The New Economic Policy of 1991 was a significant turning point in India's economic history. It was implemented on 24th July 1991. It shifted from a closed and controlled economy to an open and liberalized one. This policy was introduced to address the economic challenges faced by the country. It aimed to promote growth, efficiency, and global integration. It brought major reforms in various sectors, including industry, trade, and finance. The policy aimed to attract foreign investment and encourage private entrepreneurship. With the New Economic Policy, India embarked on economic liberalization. It led to increased competition, modernization, and globalization. It shaped the country's economic landscape. 

This article discusses the features and consequences of the New Economic Policy 1991. Study this topic thoroughly for UPSC IAS exam because questions regarding it can be asked in both the UPSC Prelims and Mains Exams.

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What is the New Economic Policy 1991?

The Government of India introduced the New Economic Policy (NEP) in 1991 to respond to a balance of payments crisis. The NEP is credited to former Prime Minister Manmohan Singh as its architect. The NEP also emphasized implementing structural reforms to boost economic efficiency. It sought to enhance international competitiveness by removing rigidities across various economic sectors. The 1991 NEP was pivotal in reshaping India's economic landscape, ushering in significant transformations. The economic policy 1991 aimed at achieving multiple goals within India's economy. These objectives included:

• Accumulating foreign exchange reserves.
• Eliminating market restrictions.
• Facilitating global trade of goods, services, capital, human resources, and technology.
• Fueling economic growth.

Also, check out the Indian Foreign Policy here.

Objectives Of New Economic Policy (NEP 1991)

• The goal of the NEP 1991 was to reduce inflation rates and build up adequate foreign money reserves 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 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 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.

Major Features of New Economic Policy 1991

• Macroeconomic stabilisation and structural changes were part of the reform programme.
• Structural reforms are medium and long-term programmes that address sector adaptation 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, public sector changes, and capital and financial sector reforms.
• Focus areas of the NEP 1991 Economic Reforms were Liberalisation, Privatization, and Globalisation.

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Major Branches of 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 reforms are mentioned as follows.

Liberalisation

Liberalisation is the process of making policies less restrictive of economic activity. It also involves the lowering of tariffs or the removal of non-tariff barriers.

• Before 1991, the government put many restrictions on domestic private companies. Some of these restrictions include the following:
  • Industrial licensing system, 
  • Price control or financial control on goods, 
  • Import license, 
  • Foreign exchange control, 
  • Limits on major company investment, and so on.
• The term “liberalization of the economy” refers to liberating manufacturing units from government-imposed restrictions.
• The government saw that many flaws had arisen in the economy due to these regulations.
• The NEP believed economic liberalisation to be a critical component. Rather than checks and regulations, market forces were to be relied on more heavily.

Privatisation

Privatization is the process of involving the private sector in owning or operating a government-owned business.

• It aims to give the private sector a larger role while reducing the involvement of the public sector.
• Disinvestment involves selling a part of the stock to the public to privatize public sector businesses.

To implement the privatization policy, the government took the following actions:

• Disinvestment of public sector companies, transferring them to the private sector.
• Establishment of the Industrial and Financial Reconstruction Board (BIFR). BIFR assists financially struggling units in public sector businesses.
• Dilution of the government's stake. Ownership and management are transferred to the private sector if they acquire more than 51% of the shares during disinvestment.

Globalisation

Globalisation refers to the integration of economies worldwide. The Indian government adopted a globalization strategy in 1991. It involved the following steps:

• Import restrictions, such as licensing and tariffs, were relaxed.
• The Foreign Exchange Management Act (FEMA) replaced the Foreign Exchange Regulation Act (FERA).
• The tariff structure was rationalized.
• Export duties were abolished.
• Globalization removed barriers, both physical and political, to economic operations. It transformed the world into a global community.
• It led to increased connections and interdependence among nations in the global economy.
• India became a significant provider of outsourcing jobs. This is especially seen in areas like BPO and banking services.
• India actively participated in the World Trade Organization (WTO) to promote international trade.

Check the Difference Between FERA And FEMA 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 insufficient to pay 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 country's economic condition worsened.
• Fiscal Deficit Rise: The government’s fiscal deficit has grown due to increased non-development expenditures. The national debt and interest rose due to 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.

We have examined the consequences of the New Economic Policy 1996 on the Indian economy. You can check out our UPSC Online Coaching and download the Testbook App now to check out various other topics relevant to the UPSC IAS Exam.