Question

With reference to the impact of the New Economic Policy of 1991 in India, consider the following statements:

1. It led to the opening of most industries to the private sector.

2. It significantly increased the size and growth rates of the Indian economy.

3. It reduced the role of public sector organizations in key industries.

4. It eliminated all non-profit organizations from economic activities.

Which of the statements given above are correct?

• A. 1, 2, and 3
• B. 1, 2, and 4
• C. 2, 3, and 4
• D. 1 and 2

Answer 1

Answer:

A. 1, 2, and 3

Impact of the New Economic Policy (NEP) of 1991 in India

Background of the 1991 Reforms

• India faced a severe Balance of Payments (BoP) crisis in 1991, with foreign exchange reserves barely sufficient for a few weeks of imports.

• The government, led by Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, initiated radical economic reforms under the guidance of the International Monetary Fund (IMF) and the World Bank.

• The core principles of these reforms were LPG: Liberalization, Privatization, and Globalization, aimed at dismantling the 'License Raj' and integrating the Indian economy with the global market.

Key Impacts of the NEP 1991

1. Opening of Industries to the Private Sector (Liberalization)

• The NEP drastically reduced the number of industries reserved exclusively for the public sector. Prior to 1991, 17 industries were reserved; this number was significantly cut down, eventually to only three (atomic energy, railways, and certain mineral oils).

• This policy shift allowed private players, both domestic and foreign, to enter sectors like telecommunications, power generation, financial services, aviation, and infrastructure, which were previously dominated by Public Sector Undertakings (PSUs).

2. Significant Increase in Economic Size and Growth Rates

• Post-1991, India moved from the slow 'Hindu rate of growth' (around 3.5%) to a much higher trajectory, often exceeding 6-7% annual GDP growth.

• The reforms stimulated investment, fostered competition, improved efficiency, and led to a boom in various sectors, particularly the services sector (e.g., IT and ITES), contributing significantly to the overall expansion of the Indian economy.

• Increased foreign direct investment (FDI) and foreign institutional investment (FII) inflows also contributed to economic growth.

3. Reduced Role of Public Sector Organizations

• Privatization and Disinvestment became key aspects of the NEP. The government aimed to reduce its direct involvement in commercial activities by selling stakes in PSUs to the private sector.

• The objective was to improve the financial health of PSUs, reduce the government's fiscal burden, and enhance their efficiency through competition.

• While PSUs continued to exist, their monopolistic power was curtailed, and they were compelled to compete with private entities, redefining their role in the economy.

4. Impact on Non-Profit Organizations

• The New Economic Policy of 1991 did not eliminate non-profit organizations (NPOs) from economic activities.

• The reforms primarily focused on market liberalization, reducing government control over industries, and integrating with the global economy. They did not target or restrict the operations of non-profit entities such as NGOs, charitable trusts, or educational institutions, which continue to play a vital role in social and developmental sectors