New Economic Policy - Indian Economy




1. New Economic Policy is related to economic reforms. Its aim is to bring about reforms in production patterns, to obtain new technology and to use full capacity expeditiously and in toto.

2. The New Economic Policy was devised and implemented, for the first time in the year 1985 during the period of Prime Minister Rajiv Gandhi.The second wave of new economic reforms came in the year 1991 during the period of P.V. Narsimha Rao government.

3. The main reason to start new economic policy (1991) was the Gulf-War and the problem of balance of payment in India.

4. Three main objectives of new economic policy were — Liberalisation Privatisation and Globalisation.

5. Main sectors of new economic reform policy, 1991 were —-Fiscal Policy, Monetary Policy, Value Fixation Policy, Foreign Policy, Industrial Policy, Foreign Investment Policy, Business Policy and Public Sector Policy.

6. The following four main steps were taken under the Fiscal Policy, 1991: 
(i)  To control public expenditure strictly 
(ii) To expand Tax Net.
(iii) To observe discipline in management of funds of Central and State governments.

7. Under the Monetary Policy, steps were taken to control inflation.

8. Measures implemented under the Industrial Reforms Policy, 1991 were: 
(i) Delicencing of industries except for the list of 18 industries. 
(ii) M.R.T.P. norms were relaxed for disinvestment. 
(iii) The areas reserved for the public sector were opened to the private sector.

9. The objectives fixed for reforms in the Foreign Investment Policy, 1991 were :

(i) Direct foreign investment up to 50% was given automatic approval, in many industries. 
(ii) Foreign companies, involved in export activities were allowed to invest upto 51% of capital. 
(iii) The government gave automatic approval for the Technology Agreement in the industries of high priorities.

10. Under the Trade Policy 1991, steps were taken to abolish the excessive protection given to many industries, for the promotion of international integration of the economy.

11. The measures implemented to bring efficiency and market discipline under the Public Sector Policy 1991 were as under (i) Number of reserved industries decreased to 8. Presently there are only four. 
(ii) The work of rehabilitation of sick industries handed over to the Board of Industrial Financial Reconstruction. 
(iii) Industries were made powerful with the help of the Memorandum of Understandings (MoU). 
(iv) Voluntary Retirement Schemes started to cut down the size of the workforce.


The main objectives behind the launching of the New Economic policy (NEP) in 1991 by the Union Finance Minister Dr. Manmohan Singh are stated as follows:

1. The main objective was to plunge the Indian Economy into the arena of ‘Globalization and to give it a new thrust on market orientation.

2. The NEP intended to bring down the rate of inflation

3. It intended to move towards a higher economic growth rate and to build sufficient foreign exchange reserves.

4. It wanted to achieve economic stabilization and to convert the economy into a market economy by removing all kinds of unnecessary restrictions.

5. It wanted to permit the international flow of goods, services, capital, human resources and technology, without many restrictions.

6. It wanted to increase the participation of private players in all sectors of the economy. That is why the reserved numbers of sectors for the government were reduced. As of now this number is just 2.


Beginning with mid-1991, the govt. has made some radical changes in its policies related to foreign trade, Foreign Direct Investment, exchange rate, industry, fiscal discipline etc. The various elements, when put together, constitute an economic policy that marks a big departure from what has gone before.

The thrust of the New Economic Policy has been towards creating a more competitive environment in the economy as a means to improving the productivity and efficiency of the system. This was to be achieved by removing the barriers to entry and the restrictions on the growth of firms.


Following steps were taken under the Liberalisation measure:

(i) Free determination of interest rate by the commercial Banks:

Under the policy of liberalization interest rate of the banking system will not be determined by RBI rather all commercial Banks are independent to determine the rate of interest.

(ii) Increase in the investment limit for the Small Scale Industries (SSIs):

Investment limit of the small-scale industries has been raised to Rs. 1 crore.  So these companies can upgrade their machinery and improve their efficiency.

(iii) Freedom to import capital goods:

Indian industries will be free to buy machines and raw materials from foreign countries to do their holistic development.

(v) Freedom for expansion and production to Industries:

In this new liberalized era now the Industries are free to diversify their production capacities and reduce the cost of production. Earlier governments used to fix the maximum limit of production capacity. No industry could produce beyond that limit. Now the industries are free to decide their production by their own on the basis of the requirement of the markets.

(vi) Abolition of Restrictive Trade Practices:

According to the Monopolies and Restrictive Trade Practices (MRTP) Act 1969, all those companies having assets worth Rs. 100 crore or more were called MRTP firms and were subjected to several restrictions. Now these firms have not to obtain prior approval of the Govt. for taking investment decision. Now MRTP Act is replaced by the competition Act, 2002.



1Liberalisation

Removal of Industrial Licensing and Registration:

Previously private sector had to obtain license from Govt. for starting a new venture. In this policy private sector has been freed from licensing and other restrictions.

Industries licensing is necessary for following industries:

(i) Liquor

(ii) Cigarette

(iii) Defence equipment

(iv) Industrial explosives

(v) Drugs

(vi) Hazardous chemicals

2. Privatisation:

Simply speaking, privatization means permitting the private sector to set up industries that were previously reserved for the public sector. Under this policy, many PSUs were sold to the private sector. Literally speaking, privatization is the process of involving the private sector in the ownership of Public Sector Units (PSU’s).

The main reason for privatization was in the currency of PSU’s are running in losses due to political interference. The managers cannot work independently. Production capacity remained under-utilized. To increase competition and efficiency privatization of PSUs was inevitable.


Step took for Privatisation:

The following steps are taken for privatization:

1. Sale of shares of PSUs:

Indian Govt. started selling shares of PSUs to public and financial institutions e.g. Govt. sold shares of Maruti Udyog Ltd. Now the private sector will acquire ownership of these PSU’s. The share of private sector has increased from 45% to 55%.

2. Disinvestment in PSU’s:

The Govt. has started the process of disinvestment in those PSU’s which had been running into loss. It means that Govt. has been selling out these industries to private sector. Govt. has sold enterprises worth Rs. 30,000 crores to the private sector.

3. Minimisation of Public Sector:

Previously Public sector was given the importance with a view to help in industralisation and removal of poverty. But these PSU’s could not able to achieve this objective and policy of contraction of PSU’s was followed under new economic reforms. Number of industries reserved for public sector was reduces from 17 to 2.

(a) Railway operations

(b) Atomic energy


 4. Globalization:

Literally speaking Globalisation means to make Global or worldwide, otherwise taking into consideration the whole world. Broadly speaking, Globalisation means the interaction of the domestic economy with the rest of the world with regard to foreign investment, trade, production and financial matters.



Steps taken for Globalisation:

Following steps are taken for Globalisation:

(i) Reduction in tariffs:

Customs duties and tariffs imposed on imports and exports are reduced gradually just to make India's economy attractive to global investors.

(ii) Long term Trade Policy:

Forcing trade policy was enforced for a longer duration.

The main features of the policy are:

(a) Liberal policy

(b) All controls on foreign trade have been removed

(c) Open competition has been encouraged.

(iii) Partial Convertibility of Indian currency:

Partial convertibility can be defined as converting Indian currency (up to a specific extent) in the currency of other countries. So that the flow of foreign investment in terms of Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI).



This convertibility stood valid for the following transaction:

(a) Remittances to meet family expenses

(b) Payment of interest

(c) Import and export of goods and services.

(iv) Increase in Equity Limit of Foreign Investment:

The equity limit of foreign capital investment has been raised from 40% to 100% percent. In 47 high-priority industries, foreign direct investment (FDI) to the extent of 100% will be allowed without any restriction. In this regard, Foreign Exchange Management Act (FEMA) will be enforced.

If the Indian economy is shining on the world map currently, its sole attribution goes to the implementation of the New Economic Policy in 1991.

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