Question

Assertion (A): The introduction of the New Economic Policy in 1991 led to significant growth in the Indian economy due to increased private sector participation.
Reason (R): The New Economic Policy allowed private sector organisations to operate in industries previously reserved for the public sector.
Select the correct answer from the codes given below:

• A. Both (A) and (R) are true, and (R) is the correct explanation of (A)
• B. Both (A) and (R) are true, but (R) is not the correct explanation of (A)
• C. (A) is true, but (R) is false
• D. (A) and (R) are false

Answer 1

Answer:

A. Both (A) and (R) are true, and (R) is the correct explanation of (A)

Understanding the New Economic Policy (NEP) of 1991

• The New Economic Policy (NEP) was introduced in India in 1991 under the leadership of Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh.
• It was a watershed moment in India's economic history, aimed at addressing a severe Balance of Payments crisis and a high fiscal deficit.
• The core pillars of the NEP are often referred to as LPG reforms:Liberalisation, Privatisation, and Globalisation.

Impact of NEP on Economic Growth and Private Sector

• The NEP led to significant growth in the Indian economy by dismantling the 'License Raj' and opening up various sectors.
• Before 1991, the Indian economy was largely characterized by a closed-door policy, extensive government control, and a dominant public sector.
• The reforms encouraged both domestic and foreign private investment, leading to increased competition, efficiency, and productivity.
• This surge in private sector participation was a crucial factor behind the accelerated economic growth observed in the post-1991 era.

Privatisation and Industrial Deregulation under NEP

• One of the most significant components of the NEP was the policy of privatisation and industrial deregulation.
• Prior to 1991, many key industries like telecommunications, power generation, airlines, and heavy manufacturing were exclusively reserved for the public sector.
• The NEP drastically reduced the number of industries reserved for the public sector from 17 to 8 initially, and further to 3 (railways, atomic energy, and certain mineral oils) over time.
• This opened up vast avenues for private sector organisations to enter and operate in areas that were previously government monopolies.

Why Reason (R) Explains Assertion (A)

• Reason (R) states that the NEP allowed private sector organisations to operate in industries previously reserved for the public sector. This is a direct consequence of the liberalisation and privatisation policies.
• Assertion (A) states that the NEP led to significant economic growth due to increased private sector participation.
• The ability of the private sector to enter and expand into previously restricted high-growth potential industries (as described in R) directly facilitated their increased participation and spurred economic growth (as described in A).
• Therefore, the opening up of reserved sectors to the private sector was a primary mechanism through which the NEP stimulated economic growth, making (R) the correct explanation for (A).

Additional Key Facts for Competitive Exams

• The Industrial Policy of 1991, a major part of NEP, abolished industrial licensing for most industries, except for a few strategic ones.
• Disinvestment of public sector undertakings (PSUs) was also a key feature to raise resources and improve efficiency.
• The reforms also included trade liberalisation (reducing import tariffs, removing quantitative restrictions) and financial sector reforms.
• The NEP helped India integrate into the global economy, leading to increased foreign trade and foreign direct investment (FDI).