After independence, India adopted a mixed economy framework to combine the advantages of capitalistic economy as well as socialist economy. However, over the years, the policies pursued towards controlling and regulating the economy started hampering the process of growth and development which ultimately led to the adoption of NEW ECONOMIC POLICY (NEP), unfolding a series of Economic Reforms i.e. a set of economic policies to accelerate the pace of growth and development.
Table of Contents
WHAT IS NEP?
In 1991, the Government of India introduced the New Economic Policy (NEP), initiating a series of reforms to rescue the economy from the crises of early 1990s. At the time, India was struggling with a severe balance of payment deficit, rising fiscal deficit, and an acute shortage of foreign currency reserves. Seeking assistance from the World Bank, India was met with the condition of opening up its economy to global markets.
NEP has three broad components:
- The policy of LIBERALISATION (L) in place of LICENSING (L) for the industries and trade.
- The policy of PRIVATISATION (P) in place of QUOTAS(Q) for the industrialists.
- The policy of GLOBALISATION (G) in place of PERMITS (P) for exports and imports.
Thus, LPG was set to replace LPQ in 1991.
FACTS RELATED TO LPG
This blog is not about LPG because there are already hundreds of blogs and information available about that, here I am going to tell you about some interesting facts related to LPG as well as LPQ:
- A few liberalisation measures were introduced in 1980s as well in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive.
- Several types of controls on private enterprises in the domestic economy such as industrial licensing system, price control on goods, import license etc. given rise to corruption, undue delays and inefficiency.
- LPG abolished the requirement of licensing except for the following five industries – liquor, cigarette, defence equipments, industrial explosives and dangerous chemicals.
- Under the NEP, number of industries reserved for public sector were reduced from 17 to 8. In 2010-11, these industries were further reduced to three industries – atomic energy, railways and defence equipments.
- Before Liberalisation Reserve Bank of India was a regulator and it used control commercial banks. It was after the NEP that the RBI became a facilitator and banks were nationalised.
- Prior to Liberalisation, tax structure was quite complex and tax rate were really high. High tax rates induced tax evasion, causing loss of revenue to the government.
- Devaluation was the first step taken by the government of India, intentionally reducing the value of currency to attract foreign investment and rise exports.
- To combat the crises of 1990s, government had to outright the sale of public enterprise to the private entrepreneurs and withdraw its ownership and management from mixed enterprises.
- Navratnas were introduced to motivate the PSUs because most public sector enterprises turned into a deadweight, mounting losses of PSUs became unsustainable.
- Initially the equity limit of foreign capital investment was 40% which now ranges from 51 to 100
CONCLUSION
The New Economic Policy of 1991 marked a turning point in India’s economic journey, shifting the nation from a heavily regulated framework to a more open, competitive, and globally connected economy. By introducing Liberalisation, Privatisation, and Globalisation, the reforms not only addressed the immediate crises of the 1990s but also laid the foundation for long-term growth and development. While the transition came with its own challenges, NEP continues to shape India’s economic landscape and remains one of the most significant milestones in its path towards modernization.
