Economic Crisis & NEP 1991

India Economy Crisis: The origin of the financial crisis can be traced from the inefficient management of
the Indian economy in the 1980s. The income from public sector undertakings was also not sufficient to meet
the growing expenditure. At times, our foreign exchange, borrowed from other countries and international
financial institutions, was spent on meeting consumption needs. Neither was an attempt made to reduce such
profligate spending nor sufficient attention was given to boost exports to pay for the growing imports.

In the late 1980s, government expenditure began to exceed its revenue by such large margins that meeting the
expenditure through borrowings became unsustainable. Prices of many essential goods rose sharply. Imports
grew at a very high rate without matching growth of exports. As pointed out earlier, foreign exchange reserves
declined to a level that was not adequate to finance imports for more than two weeks. There was also not
sufficient foreign exchange to pay the interest that needs to be paid to international lenders. Also, no country
or international funder was willing to lend to India. India approached the International Bank for Reconstruction
and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and
received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected
India to liberalise and open up the economy by removing restrictions on the private sector, reduce the role of
the government in many areas and remove trade restrictions between India and other countries. India agreed
to the conditionalities of World Bank and IMF and announced the New Economic Policy (NEP). Under NEP
1991 the government initiated a variety of policies which fall under three heads LIBERALISATION,
PRIVATISATION AND GLOBALISATION.

New Economic Policy: 1991

New Economic Policy of India was launched in the year 1991 under the leadership of P. V. Narasimha Rao.
This policy opened the door of the India Economy for the global exposure for the first time. In this New
Economic Policy P. V. Narasimha Rao government reduced the import duties, opened reserved sector for the
private players, devalued the Indian currency to increase the export. This is also known as the LPG Model of
growth.

Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy (NEP) of
India. Manmohan Singh introduced the NEP on July 24,1991. The main objectives behind the launching of
the New Economic policy (NEP) in 1991 are stated as follows:

1. The main objective was to plunge Indian Economy in to 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 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 un-necessary 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 the all sectors of the economy. That is why the
reserved numbers of sectors for government were reduced.

A. LIBERALIZATION: Liberalization entails the removal of governmental limitations on private

individual activity. Important areas such as the industrial sector, financial sector, tax reforms, foreign
exchange markets and trade and investment sectors which received greater attention in and after 1991.

1. Deregulation of Industrial Sector: Industrial licensing was abolished for almost all but product
categories — alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace
and drugs and pharmaceuticals. The only industries which are now reserved for the public sector
are defence equipment’s, atomic energy generation and railway transport. Many goods produced
by small scale industries have now been de-reserved. In many industries, the market has been allowed
to determine the prices.

2. Financial Sector Reforms: Financial sector includes financial institutions such as commercial banks,
investment banks, stock exchange operations and foreign exchange market. The financial sector in
India is regulated by the Reserve Bank of India (RBI). You may be aware that all the banks and other
financial institutions in India are regulated through various norms and regulations of the RBI. The RBI
decides the amount of money that the banks can keep with themselves, fixes interest rates, nature of
lending to various sectors etc.

One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to
facilitator of financial sector. This means that the financial sector may be allowed to take decisions
on many matters without consulting the RBI. The reform policies led to the establishment of private
sector banks, Indian as well as foreign. Foreign investment limit in banks was raised to around 50 per
cent. Those banks which fulfil certain conditions have been given freedom to set up new branches
 without the approval of the RBI and rationalise their existing branch networks. Foreign Institutional
Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest
in Indian financial markets.

3. Tax Reforms: Tax reforms are concerned with the reforms in government’s taxation and public
expenditure policies which are collectively known as its fiscal policy. There are two types of taxes
direct and indirect. Since 1991, there has been a continuous reduction in the taxes on individual
incomes as it was felt that high rates of income tax were an important reason for tax evasion.

Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in order to
facilitate the establishment of a common national market for goods and commodities. Another
component of reforms in this area is simplification. In order to encourage better compliance on the
part of taxpayers many procedures have been simplified and the rates also substantially lowered.

4. Foreign Exchange Reforms: The first important reform in the external sector was made in the foreign
exchange market. In 1991, as an immediate measure to resolve the balance of payments crisis, the
rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign
exchange. It also set the tone to free the determination of rupee value in the foreign exchange market
from government control.

5. Trade and Investment Policy Reforms: Liberalisation of trade and investment regime was initiated
to increase international competitiveness of industrial production and also foreign investments and
technology into the economy. The aim was also to promote the efficiency of the local industries and
the adoption of modern technologies. In order to protect domestic industries, India was following a
regime of quantitative restrictions on imports. This was encouraged through tight control over imports
and by keeping the tariffs very high. These policies reduced efficiency and competitiveness which led
to slow growth of the manufacturing sector.

B. PRIVATISATION: Privatization refers to the transition of a business, industry, or service from public
to private ownership and management. The following steps are taken for privatisation:

1. Sale of shares of PSUs: Indian Govt. started selling shares of PSUs to private and financial institution
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 industrialisation and removal of poverty. But these PSUs 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. Initially it was 3.

C. Globalisation: Globalization is broadly perceived as the integration of a nation’s economy with the
global economy, fostering greater interdependence and integration.

The features of globalisation under NEP 1991 are trade liberalization, Foreign direct investment, Integration
into global markets, technology transfer, cross-border trade, Access to global capital, economic diplomacy,
international collaborations, Export-oriented policies and Global supply chain integration.

Owing to globalisation, Indian companies have expanded their wings to many other countries. For example,
ONGC engaged in oil and gas exploration and production has projects in 16 countries. Tata Steel, a private
company established in 1907, is one of the top ten global steel companies in the world which have operations
in 26 countries and sell its products in 50 countries. It employs nearly 50,000 persons in other countries. HCL
Technologies, one of the top five IT companies in India has offices in 31 countries and employs about 15,000
persons abroad.

Conclusion: The New Economic Policy 1991 India was envisioned with a long-term goal of controlling
corruption, inefficiency, and stagnation in growth. The economy was in turmoil under the excessive
regulations and controls by the government and inefficient functioning of public sector units. In such a
situation, the new economic policy introduced various reforms that brought new and innovative ideas toward
building a base for the Indian economy to stand strong in the global forum. The new economic policy aims to
boost the economy growth with major developments and making India one of the leading economic powers
in the world.