India Economic Policy


India Economic Policy plays a major role in determining various government actions on the economic field. Depending on the India economic policy, the government of India initiates various actions including preparing budget, setting interest rates etc. The economic policy also influences the national ownership, labor market, and several other economic areas where government intervention is required.

There are a number of internal factors like political beliefs and policies of the parties etc. that play pivotal roles in determining the economic policy of India. Besides these, like all other countries, Indian economic policy also gets influenced by various international institutions like the World Bank and the International Monetary Fund (IMF) etc.

The Economic Policy

The year 1991 was a significant one when it comes to Indian economic policy. The year saw a major economic policy reform, which resulted in shifting the direction of India economic policy from the post-independence era.

Indian Economic Policy Prior to 1991

Prior to 1991, the colonial experience and the Fabian-socialistic approach had a great influence over India economic policy. The policy had got inclination towards protectionism, where emphasis was given on industrialization, import substitution, business regulation, state intervention in labor and financial markets, and central planning. The India economic policy during that time had three basic features:

  • Autarchic trade policy
  • Extension of public sector
  • Direct, discretionary and quantitative controls on private sector

All the above three features interacted in both the institutional environment of functioning markets as well as private ownership of means of production. It generated perverse incentives, which resulted in economic growth of mere 3.5 percent per annum.

It was the first Prime Minister of India, Jawaharlal Nehru, along with noted statistician Prasanta Chandra Mahalanobis, who formulated and supervised economic policy of India after its independence. The concept of Five-Year Plans came into existence, which were influenced by the central planning in the Soviet Union. A number of industries were nationalized during the mid-1950s, which include telecommunication, mining, steel, water, machine tools, electrical plants, insurance and a few more. Setting up new businesses required elaborated licenses and regulations. ‘Red tapeism’ was also a part of it between 1947 and 1990.

The economic policy formulated by Nehru and Mahalanobis was based on direct and indirect state intervention. Though they were quite optimistic about the success of their policy, economist Milton Friedman later criticized their policy which concentrates on capital and technology-intensive heavy industry as well as subsidizing manual, low-skill cottage industry at the same time. According to Friedman, it would waste capital and labor and would slow down the growth of small manufacturers.

Indian Economic Policy After 1991

India saw an economic policy reform in 1991. During the late 80s, government of India took some bold decisions and started easing restrictions on capacity expansion, reduced corporate taxes and removed price controls etc. These led to enhancement in growth rate, which in turn led to high fiscal deficits and aggravating current account. Further, fall down of Soviet Union, which was a major trading partner of India, and the first Gulf War which caused a sharp rise in the oil prices, compelled India to face a major balance-of-payments crisis.

In this crucial juncture, the then Prime Minister Narasimha Rao and his Finance Minister Manmohan Singh initiated the economic liberalization, which changed the economic face of the country. The reforms put an end to ‘Red tapeism’ and also to several public monopolies. Foreign direct investments in a number of sectors started pouring in.


During the last few years of economic reforms, India saw some important changes in the liberalization and rationalization of:

  • domestic and foreign investment
  • import and export trade controls
  • tax structure
  • public and financial activities