LPG Reforms

By : Neha Dhyani

Updated : Apr 25, 2022, 14:26

The LPG Reforms were a set of economic reforms announced by the Indian government in 1991 in the form of the New Economic Policy, which provided measures for liberalization, privatization, and globalization.

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 then presiding Prime Minister was Shri P V Narasimha Rao, and Dr Manmohan Singh was the Finance Minister.

About the LPG Reforms

The LPG Reforms of 1991 provided for a three-fold structure of reforms. This comprised -

  • Liberalization- the process of reducing state control over economic activity and reducing restrictions such as tariffs.
  • Privatization- the transfer of ownership of government businesses to private companies.
  • Globalization- the expansion of economic activities across the national border, increasing trade with other countries and increasing connectedness with the global economy.

Causes of the LPG Reforms

Various economic factors led to the need for the LPG Reforms. These were -

  • Balance of payments crisis - India's outgoing foreign currency was more than the incoming foreign currency. India owed large amounts of foreign currency, and hence, its foreign exchange reserves were low.
  • Under-performing 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 - 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.
  • License Raj - this was the period after Independence when there were many government restrictions on business, which led to red-tape procedures to get licenses and permissions that discouraged business growth.

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Objectives of LPG Reforms

The objectives of the LPG Reforms were as follows -

  • Change the Indian economy from the Soviet model to a market economy with less government control and more economic activity
  • Resolve the balance of payments crisis and increase India's foreign exchange reserves
  • Encourage economic growth and economic expansion into the global trade markets
  • Allow the international flow of goods, services, and capital
  • Encourage increased participation of private entities in various sectors of the economy
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Measures Under LPG Reforms

The measures taken under the LPG Reforms opened up the economy and reduced government restrictions. They were as follows -

Liberalization -

  • Liberalization of exports and imports
  • Opening up to more foreign investment
  • Liberalization of the banking sector and capital markets
  • Reduced dependence on foreign loans

Privatization -

  • Privatization of PSUs through disinvestment, i.e., through selling PSU shares to private entities.
  • Opening up industries to the private sectors that were so far reserved for the public sector.
  • Reducing government monopolies by increasing competition and thereby promoting efficiency and quality of goods and services.

Globalization -

  • Opening up the economy to foreign direct investment.
  • Relaxing of restrictions on international trade and international movement of labour.
  • Connecting to the global financial markets.

Benefits of the LPG Reforms

The LPG Reforms led to certain positive outcomes for the Indian economy -

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

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

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FAQs on LPG Reforms

Q 1. What were the LPG Reforms?

The LPG Reforms were a set of economic reforms announced by the Indian government in 1991, providing measures for Liberalization, Privatization, and Globalization.

Q 2. Who were the Prime Minister and the Finance Minister of India when introducing the LPG Reforms?

At the time of the introduction of the LPG Reforms, the Prime Minister was Shri P V Narasimha Rao, and the Finance Minister was Dr Manmohan Singh.

Q 3. Under what economic policy was the LPG Reforms introduced?

The LPG Reforms were introduced under the New Economic Policy, 1991.

Q 4. What was the immediate crisis that led to introducing the LPG Reforms?

The immediate crisis was the balance of payments crisis which led to the introduction of the LPG Reforms.

Q 5. What was the general objective of the LPG Reforms?

The general objective of the LPG Reforms was to open up the economy, reduce government restrictions on business, and increase economic growth.