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: Liberalization, Privatization, and Globalization
1. What do Liberalisation, Privatisation, and Globalisation (LPG) mean in the context of the Indian economy?
In the context of the Indian economy, LPG refers to the comprehensive model of economic reforms introduced in 1991. Each component has a specific meaning:
- Liberalisation: This refers to the process of reducing or removing government controls and restrictions on economic activities. It involved unshackling Indian businesses from complex licensing systems (like the 'licence-permit-raj') to promote free market operations.
- Privatisation: This is the transfer of ownership, management, and control of public sector enterprises (PSEs) to the private sector. It was done primarily through disinvestment, which is the sale of a part of the government's equity in PSEs.
- Globalisation: This signifies the integration of India's economy with the world economy. It involves creating a borderless economic environment, allowing the free flow of goods, services, capital, technology, and information across countries.
2. Why was it necessary for India to introduce the New Economic Policy in 1991?
India faced a severe economic crisis in 1991, making the New Economic Policy (NEP) and LPG reforms necessary. The primary trigger was a critical balance of payments crisis, where India's foreign exchange reserves depleted to a level that was barely enough to cover a few weeks of imports. This crisis was caused by several factors, including a huge fiscal deficit, rising inflation, poor performance of public sector units, and the Gulf War which increased oil prices. To secure an emergency loan from the IMF and World Bank, India had to agree to restructure its economy by opening it up, leading to the LPG reforms.
3. What is the main difference between Privatisation and Disinvestment?
While often used together, Privatisation and Disinvestment have a key difference. Privatisation is the broader concept referring to the shift of ownership and management from the public to the private sector. Disinvestment is a specific method to achieve privatisation. It involves the government selling its shares (equity) in Public Sector Undertakings (PSUs) to the private sector or the public. If the government sells more than 51% of its shares, it leads to a transfer of ownership, resulting in privatisation. However, selling a smaller stake is just disinvestment without a change in ownership control.
4. How did Liberalisation change the role of the RBI in India's financial sector?
Under the Liberalisation policy, the role of the Reserve Bank of India (RBI) transformed significantly. Previously, the RBI acted as a strict regulator, controlling interest rates, credit allocation, and bank branching. After the reforms, its role shifted from being a regulator to a facilitator of the financial sector. The RBI now focuses on managing inflation, ensuring financial stability, and supervising the banking system, while allowing commercial banks greater autonomy in their operational decisions, including setting their own interest rates based on market forces.
5. What are some key positive and negative impacts of the LPG policies on India?
The LPG policies had a mixed impact on the Indian economy.
- Positive Impacts: The reforms led to a higher GDP growth rate, making India one of the fastest-growing economies. They stimulated industrial production, particularly in the IT sector, controlled inflation, and helped reduce the fiscal deficit. It also led to an increase in foreign investment and foreign exchange reserves.
- Negative Impacts: A major criticism is that growth was uneven, neglecting sectors like agriculture. It led to increased income disparity, with benefits concentrated among the skilled and wealthy. The reforms also failed to generate sufficient employment and led to reduced government spending on social sectors like health and education.
6. How are the concepts of Liberalisation and Globalisation interconnected?
Liberalisation and Globalisation are deeply interconnected and mutually reinforcing. Liberalisation acts as a prerequisite for Globalisation. For India to integrate with the world economy (Globalisation), it first had to remove its internal and external trade barriers. For example, liberalising trade policy by reducing import tariffs and removing import licensing was a necessary step to allow foreign goods to enter the Indian market. Similarly, liberalising foreign investment norms was essential to attract foreign capital. In essence, Liberalisation opened the doors of the domestic economy, making Globalisation possible.
7. Why are the LPG reforms often criticized for increasing economic disparity and neglecting agriculture?
The LPG reforms are criticized for two main reasons regarding disparity and agriculture:
- Increased Economic Disparity: The benefits of globalisation and liberalisation largely favoured those with skills, education, and capital. This led to a widening gap between the rich and the poor. High-growth sectors like IT and finance created high-paying jobs for a skilled minority, while low-skilled workers in the unorganised sector saw little income growth.
- Neglect of Agriculture: The reform process focused heavily on the industrial and service sectors. The agricultural sector faced challenges like reduced public investment, removal of subsidies on fertilizers, and increased international competition due to liberalised imports. This resulted in slower growth in agriculture, a sector on which a majority of the population depends, leading to agrarian distress.
8. What is outsourcing and how is it a result of the Globalisation policy in India?
Outsourcing is a business practice where a company hires another company or individual to perform tasks, handle operations, or provide services that were previously done by the company's own employees. It is one of the most significant outcomes of the Globalisation process in India. As globalisation enabled the free flow of information and technology, foreign companies found it cost-effective to outsource their business processes—like call centres, clinical data processing, or accounting—to India due to the availability of a large, skilled, English-speaking workforce at lower wages. This has made India a global hub for Business Process Outsourcing (BPO).
