During the 1991 economic crisis, the government was unable to repay foreign debts as foreign exchange reserves dropped considerably. The crisis was further compounded by rising prices of essential goods. To put an end to this crisis, the government introduced a new set of policy measures, known as the New Economic Policy (NEP).
The government initiated a variety of policies which fall under three heads:
• Liberalisation: Liberalisation was introduced to put an end to various restrictive rules and laws and open various sectors of the economy.
o Deregulation of the industrial sector: Industrial licensing was abolished for almost all product categories except 18 industries related to security concerns, environment, hazardous chemicals, white or luxury goods, etc. Further, industries reserved for the public sector were reduced to only two industries i.e. one related to atomic energy and second, railways.
o Financial sector reforms: The financial sector reforms were aimed at reducing the role of RBI from regulator to facilitator. The reform policies led to the establishment of private sector banks, Indian as well as foreign. The banks which fulfilled certain conditions were also given the freedom to set up new branches without the approval of the RBI.
o Tax reforms: During 1991, steps like reduction in the taxes on individual incomes and corporation tax were taken.
• Privatisation: It means shedding of ownership or management of a government-owned enterprise.
o Disinvestment: In the 1991 Budget, the government announced the intention of partial disinvestment in selected PSUs to raise resources, encourage wider public participation and promote greater accountability.
• Globalisation: It is aimed at the integration of the Indian economy with the world economy.
o Foreign exchange reforms: In 1991, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. It signalled the beginning of letting the market, rather than the government, decide the value of the rupee in the foreign exchange market.
o Trade policy reforms: These reforms removed quantitative restrictions on imports and exports, reduced tariff rates and removed licensing procedures for imports, thus promoting international competitiveness of industrial production.
o Foreign Direct Investment (FDI): To boost and invite foreign investment in high-priority industries, it was decided to provide approval for FDI up to 51% foreign equity in 33 industries like electrical equipment, metallurgical industries, etc.
These reforms which collectively came to be known as “Liberalization, Privatization, and Globalization” (LPG) reforms, played a crucial role in transforming India’s economy, leading to higher growth rates, increased foreign investment, and greater integration into the global economy.