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The New Economic Policy of 1991 is a market-oriented economic policy introduced by the new Prime Minister Narasimha Rao in 1991. The objective was to reduce poverty. It was also aimed to attract foreign investments and raise the economy’s growth rate. The NEP started with deregulation, reforms, and liberalisation of trade policies. It also involved stabilisation measures like reducing the fiscal deficit, increasing Foreign Institutional Investment (FII) flow, improving export performance, etc. It involved some structural reforms like opening domestic capital markets, i.e., introducing the Stock Exchange and several depositories, banking, and insurance.
About New Economic Policy
In 1991, India was facing a high unemployment rate and slow growth. The Government introduced the New Economic Policy to make a coordinated effort to improve employment opportunities, which ultimately led to an overall increase in income levels by globalisation. The NEP was introduced by the then Prime Minister, P. V. Narasimha Rao, as an Economic plan to accelerate the country’s economic growth through a series of structural reforms, e.g., privatisation, liberalisation in trade and exchange rates, making more FDI investment, and deregulation in the banking, insurance and telecommunications sectors and other areas. Beneficiary groups include farmers and rural folk, who benefit from higher agricultural growth and liberalisation of imported markets for manufactured goods.
The NEP accounted for the key policies introduced to sustain economic growth from 2000 to 2004 and reduce poverty. The Government took a series of initiatives to improve the situation in the economy by initiating reform measures, which included several changes in the financial sector, infrastructure development, education, and health and educational reforms. The policy was generally targeted at various social groups such as workers, farmers, women, SC/STs, etc., to improve their economic, social, and, consequently, political status.
Objectives
• To achieve a higher, sustainable, and more widely shared economic growth rate.
• To reduce income disparities, both between and within regions.
• To reduce regional imbalances in development.
• To remove the backlog of public investment in infrastructure.
• To tackle the problem of providing adequate social services to the poor and vulnerable.
Features
• The new policy was implemented to revive economic growth in India, and it was one of the most critical policy reforms for achieving macroeconomic stability.
• It tried to promote investment and export-led growth by reducing government intervention in the economy, financial sector, trade, and industry.
• New economic policies were based on an extension of the principles of competitive markets to broaden and deepen market relations in all spheres.
The main globalisation initiative initiated by the Government of India under the NEP was the liberalisation and reduction of import controls to improve overall external competitiveness.
• Trade liberalisation was the main feature of the policy.
• NEP involved several fiscal reforms, including a reduction in fiscal deficit and broadening the tax base by expanding the instruments for revenue generation, liberalisation of indirect taxes, rationalising subsidies, and cost-cutting in public enterprises.
• Investment deregulation was another important feature of NEP.
• Fixed deposit rates were increased in line with inflation trends.
• Newmarket rates were introduced for capital and insurance markets.
• Public sector banks were separated from the direct control of the government. Their main functions were restricted to commercial banking, including payment and settlement of government accounts, rather than financing investments.
• The NEP also provided for an independent monetary policy.
• It brought about a change in the foreign trade policy to promote exports and discourage imports through exchange rate adjustments.
• The NEP adopted a strategy to promote greater private investment initiatives with appropriate regulations and monitoring.
Implementation
• A reduction in the fiscal deficit to 4% of GDP by cutting subsidies and increasing tax collection.
• A liberalisation of the trade regime through export-import policy, tariff, and non-tariff barriers.
• The industrial sector was opened to private investment (through public sector disinvestment) and foreign investment.
• Public sector enterprises were corporatised, divested, and restructured.
• Investment in agriculture and rural development was increased.
• The Banking sector was opened to make it more efficient and profitable.
• Improvements in the infrastructure were planned with participatory community-initiated planning.
• Globalisation was promoted.
• The Reserve Bank of India was made independent through a constitutional amendment.
Impacts
The New Economic Policy of 1991, as part of the overall plan to transform India into a developed nation by 2020, is still credited with contributing to India’s growth rate, which has been growing at around 8-10% since then. The NEP advocated industrialisation and technological innovation. It also advocated the re-orientation of the government’s role as a provider of goods and services. It stressed market reforms, increased FDI in the Indian economy, reduced fiscal deficit, and stabilised funds.
Conclusion
The NEP successfully restored macro-economic stability and increased the economy’s growth rate from 1992 to 1996, with a substantial increase in exports, foreign exchange reserves, and borrowing from the foreign sector. The impact of NEP was not as robust as expected because there were serious problems regarding the implementation of expected reforms and macro stability in the economy. It had far-reaching implications on economic growth and paved the way for private sector participation in the economy. If implemented successfully, IV could help reduce poverty and promote a higher economic growth rate.
