What is Liberalization, Privatization and Globalization?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

Liberalization, privatization, and globalization are the three strategies that were adopted by the Government of India under its New Economic Policy in 1991 when India was heading toward an economic crisis. The 1980s were a difficult time for India as it headed toward an economic crisis. With government spending exceeding revenue by a worrying margin, borrowing was not a sustainable option, but something that would cripple the economy.

Liberalization, Privatization and Globalization

Imports were now matching exports and exports were not increasing. This led to such a fall in foreign exchange reserves that they would not be sufficient to finance any imports after two weeks. International lenders charged rates of interest that were becoming more and more accessible to the country to pay back. This also led to a decline in India’s international reputation and no money could be secured.

Finally, India opted to approach the World Bank (IBRD- International Bank for Reconstruction and Development) and the International Monetary Fund (IMF). India got a loan of $7 billion to deal with the crisis. However, to get credit, the country had to ‘liberalize’ its economy by loosening and removing restrictions on its private sector.

LPG reforms in 1991

International agencies also expected a reduction in the government’s role in the economy and the removal of trade restrictions between other countries and India. To implement these changes, India introduced LPG reforms in 1991, which had liberalization, privatization, and globalization as its core principles.

  • To lessen the restrictions on businesses, India adopted the Liberal model which gave freedom from direct and/or physical control of the government.
  • To make the economy more open, guarantee more economic and financial independence, and integrate the economy on a global scale, India adopted a Global model.
  • To make the economy more efficient and less state-owned and controlled, India opened to the privatization of state-owned ventures.

Definition of Privatization, Liberalization and Globalization

Popularly known as the LPG Reforms of 1991, it changed the Indian way of doing business. The three terms mean:

  • Liberalization: A liberalized economy ensures greater freedom from any physical or direct control extended by the country’s government.
  • Privatization: In an economic system in which the elements are privatized, there would be private sector participation in the case of state-owned enterprise ownership
  • Globalization: A globalized economy would be more open and would provide more economic freedom. It will also have a promising scope of economic integration on a global scale.

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