Post-Independence Economic Policy in India (1991)

After gaining independence in 1947, India adopted a mixed economy model, combining elements of both socialism and capitalism. The government played a central role in economic planning through Five-Year Plans, focusing on industrialization, self-reliance, and poverty reduction. Key features included public sector dominance, import substitution, land reforms, and the "License Raj" system of regulation. These policies aimed to build a strong, self-sufficient economy but also led to inefficiencies and slow growth, prompting major economic reforms in 1991.

Industrial Policy Resolution

An Industrial Policy Resolution (IPR) is a formal government declaration outlining its stance, goals, and strategy for industrial development, often including measures like licensing, subsidies, protection for certain sectors, and directives on private sector involvement and foreign investment. India has adopted several IPRs, such as the 1948, 1956, and 1991 resolutions, each reflecting different stages of its economic development, from a mixed economy with significant state control to a more liberalized approach favouring private enterprise.

Industrial Policy Resolution (IPR), 1948 –

India’s first major industrial policy after independence; it declared Indian Economy as Mixed Economy. It categorised industries into three schedules –

1. Schedule A: Reserved exclusively for State (Private Sector)
2. Schedule B: State-led industries where private participation was allowed under state regulation.
3. Schedule C: All other industries open to private enterprises.

The government restricted foreign investment. The policy's primary goals were to create a foundation for industrial development, ensure economic stability, promote investment, and encourage both public and private sector growth. 

Industrial Policy Resolution (IPR), 1956 –

This policy laid the basic framework of industrial policy; it is also known as “Economic Constitution of India.” It had provisions for public sector, small-scale industry, foreign investment, and was timely modified. It aligned with the Second Five-Year Plan's goal of rapid industrialization, with the state taking primary responsibility for key industries like steel and power, while private enterprise operated under government regulation and licensing. The overarching goal was to accelerate industrialization and achieve economic self-sufficiency within a socialist framework. 

Industrial Policy Statement, 1977 –

This policy was an extension of the 1956 policy, majorly focused on decentralisation. The primary goal was to boost small, micro, cottage, and household industries, creating a more decentralized and employment-oriented industrial model. The policy sought to widely distribute industries in rural and small-town settings. There was a strong emphasis on developing indigenous technology and reducing reliance on foreign technology. There was more inclination towards Gandhi-Socialistic view & anti-Indira stance. Khadi & Village industry was to be reconstructed. Foreign investment in unnecessary areas prohibited (in practice, it was complete no). During this period, Coca-Cola, IBM and Chrysler were made to exit India. 

New Industrial Policy, 1991 –

Main objective was to provide facilities to market forces and to increase efficiency. Larger roles were played by:

1. Liberalisation (reduction of govt. control)
2. Privatisation (increasing role and scope of private sector)
3. Globalisation (integration of Indian economy with the World economy)

Because of LPG, old domestic firms have to compete with new domestic firms, MNCs, and imported products. The govt. allowed domestic firms to import better technology to improve efficiency and to have access to better technology. The Foreign Direct Investment (FDI) ceiling was raised from 40% to 51% in selected sectors. Industrial licensing was abolished except for 18 industries. On the recommendation of Raghavan Committee, Competition Act, 2000, was passed. Its objective was to promote competition by creating an enabling environment.

New Economic Policy 1991

After forty years of planned development, India has been able to achieve a strong Industrial base and became self-sufficient in the production of food grains. Nevertheless, a major segment of the population continues to depend on agriculture for its livelihood.

In 1991, India met with an economic crisis relating to its external debt – the government was not able to make repayments on its borrowings from abroad; foreign exchange reserves, which we generally maintain to import petroleum and other important items, dropped to levels that were not sufficient for even a fortnight. The crisis was further compounded by rising prices of essential goods.

All these led the government to introduce a new set of policy measures which changed the direction of our developmental strategies.

Reasons for New Economic Policy, 1991:

Reasons for economic reforms can be inferred as: -

1. Poor Performance of the Public Sector - During the post-independence decades, Public Sector Undertakings (PSUs) were given the "commanding heights" of the economy. However, many became "white elephants", draining resources rather than generating them. They suffered from extreme bureaucracy, lack of accountability, and huge losses, which stifled industrial growth.
2. Deficit in Balance of Payments (BOP) - The BoP is the record of all economic transactions between a country and the rest of the world. By 1991, India's imports (especially oil) far exceeded its exports. This created a massive deficit, leaving the country unable to pay for essential imports.
3. Inflationary Pressures - The economy was overheating, with the inflation rate soaring to roughly 17%. This was driven by a continuous increase in the money supply and a shortage of essential goods. The high cost of living created widespread economic unrest and eroded the purchasing power of the common citizen.
4. Fall in Foreign Exchange Reserves - By June 1991, India’s foreign exchange reserves had plummeted to about $1.2 billion, barely enough to pay for two weeks of essential imports. The situation was so dire that the government had to airlift gold to London and Zurich as collateral to secure emergency loans from the IMF and World Bank.
5. Huge Burden of Debt - The government had been spending much more than its revenue, leading to a massive fiscal deficit. Internal and external debt reached unsustainable levels. Interest payments on these debts were consuming a significant portion of the national budget, leaving little for development.
6. Inefficient Management - The "License-Permit Raj" created a system where starting or expanding a business required endless government approvals. This led to:

• Corruption and Red Tape: Massive delays in decision-making.
• Lack of Innovation: Since competition was restricted, domestic industries had no incentive to modernize or improve quality.
• Resource Misallocation: Capital was tied up in unproductive sectors due to political rather than economic logic.

These factors combined to create a "perfect storm," forcing the Indian government to adopt the LPG (Liberalization, Privatization, and Globalization) model to stabilize the economy.

Following the crisis of 1991, India approached International Bank for Reconstruction and Development (IBRD) popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis.

For availing the loan, following were the conditions imposed by the World Bank and IMF: -

1. Liberalise and open up the economy by removing restriction on the private sector,
2. Reduce the role of the government in many areas, and
3. Remove trade restriction between India and other countries.

Consequently, India announced the New Economic Policy (NEP), on July 24, 1991, by the government under Prime Minister P.V. Narasimha Rao, with Finance Minister Dr. Manmohan Singh being the architect behind the reforms.

The policy marked a significant shift from a controlled economy to a more liberalized, privatized, and globalized (LPG) one, dismantling previous protectionist measures and ushering in an era of market-oriented policies.

Liberalisation:

Liberalisation was introduced to put an end to all those rules and laws, or restriction aimed at regulating the economic activities, which became major hindrance in growth and development. And open various sectors of the economy.

Liberalisation can be further classified into various sectors such as: -

1. Deregulation of Industrial Sector –

The goal was to unlock the growth potential of Indian manufacturing by removing bureaucratic hurdles.

Prior to 1991:

1. License Raj: Entrepreneurs required government permission to start, expand, or close a firm, and even to determine production capacity.
2. Public Sector Dominance: Most major industries were reserved exclusively for the government; the private sector was largely sidelined.
3. Small Scale Industry Reservation: Numerous products were restricted to Small-Scale Industries (SSIs) to protect them, limiting large-scale efficiency.
4. Price Controls: The government fixed prices and controlled the distribution of essential industrial goods.

Post 1991:

1. Abolition of Licensing: Licensing was scrapped for all but a few sensitive sectors (e.g., alcohol, cigarettes, explosives, and electronics).
2. Dereservation: The list of industries reserved for the public sector was slashed; today, it is primarily restricted to Atomic Energy and parts of Railway Transport.
3. Market Pricing: Price fixation was handed over to market forces for the vast majority of industries.

2. Financial Sector Reforms –

The goal was to transform the financial system into a modern, efficient, and competitive engine for investment.

Prior to 1991:

1. Strict Regulation: The RBI acted as a rigid regulator, dictating interest rates, cash reserves, and the exact nature of bank lending.
2. Limited Competition: The sector was dominated by public sector banks with almost no presence of foreign or private players.

Post 1991:

1. Regulator to Facilitator: The RBI’s role shifted to supporting financial services, allowing banks more autonomy in decision-making.
2. Expansion & Competition: Private and foreign banks were allowed to enter. Banks can now open new branches without RBI approval, provided they meet certain criteria.
3. Foreign Investment: The FDI limit in banking was significantly raised (up to 74%).
4. Capital Markets: Foreign Institutional Investors (FIIs) like mutual funds and pension funds were permitted to invest in Indian markets.

3. Tax Reforms –

The goal was to simplify the tax structure, increase compliance, and broaden the tax base.

Prior to 1991:

1. High Tax Rates: Extremely high personal and corporate tax rates often led to widespread tax evasion.
2. Complex Indirect Taxes: A "cascading" system of multiple taxes (excise, VAT, service tax) made business difficult.

Post 1991:

1. Direct Tax Reduction: Continuous reduction in personal income tax and corporate tax rates to encourage voluntary disclosure and savings.
2. The GST Revolution: In 2016, the Goods and Services Tax (GST) Act was passed (effective July 2017), replacing multiple indirect taxes with a unified system to create "One Nation, One Tax, One Market."

4. Foreign Exchange Reforms –

The goal was to stabilize the Balance of Payments (BoP) and integrate with the global economy.

Prior to 1991:

1. Fixed Exchange Rate: The value of the Rupee was pegged and strictly controlled by the government.
2. Forex Scarcity: India faced a severe crisis where foreign exchange reserves were barely enough to pay for two weeks of imports.

Post 1991:

1. Devaluation: Initially, the Rupee was devalued to boost exports and attract foreign currency.
2. Market-Determined Rates: The system shifted to a Managed Float, where the value of the Rupee is determined by market demand and supply rather than government decree.

5. Trade and Investment Policy Reforms –

The goal was to increase the international competitiveness of Indian products and encourage foreign capital.

Prior to 1991:

1. Protectionism: High tariffs and quantitative restrictions (quotas) on imports were used to "protect" domestic industries from foreign competition.
2. Import Licensing: Almost all imports required a government license, slowing down industrial growth.

Post 1991:

1. Liberalized Trade: Quantitative restrictions on most imports and exports were dismantled.
2. Tariff Reduction: Drastic cuts in import duties made foreign technology and raw materials cheaper.
3. Export Promotion: Export duties were removed to make Indian goods cheaper and more competitive globally.
4. Open Access: By April 2001, all quantitative restrictions on manufactured consumer goods and agricultural products were fully removed.

Privatisation:

It implies shedding of the ownership or management of a government owned enterprise. Government companies are converted into private companies in two ways: -

1. By withdrawal of the government from ownership and management of public sector companies and or,
2. By outright sale of public sector companies.

Privatisation of the public sector by selling off part of the equity of Public Sector Enterprises (PSEs) to the public is known as disinvestment. The purpose of sale, according to the government was mainly to improve financial discipline and facilitate modernisation.

The government envisaged that private capital and managerial capabilities could be effectively utilised to improve the performance of the Public Sector Undertakings (PSUs). It also envisaged that privatisation could provide strong impetus to the inflow of FDI.

In order to improve efficiency, infuse professionalism and enable them to compete more effectively in the liberalised global environment, the government identified PSEs and declared them as:

1. Maharatnas,
2. Navratnas, and
3. Miniratnas

They were given greater managerial and operational autonomy, in taking various decision to run the company efficiently and thus increase their profits. Greater operational, financial and managerial autonomy has also been granted to profit-making enterprises referred to as miniratnas.

The Central Public Sector Enterprises are designated with different status. A few examples of public enterprises with their status are as follows:

1. Maharatnas –

• Indian Oil Corporation Limited (IOCL)
• Steel Authority of India Limited (SAIL)

2. Navratnas –

• Hindustan Aeronautics Limited (HAL)
• Mahanagar Telephone Nigam Limited (MTNL)

3. Miniratnas –

• Bharat Sanchar Nigam Limited (BSNL)
• Airport Authority of India (AAI)
• Indian Railway Catering and Tourism Corporation Limited (IRCTC)

Globalisation:

Although globalisation is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon.

Globalisation is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries. It is turning the world into one whole or creating a borderless world.

Crucial Aspects / Outcomes of Globalisation -

1. Outsourcing:

In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country (like legal advice, computer service, advertisement etc.)

Many of the services such as voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching are being outsourced by companies in developed countries to India.

Most multinational corporations, and even small companies, are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.

2. World Trade Organisation (WTO) –

The WTO was founded in 1995 as the successor organisation to General Agreement on Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes.

WTO is is expected to establish rule-based trading regime in which nations cannot place arbitrary restrictions on trade. Its purpose is also to enlarge production and trade of services, to ensure optimum utilisation of world resources and to protect the environment.

The WTO agreements cover trade in goods as well as services to facilitate international trade through removal of tariff as well as non-tariff barriers and providing greater market access to all member countries.

India as a member of WTO, has been in the forefront of framing fair global rules, regulations and safeguards and advocating the interests of the developing world. India has kept its commitments towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and reducing tariff rates.

Indian Economy during Reforms: An Assessment

Assessment can be seen in both perspectives, positive as well as negative.

Positive Aspect:

During the reform period, the growth of agriculture has declined. While the industrial sector reported fluctuation, the growth of service sector has gone up. This indicates that GDP growth is mainly driven by growth in the service sector. The opening of the economy has led to a rapid increase in foreign exchange reserves and foreign direct investment. India is one of the largest foreign exchange reserve holder in the world. Since 1991, India is seen as a successful exporter of auto parts, pharmaceutical goods, engineering goods, IT software and textiles. Rising prices have also been kept under control.

Negatives Aspect:

The reform process has been widely criticised for not being able to address some of the basic problems facing our economy especially in areas of employment, agriculture, industry, infrastructure development and fiscal management.

1. Growth and Employment – Reform led period has not generated sufficient employment opportunities in the country.
2. Reforms in Agriculture – The growth rate has been decelerating. Public investment in agriculture sector especially in infrastructure, which includes irrigation, power, roads, market linkages, and research and extension has fallen. The partial removal of fertiliser subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers. Policy changes such as reduction in import duties on agricultural products, low minimum support price, and lifting of quantitative restrictions on the imports of agricultural products, have adversely affected Indian farmers as they now have to face increased international competition. Because of export-oriented policy strategies in agriculture, there has been a shift from production for the domestic market towards production for the export market focusing on cash crops in lieu of production of food grains. This puts pressure on prices of food grains.
3. Reforms in Industry – Decrease in demand of industrial products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc. Cheaper imports have replaced the demand for domestic goods. The infrastructure facilities, including power supply have remained inadequate due to lack of investment. Developing countries like India still does not have the access to markets of the developed countries because of high non-tariff barriers. 
4. Disinvestment – The assets of PSEs have been undervalued and sold to the private sector, creating a substantial loss to the government. The proceeds from the disinvestment are used to offset the shortage of government revenues rather than using it for the development of PSEs and building social infrastructure in the country.
5. Reforms and Fiscal Policies – Economic reforms have placed limits on the growth of public expenditure, especially in social sectors. The tax reductions in the reform period, aimed at yielding larger revenue and curb tax evasion, have not resulted in increase in tax revenue for the government. The reform policies, involving tariff reduction, have curtailed the scope for raising revenue through custom duties.

Conclusion

The new economic policy of 1991 hauled India out of the license-permit-quota raj, breathing new life to the stagnating economy. It was a significant step taken by the government, which launched India onwards onto the path of globalization. As the LPG regime unleashed itself, a plethora of changes took place. The stronghold of bureaucracy loosened; public-private partnerships emerged loosening the shackles of government over the suffocated private sector.

The process of Globalisation through liberalisation and privatisation policies has produced positive, as well as, negative results both for India and other countries.

Scholars argue that globalisation should be seen as an opportunity in terms of greater access to global markets, high technology and increased possibility of large industries of developing countries to become important players in the international arena.

Critics argue that globalisation is a strategy of the developed countries to expand their markets in other countries. It has compromised the welfare and identity of people belonging to poor countries. Market driven globalisation has widened the economic disparities among nations and people.

In the Indian Context, It has aggravated the inequalities; it has increased the income and quality of consumption of only high income groups. The growth has been concentrated only in some select areas in the services sector such as telecommunication, information technology, finance, entertainment, travel and hospitality services, real estate, and trade rather than vital sectors such as agriculture and industry which provide livelihoods to millions of people in the country.