Introduction to LPG

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.  In order 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 higher economic growth rate and to build sufficient foreign exchange reserves.

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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. 

Read more about liberalization here.


Privatization

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

(i) Government is shredded from the ownership or management of the public-sector companies.

(ii) 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 fro 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-

  1. Liberalisation and deregulation of the economy is a major prerequisite for privatisation to set foot. 

  2. 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. Globalisation is also divided into three types.


The Main Elements of Globalisation are- 

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

  2. The amount of foreign capital in a country is a good indicator of growth and globalisation of an economy. 

  3. 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 per cent per annum.

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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 serious danger to the process of investment in the Indian economy. It was 8.5 per cent of GOP prior to 1991. Thanks to the LPG policies, government revenue has increased. As a result, Fiscal deficit deduced to 4% of the GOP( gross operating profit).


4. Check on Inflation

LPG reforms made a flow of demand and supply smooth and it in return checked the inflation. There was a fall in inflation rates as reforms increased 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. 

FAQ (Frequently Asked Questions)

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.