Liberalization Privatization and Globalization (LPG) Part - I

 

           In 1991, India has adopted LPG (Liberalization, Globalization and Privatization) system after facing long economic problems. At that time, it was very crucial to work towards economic reforms to make country socially and economy stabilized.

     In this article we will discuss about LPG system as well as why economic reforms are needed in India in 1991 in 4 parts.

 

 

 

 

LPG system 1991-

      Since after independence, when Britishers had left India, slowly nationalization process was taken place and Indian economy was mainly closed in nature means, very less trade engagement and investment at international level, most of the economic activities was lying with the hand of government and private entities played minimal role in economic development of nation.

        But by 1991, Indian economy was facing many problems including high inflation, low GDP and very less foreign exchange. Therefore, at that time IMF had asked Indian government to open its economy and linked it with global economy. Consequently, Indian government have adopted LPG system.

 

Need of Economic Reform (LPG) 1991-

   There were many reasons to open economy and adopt LPG system by Indian government.

   These reasons are divided in to two parts -        

·      Long term historical reasons

·      Immediate reasons

 

Historical Reasons-

After launching first FYP (Five Years Plan) in 1951, India started its journey towards economic development in line with socialistic view.

     Up to 6^th FYP (1985), primary role was assigned to public sector units for national growth and development and private sectors were played secondary role.

     Many reasons result economic reform in long term-

Ø Restrictions on trade and industries including quotas of production and permits of export-import.

Ø Public sector units became centre of corruption and inefficiencies.

Ø Private sector failed to diversify and modernize in absence of competition.

Ø Disappointing results of policies of license, permits, quotas etc.

Ø Barriers on foreign trade and investment to protect domestic industries from foreign completion

Ø Government expenditure was much higher than revenue

Immediate Reasons-

Ø Fiscal Deficit – reached up to 8.4 % of GDP in 1990-1991

Ø BoP (Balance of Payment) crisis – insufficient money left for importing items even for 10 days

Ø Gulf crisis – Iraq war crisis of 1990 had increased petrol prices and reduced remittances to India, which further deepen BoP crisis.

Ø Fall in Forex Reserve – drastically dried up in absence of foreign trade and investment as that time Indian economy was closed in nature.

 

Ø Unable to repayment of loan and interest to international lenders like IMF, World Bank etc.

       These reasons were responsible for stagnant Indian economy and was created unprecedented economic crisis by making Indian economy inefficient.

      These immediate crises awakened Government towards economic reforms and consequently India opened its economy and adopted LPG (Liberalization, Privatization and Globalization) in 1991 as advised by World Bank.

                                        In further parts, individually will be discussed.

     

 -    By Pooja Gupta