September , 2016
25 years of India’s New Economic Policy
15:25 pm

Kishore Kumar Biswas

When the globalization process had been going on, I can remember a section of my university teachers and also the mainstream media saying that India’s depleted foreign exchange was the main reason behind the implementation of an open economy system or a global economic system at the beginning of 1991. As if there was no alternative to that. It was true that foreign exchange reserve came down to $ 1.1 billion and such a low level in the early 1991 was only enough for about two week’s imports. But later, it was clear that talks on it had been  going on for about a decade before it started in 1991. A section of observers think that the implementation of an open economy system was very difficult politically. The shrinkage of foreign exchange was just an opportunity to kick-start the new system. It was indeed politically difficult. The then new Congress government headed by P.V. Narashimha Rao, which started the new economic regime, came to power without taking any mandate from the people about the economic system. So, after winning the election, it started the historic process, which resulted in a clear shift in ideology of economic policy. 

At the time of implementation of the new economic policy (NEP), many political parties raised their voices against it. A section of industrialists also went against this. But within a short span of time, the situation changed. No parliamentary political party in India really went against the new system. That is why in 1994, when the problem of foreign exchange reserve subsided, there was no retraction of the new economic system. Later, the intensity of the process of globalization was increased and the political parties did not go against it except making occasional criticism on a particular economic policy.

What was the change?

Without going into the details of the list of changes one should clearly notice that the repeal of the licencse raj has been the most talked about reform measure. In the new system, any investor can start a business or production unit (except in the few restricted sectors) without having to get a lot of  permissions from a department. But the entrepreneurs have to follow some rules including environmental laws, financial, and foreign exchange regulations, etc. The MRTP act has been changed to attain efficiency and cost minimization. Gradually, most of the goods came under open general licence for import and import duties were brought down to around 30% or even more.

The positive results after NEP

Higher growth and lower poverty levels in the reform period of India have been discussed as the foremost success stories. A few lines of Rajib Kumar of Centre of Policy Research will not be out of context. “No waiting list for cars and scooters, no special licences for securing foreign exchange for studying abroad, no gold smuggling, and no more the dread of the customs officers at airport with long queues that took hours to be cleared as each case was opened and rummaged to look for the ‘banned item’.” (The Economic and Political Weekly, July 16, 2016). Actually, the success story of globalization is easily seen around us, particularly in the urban areas and also in rural areas to a limited extent.

Nature of growth

It is true that India, along with a large number of countries have experienced an unprecedented amount of growth. But it became unsustainable after the onset of the global financial crisis in 2007-08. Quite a number of countries like BRICS nations continued their pace of growth for another few years even after the global crisis. But from 2012-13, almost all major economies have been unable to sustain their growth. The entire economic logic in favour of market economy has been shattered and a huge number of economists are now hesitant consider this phenomenon as a temporary one. This unsustainable growth is thought to be rooted in the nature of growth. Thomas Piketty in ‘Capital in the Twenty-First Century and Why Nations Fail’ (2014) and Daron Acemoglu and James A. Robinson (2012) emphasized the need for proper distribution and transformation of the economy as inclusive institutions.

Many economists consider, as Atul Sood of Centre for the Studies in Regional Development, JNU, wrote, “ inclusive growth cannot be reached simply by the state redistributing the gains from economic growth. There is a need for a redistribution of assets and intervention in market process to create conditions and opportunities for all to participate in the growth process, particularly those who have been historically disadvantaged.” (EPW, July, 16, 2016). Surprisingly enough, as Sood pointed out that there is a talk of inclusive growth without any discussion on redistribution of assets, quantity and quality of jobs and precarious livelihood.

Source of growth

Indian economy experienced low growth during the first three decades after independence. The standard growth rate had been 3-4%, which was known as Hindu rate of growth. In the 1980s, the growth rate was impressive. But Indian growth rate has been highest in the last decade from 2003-04. At that time, India achieved double digit growth. But after 2012-13, the slowdown of growth rate was visible. But what was the source of high growth? It has been pointed out the source of new growth has been rooted in the spread of construction, township, urban development, IT parks, commercial centres and other service sector activities. These activities have been mainly urban and peri-urban centric. The industrial sector has not been able to grow much. The rural economy, where most of the Indians live, has been neglected long and experienced very low growth. Noticeably, the rural, mining and forest areas have been utilized to meet the new growth.

Income inequality

Income inequality has been spectacular in the reformed period. There has been no disagreement about this. Disagreement has been there only in finding out the causes of rising inequality. Prabhat Patnaik, professor emeritus, Centre for Economic Studies and Planning, JNU, explained, while theorizing the reason of growing inequality India in the globalized system, “Unless output growth rate is such that the unemployment growth rate associated with it exceeds the rate of growth of labour supply to start with (which is itself a necessary and not a sufficient condition),  the economy will fall into a vicious circle of growing inequality and growing relative labour reserve.” (EPW, July 16, 2016). Rajib Kumar thinks that the reforms were branded pro-rich as people with better initial endowments benefited disproportionately from significant positive impacts, thus exacerbating both income and regional inequalities. Kaushik Basu, chief economist, World Bank, expressed a similar opinion on rising income inequality in India.

Privatization of natural resources

Recently, Ramachandra Guha, a renowned historian,  explained at length to the media the extractive nature of the economy by citing the mining sector. Mining sector under state has been used by private parties not so qualified in mining matters, which led to a unhealthy nexus between businessmen and politicians. Secondly, due to political patronage, miners, in many cases, did not care for the environment and labour regulations. Thirdly, as mining in the private hands was not regulated well, miners at many times over extracted materials when price was higher. Fourthly, as miners did not use modern technology, they heavily damaged the environment. The forest, rivers and springs and cultivable lands were worst hit. Fifthly, people residing in and around mining areas, in many cases, became impoverished by extensive mining by companies. This has increased the intensity of extremist activities.



It is true that the last 25 years of globalization has been successful according to some indicators and not so successful according to others. There has been rising doubt about the sustainability of growth prospects and aspects. If India cannot have sustained, inclusive and equitable growth, the entire economic model would be questioned even by the proponents of  globalization. The new economic regime has benefited a section of Indians. Now it needs to benefit the rest.

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