Question

Consider the following statements about the New Economic Policy of 1991:
i. It led to the opening of most industries to private sector participation.
ii. It resulted in a significant increase in the size and growth rate of the Indian economy.
iii. It eliminated all public sector organisations in India.
Which of the statements given above is/are correct?

• A. Only i and ii
• B. Only i and iii
• C. Only ii and iii
• D. All of the above

Answer 1

Answer:

A. Only i and ii

The New Economic Policy (NEP) of 1991: An Overview

• The New Economic Policy (NEP) of 1991 was a landmark set of economic reforms introduced in India to address a severe Balance of Payments crisis. India was on the verge of defaulting on its external debt.
• The policy was initiated by the then Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh. It marked a significant shift from a highly controlled, inward-looking economy to a more open, market-oriented one.
• The core components of the NEP are often referred to as LPG reforms: Liberalization, Privatization, and Globalization.

Key Pillars of NEP 1991:

• Liberalization:
  • It involved freeing the economy from unnecessary controls and restrictions.
  • The 'License Raj', a system requiring government licenses for establishing or expanding industries, was largely dismantled.
  • Industrial licensing was abolished for most industries, except for a few strategic sectors like defense, atomic energy, and railways.
  • Restrictions on foreign technology imports were eased, and the Monopolies and Restrictive Trade Practices (MRTP) Act was reformed to promote competition.
  • This policy effectively opened most industries to private sector participation, leading to increased competition and efficiency.
• Privatization:
  • This component aimed at reducing the role of the public sector and increasing the participation of the private sector in economic activities.
  • It involved the disinvestment of Public Sector Undertakings (PSUs), selling shares of government-owned companies to the private sector.
  • However, it is crucial to note that the policy did not eliminate all public sector organizations. Many PSUs continued to operate, albeit with greater autonomy and focus on performance. The goal was reform and efficiency, not complete eradication.
• Globalization:
  • It refers to the integration of the Indian economy with the world economy.
  • Key measures included reduction in tariffs and import duties, removal of quantitative restrictions on imports, and encouragement of Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).
  • The rupee was devalued to boost exports and made partially convertible.

Impact and Outcomes of NEP 1991:

• The NEP led to a significant increase in the size and growth rate of the Indian economy. India's GDP growth rate accelerated substantially in the post-reform period.
• Foreign exchange reserves increased dramatically, stabilizing the economy.
• It fostered competition, led to technological advancements, and improved product quality due to private sector entry and global exposure.
• The services sector, particularly IT and ITES, experienced exponential growth.
• Despite its successes, the NEP also faced criticisms, including concerns about increasing income inequality, neglect of the agriculture sector, and regional disparities.