Pre-reform scenario and the New Economic Policy, 1991

1. The pre-reform scenario (1951–1991)

After Independence India chose a mixed economy with a dominant public sector and planned development through Five-Year Plans (the First Plan began in 1951). The model drew on the Mahalanobis strategy of the Second Plan (1956), which stressed heavy industry. Its main features were:

1. Industrial licensing under the Industries (Development and Regulation) Act, 1951. A licence was needed to start a unit, expand capacity, change location or product.
2. Dominance of the public sector under the Industrial Policy Resolutions of 1948 and 1956, with 17 industries reserved for the State.
3. Control of big business under the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969: large houses needed approval for expansion.
4. Restriction on foreign capital under the Foreign Exchange Regulation Act (FERA), 1973, which generally limited foreign equity to 40 per cent; some multinationals such as Coca-Cola and IBM left India in 1977–78.
5. Import substitution and protection: high tariffs, quantitative restrictions and import licensing.
6. Reservation of products for small-scale industry.
7. Financial repression: nationalisation of 14 banks in 1969 and 6 more in 1980, administered interest rates, and directed credit.
8. Price and distribution controls on steel, cement, fertiliser, sugar and other goods.

Results. The system built an industrial base, research institutions and self-sufficiency in food after the Green Revolution. But growth averaged about 3.5 per cent a year until 1980, which Professor Raj Krishna called the “Hindu rate of growth”. The “licence-permit raj” bred delay and corruption, public sector units made losses, industry was inefficient and uncompetitive, technology was outdated, and exports stagnated.

2. The crisis of 1991

By 1990–91 the economy faced a severe balance of payments crisis:

• Foreign exchange reserves fell to a level that could pay for only a few weeks of imports.
• The Gulf War of 1990–91 raised oil prices and stopped remittances from Indian workers in Kuwait and Iraq.
• The fiscal deficit was high and growing, financed by borrowing.
• Inflation reached double digits.
• India’s credit rating was downgraded and commercial lenders stopped lending; non-resident Indians withdrew deposits.
• The government pledged gold with the Bank of England and the Union Bank of Switzerland to raise foreign currency, and turned to the IMF and World Bank for loans.

3. The New Economic Policy

The government of P.V. Narasimha Rao, with Dr. Manmohan Singh as Finance Minister, announced the New Industrial Policy on 24 July 1991 and presented the reform Budget the same day. The NEP has two parts: stabilisation measures (short-term, to control inflation, the fiscal deficit and the balance of payments) and structural reforms (long-term, to make the economy efficient and competitive), grouped under liberalisation, privatisation and globalisation (LPG).

Objectives

1. Restore macroeconomic stability and solve the balance of payments crisis.
2. Raise the rate of growth and make industry internationally competitive.
3. Replace controls with market forces.
4. Attract foreign investment and technology.
5. Reduce the role of the State to areas where it is necessary.
6. Integrate the Indian economy with the world economy.

Main measures

• Industrial policy: industrial licensing abolished except for a short list of industries (now only a handful, such as defence aerospace, hazardous chemicals, industrial explosives, tobacco products and alcoholic drinks); reserved public sector list cut to eight, later to two; MRTP pre-entry restrictions removed, and the MRTP Act was later replaced by the Competition Act, 2002.
• Foreign investment: automatic approval of foreign equity up to 51 per cent in priority industries; FERA replaced by the Foreign Exchange Management Act, 1999; foreign institutional investors allowed into the stock market from 1992.
• Trade policy: import licensing dismantled, tariffs reduced in stages, quantitative restrictions removed by 2001; India became a founding member of the WTO on 1 January 1995.
• Exchange rate: devaluation of the rupee in July 1991, a market-determined exchange rate from 1993, and current account convertibility in August 1994.
• Financial sector: banking reforms on the Narasimham Committee (1991) report: lower reserve requirements, freeing of interest rates, entry of new private banks, prudential norms; SEBI given statutory powers in 1992; capital issues control abolished.
• Fiscal reforms: cuts in subsidies, rationalisation of taxes on the Chelliah Committee report, and later the Fiscal Responsibility and Budget Management Act, 2003 and the GST from 1 July 2017.
• Public sector reform: disinvestment, memoranda of understanding giving autonomy, and referral of sick units for revival.

4. Assessment

Achievements: higher growth; a large rise in foreign exchange reserves; growth of foreign investment; a boom in IT, telecom and services; wider consumer choice; modernisation of industry; and a lower share of controls in daily business.

Criticism: neglect of agriculture; “jobless growth” in organised industry; rising inequality between regions and income groups; pressure on small industries from imports and multinationals; disinvestment at low prices; and greater exposure to global shocks.

How this is examined

January 2026 (100 marks) set “Explain the New Economic Policy 1991” for 16 marks; June 2025 set “Explain the New Economic Policy in detail” (10 marks) and the pre-reform scenario as a 6-mark note. For the pre-reform note use the eight features of section 1 and two lines on results; for the NEP use background, objectives, measures in heads, and assessment.