LPG REFORMS

Context:

• The Indian economy has travelled through an eventful period through the last three decades.

Background

• The Economic reforms which changed the path of the economy that the country witnessed in later years was the LPG reforms(Liberalization, Privatization, Globalization) sometimes also referred to as LPGM where M stands for Marketization introduced in 1991 introduced during the crisis that affected the government.
• The Indian economy has travelled through an eventful period through the last three decades.
• In the post-independence economic history of our country, 1991 stands out as a watershed year.
• This was the year in which the economy was faced with a severe balance of payments crisis. In response, we launched a wide-ranging economic programme, not just to restore the balance of payments but to reform, restructure and modernise the economy.
• Thus, the crisis was converted into an opportunity to bring about fundamental changes in the approach and conduct of economic policy.
• A near tragedy was averted and a new path was laid out before the country.

Factors which led to 1991 reforms

• Rise in Prices: The inflation rate increased from 6.7% to 16.7% and the country’s economic position became worse.
• Rise in Fiscal Deficit: Due to increase in non-development expenditure, the fiscal deficit of the government increased. Due to the rise in fiscal deficit there was a rise in public debt and interest. In 1991 interest liability became 36.4% of total government expenditure.
• Increase in Adverse Balance of Payments: In 1980-81 it was Rs. 2214 crore and rose in 1990- 91 to Rs. 17,367 crores. To cover this deficit a large amount of foreign loans had to be obtained and the interest payment got increased.
• Iraq War: In 1990-91, war in Iraq broke, which led to a rise in petrol prices. The flow of foreign currency from Gulf countries stopped and this further aggravated the problem.
• Dismal Performance of PSUs: These were not performing well due to political interference and became a big liability for the government.
• Fall in Foreign Exchange Reserves: India’s foreign exchange reserve fell to low ebb in 1990-91 and it was insufficient to pay for an import bill for 2 weeks.

International events associated with Indian reforms:

• The Soviet Union was collapsing at the time, proving that more socialism could not be the solution for India’s ills.
• Deng Xiaoping had revolutionized China with market-friendly reforms.
• The 1990-91 Iraq war led to the stoppage of flow of foreign currency from Gulf countries.
• To tide over the Balance of Payment (BoP) issues, India borrowed huge amounts from the International Monetary Fund (IMF).
• The Asian financial crisis of 1997-99 laid India low.
• The dot-com collapse and global recession of 2001, and the huge global uncertainty created in the run-up to the invasion of Iraq in 2003.
• The global boom of 2003-08 was spearheaded by China.

Scope of LPG Reforms

• Liberalization- It refers to the process of making policies less constraining of economic activity and also reduction of tariff 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 political boundaries of nation states.

Features of LPG Policy

• Abolition of Industrial licensing/ Permit Raj
• Public sector role diluted
• Beginning of privatisation
• Free entry to foreign investment and technology
• Industrial location policy liberalized
• Abolition of phased manufacturing programmes for new projects
• Removal of mandatory convertibility cause
• Reduction in import tariffs
• Deregulation of markets
• Reduction of taxes

Outcomes of LPG Reforms 6.1

Positive outcomes:

• India’s GDP growth rate increased. During 1990-91 India’s GDP growth rate was only 1.1% but after 1991 reforms GDP growth rate increased year by year and in 2015-16 it was estimated to be 7.5% by the IMF.
• Since 1991, India has firmly established itself as a lucrative foreign investment destination and FDI equity inflows in India in 2019-20 (till August) stood at US$ 19.33 billion.
• In 1991 the unemployment rate was high but after India adopted a new LPG policy more employment got generated as new foreign companies came to India and due to liberalisation many new entrepreneurs started companies.
• Per Capita income increased due to an increase in employment.
• Exports have increased and stood at USD 26.38 billion as of October, 2019.

Challenging outcomes:

• In 1991, agriculture provided employment to 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 the per capita income of the farmers and increasing the rural indebtedness.
• Due to 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 ine
• Globalization has also contributed to the destruction of the environment through pollution by emissions from manufacturing plants and clearing of vegetation cover. It further a ects 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 declining incomes of people who may be rendered redundant.