs or the removal of non-tariff barriers is known as liberalisation.
• Prior to 1991, the government put a variety of restrictions on domestic private companies.
• The industrial licensing system, price control or financial control on goods, import licence,
foreign exchange control, limits on major company investment, and so on were among
them.
• The term "liberalisation of the economy" refers to the liberation of manufacturing units from
government-imposed direct or physical restrictions.
• The government saw that as a result of these regulations, a number of flaws had arisen in
the economy.
• The NEP believed economic liberalisation to be a critical component. Market forces, rather
than checks and regulations, were to be relied on more heavily.
• Reforms in the Industrial Sector:
o Abolition of Industrial Licensing: A new industrial policy was launched in July 1991.
Except for the following five industries, it repealed the licencing requirement. Liquor
(a), cigarettes (b), defence equipment (c), industrial explosives (d), and hazardous
chemicals (e).
o Public sector contraction: The number of industries allocated for the public sector
has been decreased from 17 to 8 under the new industrial policy. The number of
these industries decreased to only two in 2010-11: i. Nuclear Power and ii.
Railways.
• Financial Sector Reforms:
o The Reserve Bank of India (RBI) regulates and controls the financial industry in
India (Reserve Bank of India).
o The RBI's function shifted significantly from "regulator" to "facilitator" of the
financial industry as a result of liberalisation.
o In the Indian banking industry, the free play of market forces has resulted in the
rise of private bankers, both domestic and international.

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o Foreign institutional investors (FIIs) were also allowed to invest in Indian financial
markets as a result of the liberalisation.
• External Sector Reforms:
o Foreign exchange reforms and foreign trade policy changes are two examples of
external sector reforms.
o Devaluation of the Indian rupee versus foreign currencies began foreign exchange
liberalization in 1991.
o Devaluation refers to the decrease in the value of our currency in comparison to
other currencies.
• Fiscal Reforms:
o Fiscal reforms deal with the government's revenue and expenditure.
o Fiscal changes are mostly tax measures.
o Taxes are divided into two categories: a) direct taxes and b) indirect taxes.

Privatisation:
• The process of engaging the private sector in the ownership or operation of a state-owned
business is known as privatisation. It entails the progressive transfer of government
ownership and control of public-sector businesses.
• Privatization entails giving the private sector a larger role while diminishing the role of the
public sector.
• Disinvestment is the privatisation of public sector businesses by selling a portion of their
stock to the general public.
• The government took the following actions to carry out its privatisation policy:
• Disinvestment in the public sector, or the transfer of a public-sector company to the private
sector.
• The Industrial and Financial Reconstruction Board was established (BIFR). This board
was formed to help ill units in public-sector businesses that were losing money.
• The government's stake is being diluted. If the private sector obtains more than 51 percent
of the shares throughout the disinvestment process, ownership and management are
transferred to the private sector.

Check the details on the Economy Notes here.

Globalisation:
• Globalisation is the term used to describe the global integration of diverse economies.

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• Until 1991, the Indian government had a tight policy on imports and foreign investment,
including licencing of imports, tariffs, and other restrictions, but with the new policy, the
government adopted a globalisation strategy, adopting the following steps:
o Liberalization of imports. Many limitations on capital goods imports were lifted by
the government.
o The Foreign Exchange Regulation Act (FERA) was repealed, and the Foreign
Exchange Management Act was enacted in its stead (FEMA)
o Tariff structure rationalisation
o Duty on exports is abolished.
• Physical and political boundaries were no longer a barrier to economic operation as a
result of globalisation. The entire globe is transformed into a global community.
• Globalisation brings more connection and interdependence amongst the many nations
that make up the global economy.
• Outsourcing:
o Outsourcing is when a firm contracts a company to offer a regular service that was
previously done internally.
o It's a result of globalisation. India has become a key supplier of outsourcing
employment as a result of new economic policies. BPO, banking services, and so
on.
• WTO (World Trade Organization):
o The WTO was created to administer all multilateral trade agreements by giving all
nations in the worldwide market equal trading possibilities.
o India has been an active member of the World Commerce Organization (WTO),
which strives to increase international trade.

What International Events Have Been Linked To Indian Reforms?

• India borrowed large sums from the International Monetary Fund (IMF) to tide over its
Balance of Payments (BoP) problems (IMF).
• India was brought to its knees by the Asian financial crisis of 1997-99.
• The worldwide recession and dot-com bust of 2001, as well as the enormous global
uncertainty that surrounded the invasion of Iraq in 2003.
• China was in the forefront of the global economic boom from 2003 to 2008.
• At the time, the Soviet Union was falling, demonstrating that greater socialism could not
be the answer to India's problems.
• Deng Xiaoping's market-friendly reforms have transformed China.
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• The Gulf nations' flow of foreign cash was halted as a result of the 1990-91 Iraq conflict.

The Impact Of The LPG Reforms

Positive Impact:
• The rate of growth of India's GDP has risen. India's GDP growth rate was only 1.1 percent
in 1990-91, but following 1991 reforms, it rose year by year, reaching 7.5 percent in 2015-
16, according to the IMF.
• Since 1991, India has established itself as a profitable foreign investment destination, with
FDI equity inflows totaling US$ 19.33 billion in 2019-20.
• Exports climbed to USD 26.38 billion in October of this year.Because of the rise in
employment, per capita income grew.
• The unemployment rate was high in 1991, but when India implemented a new LPG
strategy, more jobs were created as new international firms arrived in India and many new
entrepreneurs established businesses as a result of liberalisation.

Negative Impact:
• Agriculture employed 72 percent of the population in 1991 and generated 29.02 percent
of GDP.
• Agriculture's share of GDP has dropped dramatically to 18%. Farmers' per capita income
has decreased as a result, and rural indebtedness has increased.
• As the Indian economy has been more open to international competition, more
multinational corporations (MNCs) are competing with local firms and enterprises that are
struggling owing to financial limitations, a lack of sophisticated technology, and inefficient
manufacturing.
• Globalization has also led to environmental damage through pollution from industrial
facilities and the removal of natural cover. It also has an impact on people's health.
• LPG policies have widened the country's economic disparities. An economy's greater
growth rate is accomplished at the price of people's wages, which may be reduced as a
result of job losses.

We have examined the consequences of the New Economic Policy 1996 on the Indian economy.
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