NEW INDUSTRIAL POLICY, 1991

It were the industrial policies of past which had shaped the nature and structure of the Indian economy. The need of the hour was to change the nature and structure of the economy by early 1990s. The Government of India decided to change the very nature of the industrial policy which will automatically lead to change in the nature and scope of the economy. And here came the New Industrial Policy of 1991.

With this policy the government kickstarted the very process of reform in the economy, that is why the policy is taken more as a process than a policy.

Background: India was faced with severe balance of payment crisis by June 1991. Basically, in early 1990s, there were inter-connected set of events, which were growing unfavourable for the Indian economy:

(i) Due to the Gulf War (1990–91), the higher oil prices were fastly23 depleting India’s foreign reserves.

(ii) Sharp decline in the private remittances from the overseas Indian workers in the wake of the Gulf War24, specially from the Gulf region.

(iii) Inflation peaking at nearly 17 per cent.25

(iv) The gross fiscal deficit of the Central Government reaching 8.4 per cent of the GDP.26

(v) By the month of June 1991, India’s foreign exchange had declined to just two weeks of import coverage.27

India’s near miss with a serious balance of payments crisis was the proximate cause that started India’s market liberalisation measures in 1991 followed by a gradualist approach.28 As the reforms were induced by the crisis of the BoP, the initial phase focussed on macroeconomic stabilisation while the reforms of industrial policy, trade and exchange rate policies, foreign investment policy, financial and tax reforms

as well as public sector reforms did also follow soon.

The financial support India recieved from the IMF to fight out the BoP crisis of 1990–91 were having a tag of conditions to be fulfilled by India. These IMF conditionalities required the Indian economy to go for a structural re-adjustment. As the nature and scope of the economy were moulded by the various industrial policies India did follow till date, any desired change in the economic structure had to be induced with the help of another industrial policy. The new industrial policy, announced by the government on 23 July, 1991 had initiated a bigger process of economic reforms in the country, seriously motivated towards the structural readjustment naturally obliged to ‘fulfill’ IMF conditionalities.29 The major highlights of the policy are as follows: