LPG Reforms in India: Introduction, Objective, Full Form

LPG Reforms, or Liberalization, Privatization, and Globalization reforms, refer to a set of economic reforms introduced by the Indian government in 1991. These reforms were a part of India’s New Economic Policy, which aimed to uplift the country economically. The LPG Reforms contributed greatly to making India a globally integrated economy.

The nature of the Indian economy changed drastically after the New Economic Policy was introduced. Find out more about the LPG Reforms, their objectives, significance, and what changes they brought to the Indian economy here.

About LPG Reforms

The LPG Reforms were introduced at a time when the Indian economy was facing a balance of payment crisis. These reforms were introduced to promote economic growth and improve India's foreign exchange situation. The LPG Policy of 1991 provided a three-fold structure of reforms, which comprised the following

• Liberalization: The process of reducing state control over economic activity and reducing restrictions such as tariffs.
• Privatization: This part of the LPG Reforms required the transfer of ownership of government businesses to private companies.
• Globalization: The expansion of economic activities across the national border was also an agenda of the LPG Policy. This move targeted an increase in trade with other countries and integration with the global economy.

Full Form of LPG Reforms

• The full form of LPG is Liberalization, Privatization, and Globalization.
• These three areas were the focus points of the Indian government while introducing the New Economic Policy of 1991.
• The LPG Policy was introduced by then-Prime Minister Shri P V Narasimha Rao and then-Finance Minister Dr. Manmohan Singh.

Why was the LPG Reform Introduced in India?

The pre-LPG Reform era in India had an obsolete, colonial economic policy that involved high state interference in the market. India was a closed economy with little to no foreign trade and very little private ownership. The LPG Policy aimed to place India in the global economy by aligning its economic goals with global economic goals.

Economic Factors that Led to LPG Reforms in India

• Balance of Payments Crisis: India's outgoing foreign currency was more than the incoming foreign currency before the LPG Policy was introduced. India owed large amounts of foreign currency, and hence, its foreign exchange reserves were low.
• Underperforming PSUs: The Public Sector Undertakings were not performing well and were becoming a costly liability for the government as very few were making profits.
• Fiscal Deficit: Before the LPG Reforms in 1991, the government was facing a fiscal deficit, and there was a lot of public debt.
• High Inflation: Inflation had drastically increased in the years preceding the LPG Reforms in India, prompting the government to take action.
• License Raj: This was the period after Independence when there were many government restrictions on business. This led to red-tape procedures to get licenses and permissions that discouraged business growth.

Global Factors that Led to LPG Policy in India

• The government took the fall of the Soviet Union as an indicator that an entirely socialist approach in economics would not work.
• Facing a financial crunch after the 1990-91 Iraq war stopped the flow of foreign currency led to India adopting the LPG Policy.
• The global recession of 2001 was a final hit that necessitated India to introduce the LPG Reforms.

LPG Policy Objectives

LPG Reforms in India were introduced at a time when the Indian market was struggling to balance its payment deficit. The key objectives of the LPG Policies are shared below.

• The reforms focused on changing the Indian economy from the Soviet model to a market economy with less government control and more economic activity.
• The LPG Reforms 1991 aimed to resolve the balance of payments crisis and increase India's foreign exchange reserves.
• The policy encouraged economic growth and economic expansion into the global trade markets.
• The LPG Policy in India allowed the international flow of goods, services, and capital.
• It encouraged increased participation of private entities in various sectors of the economy.

Features of LPG Reforms

The measures taken under the LPG Reforms opened up the economy and reduced government restrictions. These reforms were a part of the New Economic Policy that was introduced in 1991 by the government of India. The features of the LPG Policy in India are discussed below.

Benefits of the LPG Reforms

The LPG Reforms in India led to certain positive outcomes for the Indian economy. We have shared some of the benefits of the LPG Policy below.

• The reforms helped India overcome a balance of payments crisis and reduced India's dependence on foreign loans.
• The LPG Reforms helped the government with its fiscal deficit by privatizing inefficient or loss-making PSUs, thereby reducing government expenditure and losses.
• The LPG Policy of 1991 fostered economic growth by reducing government restrictions. This encouraged the entry of private players into the market which introduced competition to counter state monopolies.
• LPG Reforms in India enabled the country to participate in global trade markets and establish its place as a major developing country.

The LPG Reforms did face criticism due to negative impacts on the agriculture sector, growing income inequality, and difficulties faced by local businesses. This exposed the developing Indian economy to the ups and downs of global markets and international competition. However, on the whole, the LPG Reforms enabled India to come out of an economic crisis, reduce its dependence on loans, and become a major developing economy.

FAQs on LPG Reforms

Q1. What were the LPG Reforms?

The LPG Reforms were a set of economic reforms announced by the Indian government in 1991. These reforms were a part of the New Economic Policy of India which was introduced to provide measures for the Liberalization, Privatization, and Globalization of the nation’s economy.

Q2. What is the full form of LPG Reforms?

LPG Reforms full form is Liberalization, Privatization, and Globalization reforms. The LPG Policy was introduced by the then-Finance Minister Dr. Manmohan Singh to scale up India’s economy from a closed one to a globalized one.

Q3. Who introduced the LPG Reforms in India and when?

Former Prime Minister, Shri P V Narasimha Rao, and former Finance Minister, Dr Manmohan Singh introduced the LPG Reforms in India on July 24, 1991. The LPG Reforms were a part of India’s New Economic Policy that aimed to globalize the economy.

Q4. What was the objective of the LPG Reform?

The general objective of the LPG Reforms was to open up the economy, reduce government restrictions on business, and increase economic growth. The LPG Policy also aimed to resolve the balance of payments crisis and increase India's foreign exchange reserves.

Q5. Under which economic policy were the LPG Reforms introduced?

The LPG Reforms were introduced under the New Economic Policy of 1991. This policy was introduced to transform India’s economy and globalize it. Before the LPG Reforms, India had a closed economy with high state interference and little to no private ownership in the market.

Q6. What was the crisis that led to the LPG Reforms?

The crisis that led to the LPG Reforms was the balance of payments crisis. India's outgoing foreign currency was more than the incoming foreign currency and it owed a large amount of foreign currency before the LPG Policy was introduced.

Q7. Was the LPG Reform successful?

Yes, the LPG Reforms in India were successful. Opening up the Indian economy led to better integration of the country into the global market. However, there were also some negative impacts of the LPG Reforms, such as the decline of the agriculture sector, growing income inequality, etc.