New Economic Policy 1991: Features, Objectives, Initiatives & UPSC Notes

The New Economic Policy 1991 refers to the set of economic reforms introduced by the Government of India under Prime Minister P.V. Narasimha Rao. The Indian government introduced the new economic policy 1991 as a significant step toward economic reforms. 

The policy was designed to reduce restrictions on the economy and strengthen India's position in the global economic scenario. The new economic policy of India was launched formally by Finance Minister Dr Manmohan Singh under the leadership of P.V. Narasimha Rao, the Prime Minister of India. It enacted steps to increase India's economic credibility in the global arena. The new economic policy 1991 India focuses on building foreign exchange reserves, removing market restrictions, and improving the exchange of goods, services, capital, human resources, and technology worldwide, thus encouraging the economy's growth.

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The New Economic Policy 1991 is a topic relevant to the UPSC CSE context under General Studies Paper III. It is a basic topic for aspirants which helps to understand the dynamic aspect of the New Economic Policy of 1991. The New Economic Policy 1991 is an important topic for UPSC Civil Services because it highlights the key aspects of the New Economic Policy India, which are frequently discussed in the exam. Join UPSC Coaching today to boost your preparation. 

Check out the complete Indian Economy Notes here.

The Government of India introduced the New Economic Policy (NEP) in 1991 to respond to a balance of payments crisis. The New Economic Policy 1991 is credited to former Prime Minister Manmohan Singh as its architect. The New Economic Policy 1991also emphasized implementing structural reforms to boost economic efficiency. It sought to enhance international competitiveness by removing rigidities across various economic sectors. Before 1991, India observed limited economic growth due to multiple controls and restrictions on new ventures and the inflow of foreign goods and services. So, a monetary policy in India was necessary to bring about significant reforms that would remove the barriers to growth and boost the economy. The key features of the New Economic Policy 1991 India are mentioned as follows: 

• The policy emphasized liberalization and privatization, allowing global exposure.
• The new economic policy of India recommended structural reforms and measures to control inflation. 
• The policy focused on increasing international market competitiveness by allowing the entry of foreign companies. 
• The policy reduced control and reservation by the government in different sectors and allowed more participation of private companies to help in growth and profitability.

Also, check out the Indian Foreign Policy here.

Objectives Of New Economic Policy (NEP 1991)

• The goal of the New Economic Policy 1991 was to reduce inflation rates and build up adequate foreign money reserves to increase its economic growth rate.
• The primary 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 stabilization 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 number of reserved government sectors has 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.

Significant Features of New Economic Policy 1991

The policy promoted disinvestment in public sector enterprises and encouraged private ownership to enhance efficiency and competitiveness. It aimed to integrate India with the global economy by promoting foreign trade, investment, and the flow of technology and capital.

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

Check out the Monetary Policy Committee here.

Major Branches of New Economic Policy, 1991

India's new economic policy, or the model of liberalization, privatization, and globalization, was unveiled on 24 July 1991. India's new economic policy reforms are mentioned as follows.

Liberalisation

Liberalization 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 liberalization to be a critical component. Rather than checks and regulations, market forces were to be relied on more heavily.

Privatization

Privatization is the process of involving the private sector in owning or operating a government 24 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.

Globalization

Globalization 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?

India faced a severe shortage of foreign exchange, with reserves barely enough to cover a few weeks of imports. The government’s expenditure far exceeded its revenue, leading to unsustainable borrowing and rising debt. Double-digit inflation rates eroded purchasing power and destabilized the economy.

• 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.