Economic Reforms in India – Liberalisation, Privatisation, Globalisation (LPG)
Economic Reforms in India – Liberalisation, Privatisation, Globalisation (LPG)
Background
By the early 1990s, India faced a severe economic crisis caused by:
- High fiscal deficit
- Low foreign exchange reserves (barely enough to cover 2 weeks of imports)
- Slow economic growth
- Excessive government control over businesses (License Raj)
To address this, the Government of India introduced the LPG reforms in 1991, marking a paradigm shift from a centrally planned economy to a market-driven economy.
Liberalisation
Liberalisation refers to the removal of unnecessary controls and restrictions imposed by the government on businesses and the economy.
Key Measures
- Dismantling License Raj – Industrial licenses abolished for most sectors.
- Reduction in tariffs and import duties – Encouraging imports and competition.
- Easier entry of private and foreign firms into sectors like banking, telecommunications, etc.
- Financial sector reforms – Greater autonomy to RBI and banks.
Example
Previously, a company needed multiple licenses to set up a factory. Post-1991, most industries could operate freely, fostering faster industrial growth.
Privatisation
Privatisation refers to the transfer of ownership, management, or control of public sector enterprises (PSEs) to private entities.
Key Measures
- Disinvestment of Public Sector Units (PSUs) – Selling government shares to private players.
- Greater role for private players in sectors like telecom, aviation, banking.
- Corporatisation of public enterprises to improve efficiency.
Example
Maruti Udyog, once a government company, was gradually privatised and became Maruti Suzuki, contributing to India’s automobile boom.
Globalisation
Globalisation refers to greater integration of the Indian economy with the global economy through increased trade, investment, technology flow, and mobility of people and services.
Key Measures
- Removal of quantitative restrictions on imports.
- Participation in WTO to integrate with the global trading system.
- Increased FDI limits across sectors like retail, insurance, and defence.
- Promotion of exports through incentives and schemes.
Example
The entry of companies like Hyundai, Amazon, and Google into India was facilitated by globalisation, which opened the economy to foreign investors and businesses.
Impact of LPG Reforms
Positive Outcomes
- Higher GDP growth rate (averaging 6-8% in subsequent years).
- Foreign exchange reserves improved significantly.
- Greater consumer choices due to foreign brands entering India.
- Boom in IT and services sectors, making India a global outsourcing hub.
Challenges and Criticism
- Increased income inequality.
- Jobless growth in some sectors.
- Vulnerabilities to global shocks (like 2008 financial crisis).
- Concerns over excessive privatisation of essential services.
Statement-based MCQs
MCQ 1
Consider the following statements regarding economic reforms in India:
- Liberalisation aimed to reduce government control over economic activities.
- Privatisation refers to restricting foreign investment in the public sector.
- Globalisation allowed greater integration of India’s economy with the world.
Which of the statements given above is/are correct?
a) 1 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
MCQ 2
Which of the following was a key element of India’s 1991 economic reforms?
- Reduction of import tariffs.
- Removal of industrial licensing for most sectors.
- Prohibition of foreign direct investment (FDI) in core sectors.
Select the correct answer using the code below:
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
MCQ 3
What was the primary reason for introducing economic reforms in India in 1991?
a) Excessive foreign investment
b) Severe balance of payments crisis
c) Decline in agricultural production
d) Opposition from the World Bank
MCQ 4
Which of the following is a valid impact of privatisation?
a) Increased efficiency in public enterprises.
b) Decline in foreign direct investment.
c) Reduced foreign trade.
d) Expansion of the informal economy.
MCQ 5
Under globalisation, which of the following trends became prominent in India after 1991?
- Increased foreign investments.
- Rise of the service sector, especially IT and BPOs.
- Greater integration with global supply chains.
Select the correct answer using the code below:
a) 1 only
b) 1 and 2 only
c) 1, 2 and 3
d) 2 and 3 only
