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New Economic Policy of India Since 1991

Updated on January 23, 2016
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IRSHAD CV is an economics student. He likes to deal with Indian economy and related affairs.


India is the second largest populated country in the world. Now, India is considering as a developing country and its economy as an emerging one. Since Indian geography and population are large, the social system is more complicated one to manage. So many cultures, traditions, languages, religious etc are uniting under the name of India. In such an independent social system, its developmental progress is very vital. Because in this globalized world, a country is recognized as good based on the developmental achievements that it has achieved. To measure the progress of any country, its economic condition can be taken as a tool. A country can be developed only with an efficient and stronger economic functioning are there.

After the World War II, there were so many colonial new countries got freedom. India was one of the largest colonies of British and India become independent in 1947. For getting freedom, there developed many national movements in India. Anyway, after 1947 Indian economic and social system were entirely changed from what India had before colonization. Above all the 20th century shows a trend of rapid economic autonomy for every one irrespective of considering domestic or foreign sectors

Initially India followed a system of administration with the influence of socialist economy under Jawaharlal Nehru as the Prime Minister. So, there were many restrictions for foreigners to interact with India. The foreign investment was totally restricted. This restriction was influenced in the colonial experience. Anyhow after 16 years of rule of Jawaharlal Nehru, there arose many leaders and Prime Ministers. By 1990s the Indian economy compelled to open its economy and followed liberalization pattern.

Economic Reforms

As mentioned above, initially India kept an aloof from the globalization. At the same time almost every country including China were entered in to the globalization path. From 1980, India began to show some kind of economic liberalization. But which was not much favorable for improving the competitiveness.

At last urgently India reformed its economy in 1991 under the leadership of Narasimha Rao as the Prime Minister and Dr. Manmohan Singh as the finance minister. There were many arguments for liberalizing Indian economy since 1960 onwards. But it was come in to reality only in 1991. To make reforms in the Indian economy, there were many reasons.

The major causes which lead India to make an immediate reform in its economy were the Balance of Payment crisis and the failure of fiscal policy. During that time the Gulf war was going on. As a result of this, oil price increased rapidly. This was a great threaten for India, because almost all the oil requirements of the country were satisfied by importing from gulf countries. Oil resource was very essential for the working of Indian industries, agriculture etc. Further Indian labors were worked in gulf countries. But as an impact of gulf war, the income from foreign sector began to decline. This multiple reasons lead to the Balance of Payment crisis.

Above all, there was an uncertainty in 1991 in the Indian economy. The foreign currency reserve of India was just enough to meet the need of two weeks. That is the shortage of foreign exchange resources. Finally these entire situation compelled India to launch a series of reforms in its economy and also in its structure. On July 23rd of 1991, economic reforms in India began to functions.

How India Tackled the Crisis of 1991

To meet the contingencies in the Balance of Payment, India contacted International Monetary Fund (IMF). IMF was very favorable to give assistance based on agreeing with certain conditions. Some of them are listed below.

I) Devaluation of Indian currency

II) Reduction in the government expenditure

III) Reduction in import tariff etc.

By the conditions, IMF looked to build a better India. For example: Indian economy of that time was restricted the foreign products. To do this restriction, government imposed huge rate of tariff on imported goods. This reduced the foreign competition in Indian domestic industries. After liberalization, when import tariff become smaller many foreign products began to reach in India. This gradually strengthened the competition and quality of products.

Even though it was an urgent matter for India, there were many experts and thinkers who argued against foreign agreements and economic reformation. But India was in an emergency condition, so India accepted the demand put forwarded by IMF and by to make reforms in its economy. Any way today India benefited many things from this change adopted since 1991.

The LPG as the Products of Economic Reforms

Since the economic reforms of 1991, India witnessed wide and tremendous changes across the country in different sectors especially in industrial sector. Then foreigners got more autonomy over their investment. This gradually helped India to recover from its economic crisis. For the simplicity, let us conclude every impact of economic reforms under three heads like Liberalization, Privatization and Globalization. Each of them is briefly explained below.


Liberalization is generally considered as a political ideology. As the term itself disclose, it is the process of removing barriers and restrictions in the economy for the private and foreign sectors. In the case of India, it was an innovative idea since until 1990 India followed closed economic model. By liberalization, India has removed trade barriers and investment restriction to the foreigners. In short, liberalization was a welcoming policy of India towards foreign investment and competition.


Privatization is an innovative idea which came in to reality along with the impact of liberalization. Privatization simply refers to the process of reducing regulations in the economy for the private sector. By this, the role of state or government began to decline. Privatization in India did the following two outcomes. They are disinvestment and denationalization. Denationalization is the process of selling of the entire ownership to the private sector. On the other hand disinvestment is the process of selling government or public owned securities or stocks to the private sector. Here disinvestment never requires complete selling of securities. If the majority of the ownership (above 51%) of a company transferred to private sector, they can claim the ownership and domination.


Globalization is a real phenomenon of today's world. Globalization is an ideology which argues that all countries are under a single umbrella without borders or barriers. That means, globalization makes the world as like a supermarket. Where every things are available which may produce from any corner of the world. Further the globalization is activating every country to participate in trade. In short globalization is an outcome of changes that occurred all over the world. Now, it integrated all countries and it sees the world as a single economy. In the case of India, all these innovative ideology improved its conditions even there exist few drawbacks.


The economic reform in India of 1991 was happened as an emergency action. It entirely changed the Indian economic structure. The main feature of this reform is nothing, but it leads the Indian economy to be a market oriented one. Along with public the private industrialists are also began to enjoy more autonomy. Compared to China, India is producing output less than the Chinese. This may be because China adopted the economic reform in 1978, But India adopted the same only in 1991.


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      shume 3 years ago

      It was very useful,i like this article.