LPG Reforms

LPG Reforms

Liberalization, Privatization, and Globalization?

  • Liberalization– It refers to the process of making policies less constraining of economic activity and also reduction of tariffs or removal of non-tariff barriers.
  • Privatization– It refers to the transfer of ownership of property or business from a government to a privately owned entity.
  • Globalization– It refers to the expansion of economic activities across the political boundaries of nation-states.

What were LPG Reforms?

The term LPG stands for Liberalization, Privatization, and Globalization, representing the three core areas of focus in the Indian government’s New Economic Policy of 1991. The LPG Policy was introduced under the leadership of Prime Minister Shri P V Narasimha Rao and Finance Minister Dr. Manmohan Singh.

Liberalization aimed to reduce government control and regulations, while privatization involved transferring ownership of state-owned enterprises to the private sector. Globalization focused on expanding economic activities and integrating India with the global economy. Together, these three pillars formed the basis of the LPG reforms, marking a significant shift in India’s economic policies.

Factors that led to LPG Reforms

  • Price Increases: Inflation soared from 6.7% to 16.7%, worsening the country’s economic situation.
  • Increased Fiscal Deficit: The government’s fiscal deficit increased as non-development spending increased. The national debt and interest rates have risen as a result of the increased budget imbalance. Interest liabilities accounted for 36.4% of overall government spending in 1991.
  • Increase in the Unfavourable Balance of Payments (BOP): It was Rs. 2214 crore in 1980-81 and Rs. 17,367 crore in 1990-91. To finance the deficit, a considerable number of foreign loans were needed, and the interest rate had to be raised.
  • The Iraq War broke out in 1990-91, resulting in a spike in gasoline costs. The influx of foreign currency from Gulf countries ceased, exacerbating the situation.
  • PSU Performance: Due to political influence, PSUs were underperforming and became a major burden for the government.
  • Foreign Exchange Reserves Depletion: In 1990-91, India’s foreign exchange reserves were depleted to the point where they were unable to cover a two-week import bill.

General Features of LPG Reforms

  • Removing the mandatory convertibility clause
  • Reducing the import tariffs
  • Market deregulation.
  • Reducing the taxes.
  • Letting go of Industrial licensing/ Permit Raj
  • The role of the public sector was decreased
  • Beginning of privatization
  • Restriction-free entry to foreign investment and technology
  • Industrial location policy liberalized
  • Abolition of phased manufacturing programs for new projects

Beneficial Impacts of LPG Reforms

  • It increased the GDP growth rate year by year and in 2015-16 it was estimated to be 7.5% by the IMF from 1.1% in 1990-91.
  • There was an increase in the flow of foreign investment in the Indian economy, it now accounts for US$ 19.33 billion as of 2019-20 (till August).
  • Increased foreign investment facilitated an increase in job creation thus leading to a decrease in the unemployment rate.
  • Increase in employment, the per capita income increased, and there was also a rise in exports from India.

Challenging outcomes:

  • In 1991, agriculture employed 72 percent of the population and contributed 29.02 percent of the GDP. Now the share of agriculture in the GDP has gone down drastically to 18 percent. This has resulted in a lowering of the per capita income of the farmers and increasing the rural indebtedness.
  • Due to the opening up of the Indian economy to foreign competition, more MNCs are competing with local businesses and companies which are facing problems due to financial constraints, lack of advanced technology, and production line
  • Globalization has also contributed to the destruction of the environment through pollution by emissions from manufacturing plants and the clearing of vegetation cover. It further affects the health of people.
  • LPG policies have led to widening income gaps within the country. The higher growth rate is achieved by an economy at the expense of the declining incomes of people who may be rendered redundant.

Related Links: Five-Year Plans of India