Economic reforms, also known as structural adjustments, constitute a comprehensive and multi-faceted approach to advancing economic development. These reforms encompass changes in the agricultural sector, industrial sector, financial sector, fiscal policies, international trade, and more. In India, the expedient and effective implementation of economic reforms was initiated by the Narasimha Rao government in July 1991.

3.2.1 Objectives of NEP 1991

The New Economic Policy (NEP) of 1991 set out several key objectives, including:

(a) Fiscal Deficit Reduction and Price Stability: The aim was to decrease the fiscal deficit and attain relative price stability in the economy.

(b) Expanding the Private Sector: The policy sought to limit the scope of the public sector’s involvement in various areas, thereby creating more opportunities for the private sector.

(c) Industrial Policy Liberalization: The NEP aimed to liberalize industrial policies and eliminate the need for industrial licenses in most private sector industries.

(d) Attracting Foreign Capital: The policy encouraged the inflow of foreign capital by offering concessions to foreign direct investment.

(e) Trade Liberalization: The NEP promoted the liberalization of foreign trade by reducing tariff duties and eliminating quota restrictions on many imports.

The New Economic Policy, often referred to as the ‘Economic Reforms’ policy, aimed to eliminate inefficiencies in the economic system.

3.2.2 Components of NEP 1991

The NEP of 1991 comprised two main components:

Macroeconomic Stabilization—Demand Side Management

Macroeconomic stabilization policies involved short-term measures to achieve low and stable inflation, as well as a sustainable fiscal and balance of payments position. These stabilization policies encompassed actions like:

(a) Inflation control

(b) Fiscal adjustments

(c) Enhancing the balance of payments situation

Structural Adjustment—Supply Side Management

Structural adjustment policies focused on long-term measures to remove impediments hindering economic growth. These policies encompassed supply-side management actions such as:

(a) Reforms in trade and capital flow

(b) Deregulation of the industrial sector

(c) Reforms in the public sector, including disinvestment

(d) Reforms in the financial sector

The objective of structural reforms was to eliminate bureaucratic obstacles, red tape, and controls while streamlining decision-making processes to enhance efficiency and transparency.

3.2.3 NEP—Policy of Liberalisation, Privatisation, and Globalisation (LPG)

Within the NEP of 1991, structural reforms were aligned with the principles of:




These principles guided the transformation of the Indian economy, fostering greater openness, private sector participation, and integration with the global economy.

Objective Type Questions

1.What were the key objectives of the New Economic Policy (NEP) of 1991 in India?

A) Expanding the public sector and reducing private sector involvement

B) Maintaining a high fiscal deficit for economic stability

C) Attracting foreign capital by imposing strict regulations

D) Reducing fiscal deficit and encouraging private sector growth
Answer: D) Reducing fiscal deficit and encouraging private sector growth

2.What is the primary focus of macroeconomic stabilization within the NEP of 1991?

A) Enhancing economic growth in the long term

B) Achieving low and stable inflation in the short term

C) Increasing government intervention in the economy

D) Promoting foreign trade liberalization
Answer: B) Achieving low and stable inflation in the short term

3.What does the term “LPG” stand for in the context of the NEP of 1991?

A) Low-Price Growth

B) Liberalization, Privatization, and Globalization

C) Large Public Government

D) Local Production Goals
Answer: B) Liberalization, Privatization, and Globalization

4.Which component of the NEP is focused on removing long-term obstacles in the growth path of an economy?

A) Macroeconomic Stabilization

B) Fiscal Deficit Reduction

C) Structural Adjustment

D) Foreign Trade Liberalization
Answer: C) Structural Adjustment

5.What was one of the objectives of the NEP regarding foreign trade?

A) Increasing tariff duties on imports

B) Eliminating all foreign trade

C) Reducing tariff duties and abolishing quota restrictions

D) Imposing strict regulations on foreign trade
Answer: C) Reducing tariff duties and abolishing quota restrictions

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