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New Industrial Policy 1991 – Liberalization, Privatization & Globalization

In July 1991, India introduced New Industrial Policy (NIP) 1991 as part of economic reforms.

1. Background of New Industrial Policy 1991

  • Balance of Payments Crisis in 1990-91 forced India to seek IMF assistance, which required economic reforms.
  • Low Growth Rate – India’s GDP growth was stagnant around 3–3.5%, often termed the “Hindu rate of growth.”
  • Global Changes – End of the Cold War and collapse of the Soviet Union opened up global markets and increased competition.
  • Fiscal Deficit and Inflation – High fiscal deficit and rising inflation created macroeconomic instability, necessitating structural reforms.

2. Main Features of NIP 1991

1. Industrial Licensing Abolished

  • Industrial licensing abolished for most industries.
  • Only a small list of strategic industries remained under licensing.

2. Role of Public Sector Reduced

  • Number of industries reserved for public sector reduced from 17 to 8, later to even fewer.
  • Policy of disinvestment in selected public sector enterprises.

3. MRTP Act Provisions Relaxed

  • Asset limit for MRTP companies removed.
  • Large business houses allowed to expand and diversify.

4. Foreign Investment Liberalised

  • Automatic approval for FDI up to certain limits in many sectors.
  • Permission for foreign technology agreements.

3. Liberalisation, Privatisation and Globalisation (LPG)

(a) Liberalisation

  • Removal of licensing, quotas, controls and restrictions.
  • Greater freedom to private sector in investment, production and pricing.

(b) Privatisation

  • Transfer of ownership or management from public sector to private sector.
  • Disinvestment of government equity in PSEs.

(c) Globalisation

  • Increasing integration with world economy through trade, FDI, technology and capital flows.

4. Impact of NIP 1991

  1. Increased Industrial Growth – Industrial growth rate improved, with higher investment and greater efficiency due to competition and technology inflows.

  2. Rise of Private Sector – Private sector became the dominant force in manufacturing, services, and infrastructure, contributing significantly to GDP and employment.

  3. Foreign Investment Inflow – FDI increased from negligible levels to billions of dollars, especially in telecom, IT, automobiles, and services, bringing capital, technology, and management practices.

  4. Competitive Environment – Domestic firms faced intense competition from imports and MNCs, leading to quality improvement, cost reduction, and innovation.

  5. Export Growth – Exports grew substantially, especially in software services, pharmaceuticals, textiles, and engineering goods, improving India’s trade balance.

  6. Challenges and Disparities – While growth accelerated, regional disparities, income inequality, and agricultural sector distress persisted, requiring focused policy attention.

5. Quick Revision Points

  • NIP 1991 introduced LPG reforms.
  • Abolished most industrial licensing, reduced public sector role, liberalised FDI.
  • Aimed at higher growth, efficiency and global integration.

6. Quiz Time 🎯

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