NEW ECONOMIC POLICY (NEP) IN

INDIA, 1991
B.A., LL.B (Hons)
Macroeconomics Seminar
 Introduction
◦ In 1991, India faced an unprecedented financial crisis triggered by a major
Balance of Payments situation.
◦ The crisis presented an opportunity for the government to reform the country's
economic situation and introduce fundamental changes in economic policy.
◦ Structural reforms and stabilization policies were implemented to remove
rigidities in various sectors of the Indian economy and correct weaknesses on
the fiscal and BoP fronts.
◦ P V Narasimha Rao was the Prime Minister and Dr. Manmohan Singh was the
Finance Minister when the New Economic Policy (NEP) was introduced.
 What is the New Economic Policy (NEP)?

◦ It is a set of policy measures that emphasized liberalization, and

privatization, and its outcome was globalization.
◦ It 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).
◦ New economic policy was undertaken given the 1991 financial crisis that
arose due to reasons like the Gulf War that pushed up oil prices and lower
remittances from the Gulf, foreign reserves at an all-time low, and
hyperinflation occurring at the same time.
 Objectives of New Economic Policy 1991
◦ Enter into the field of ‘globalization’ and make the economy more market-
oriented.
◦ Reduce the inflation rate and rectify imbalances in payment.
◦ Increase the growth rate of the economy and create enough foreign exchange
reserves.
◦ Stabilize the economy and convert the economy into a market economy by the
removal of unwanted restrictions.
◦ Allow the international flow of goods, capital, services, technology, human
resources, etc. without too many restrictions.
◦ Enhance the participation of private players in all sectors of the economy. For this,
the reserved sectors for the government were reduced to just 3.
Steps under economic reforms of 1991
• Three branches of the economic reforms of 1991:
1.Liberalization
2.Privatization
3.Globalization
• The goal was to shift India from a Soviet-style economy to a
market economy
• The reforms were initiated in 1991 and continue to this day
 Steps taken under Liberalisation
◦ Commercial banks were given the freedom to determine interest rates, which
was previously decided by the Reserve Bank of India.
◦ The investment limit for small-scale industries was raised to Rs. 1 crore.
◦ Indian industries were allowed to import capital goods and raw materials
from foreign countries.
◦ Industries could diversify their production capacities and reduce production
costs based on market requirements.
◦ Companies with assets worth more than Rs.100 crore were no longer
classified as MRTP firms which were subject to severe restrictions.
◦ Industrial licensing and registration were removed, except for the following
sectors: Cigarette, Liquor, Industrial explosives, Defence equipment,
Hazardous chemicals, and Drugs.
 Steps taken under Privatisation
• The privatization reforms involved selling shares of PSUs to the public and
financial institutions.
• Disinvestment in PSUs was carried out, meaning selling PSUs to the private
sector.
• The number of industries reserved for the public sector was reduced from 17 to
only 3, which are
1.transport and railway,
2.atomic energy, and
3.mining of atomic minerals.
 Steps taken under Globalisation
• A gradual reduction in customs duties and tariffs on exports and imports
• Enforced long-term trade policy
1.Implementation of liberal policy
2.Encouragement of open competition
3.Removal of controls on foreign trade
• Replacement of positive list with a limited negative list for imports
• Partial convertibility of Indian currency
• Increase in equity limit of foreign capital investment from 40% to 100%
• Enactment of the Foreign Exchange Management Act (FEMA) to replace the
Foreign Exchange Regulation Act (FERA)
 Conclusion
◦ The economic reforms of 1991 brought about widespread economic
development in the country.
◦ Deregulation led to great leaps in sectors such as civil aviation and telecom.
◦ The end of the License Raj resulted in the emergence of many start-ups and
mushrooming businesses in India.
◦ However, the process of economic development is still incomplete and requires
improvement.
◦ The New Economic Policy was implemented during a crisis in the economy.
◦ Increased regulations and controls by the government led to corruption, delays,
and inefficiency.
◦ Economic growth started to decline.
◦ Economic reforms were introduced to reduce restrictions on the economy in this
scenario.
 Reference

◦ Economic Reforms of 1991 in India – economic reforms of 1991 for IAS (byjus.c
om)
◦ New Economic Policy (NEP) 1991 - Indian Economy Notes (prepp.in)
THANK YOU!