LPG Reforms – Liberalisation, Privatisation, Globalisation
🟠 Topic 71: LPG Reforms – Liberalisation, Privatisation, Globalisation
📖 Explanation (1000+ Words)
📌 Introduction
The LPG Reforms — Liberalisation, Privatisation, and Globalisation — mark the watershed moment in India’s economic history. Triggered by the 1991 Balance of Payments (BoP) crisis, these reforms dismantled India’s license-permit raj, opened up the economy to global competition, reduced state control, and integrated India into the global economy. These changes paved the way for high economic growth, technological progress, and increased foreign investment.
🔹 Background – 1991 Economic Crisis
Key Factors Behind the Crisis
✔️ High Fiscal Deficit – Reached ~8.5% of GDP.
✔️ External Debt Crisis – Short-term debt reached unsustainable levels.
✔️ Collapse of Forex Reserves – Reserves fell to cover less than 3 weeks of imports.
✔️ Global Oil Price Shock – Gulf War in 1990 increased India’s import bill.
✔️ Closed Economy Model – License raj, high tariffs, and excessive regulation discouraged competition.
Emergency Measures
✔️ Rupee devaluation by nearly 18%.
✔️ Gold pledged to raise emergency funds.
✔️ Approach to IMF for bailout tied to economic reforms.
🔹 What are LPG Reforms?
| Component | Description |
|---|---|
| Liberalisation | Reducing state control over industries, easing restrictions on private businesses. |
| Privatisation | Selling government stakes in PSUs to private sector for efficiency. |
| Globalisation | Integrating India with global trade, investment, and technology flows. |
🔹 1️⃣ Liberalisation – Key Features
📖 Definition
Liberalisation refers to the removal of restrictions and controls imposed by the government on trade, industry, and investment, allowing market forces to drive economic decisions.
Key Reforms
✔️ Abolition of Industrial Licensing – License requirement scrapped for most sectors (except strategic ones like defence).
✔️ Reduction in Tariffs & Duties – Customs duties lowered to encourage global trade.
✔️ De-reservation of Public Sector – Private sector allowed into key industries (telecom, aviation).
✔️ Financial Sector Reforms – Private & foreign banks allowed, interest rates deregulated.
✔️ FDI Liberalisation – Automatic route allowed in multiple sectors.
Impact of Liberalisation
| Sector | Impact |
|---|---|
| Industry | More competition, increased efficiency |
| Foreign Investment | Higher FDI inflows |
| Banking | Better services, innovation |
| Telecom | Lower tariffs, technological upgrades |
🔹 2️⃣ Privatisation – Key Features
📖 Definition
Privatisation refers to the transfer of ownership or management of state-owned enterprises (PSUs) to the private sector.
Methods of Privatisation
| Method | Description |
|---|---|
| Strategic Sale | Government sells majority stake to private player |
| Disinvestment | Partial sale through public offering (IPO, OFS) |
| Outsourcing | Private firms manage non-core functions of PSUs |
Examples of Privatised Entities
| PSU | Buyer |
|---|---|
| Air India | Tata Group |
| VSNL (now Tata Communications) | Tata Group |
| BALCO | Sterlite Industries |
Benefits of Privatisation
✔️ Improved operational efficiency.
✔️ Reduced fiscal burden on government.
✔️ Increased competition and innovation.
✔️ Better customer service quality.
🔹 3️⃣ Globalisation – Key Features
📖 Definition
Globalisation refers to the integration of the domestic economy with the global economy, facilitated by cross-border trade, investment, technology transfer, and cultural exchange.
Key Reforms Facilitating Globalisation
✔️ Lower Import Tariffs – From over 100% to average ~10% now.
✔️ Membership in WTO (1995) – Committed to global trade rules.
✔️ FDI Liberalisation – Integration into global value chains (GVCs).
✔️ Promotion of Export-Oriented Units (EOUs) and Special Economic Zones (SEZs).
Benefits of Globalisation
✔️ Access to global markets for Indian firms.
✔️ Cheaper imports of technology and capital goods.
✔️ Integration into global service delivery (IT-BPO).
✔️ Exposure to global best practices in management, governance, and technology.
Case Study – IT Sector Boom Post-LPG Reforms
- Liberalisation allowed private IT firms to emerge.
- Globalisation connected Indian IT services to global demand.
- Privatisation of VSNL enhanced global connectivity.
- Result: India’s IT exports grew from ~$100 million in 1991 to ~$194 billion in 2023.
🔹 Impact of LPG Reforms
| Parameter | Pre-1991 | Post-1991 |
|---|---|---|
| GDP Growth | ~3-4% | ~6-8% |
| Exports (as % of GDP) | 7% | ~20% |
| Forex Reserves | $5.8 billion (1991) | ~$620 billion (2023) |
| FDI Inflows (Annual) | Negligible | ~$70 billion |
| Poverty Ratio | ~45% | ~21% (2011-12) |
Sectors Benefiting the Most
| Sector | Impact |
|---|---|
| IT & Software | Global outsourcing hub |
| Telecom | Revolution in connectivity |
| Pharmaceuticals | Global supply of generic drugs |
| Automobiles | Integration into global value chains |
🔹 Challenges of LPG Reforms
1️⃣ Rising Inequality
- Urban-rural divide widened.
- Rich benefited more from globalisation.
2️⃣ De-industrialisation Risk
- Cheap imports hurt small-scale industries.
- MSMEs faced competition from Chinese products.
3️⃣ Jobless Growth
- High growth in services, but limited employment creation in manufacturing.
- Agriculture’s share in GDP fell sharply.
4️⃣ External Vulnerability
- High dependence on foreign capital flows.
- Current account deficits widened due to import dependence.
Case Study – 1991 Reforms & Indian Middle Class
- Liberalisation created a new middle class, with access to: ✔️ Global brands (electronics, cars, fashion).
✔️ Foreign education & employment opportunities.
✔️ Investment in global financial markets. - This aspirational middle class became a driver of consumption and savings.
📚 Practice MCQ
1️⃣ What does liberalisation refer to in the context of 1991 reforms?
✅ Options:
(a) Transfer of PSU ownership to private players
(b) Integration of Indian economy with the world
(c) Reduction of government control over business and trade
(d) Adoption of a socialist economic model
2️⃣ Which of the following was a major objective of privatisation under LPG reforms?
✅ Options:
(a) Increase government control over key industries
(b) Improve efficiency and reduce fiscal burden
(c) Promote import substitution
(d) Achieve self-sufficiency in agriculture
3️⃣ India’s 1991 economic reforms were partly driven by:
✅ Options:
(a) High forex reserves
(b) Rising export surplus
(c) Severe balance of payments crisis
(d) Introduction of GST
