35 Years of New Economic Policy, 1991

2026 marks 35 years of the 1991 NEP, substantial but incomplete in creating mass non-farm jobs. India must rethink its strategy, as China’s per-capita GDP, which was similar to India’s in 1991, is now ~5 times higher.

Key Features of New Economic Policy (NEP), 1991

Core Focus: Based on Liberalisation–Privatisation–Globalisation (LPG) to reduce State control, expand private participation, attract foreign capital, and modernise the economy.
Fiscal Discipline: Targeted at reducing fiscal deficit to ~3–4% (medium term) through subsidy rationalisation, lower non-plan expenditure and wider tax reforms to raise revenue.
Monetary Reforms: Adopted a tighter monetary stance to curb imports and current account stress; used tools like treasury bills and long-term securities, and raised import credit costs.
Banking Liberalisation: Gave banks greater autonomy to set deposit interest rates and maturity terms, moving away from heavy administrative control.
Trade Reforms: Devalued the rupee by ~18% to boost exports, eased import restrictions for exporters, and liberalised capital goods imports without prior approvals.
Industrial Policy Reforms: Abolished industrial licensing for most sectors, reduced public sector exclusivity, and opened key industries to private entry to raise competition.
MRTP & SSI Reforms: Amended Monopolies and Restrictive Trade Practices Act to remove expansion approvals for large firms; allowed small enterprises to sell up to 44% equity to larger companies.
FDI Reforms: Raised Foreign Direct Investment (FDI) cap from 40% to 51% in priority industries and created the Foreign Investment Promotion Board (FIPB) for faster clearances.

Achievements of the 1991 Reforms

Mobility Rise: Vehicle ownership increased ~45 times, reflecting rising income capability.
Formal Savings: Provident Fund rose ~75 times, signalling expansion of formal wage employment.
External Strength: Foreign exchange reserves jumped ~120 times, improving macro-stability.
Capital Markets: Stock market value expanded ~500 times, enabling deeper investment.
Connectivity Boom: Phone connections rose ~600 times, powering productivity and services growth.

Structural Deficits of Post-1991 Growth

Farm Dependence: Approximately 45% of India’s workforce remains in agriculture, indicating an incomplete transformation.
Informality Trap: India has ~6.3 crore enterprises, but only ~8 lakh are Provident Fund-paying employers, signalling the very thin formal base.
Weak Manufacturing Jobs: Manufacturing workforce share is only ~11%, similar to the post-industrial phase, indicating premature deindustrialisation.
Trust Deficit: Over-regulation and suspicion toward entrepreneurs kept firms small; India’s growth didn’t translate into enough stable wage jobs.
Job Supply Mismatch: India adds ~20 million entrants annually but creates only ~2 million jobs, thereby widening underemployment pressures.

Need to Reorient India’s Development Strategy

Wealth Creation: “Garibi Hatao” needs “Ameeri Banao”, because only expanding incomes, firms and tax base can sustainably fund welfare and jobs.
Policy Experimentation: “Cross the river by feeling the stones”, shift from policy paralysis to calibrated trials, piloting reforms in select sectors/States and scaling what works fast.
Pragmatism Over Ideology: “Black/white cat”, back any State/sector/firm (manufacturing or services, domestic or foreign) that delivers high-wage non-farm job creation, not ideological preferences.
Risk Acceptance: “When you open the window, some flies will always get in” Fraud cases should be handled through smarter enforcement, not blanket over-criminalisation that discourages investment.

Way Forward: Reform Agenda for 2026

Deregulation: Cut licensing, inspections and notices to reduce compliance fear; E.g., implement Jan Vishwas Siddhant as a single-source regulatory truth system.
Decriminalisation: Replace jail-based compliance with civil penalties and graded deterrence; E.g., expand Jan Vishwas 2.0/3.0 to rationalise economic offences.
Digitisation: Make government interface paperless and cashless to cut transaction costs; E.g., single-window approvals and faceless compliance like GST portal workflows.
Decentralisation: Devolve funds, functions and functionaries to local levels for job creation ecosystems; E.g., 15th Finance Commission local body grants & SVAMITVA Scheme to strengthen Panchayat revenues.

“Thirty-five years after 1991, reforms delivered growth but not enough jobs; India must now shift from ideology to abundance and entrepreneurship-led employment. The true test of reform is not GDP alone, but whether it creates ‘dignified work’ for India’s demographic future and global standing.”

Reference: The Indian Express

PMF IAS Pathfinder for Mains – Question 501

Q. India adopted the New Economic Policy in 1991 to accelerate growth through liberalisation, privatisation and global integration. Critically examine whether the post-1991 growth experience has been inclusive. Suggest policy measures to address the key distortions that have emerged. (250 Words) (15 Marks)

Approach

Introduction: Write a brief introduction about the New Economic Policy (NEP).
Body: Write post-1991 inclusivity in growth, also mention key distortions and suggest policy measures to address the key distortions that have emerged.
Conclusion: Emphasis on inclusion and sustainable development to address the structural issue of the economy.