New Economic Policy of 1991 was a key moment in India history. It brought a major change, moving the country from a state-controlled, inward-focused economy to a market-driven, globally connected one. Introduced on July 24, 1991, under Prime Minister P.V. Narasimha Rao, the policy aimed to encourage private investment, liberalize trade, and open India to the world.

Narasimha Rao and Finance Minister Dr. Manmohan Singh, the NEP was a set of structural reforms designed to combat an unprecedented economic crisis. 

The new economic policy core philosophy centered on Liberalisation, Privatisation and Globalisation (LPG Reforms), aiming to improve productivity, reduce government restrictions, and integrate the Indian economy with the rest of the world. This policy was crucial for building foreign exchange reserves, encouraging global trade and accelerating the country’s economic growth rate.

What is New Economic Policy 1991?

New Economic Policy 1991 is a set of economic reforms that fundamentally restructured the Indian economy. Its primary goal was to bring macroeconomic stability and improve the country’s economic efficiency and global competitiveness.

The policy consisted of two major types of measures:

1. Stabilization Measures: These were short-term measures to correct the balance of payments (BoP) deficit and control the high inflation rate.
2. Structural Reforms: These were long-term measures aimed at removing rigidities in the economy and enhancing the supply-side efficiency by introducing Liberalisation, Privatisation, and Globalisation (LPG).

The Economic Crisis in India in 1991 Why NEP was Introduced

The economic crisis in India 1991 was the direct trigger for the introduction of the New Economic Policy 1991. A combination of domestic and external factors pushed the Indian economy to the brink of collapse, necessitating radical economic reforms 1991.

The five main reasons for adopting the NEP 1991 were:

Branches of New Economic Policy 1991 

The New Economic Policy 1991 is famously known as the LPG Reforms because it rests on three core branches of New Economic Policy 1991: Liberalisation, Privatisation and Globalisation.

Liberalisation 

Liberalisation refers to the removal of entry and growth restrictions on private sector firms, freeing them from direct government control.

• Abolition of Industrial Licensing : Licensing was abolished for nearly all industries, except for a few like liquor, cigarettes, defense equipment, and hazardous chemicals.
• Freedom to Determine Interest Rates: Commercial banks were given the autonomy to freely determine their own interest rates, a move previously controlled by the Reserve Bank of India (RBI).
• De-reservation of Industries: The investment limit for small-scale industries was raised.

Privatisation 

Privatisation is the process of transferring ownership and control of Public Sector Undertakings from the government to the private sector.

• Disinvestment: The government began selling shares of PSUs to the public and private entities.
• Minimisation of Public Sector: The number of industries exclusively reserved for the public sector was drastically reduced from 17 to just 3: railways, atomic energy and mining of atomic minerals.
• Improvement in Efficiency: The main objective was to enhance efficiency and productivity by reducing political interference and introducing a competitive environment.

Globalisation

Globalisation refers to the integration of the Indian economy with the global economy, allowing for the free flow of goods, services, capital, technology and human resources across borders.

• Partial Convertibility of Rupee: The Indian Rupee was made partially convertible, meaning it could be exchanged for foreign currencies for transactions related to imports, exports, and remittances.
• Foreign Investment Policy: The equity limit for Foreign Direct Investment was significantly raised, with 100% FDI being allowed in many high-priority sectors without restrictions.
• Reduction of Import Duties: Import tariffs and customs duties were rationalized and substantially reduced to attract global investors and encourage open competition.
• Replacement of FERA with FEMA: The restrictive Foreign Exchange Regulation Act (FERA) was replaced by the more liberal Foreign Exchange Management Act.

Check Out UPSC CSE Books

Visit PW Store

Features of the New Economic Policy 1991

The core New Economic Policy 1991 objectives were centered on overcoming the crisis and building a stable, competitive economy for the future.

• Stabilising the Economy: To control the rising inflation rate and address the balance of payments crisis.
• Achieving Higher Economic Growth: To move towards a higher trajectory of economic growth by removing unnecessary restrictions and fostering a competitive environment.
• Integrating with the World Economy: The main objective was to plunge Indian Economy in to the arena of Globalization.
• Increasing Foreign Exchange Reserves: To build sufficient foreign exchange reserves to handle future external shocks.
• Increasing Private Participation: To increase the participation of private players in all sectors of the economy.

Ready to boost your UPSC 2026 preparation? Join PW’s UPSC online courses today!

DOWNLOAD PDF