New Economic Policy Class 12 | Economic Reforms since 1991 |


New economic Policy Class 12 | Economic Reforms since 1991 | Chapter 6 |


New economic reform refers to the set of policies which were undertaken to accelerate the speed of growth and development in the country. In 1991, government of India had implemented three major reforms in the country which drastically affected the Indian economy, such as; the liberlisation policy replaced the licensing policy for trade and industries, the privatisation policy replaced the quotas for the industries and the globalisation replaced the permits for import and export of goods and services.

Need of New Economic Policy

  1. Crises of BOP: The crises of BOP were related with the deficit in BOP account. The current account deficit and borrowings were increasing day by day for which new economic policy was the only alternative.
  2. Inflationary Spiral: Before 1991, the rate inflation was very high because of increased money supply in the economy which resulted in the spiral of inflation from which only new economic policy could tackle.
  3. Bad performance of Public Sector Undertakings (PSUs): Due to corruption in the public sector undertakings, a huge amount of government which was invested for the purpose of growth and development got resulted in the loss.
  4. Reduction in Forex Reserves: With the continuous import of necessities goods, the forex reserve was declined very much due to which the government of India even had to mortgage the countries gold with World Bank to clear its debts.
  5. High Fiscal Deficit: Fiscal deficit refers to the borrowings made by the government which was very high and showed the poor financial condition of the country along with the hindrance of inflation.

Importance of Economic Policy

  1. Made Economy more Vibrant: With the increase in level f economic activity, the level of GDP growth was also increased which made the Indian economy more vibrant.
  2. Increase in Industrial Production: With the introduction of IT sector in India, the level of production in the industries was increased.
  3. Check on Inflation and Fiscal Deficit: With the greater flow of goods and services in the country, the rate of inflation in the country has been lowered and decreased the fiscal deficit as there were many private investor came in the country to invest.
  4. Sovereignty of Consumer: With the increase in the production and import of goods and services, the consumer got a large variety of goods and services from the domestic as well as global market which leads to increase in the consumer sovereignty.
  5. Flow of Foreign Investment: With the privatisation in the country, the flow of foreign investment had also increase in the country as government became more liberal with the private investment.
  6. Shift in Market: With the globalisation in the country, the Indian market shifted from the monopoly one to the Competitive market as then producers also had to face global competitors also.
  7. Emerging Economic Power: With the economic policy in India, India emerges as the economic power as then India started exporting goods and services also to the rest of the world.

Limitation of Economic Policy

  1. Lopsided Growth: Although, the economic policies were acted as a beneficiary but the development and economic growth was lop-sided because all the sectors were included in the process of growth and with globalisation in the country, the farmers started exporting food grains to gain more profit which resulted in the shortfall of food grain for domestic consumption.
  2. Erosion of Cultures: With the globalisation in the country, the citizen of India started adopting western culture and every person wanted economically independence due to which the Indian people started disregarding the Indian culture.
  3. Negligence of Agriculture Sector: At that time, the whole growth process was dependent on tertiary and secondary sector due to which the primary sector of the economy faced negligence and also faced increase in the level of poverty in the economy.
  4. Growth of Urban Areas: The new economic policy did not focused on rural areas as all the development projects were made in the urban areas only and not in rural areas.
  5. Colonialism in Economy: With the expansion of private sector and increase in the number of MNCs’, the control was in the hands of private sector which India did not want as they already served before to Britishers for 200 years.

Elements of New Economic Policy

  • Liberalisation
  • Privatisation
  • Globalisation


Liberation refers to the freedom given to private sector for production along with the direct and indirect control of the government. Before the policies, government used to control the private sector through licenses and many other types of restriction were applied on private sector by the government due to which many shortcomings were emerged in the country like rise in corruption and delay in production, the rate of GDP falls for which government decided to consider liberalisation as new economic policy.

Reforms recorded under Liberalisation

  1. Industrial Sector Reforms: The reforms which were undertaken with the de-regulation of industrial sector were included in industrial sector reform. Some points which highlights its changes are as follow:
  • Abolition of Licenses: With the introduction of new economic policy, the licenses were abolished from the every industries but except five industries such as; liquor for human consumption, cigarette, defence equipment, industrial explosives and dangerous chemicals.  
  • Freedom on importing capital goods: With the liberalisation in the country, the industries were made free to import capital goods for other countries to increase the production.
  • Increase in Production Capacity: With the abolition of licenses, private sector was made free to produce any quantity as per the condition of the market.
  • Contraction of Public Sector: Many foreign as well as domestic investors came-up after the introduction of liberalisation policies due to which public sector contracted but two industries, namely; Railways and Atomic Energy were in the control of Government.
  1. Fiscal Reforms: After independence, the tax structure of the country was very complex and people used to fear from heavy tax burden due to which the practice of tax evasion was very high but with the introduction of policies of economic growth, the tax structure was made simplified and moderate which raised the tax revenue of the government.
  2. Financial sector Reforms: Financial sector refers to the banking and non-banking financial institutes along with stock exchange market and foreign exchange market. With the introduction of Liberalisation, the role of Reserve Bank of India (RBI) was shifted from regulator to Before NEP, the rate of interest were to be fixed by RBI but after NEP as a facilitator, the RBI would also facilitate free play of market and commercial banks got power to decide interest rate.
  3. External Sector Reforms: With the devaluation of Indian currency in the international market, the flow of foreign currency was increased for the development and growth purpose of the country. Along with this, the reduction in the rates of import and export tariff so that domestic industries might also had competition with international competitors.


Privatisation refers to the process of involvement of private sector in the process of growth along with the ownership and operation in the public enterprises through disinvestment policy instrument along with the joint ownership or selling of shares of government enterpirse.

Need for Privatisation

  • With the shift from agriculture sector to industrial sector, the percentage of contribution was more in secondary sector.
  • Government sectors enterprises were in social dead-weight due to which the profits were unstable or less.
  • Corruption, leakage, pilferage in the public sector undertakings.
  • Private sector works more efficiently and competition was also increase for the public sector.
  • Navratnas of India were under the control of government.

Merits of Privatisation

  • Private sector works on the principle of Self-interest. Therefore to increase the profit, the level of productivity also increased.
  • With the increase in competition, modernisation and up-gradations in the country also increased.
  • Consumer of India would get a diversed range of product for the satisfaction of wants which helps in increasing the consumer sovereignty.

Demerits of Privatisation

  • The social interest lacks behind the interest of self-interest.
  • The private sector would produce only those goods which were benefitiary to them due to which the weaker section of the society


Globalisation means integrating the economy of other countries with our country for the purpose of growth and free flow of goods and services. The New Economic Policy aimed in integrating the economy of other country with our country. With which capital and technology could flow easily.

Strategies promoted under Globalisation

  1. Partial Convertibility: It was allowed to convert the Indian rupee for the purpose of import and export and to pay the dividends and interest.
  2. Trade Policy: An open competition was encouraged by removing all the restrictions and controls on foreign trade which were enforced for longer term.
  3. Tariff Reduction: With the reduction in tariff policies, the foreign products were made easy to import to increase the competition among the domestic producers.
  4. Increase in rate of Foreign Investment: The rate of investment by foreign person was increased even in high priority industries due to which Foreign Exchange Management Act (FEMA) was enforced.

You May Also Read Indian Economy on The Eve of Independence,  Economic Planning, Agriculture Sector, Strategy of Industrial Growth, India’s Foreign Trade, Economic Reforms Since 1991, Poverty, Human Capital Formation, Rural Development, Unemployment, Environment, India China Pakistan Comparative Study for better understanding of the chapters and scoring higher in upcoming exams.

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