In 1991 the economy faced a serious foreign exchange crisis, high government deficit and a rising trend of prices despite bumper crops.
In 1991, India met with an economic crisis relating to its external debt — the government was not able to make repayments on its borrowings from abroad; foreign exchange reserves, which we generally maintain to import petrol and other important items, dropped to levels that were not sufficient for even a fortnight.
The crisis was further compounded by rising prices of essential goods.
There was also not sufficient foreign exchange to pay the interest that needs to be paid to international lenders.
India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis.
For availing the loan, these international agencies expected India to liberalise and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions.
India agreed to the conditions of World Bank and IMF and announced the New Economic Policy (NEP).
The NEP consisted of wide ranging economic reforms.
The thrust of the policies was towards creating a more competitive environment in the economy and removing the barriers to entry and growth of firms.
This set of policies can broadly be classified into two groups: the stabilisation measures and the structural reform measures.
Stabilisation measures are short term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control.
In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control.
On the other hand, structural reform policies are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy.
The government initiated a variety of policies which fall under three heads viz., liberalisation, privatisation and globalisation.
The first two are policy strategies and the last one is the outcome of these strategies.
As a part of economic reforms, the Government of India announced a new industrial policy on July 24, 1991.
The Industrial Policy Statement of 1991 stated that “the Government will continue to pursue a sound policy framework encompassing encouragement of entrepreneurship, development of indigenous technology through investment in research and development, bringing in new technology, dismantling of the regulatory system, development of the capital markets and increased competitiveness for the benefit of common man”.
The major objective of this policy—
 Development and utilization of indigenous capabilities in technology and manufacturing.
 Dismantling of the regulatory system.
 Development of the capital market.
 Promoting workers participation in management, enhancing their welfare and equipping them to deal with inevitability of technological change.
 Preventing monopolies and concentration of industrial power.
 Assisting small enterprises.
Features of the New Industrial Policy, 1991
Till July 1991, the emphasis was on “regulation.”
The New Industrial Policy of 1991 shifts emphasis from regulation to development.
In 1956 resolution on industrial policy, 17 industries were reserved for the public sector.
This number was reduced to 8 in 1991 industrial policy.
In 2001, a review of the policy was done and only 3 industries are now reserved for public sector. Now, only atomic energy, arms and rail transport are reserved for public sector.
Since 1991, promotion of foreign direct investment (FDI) has been an integral part of India’s economic policy.
FDI up to 100 per cent has also been allowed under automatic route for most manufacturing activities in Special Economic Zones (SEZs).
In order to invite foreign investment in high priority industries, requiring large investments and advanced technology, it has been decided to provide approval for direct foreign investment upto 51% foreign equity in such industries.
Automatic permission will be given for foreign technology agreements in high priority industries up to a lump sum payment of rs. 1 crore, 5% royalty for domestic sales and 8% for exports, subject to total payment of 8% of sales over a 10 year period from date of agreement or 7 years from commencement of production.
No permission will be necessary for hiring of foreign technicians, foreign testing of indigenously developed technologies.
Emphasis will be placed on controlling and regulating monopolistic, restrictive and unfair trade practices.
Simultaneously, the newly empowered MRTP commission will be authorized to initiative investigations on complaints received from individual consumers or classes of consumers in regard to monopolistic, restrictive and unfair trade practices.
In the industrial policy 1991, major changes have been made in the Monopolistic and Restrictive Trade Practice Act.
Companies having investment of Rs. 100 crores, will not be required to take prior Government permission, for opening new subdivisions, or to expand the present industry or for amalgamation of companies.
Reservation of items of manufacture exclusively in the small scale sector has been an important tenet of industrial policy.
The sick PSUs (Public Sector Undertakings) were to be treated on the same basis as private companies.
A sick PSU (Public Sector Undertakings) was referred to BIFR which had to decide if the PSU (Public Sector Undertakings) was to be revived or shut down.
Effects of the Policy—
 Increase in production.
 Increase in competition.
 Increase in efficiency of public sector.
 Increase in export.
 Balanced regional development.
 More significance to small scale industries.