New Economic Policy 1991: Overview, Objectives, and Significance

By BYJU'S Exam Prep

Updated on: November 14th, 2023

The New Economic Policy 1991 was undertaken by Finance Minister Manmohan Singh. Globalization resulted from the New Economic Policy of India, a set of legislative initiatives that strongly emphasized privatization and liberalization. Back in 1991, when India was facing an unprecedented internal economic crisis along with changing international scenario, the then government in power, led by Narasimha Rao, came up with economic reforms or the NEP 1991 to tackle all the issues.

At present, we still follow the NEP 1991 model for economic reforms. The topic of New Economic Policy, covered under the economy section is extremely relevant for the upcoming UPSC Exam.

New Economic Policy 1991: Overview

Manmohan Singh, the then finance minister, launched the New Economic Policy to address the country’s economic problems in the 1990s. This followed the International Monetary Fund (IMF) lending guidelines for India. The country’s economy was losing legitimacy, and no country was ready to provide money. The nation’s foreign exchange reserves also shrank during this time.

A New Economic Policy was implemented in response to the 1991 financial crisis, which was brought on by factors such as the Gulf War, which increased oil costs and decreased remittances from the region, record-low foreign reserves, and concurrent hyperinflation. It encompassed a variety of policy actions, including stabilization actions (to control inflation and maintain the proper balance of payments) and different structural reform actions (to improve the economy’s efficiency and increase international competitiveness by removing rigidity in various economic segments).

This NEP was also known as the LPG Model of Growth.

Objectives of the New Economic Policy 1991

The objectives of the New Economic Policy 1991:

  • To make the Indian economy a player in the Globalization space and to give it a fresh focus on market orientation.
  • The goal of the New Economic Policy was to slow the rate of inflation.
  • To accelerate economic expansion and accumulate significant foreign exchange reserves.
  • The New Economic Policy 1991 promoted economic stability and eliminated market constraints that hindered growth.
  • You can bring more goods, services, money, people, and technology from elsewhere by reducing barriers.
  • Government-reserved sectors were eliminated to increase private players’ involvement in different economic sectors.

Significance of the NEP 1991

The government brought structural Reforms and Stabilization Policies in 1991. The idea was to pace the country’s economic growth, which was halted due to external/internal factors. The Structural Reforms were ushered in to tide over the rigidities in the various sectors of the Indian economy. Stabilization policies were brought to correct the weaknesses of the fiscal and Balance of Payments.

Features of the New Economic Policy

The features of the New Economic Policy 1991 are generally considered threefold:


The Reserve Bank of India was the authorized bank to determine the interest rates. After New Economic Policy 1991, a commercial bank could determine the interest rates.

  • ₹1 Crore was set up as the investment limit for small-scale industries.
  • After New Economic Policy, Indian industries got the freedom to import capital goods like machinery and raw materials from foreign countries.
  • Earlier, the government fixed the maximum production capacity of industries. After NEP 1991, industries could diversify their production capacities and lessen production costs. Industries were able to decide this based on market requirements.
  • Some of the restrictive trade practices were lifted. Earlier, companies with assets of more than ₹100 crores were under MRTP firms (as per Monopolies and Restrictive Trade Practices (MRTP) Act 1969). These were subjected to severe restrictions lifted after New Economic Policy.
  • Industrial licensing and registration were lifted. Accordingly, the private sector was set free to start a new venture without obtaining licenses. Only a few sectors are exceptions that still need licenses, such as cigarettes, liquor, industrial explosives, defence equipment, hazardous chemicals, and drugs.


Privatization aims to open the private sector to previously reserved industries for the government sector. This involves selling the PSUs to private players. The objective of privatization in New Economic Policy 1991 was to remove political interference in PSUs.

  • Shares of PSUs were sold to the public and financial institutions. For example, Maruti Udyog shares were sold to private players.
  • PSUs are sold to private players, which means disinvestment in PSUs.
  • The number of reserved public sectors decreased from 17 to 3. The three reserved public sectors were transport and railway, atomic energy, and mining of atomic minerals.


Globalization is referred to as the opening up of the economy toward foreign investors and global trade. The New Economic Policy led to Globalization.

  • Reduction in customs duties and tariffs on exports and imports were appreciated to make our country attractive to investors globally.
  • Enforcement of trade policy for a longer duration was done. The basic features of the New Economic Policy 1991- trade policy were liberal policy, encouragement of open competition, and removal of foreign trade controls.
  • Earlier, imports were regulated by a positive list of freely importable items. After, the list was replaced with a negative list where almost all intermediate and capital goods were freed from the list of important restrictions.
  • The currency of India, i.e., Rupees was made partially convertible.
  • The draconian Foreign Exchange Regulation Act (FERA) had been replaced by Foreign Exchange Management Act (FEMA).

☛ Check: Difference Between FERA and FEMA

Using a gradualist approach with the help of the New Economic Policy, India showed dramatic results. The growth of GDP can be seen clearly. It also lowered import tariffs. however, it has been reversed over the past few years. Some reforms are yet to be accomplished, such as focusing more on health, education, and environmental concerns. India has come a long way in the economy and has to go a long way.

☛ Check: Difference Between Privatization, Liberalization and Globalization

New Economic Policy 1991 UPSC

New Economic Policy, or the NEP 1991, is a vital topic for UPSC Prelims and UPSC Mains. The topic is covered under the Economy section of the UPSC Syllabus, and you must refer to the Indian Economy Notes for UPSC to understand the topic well.

New Economic Policy 1991 UPSC Questions

Question: In the post-Independence period, the New Economic Policy 1991 was introduced under the following:

  1. Janata Party Government
  2. Indira Gandhi Government
  3. Rajiv Gandhi Government
  4. P.V. Narsimha Rao Government

Answer: Option D

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