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New Economic Policy (1991) – Economic Reforms

India’s New Economic Policy (NEP) 1991 introduced wide‑ranging reforms to overcome the balance of payments crisis and move towards a market‑oriented economy.

1. Background to NEP 1991

  • High fiscal deficit and public debt.
  • Severe balance of payments crisis – foreign exchange reserves enough for only a few weeks of imports.
  • Slow growth, high inflation, inefficiencies due to License Raj and over‑regulated public sector.
Exam Tip
In answers, always mention BoP crisis + high fiscal deficit + inefficiencies of License Raj as reasons for 1991 reforms.

2. Main Components of Economic Reforms

1. Industrial Policy Reforms

  • Abolition of most industrial licensing.
  • Reduction in number of industries reserved for public sector.
  • Relaxation of MRTP Act (limits on big business).

2. Trade Policy Reforms

  • Reduction in import tariffs and removal of quantitative restrictions.
  • Shift from import substitution to export promotion.
  • Partial convertibility of rupee on current account.

3. Fiscal Reforms

  • Rationalisation and reduction of tax rates.
  • Broadening of tax base.
  • Introduction of VAT/GST in later years.

4. Financial Sector Reforms

  • Deregulation of interest rates.
  • Entry of new private sector banks.
  • Strengthening of capital market regulation (SEBI).

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3. Objectives of NEP 1991

  • Achieve higher economic growth.
  • Improve efficiency and productivity.
  • Integrate Indian economy with global markets.
  • Reduce role of state in production and encourage private initiative.

4. Outcomes – Mixed Experience

Positive:

  • Higher growth in GDP and especially in services sector.
  • Increased FDI and FII inflows.
  • Modernisation and global competitiveness in many industries.

Challenges:

  • Rising inequality between regions and social groups.
  • Pressure on small‑scale and traditional industries.
  • Greater dependence on world markets.

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5. Quick Revision Points

  • NEP 1991 was response to BoP and fiscal crisis.
  • Key reforms: industrial, trade, fiscal, financial sector.
  • Aimed at growth, efficiency, global integration and private sector development.

6. Quiz Time 🎯

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