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                  New Economic                                                                  UPSC Notes for 
                  Policy 1991                                                                   Economy 
                         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. 
                                                                                                                                              Page - 2 
                
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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. 
                                                                                                                                              Page - 3 
                
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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.  
                                                                                                                       Page - 4 
              
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