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Introduction to LPG

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Last updated date: 04th Mar 2024
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Indian Trade blending with LPG

Indian trade economy met and adopted a new hemisphere where LPG was introduced. LPG is the acronym for Liberalization, Privatization, and Globalization. The Government of India was aware of the world trade economy, which was free of any obstacles and ran smoothly. To install the same in our country, the Indian Government loosened its control on international trade and capital, took steps to hand over the sick public sector units to the private entities, and boosted the growth of interdependence on the world trade economy. In short, the Indian Government took an advent to introduce LPG in our economy, which opened our economy to the world trade centre that helped in harnessing abundant wealth, talent, fame, and honour to our country.


LPG is the subject matter to be dealt with in this section. We will understand what agitated the reform of LPG and how it is progressing in the present Indian era.    


Liberalization, Privatisation, and Globalisation

India’s economy in the early nineties faced a major crisis, followed by a foreign exchange crunch that pushed the economy down. The country exhausted its foreign exchange reserves.  To face the crisis, the government came up with new adjustments in the economy by bringing new reforms. 


These reforms were known as 'structural adjustments'. The government announced a New Economic Policy on July 24, 1991. This new model of economic reforms is commonly known as the LPG or Liberalisation, Privatisation, and Globalisation model. 


The main objective was to put the Indian economy into the arena of “Globalization” and to give it a new thrust on market orientation. The policy was intended to move towards a higher economic growth rate and to build sufficient foreign exchange reserves.


Liberalization

Liberalization removes state control over economic activities. It provides better autonomy to the businesses in decision-making without government interference. It was assumed that the market forces of demand and supply would operate automatically to derive a better efficiency and economic health will recover. Internally, this was enacted by bringing reforms in the real and financial sectors and externally by releasing foreign exchange and trade from state governments grip. 


Privatization

It means withdrawing the ownership or management of a government enterprise. Government companies are converted into private companies in two ways 


  • Government is shredded from the ownership or management of the public-sector companies.

  • by the blatant sale of public sector companies.


Privatization is the transfer of the control and ownership of businesses from the public sector to the private sector. It means a decline in the role of the government as the property rights shaft from public to private. 


The public sector enterprises had been experiencing challenges, since planning, such as low efficiency, low profitability, growing losses, political interference, lack of autonomy, labour issues, etc. Therefore, to address this situation government introduced privatisation in the economy. 


Conditions to be met before Privatisation

  • Liberalization and deregulation of the economy are major prerequisites for privatization to set foot. 

  • Capital markets should be developed to bear the brunt of disinvested public sector shares.


Globalization

Globalization can be defined as the integration of the national economy with the world economy. It enables a free flow of information, technology, goods and services, capital investments, and even people across different countries. It brings the trade, investments, and markets from various countries under one umbrella. It promotes a more lucid economy. Globalization is also divided into three types.


The Main Elements of Globalisation are

  • To open the domestic markets for the steady flow of foreign manufactured goods, India reduced customs duties on imports. 

  • The amount of foreign capital in a country is a good indicator of the growth and globalization of an economy. 

  • Foreign Exchange Regulation Act (FERA) was liberalized in 1993 and later the Foreign Exchange Management Act (FEMA) 1999 was passed to start transactions in foreign currency.


Positive Impact of LPG in Our Economy

1. Increase in GDP Growth- 

The Indian economy has surely become vibrant after the LPG reforms. The overall growth of the economy has trended up as indicated by GDP growth. Post LPG policies, the growth of GDP shot up to as high as 8 percent per annum.


2. Stimulant to Industrial Production-

LPG policies have worked as a great stimulant to industrial production in the Indian economy. IT industries in India have reached the global level because of these LPG reforms.


3. Curb on Fiscal Deficit

 The ever-increasing fiscal deficit has been a danger to the process of investment in the Indian economy. It was 8.5 percent of GOP before 1991. Thanks to the LPG policies, government revenue has increased. As a result, the Fiscal deficit was deduced to 4% of the GOP (gross operating profit).


4. Check on Inflation

LPG reforms made the flow of demand and supply smooth and it in return checked the inflation. There was a fall in inflation rates as reforms increased the production of goods and services resulting in either falling of price or constant price. The competition also helped to keep inflation in check.


5. The Decline in Poverty

The reform led to the smooth running of businesses without any hindrance, which led to more employment and hence the decline in Poverty. 


Negative Impact of LPG Reforms

  • The reforms were mainly for the formal sector of the economy, the agricultural sector, the urban informal sector, and forest depending communities were untouched by the reform. This resulted in Uneven economic growth and unequal distribution of wealth. 

  • Economic liberalization in the organized manufacturing industries (subjected to strict labour laws) has led to very little employment.

  • Market-based reforms led to the economic disparity between the rich class and the poor class.

  • Social Sectors like Health, education were ignored in this reform which has led to poor health sector development and lousy educational growth.

  • Economic reforms have pushed up the growth of the economy but have miserably failed to generate adequate employment. 

FAQs on Introduction to LPG

1. How did LPG reforms lead to Income Disparity?

Globalization leads to ever-increasing income gaps within the country. It benefits those who possess skills and technology. The growth rate accomplished by an economy can be at the expense of decreasing incomes of people has rendered them unessential.


2. Did LPG Reforms Lead to Increased Competition in the Market?

Yes, The competition increased as the flow of goods and services from foreign countries increased. The variety of products accelerated leading for consumers a wide variety of choice. It increased competition in the market.

3. How did LPG affect India?

With the introduction of LPG reforms, the Indian economy has become more of a vibrant economy. The overall economic activity has escalated, this is being reflected by the GDP indicator ever since 1991.