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New Economic Policy 1991: Objectives and Components

Last Updated : 06 Apr, 2023
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In the early 1990s, India faced a major crisis followed by a foreign exchange deficit, resulting in its economic downfall. To overcome the crisis, the government came up with adjustments to the economy by bringing new reforms. The reforms introduced were called ‘structural reforms’ and launched under the ‘New Economic Policy (NEP)’. 


What is New Economic Policy?

The New Economic Policy was introduced in 1991 under the leadership of P. V. Narasimha Rao. It refers to the economic activities of the government and includes various policy and structural perform methods like stabilisation measures to control inflation and correct BoP (Balance of Payment), improving the efficiency of the economy, and increasing international competitiveness.

The Stabilisation Measures refer to the short-term measures launched by the government with the aim of:

  1. Controlling inflation by keeping the prices of goods under control, and
  2. Maintaining a sufficient foreign exchange reserve to correct the weakness of BoP (Balance of Payment).

Along with Stabilisation measures, the government also launched Structural Reform Measures (long-term measures) with the aim of:

  1. Improving the efficiency of the economy, and
  2. Removing rigidity from various segments of the Indian Economy to increase international competitiveness.

Objectives of the New Economic Policy, 1991

  1. The main objective of the NEP was to open the Indian economy into the Globalisation arena and provide a new direction to the Indian market. 
  2. The NEP focused on reducing the rate of inflation and building up foreign exchange reserves to accelerate the economic growth of the country.
  3. The NEP aimed at increasing the participation of the private sector in economic growth by reducing the number of sectors reserved for the government.
  4. The NEP was intended at permitting a global movement of goods and services, capital, human resources, and technology by reducing trade restrictions.
  5. The NEP aimed at attaining economic stability and an economic market by eliminating all the unessential trade and tariff restrictions.

Components of the New Economic Policy, 1991

The New Economic Policy has been divided into three broad concepts that are: Liberalisation, Privatisation, and Globalisation, or the LPG Model. The LPG Model was introduced to replace the LQP Model, i.e., Licensing, Quotas, and Permits. The main aim of introducing the reforms was to attain a high rate of economic growth, reduce the rate of inflation, reduce the fiscal deficit, and overcome the BoP (Balance of Payment) crisis.


Liberalisation of an economy is considered a key component of NEP. Before the New Economic Policy of 1991, the private sector was in control of the government. Because of this, the domestic industries were not allowed to take any decisions regarding the industry’s work without the government’s interference. This resulted in a fall in professionalism and inefficiency of work within the industry. With the introduction of the liberalisation policy, this sector gained the freedom of decision-making without any interference from the government.

The government also decided to abolish the licensing system. Before 1991, a business needed to get a license from the government to start any industrial activity. This resulted in a delay in getting a license, as there was a long queue of people before the window of the government department, seeking authorisation to get a license. This also resulted in corruption as the officers started taking bribes to make the process faster. To end this, the government abolished the licensing system and permitted individuals to start their industrial activities without any permission (however permission is still required in industries, such as medicine, defense equipment, etc.).

Under the Liberalisation Policy, the government of India introduced various economic reforms. These reforms are:

  • Industrial Sector Reforms: This reform included policies like Reduction in Industrial Licensing, Decrease in the Role of the Public Sector, De-reservation under Small-Scale Industries, and the Monopolies and Restrictive Trade Practices (MRTP) Act.
  • Financial Sector Reforms: This reform included policies like Change in the Role of RBI, Origin of Private Banks, Increase in limit of Foreign Investment, and Ease in the Expansion Process.
  • Tax Reforms: There are generally two types of taxes, Direct and Indirect Taxes. This reform included policies like the Rationalisation of Direct Taxes, Reform in Indirect Taxes, and Simplification of Process.
  • Foreign Exchange Reforms: This reform included policies like the Devaluation of Rupee and Market Determination of Exchange Rate.
  • Trade and Investment Policy Reforms: This reform included policies like the Removal of Quantitative Restrictions on Import and Export, Removal of Export Duties, Restriction in Import Duties, and Relaxation in Import Licensing System. 


Privatisation refers to the partial or full ownership and operation of public sector enterprises by the private sector. It implies the withdrawal of government ownership from the public sector. It can be done in two ways:

  1. Outright sale of part of the equity of Public Sector Undertakings (PSUs) to private entrepreneurs (also known as Disinvestment), or
  2. Withdrawal of ownership and management of the public sector companies from the government to the private sector.

The need for privatisation was felt mainly because of the poor performance of the Public Sector Undertakings. As a result, the consumers were facing a major loss, as they did not receive quality products, and other services, such as poor delivery systems, etc. With the introduction of the privatisation policy, this factor was eliminated.

  • Unlike PSUs, Privatisation promoted the diversification of production.
  • Unlike PSUs, the Privatisation of enterprises generated higher profits.
  • It also promoted customer superiority.
  • Unlike PSUs, Privatisation provides high productivity.
  • Unlike PSUs, Privatisation promoted growth and development by working in a competitive environment.


Globalisation refers to the integration of the economy of a country with the economies of other countries. The process of globalisation is associated with the free flow of trade, capital across borders, increasing openness, growing economic independence, and deepening economic integration in the world. The Globalisation of the economy is considered to be a complex phenomenon as it is a result of a set of various policies that aim at integrating an economy with the world and transforming it towards greater interdependence.

The main aim of globalisation was to integrate the Indian economy with the global economy. As a result, there will be an unrestricted flow of information, goods and services, technologies, and even people within countries, which will eventually enhance the development of the country. The government allowed foreign companies to hold 51 percent or more shares of the Indian companies in the case of collaboration so that they can function freely and as the owner. This also promoted the transfer of the latest technologies into Indian territory due to collaboration with MNCs. The reduction of the tariff and non-tariff barriers, adoption of policies to promote exports, increase in Foreign Investments, increase of foreign currency in the country (Forex), growth of the IT industry in India, and several other features came under the globalisation policy.

Measures of the LPG Policy

  1. Due to the Liberalisation of the economy, the market got opened up to more foreign investments and import and export of goods.
  2. The Liberalisation Policy helped in reducing the dependence on foreign loans and expand the banking sectors and capital markets.
  3. Privatisation Policy helped in opening up the industries, that were reserved for the public sector, to the private sector. 
  4. Privatisation Policy helped in reducing the monopolies of the government by increasing competition. 
  5. Privatisation of PSUs resulted in the promotion of efficient and improved quality of goods and services for the consumers.
  6. The Globalisation Policy helped in opening the local market to the global market which helped India in connecting with the global financial markets.
  7. It helped in opening up the economy to foreign direct investment and reducing international trade restrictions.

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