New Economic Policy (NEP) 1991- Objectives, Features and Impacts of NEP 1991 | UPSC Economy Notes

Priyanka Waghmare | Updated: Feb 7, 2022 11:14 IST

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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 to 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.

Check out complete Indian Economy Notes here.

  • New Economic Policy 1991 (UPSC Notes for Economy): Download PDF Here!
  • New Economic Policy 1991
  • Objectives Of New Economic Policy
  • Features of New Economic Policy
  • What Factors Lead to 1991 Economic Reforms?
  • Reforms of the New Economic Policy 1991
    • Liberalisation
    • Privatisation
    • Globalisation
  • What International Events Have Been Linked To Indian Reforms?
  • The Impact Of The LPG Reforms
    • Positive Impact
    • Negative Impact
  • New Economic Policy FAQs

New Economic Policy 1991 (UPSC Notes for Economy): Download PDF Here!

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 and measures that emphasized liberalization, privatization, and its outcome was globalization.
  • 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.
  • New Economic Policy of 1991 included various policy measures such as stabilization measures to control inflation and the correct balance of payments and various structural reform measures to improve the efficiency of the economy and increase international competitiveness by removing rigidity in various economic segments.
  • Thie P. V. Narasimha Rao administration reduced import tariffs, freed up the private sector, and reduced the Indian rupee to encourage exports under the New Economic Policy, also known as 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 'globalization' arena and provide it with a new direction in the market.
  • 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 any limitations, it aimed to enable the worldwide movement of products, services, capital, people resources, and technology.

Also read: Minimum Support Price in India (MSP) here

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, and 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 Liberalisation, Privatization, and Globalisation.

Check out the Difference Between Globalisation and Liberalisation here.

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 a 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.

Check out the Concept of Import Cover and Forex Reserves here.

Reforms of the New Economic Policy 1991

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

Liberalisation

    • 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:
      1. 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).
      2. Public sector contraction: The number of industries allocated for the public sector has 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.

Also, check Industrial Sickness here.

  • Financial Sector Reforms:
    • The Reserve Bank of India (RBI) regulates and controls the financial industry in India.
    • The RBI's function shifted significantly from "regulator" to "facilitator" of the financial industry as a result of liberalisation.
    • In the Indian banking industry, the free play of market forces has resulted in the rise of private bankers, both domestic and international.
    • Foreign Institutional Investors (FIIs) were also allowed to invest in Indian financial markets as a result of the liberalisation.
  • External Sector Reforms:
      • Foreign exchange reforms and foreign trade policy changes are two examples of external sector reforms.
      • Devaluation of the Indian rupee versus foreign currencies began foreign exchange liberalization in 1991.
      • Devaluation refers to the decrease in the value of our currency in comparison to other currencies.
  • Fiscal Reforms:
    • Fiscal reforms deal with the government's revenue and expenditure.
    • Fiscal changes are mostly tax measures.
    • 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.

Study the Disinvestment Policy in India here.

Globalisation

  • Globalisation is the term used to describe the global integration of diverse economies.
  • Until 1991, the Indian government had a tight policy on imports and foreign investment, including licensing of imports, tariffs, and other restrictions, but with the new policy, the government adopted a globalisation strategy, adopting the following steps:
    • Liberalization of imports. Many limitations on capital goods imports were lifted by the government.
    • The Foreign Exchange Regulation Act (FERA) was repealed, and the Foreign Exchange Management Act was enacted in its stead (FEMA)
    • Tariff structure rationalisation
    • 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 among the many nations that make up the global economy.

Check the Difference Between FERA And FEMA here.

Outsourcing

    • Outsourcing is when a firm contracts a company to offer a regular service that was previously done internally.
    • 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)

    • The WTO was created to administer all multilateral trade agreements by giving all nations in the worldwide market equal trading possibilities.
    • India has been an active member of the World Trade Organization (WTO), which strives to increase international trade.

Study India and WTO relations here.

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.
  • 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 at 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.
  • 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 Gross Domestic Product (GDP) has risen. India's GDP growth rate was only 1.1 percent in 1990-91, but following the 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. Download the Testbook App now to learn more about the Indian Economy for UPSC!

नई आर्थिक नीति 1991 के बारे में हिंदी भाषा में पढ़ें!

New Economic Policy FAQs

Q.1 When did the government make a new economic policy announcement?

Ans.1 On July 24, 1991, the government unveiled the plan of the New Economic Policy.

Q.2 What was the reason behind the government's announcement of a new economic policy in 1991?

Ans.2 The 1991 New Industrial Policy intended to significantly de-regulate industry in order to encourage the development of a more efficient and competitive industrial sector.

Q.3  In India, who was the first to implement the LPG policy?

Ans.3 LPG reforms were launched in India by Minister P. V. Narasimha Rao.

Q.4 What are the benefits of the 1991 New Economic Policy?

Ans.4 For the first time, India's economy was exposed to the rest of the world thanks to new economic policies. It also lowered import tariffs, created a private-sector reserve, and depreciated the Indian rupee to boost exports.

Q.5 What is the significance of New Economic Policy?

Ans.5 The NEP reflected a more market-oriented economic strategy aimed at boosting the country's economy.

Q.6  Who Initiated The 1991 Economic Reforms?

Ans.6 Manmohan Singh, as finance minister in the PV Narasimha Rao government, introduced economic reforms in the Union Budget on July 24, 1991.

Q.7 What do the 1991 LPG reforms stand for?

Ans.7 Liberalisation, privatisation, and globalisation are the three pillars of the LPG Reforms.

Q.8 What influence has LPG had in India?

Ans.8 The LPG reforms have undoubtedly boosted the Indian economy. The economy's overall growth has been trending upward, as seen by GDP growth.

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