Liberalisation, Privatisation, Globalisation (LPG) Reforms of 1991

The LPG reforms are the big set of economic changes India began in July 1991. They moved India away from a tightly controlled economy towards a more open, market-based one. Liberalisation means removing government controls on business. Privatisation means giving the private sector a bigger role and reducing government ownership of companies. Globalisation means connecting India's economy more closely with the rest of the world through trade and foreign investment.

These reforms were started to escape a serious balance-of-payments (BoP) crisis, and they reshaped India's economy for the next three decades.

What was the economy like before 1991?

From the 1950s, India followed a planned, state-led model. To start or expand a factory, a business needed a government industrial licence. This system came to be called the "licence raj". Many key industries were reserved for the public sector. Imports faced very high tariffs and many were restricted. In 1990-91, the highest customs duty was 355%. The idea was to make India self-reliant, but over time the system became slow, costly and full of red tape. Growth stayed low for decades.

Why did the crisis happen in 1991?

Several problems hit together:

• High government deficits: through the 1980s, governments spent much more than they earned and borrowed heavily. The combined fiscal deficit of the Centre and states rose to around 10% of GDP by the end of the decade.
• The Gulf War (1990-91): oil prices jumped, so India's import bill rose sharply. Money sent home by Indian workers in the Gulf also fell, as many had to return.
• Loss of confidence: India's credit rating was cut, and Non-Resident Indians (NRIs) started withdrawing their deposits.
• Political uncertainty: frequent changes of government made lenders nervous.

As a result, India's foreign exchange reserves fell to a dangerously low level. By mid-1991, they could pay for only about two to three weeks of imports. India was close to defaulting on its foreign loans. To raise emergency money, India pledged its gold: about 47 tonnes were flown to the Bank of England, and about 20 tonnes went to the Union Bank of Switzerland, around 67 tonnes in all.

What reforms were made, and when?

The new government of Prime Minister P.V. Narasimha Rao, with Dr. Manmohan Singh as Finance Minister, acted fast. The reforms had two parts. Stabilisation meant short-term steps to fix the crisis. Structural reform meant long-term changes to how the economy works.

• Devaluation of the rupee: the rupee was devalued by about 18-19% in two steps, on 1 and 3 July 1991. This made Indian exports cheaper abroad and imports costlier.
• New Industrial Policy (24 July 1991): announced on the same day as the Union Budget. Industrial licensing was abolished for all but 18 industries. Industries reserved for the public sector were cut from 17 to 8. The asset limit under the MRTP Act (which earlier forced big companies to take approval before expanding) was removed. Automatic approval for foreign direct investment (FDI) up to 51% was allowed in 34 high-priority industries.
• Trade reform: the peak customs duty was cut from over 300% to 150% in 1991-92, and kept falling in later years. Import licensing on most machinery and raw materials was removed. The remaining quantitative restrictions (limits on the quantity of imports) were removed by April 2001.
• Exchange rate reform: the Liberalised Exchange Rate Management System (LERMS) came in March 1992. Under it, 60% of foreign exchange earnings could be converted at the market rate and 40% at an official rate. The two rates were unified in March 1993, making the rupee market-determined. In August 1994, the rupee became convertible on the current account, and India accepted Article VIII of the IMF's rules.
• Financial sector reform: the Narasimham Committee (1991) suggested banking reforms. The Securities and Exchange Board of India (SEBI) got legal powers in 1992 to regulate the stock market.
• Privatisation and disinvestment: the government began selling small shares in public sector companies from 1991-92.
• IMF and global support: India took loans from the International Monetary Fund (IMF), including an 18-month stand-by arrangement in 1991, and agreed to carry out reforms. India became a founding member of the World Trade Organization (WTO) in 1995.

What changed after 1991?

India's growth rate rose clearly above its old average. Foreign exchange reserves were rebuilt over the next decade. Sectors like telecom, IT services, airlines, cars and banking grew with private and foreign investment. Ordinary people got more choices of goods, such as phones and cars, which once needed long waiting periods.

Commonly confused concepts

• Liberalisation vs privatisation vs globalisation: liberalisation removes rules and controls; privatisation changes ownership from government to private hands; globalisation links India to world markets (trade, investment, technology).
• Privatisation vs disinvestment: in disinvestment, the government sells part of its share but may stay the main owner. In privatisation (strategic sale), control passes to a private buyer.
• Devaluation vs depreciation: devaluation is a deliberate cut in a currency's value by the government or central bank under a fixed system (as in July 1991). Depreciation is a fall in value caused by market demand and supply.
• Current account vs capital account convertibility: current account convertibility (India, 1994) lets you freely change rupees for foreign currency for trade, travel and remittances. Capital account convertibility would let you do so freely for investments and loans; India has only partly opened its capital account (the Tarapore Committees of 1997 and 2006 studied this).
• Stabilisation vs structural reforms: stabilisation fixes the short-term crisis (deficits, reserves); structural reforms change the long-term rules (licensing, trade, finance).

Issues, criticism and the way forward

• Jobs: critics point out that growth after 1991 did not create enough good-quality jobs, especially in manufacturing. This is sometimes called "jobless growth".
• Agriculture: reforms focused on industry and services. Agriculture, where most workers are, got less reform attention.
• Inequality: incomes rose, but gaps between rich and poor, and between states, also widened, according to many studies.
• Unfinished agenda: experts often speak of "second-generation reforms" in land, labour, power, courts and public sector efficiency that are still incomplete.
• New shocks: supporters of the reforms argue they made India much stronger. But events since 2020, such as the pandemic and supply cut-offs, have shown that openness alone does not guarantee security of supply. This has started a debate on how to stay open while also protecting critical supplies.

Concepts to Know

• Balance of Payments (BoP): The record of all money flowing between a country and the rest of the world in a year: trade, services, remittances, investment and loans. A BoP crisis means the country cannot pay for its imports or repay its foreign debts.
• Foreign exchange (forex) reserves: Foreign currency (mainly US dollars), gold and other safe assets held by the RBI. They are used to pay for imports and debts in emergencies. "Weeks of import cover" tells how long they would last.
• Fiscal deficit: The gap between what the government spends and what it earns (other than borrowing). A high fiscal deficit means heavy borrowing.
• Tariff (customs duty): A tax on imported goods. A 150% tariff means a ₹100 import costs ₹250 after duty.
• Industrial licence: Government permission needed to set up or expand a factory. Under the licence raj, even the quantity a company could produce needed approval.
• FDI (Foreign Direct Investment): Money a foreign company puts into a business in India to own and run it, such as building a factory.
• IMF (International Monetary Fund): A global organisation that lends to countries in a BoP crisis, usually on the condition that they carry out reforms.