The New Economic Policy of 1991 — Liberalisation, Privatisation, Globalisation

4. The New Economic Policy of 1991 — Liberalisation, Privatisation, Globalisation

For roughly the first four decades after independence, the Indian economy operated under a

heavily state-controlled model — extensive licensing requirements before a firm could start or

expand production (commonly called the "Licence Raj"), a large public sector reserved for many

industries, high tariff barriers restricting imports, and tight restriction on foreign

investment. By 1991, India faced a serious balance-of-payments crisis — foreign exchange

reserves had fallen to a level barely sufficient to cover a few weeks of essential imports. This

crisis was the immediate trigger for the Government of India to announce a sweeping set of

reforms, together called the New Economic Policy (NEP), 1991, built on three pillars,

commonly abbreviated LPG:

1. Liberalisation — the process of reducing government control and regulation over economic activity, freeing businesses from many of the licensing requirements and restrictions that had previously constrained them. Key elements: abolition of industrial licensing for most industries, de-reservation of many sectors earlier reserved for the public sector, easier entry for private business into fields previously restricted, and simplification of rules governing expansion of existing businesses. The core idea is that businesses would be freer to decide what to produce, how much to produce, and how to price it, with market forces — not government permission — as the primary discipline.
2. Privatisation — the process of reducing the role of the public sector (government-owned enterprises) in the economy and increasing the role of the private sector. This took several forms: disinvestment (the government selling a part of its shareholding in public-sector undertakings to private investors), reducing the number of industries reserved exclusively for the public sector, and giving greater managerial and financial autonomy to public-sector enterprises that remained government-owned. The underlying aim was to improve efficiency by subjecting more of the economy to competitive, private-sector discipline.
3. Globalisation — the process of integrating the Indian economy with the world economy, removing barriers to international trade and investment. Key elements: substantial reduction of import tariffs, relaxation of restrictions on Foreign Direct Investment (FDI) so that …