New Economic Policy 1991

Also called: New economic reforms, Structural adjustment programme · Topic: Recent Developments in Indian Politics: Coalitions, Mandal and a New Consensus · NCERT: Class 12, Ch 8 "Recent Developments in Indian Politics"

Meaning

The New Economic Policy (NEP) 1991 is the set of Liberalisation, Privatisation and Globalisation (LPG) reforms. P.V. Narasimha Rao's Congress government and Finance Minister Manmohan Singh brought them out in full in 1991, but they had already started under Rajiv Gandhi.

• It matters because, in NCERT's words, it "radically changed the direction" India's economy had taken since independence.
• India moved away from state-led planning and the licence system.
• Every government since 1991 has kept these reforms. This is the first part of the "new consensus" in Indian politics.

Explanation

Why reform came: the 1991 crisis

• Balance of payments (BoP) crisis: a country runs short of foreign currency. It then cannot pay for its imports or repay its foreign loans.
• How the reserves fell:
• At the end of March 1990, foreign exchange reserves could pay for a little under two months of imports [2].
• By the end of December 1990, they could pay for only three weeks of imports [2].

• In July 1991, the Finance Minister said reserves were about ₹2,500 crore, enough for only a fortnight of imports [3].

• Gold pledged: in July 1991, the RBI pledged gold for a short time to raise loans. This showed the world that India would meet all its foreign payments [2].

• Fiscal deficit (the gap between what the government spends and what it earns, filled by borrowing):
• The Centre's fiscal deficit was more than 8% of GDP in 1990-91 [3].
• The 1991-92 Budget aimed to cut it from about 9% to 6.5% of GDP [4].

The three parts: L, P and G

• Liberalisation: fewer government controls on business.
• Privatisation: a bigger role for private firms and a smaller role for the public sector.
• Globalisation: more trade with the rest of the world, and more investment from it.
• Structural adjustment: these were deep changes to how the economy works, not just short-term fixes. Such programmes are often tied to loans from the IMF and the World Bank.

The main steps, in order

1. Rupee devaluation (July 1991): - Devaluation means the government officially lowers the value of the rupee against foreign currencies. Exports become cheaper and imports become dearer. - The rupee was devalued by about 19% in mid-1991. The aim was to restore confidence and stop money flowing out of India [4]. - Exporters also got import licences they could sell. In practice, this created a dual exchange rate (two rates at the same time) [4].

2. Union Budget 1991-92: Manmohan Singh presented it on 24 July 1991 [3].

3. Statement on Industrial Policy (24 July 1991), announced on the same day as the Budget: - Industrial licensing (needing government permission to set up or expand a factory) was abolished for all except 18 industries [5]. - Fewer industries were reserved for the public sector. Public and private firms now had to compete [5]. - FDI (foreign direct investment, where foreigners own and run businesses in India) got automatic approval up to 51% foreign equity in 34 priority industries [5]. - The Foreign Investment Promotion Board (FIPB) was set up to approve investment above 51% [5]. - The MRTP Act, 1969 was relaxed [5]. This law had limited the growth of big business houses. The Competition Act, 2002 later replaced it.

4. Trade reform: import duties and import controls were cut.

5. Financial-sector reform: banking and capital markets were reformed. The details belong to the economy paper.

Limits and criticism

• Weak mandate:
• The reforms came during a crisis.
• They were brought in by a minority government (a government with fewer than half the Lok Sabha seats, which survives only while other parties support it or stay neutral).

• Critics say there was no full political debate and no clear mandate from voters.

• Social concerns: many movements and organisations criticised the policies. Their worries were jobs, farmers, the public sector and economic sovereignty (India's freedom to set its own economic policy).

In the Constitution and practice

• Legal form:
• The NEP is not a constitutional amendment or a single Act. It is a set of executive policy decisions.

• These decisions were carried out through the Union Budget (the "annual financial statement" under Article 112), the Statement on Industrial Policy, and changes to laws such as the MRTP Act, 1969 [5].

• Who carried it out:

• A Congress government led by P.V. Narasimha Rao (June 1991 – May 1996), with Manmohan Singh as Finance Minister.

• The AIADMK and some smaller parties supported it (NCERT).

• Political survival:

• The government began as a minority government and later won a majority in the Lok Sabha.
• It survived a no-confidence motion in July 1993. A no-confidence motion is a Lok Sabha vote saying the House no longer trusts the ministers; if it passes, the whole government must resign under collective responsibility (Art. 75(3)).

• That vote later led to the JMM bribery case.

• Same period, other landmarks: the 73rd and 74th Amendments (1992) gave constitutional status to Panchayati Raj and municipalities. The Look East policy brought closer ties with ASEAN.

• Outcome and lasting effect:
• Every later government kept the reforms: the United Front (1996-98), NDA (1998-2004), UPA (2004-14) and NDA (2014 onwards).
• This continuity is the first element of the "new consensus": the major parties now agree on the basic economic path.

Don't confuse with

• Union Budget 1991-92 vs Statement on Industrial Policy 1991: both came on 24 July 1991. The Budget dealt with government income, spending and the deficit [3]. The Industrial Policy ended licensing (except for 18 industries) and opened the door to FDI [5].
• Origin vs visibility: the reforms began under Rajiv Gandhi. They only became visible in 1991 under Rao. An exam option saying they "began in 1991" is loose.
• Liberalisation vs privatisation: liberalisation removes controls, such as licensing. Privatisation shifts the economy's weight from the public sector to private firms. A step can be one without being the other.
• MRTP Act, 1969 vs Competition Act, 2002: the MRTP Act was only relaxed in 1991 [5]. It was replaced by the Competition Act, 2002.

Prelims Hooks

• 24 July 1991: the Union Budget 1991-92 and the Statement on Industrial Policy were both presented on this day [3][5].
• Industrial Policy 1991: licensing stayed for only 18 industries. FDI got automatic approval up to 51% in 34 priority industries. The FIPB was set up for investment above 51% [5].
• July 1991: the RBI (not the Finance Ministry) pledged gold [2]. The rupee was devalued by about 19% [4].
• Reserves in July 1991: about ₹2,500 crore, enough for only a fortnight of imports [3].
• Trap: the Rao government was a minority Congress government backed by the AIADMK when the reforms began. It won a majority only later.
• Trap: the NEP was continued by every later government, including the NDA and United Front. It was not reversed by any of them.

Mains Points

• Crisis-driven reform and democracy (GS-I):
• The LPG reforms grew out of a BoP emergency under a minority government. They were never first put to voters.
• Yet every later government kept them, which shows a lasting party and elite consensus.

• Critics argue this has narrowed the room for real economic choice at election time.

• Minority governments can make big changes: the Rao government delivered both the NEP and the 73rd and 74th Amendments. This challenges the view that minority or coalition governments cannot take big decisions.

• Growth vs social cost: a balanced answer weighs the critics' concerns (jobs, farm distress, a shrinking public sector, economic sovereignty) against the recovery from the 1991 crisis, when reserves had fallen to a fortnight of imports [3], and the higher growth and reserves that followed.

Read more

• The Rao government and the New Economic Policy (1991-96)