Economic Reforms of 1991 and Industrial Policy: LPG, Industrial Policy Resolutions, MSME, PSUs and Disinvestment for SSC

The year 1991 is the turning point of the Indian economy, when the country opened up its markets and reduced the control of the government. SSC economy regularly asks about the reasons, the main reforms, the industrial policies and the public sector classification. This guide on economic reforms of 1991 and industrial policy for SSC covers all of them in tables, with practice questions and FAQs.

Why the 1991 Reforms?

• A serious balance of payments crisis: foreign exchange reserves fell so low that they could cover only about two weeks of imports.
• A high fiscal deficit, high inflation and the rise in oil prices after the Gulf War (1990).
• India pledged gold to raise foreign currency, and took a loan from the IMF.
• Prime Minister: P. V. Narasimha Rao; Finance Minister: Dr. Manmohan Singh.

LPG Reforms: New Economic Policy (1991)

Industrial Policy Resolutions in India

Planning Commission and NITI Aayog

The Planning Commission (1950) was replaced by NITI Aayog on 1 January 2015, which acts as a think tank and works on “cooperative federalism”.

MSME Sector

These are the limits under the 2020 classification; they were raised again in 2025. MSMEs provide the largest employment after agriculture and contribute a large share of exports and manufacturing output. The Ministry of MSME is in charge, and the Khadi and Village Industries Commission (KVIC, 1957) supports khadi and village industries.

Public Sector Enterprises

• Disinvestment means selling part or all of the government’s share in a PSU; the Department of Investment and Public Asset Management (DIPAM) handles it.
• Air India was sold to the Tata Group in 2022.
• The 1991 policy led to a Disinvestment Commission (1996).
• The PSU shares can be sold through an IPO or an offer for sale (OFS).

FDI Policy

• FDI is regulated by the Foreign Exchange Management Act (FEMA), 1999, which replaced FERA, 1973.
• The Department for Promotion of Industry and Internal Trade (DPIIT) is responsible for FDI policy.
• FDI is permitted under the “automatic route” (no prior approval) and the “government route” (prior approval needed).
• Sectors such as atomic energy, lottery and gambling are closed to FDI.
• FPI (portfolio investment) is regulated by SEBI.

Other Reforms and Initiatives

Tricks to Remember

• 1991 = LPG; Rao (PM) and Manmohan Singh (FM).
• 1956 policy = economic constitution of India; 1991 = delicensing.
• FEMA 1999 replaced FERA 1973.
• Maharatna PSUs: investment limit 5,000 crore rupees.

Quick Tips

• Learn the three parts of LPG with measures.
• Learn the year and feature of each industrial policy.
• Remember the MSME limits.
• Remember that FEMA replaced FERA.

Quick Revision Points

• The 1991 reforms: liberalisation, privatisation and globalisation.
• The 1956 policy was the economic constitution.
• NITI Aayog replaced the Planning Commission in 2015.
• FEMA 1999 replaced FERA.
• Maharatna PSUs have the highest financial autonomy.

Practice Questions With Answers

1. Who was the Finance Minister during the 1991 reforms?
   Answer: Dr. Manmohan Singh
2. What does LPG stand for in the economic context?
   Answer: Liberalisation, Privatisation and Globalisation
3. Which policy is called the economic constitution of India?
   Answer: Industrial Policy Resolution of 1956
4. Which act replaced FERA?
   Answer: FEMA, 1999
5. Which body replaced the Planning Commission?
   Answer: NITI Aayog
6. What is the investment limit for a micro enterprise (2020 definition)?
   Answer: Up to 1 crore rupees
7. Which PSU category has the highest autonomy?
   Answer: Maharatna
8. What is the sale of government shares in a PSU called?
   Answer: Disinvestment
9. Which company bought Air India in 2022?
   Answer: Tata Group
10. Which year was GST launched?
    Answer: 2017

How to Practise This Chapter

Practise 10 questions every day and write the steps on paper. Then attempt timed sets from our practice papers and the previous year papers page. See all topics on the Indian Economy notes page, read the previous topic Agriculture and Land Reforms and the next topic Poverty, Unemployment and Inequality.

Frequently Asked Questions

Why were the 1991 reforms needed?

Because of a balance of payments crisis and a large fiscal deficit.

What are LPG reforms?

Liberalisation, privatisation and globalisation introduced in 1991.

Who were the architects of the 1991 reforms?

P. V. Narasimha Rao and Manmohan Singh.

What was the Industrial Policy of 1956?

The policy that classified industries into three schedules and made the public sector dominant.

What is delicensing?

The removal of the requirement of a licence for setting up an industry.

What is disinvestment?

The sale of the government’s stake in public sector companies.

What are Maharatna companies?

The biggest profit-making PSUs with the highest financial autonomy.

What is FDI?

Foreign direct investment, an investment from abroad in a business in India.

What is FEMA?

The Foreign Exchange Management Act of 1999, which regulates foreign exchange transactions.

What is the MSME sector?

The micro, small and medium enterprises sector.

Is this topic asked in SSC?

Yes. The 1991 reforms are a standard question in the economy section.

What is NITI Aayog?

The policy think tank of India that replaced the Planning Commission in 2015.