The term Economic Reforms in India primarily refers to the New Economic Policy (NEP), a comprehensive concept and policy initiative launched in July 1991. This policy marked a major transformation, steering the nation away from a closed, state-dominated model toward a more open, market-driven economy. The reforms were necessitated by a severe Balance of Payments (BoP) crisis in 1991, where foreign exchange reserves had fallen to critically low levels, barely sufficient for a few weeks of imports. The structural adjustment program was initiated under Prime Minister P. V. Narasimha Rao and Finance Minister Dr. Manmohan Singh.
The mechanism is encapsulated by the LPG Model: Liberalisation, Privatisation, and Globalisation. Liberalisation involved dismantling the restrictive "License Raj" by abolishing industrial licensing for most sectors and giving commercial banks freedom to determine interest rates. Privatisation reduced the public sector's role, decreasing the number of industries reserved for the state from 17 to 2 (later 3), and introduced disinvestment through the sale of Public Sector Undertaking (PSU) shares. Globalisation integrated India with the world economy by encouraging Foreign Direct Investment (FDI), raising foreign equity limits up to 100% in some industries, and lowering import duties.
The reforms are intrinsically connected to the pre-1991 "License Raj" system and were a condition for a loan from the International Monetary Fund (IMF) and the World Bank. They also led to the establishment of institutions like the Securities and Exchange Board of India (SEBI) and the amendment of the Foreign Exchange Regulation Act (FERA). While the core principles remain, the process is ongoing, with recent changes including the consolidation of 29 labour laws into four Labour Codes (such as the Code on Wages, 2019 and the Industrial Relations Code, 2020) and the implementation of the Goods and Services Tax (GST).