LPG Reforms in India

By Avinash Kumar|Updated : July 10th, 2020

LPG Reforms in India was a very crucial step forward for the economic development of India. This topic is important for UPSC Prelims and Main. 

Since independence, India followed the mixed economy framework by combining the advantages of the capitalist economic system with those of the socialist economic system. In 1991, India met with an economic crisis relating to its external debt — the government was not able to make repayments on its borrowings from abroad as the foreign exchange reserves were exhausted. The crisis was further compounded by rising prices of essential goods. All these led the government to introduce a new set of policy measures which changed the direction of our developmental strategies.

Now, we will take a look at the background of the crisis, measures that the government adopted and their impact on various sectors of the economy.

Background of the crisis:

  • Inefficient management of the Indian economy in the 1980s. India being an agro-based economy neglected other sectors like industry, banking, insurance, foreign trade, etc.
  • When expenditure is more than income, the government borrows to finance the deficit from banks and also from people within the country and from international financial institutions.
  • Development policies required that even though the revenues were very low, the government had to overshoot its revenue to meet challenges like unemployment, poverty and population explosion.
  • The continued spending on development programmes of the government did not generate additional revenue.
  • Moreover, the government was not able to generate sufficiently from internal sources such as taxation.
  • The income from public sector undertakings was also not very high to meet the growing expenditure.
  • Foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs.
  • Also, sufficient attention was not given to boost exports to pay for the growing imports.
  • In the late 1980s, government expenditure began to exceed its revenue by such large margins that meeting the expenditure through borrowings became unsustainable.
    • Prices of many essential goods rose sharply.
    • Imports grew at a very high rate without matching the growth of exports.
    • Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks.

India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as a loan to manage the crisis. For availing the loan, India agreed to the conditionalities of the World Bank and IMF and announced the New Economic Policy (NEP).

This set of policies can broadly be classified into two groups: the stabilisation measures and the structural reform measures.

Stabilisation measures are short-term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and keep rising prices under control.

Structural reform policies are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy. The government initiated a variety of policies which fall under three heads viz., liberalisation, privatisation and globalisation.


Though a few liberalisation measures were introduced in the 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive.

In India, regulatory mechanisms were enforced in various ways:

  • Industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or decide the amount of goods that could be produced
  • The private sector was not allowed in many industries
  • Some goods could be produced only in small-scale industries, and
  • Controls on price fixation and distribution of selected industrial products.
  1. Delicensing: End of License Raj

The reform policies introduced in and after 1991 removed many of these restrictions. Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals.

Delicensing and De-Reservation Exception List

  1. De-Reservation

The only industries which are now reserved for the public sector are a part of defence equipment, space, atomic energy generation, railway transport, mining of rare minerals, etc. Many goods produced by small-scale industries have now been de-reserved. In many industries, the market has been allowed to determine prices.

  1. De-Control

Pricing of commodities done by the government was restricted only for the critical commodities present in the following list.


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  1. De-Regulation

All other additional restrictions were removed as listed in the above table.


It implies shedding of the ownership or management of a government-owned enterprise. Government companies are converted into private companies in two ways (i) by the withdrawal of the government from ownership and management of public sector companies and or (ii) by the outright sale of public sector companies.

As per the provisions of De-Reservation, the government was to limit its role for few sectors only and for all other sectors, there would be scope for free participation of private players.

Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the public is known as disinvestment. The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernisation.

The government envisaged that privatisation could provide a strong impetus to the inflow of FDI. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. For instance, some PSUs have been granted special status as Maharatnas, Navratnas and Miniratnas.

Impact of Economic Reforms

The reform process has completed three decades since its introduction. Let us now look at the performance of the Indian economy during this period.

  • The post– 1991 India witnessed a rapid growth in GDP on a continual basis for two decades. The growth of GDP increased from 5.6 percent in 1990–91 to 7.2 percent in 2017–18.
  • During the reform period, the growth of agriculture has declined. Public investment in agriculture sector especially in infrastructure, which includes irrigation, power, roads, market linkages and research and extension (which played a crucial role in the Green Revolution), has fallen in the reform period. There has been a shift from production for the domestic market towards production for the export market focusing on cash crops in lieu of production of food grains. This puts pressure on the prices of food grains.
  • While the industrial sector reported fluctuation, the growth of the service sector has gone up. Industrial growth has also recorded a slowdown. This is because of the decreasing demand for industrial products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc. Moreover, a developing country like India still does not have access to developed countries’ markets because of high non-tariff barriers.
  • The foreign investment, which includes foreign direct investment (FDI) and foreign institutional investment (FII), has increased from about US $100 million in 1990-91 to US $ 30 billion in 2017-18.
  • There has been an increase in the foreign exchange reserves from about US $ 6 billion in 1990-91 to about the US $ 413 billion in 2018-19.
  • Economic reforms have placed limits on the growth of public expenditure, especially in social sectors.

The process of globalisation through liberalisation and privatisation policies has produced positive as well as negative results. It has provided greater access to global markets, high technology, and increased the possibility of large industries of developing countries to become important players in the international arena. Viewed from the Indian context, some studies have stated that the crisis that erupted in the early 1990s was basically an outcome of the deep-rooted inequalities in Indian society and the economic reform policies initiated as a response to the crisis by the government, with externally advised policy package, further aggravated the inequalities. Further, it has increased the income and quality of consumption of only high-income groups and the growth has been concentrated only in some select areas in the services sector such as telecommunication, information technology, finance, entertainment, travel and hospitality services, real estate and trade, rather than vital sectors such as agriculture and industry which provide livelihoods to millions of people in the country.

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Avinash KumarAvinash KumarMember since Feb 2017
Don't quit, suffer now and live the rest of your life as a champion. -Muhammad Ali
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