New Economic Policy

The heavy industry strategy was implemented under the ownership and management of the public sector. The government made budgetary provisions for the public sector to create infrastructure and establish industries. The process went on for more than three decades.

However, an evaluation of the performance of the public sector by the government itself found that barring a few, more than half of the public sector units have been running on losses. There was gross mismanagement and labour problems falling the public sector units. It was a major shock to the government to find all these short comings of public sector.

The failure of the public sector on various fronts was seen as one of the major reasons for lack of all round development of the country in the area of industrialisation, removal of poverty and unemployment, etc. Hence in 1991, the central government came out with a new economic policy resolution. The main feature of this policy are:

  1. Liberalization
  2. Privatization
  3. Globalization

The policy is also popularly called LPG model of development.


Liberalization means withdrawal of controls and regulations by the government on establishment and running of industries in the country. Till 1991, all the public sector units were practically under the government even if they were called autonomous bodies.

There were lot of interventions by the ministries of the government in functioning of the public sector. This resulted in politilization and fall in professionalism and inefficiency. In order to overcome this problem the government decided to stop political intervention in the running of the public sector units by signing a memorandum of understanding. According to this the management of public sector units will be given autonomy to function but they will also be accountable.

Another important feature of liberalization is to do away with the licensing system. Earlier it was mandatory for any private individual or organization to seek permission from the government to start any industrial activity. There was heavy rush and long queue before the window of the concerned government department to get a license. This system slowly gave rise to delays in getting license.

Government officials started taking bribes to clear files. Such corrupt practices brought bad name to the government. So in 1991 government decided to abandon the licensing system and allowed the interested individuals to start their industrial activity without any permission. However, permission is still required only in case of strategic industries such as medicine, defence equipments, etc.


Privatization implies opening of the door of industrial activities to the private sector which was exclusively reserved for public sector only except nuclear energy and defence. Since basic and heavy industries were strictly under public sector there was no room for competition.

The quality of product and services deteriorated due to lack of competition from other companies. As a result the consumers were the major looser because they did not get quality products and the delivery system and other services were also very poor. So the government decided to allow and encourage the entry of private sector in the areas earlier reserved for public sector only.

As a result private sector entry was seen in telecommunication, civil aviation, etc. The government also decided to disinvest some of the public sector companies by selling part of their assets to public.


Globalization is a process in which attempts are made by the different countries in the world to allow free flow of goods and services, labour technology, investments etc. India is a member of world trade organization (WTO) which is the nodal agency to promote globalization.

In 1991 industrial policy, India adopted soft attitude towards foreign companies to do their business in India in order to promote competition. It also committed itself to abolish or reduce tariff on import of commodities. On the other hand, India also adopted policies to promote exports.

The government also allowed foreign companies to hold 51 percent share or more in case of their collaboration with Indian companies so that they can function freely and as the owner. This will also facilitate transfer of latest technology into Indian territory.