In the early 1990s, India faced a major crisis followed by a foreign exchange deficit, resulting in its economic downfall. To overcome the crisis, the government came up with adjustments to the economy by bringing new reforms. The reforms introduced were called ‘structural reforms’ and launched under the ‘New Economic Policy (NEP)’.
The New Economic Policy was introduced in 1991. There are three broad concepts of New Economic Policy: Liberalisation, Privatisation, and Globalisation, or the LPG Model. The LPG Model was introduced to replace the LQP Model, i.e., Licensing, Quotas, and Permits. The main aim of introducing the reforms was to attain a high rate of economic growth, reduce the rate of inflation, reduce the fiscal deficit, and overcome the BoP (Balance of Payment) crisis.
Liberalisation
Liberalisation of the economy is considered a key component of NEP. Before the New Economic Policy of 1991, the private sector was in control of the government. Because of this, the domestic industries were not allowed to take any decisions regarding the industry’s work without the government’s interference. This resulted in a fall in professionalism and inefficiency of work within the industry. With the introduction of the liberalisation policy, this sector gained the freedom of decision-making without any interference from the government.
The government also decided to abolish the licensing system. Before 1991, a business needed to get a license from the government to start any industrial activity. This resulted in a delay in getting a license, as there was a long queue of people before the window of the government department, seeking authorisation to get a license. This also resulted in corruption as the officers started taking bribes to make the process faster. To end this, the government abolished the licensing system and permitted individuals to start their industrial activities without any permission (however permission is still required in industries, such as medicine, defense equipment, etc.).
Privatisation
Privatisation refers to the partial or full ownership and operation of the public sector enterprises by the private sector. It implies the withdrawal of government ownership from the public sector. It can be done in two ways:
- Outright sale of part of the equity of Public Sector Undertakings (PSUs) to private entrepreneurs (also known as Disinvestment), or
- Withdrawal of ownership and management of the public sector companies from the government to the private sector.
The need for privatisation was felt mainly because of the poor performance of the Public Sector Undertakings, PSUs. As a result, the consumers were facing a major loss, as they did not receive quality products, and other services, such as the delivery system were also very poor. With the introduction of the privatisation policy, this factor was eliminated as:
- Unlike PSUs, Privatisation promoted the diversification of production.
- Unlike PSUs, the Privatisation of enterprises generated higher profits.
- It also promoted customer superiority.
- Unlike PSUs, Privatisation provides high productivity.
- Unlike PSUs, Privatisation promoted growth and development by working in a competitive environment.
Globalisation
Globalisation refers to the integration of the economy of a country with the economies of other countries. The process of globalisation is associated with the free flow of trade, capital across borders, increasing openness, growing economic independence, and deepening of economic integration in the world. The main aim of globalisation was to integrate the Indian economy with the global economy. As a result, there will be an unrestricted flow of information, goods and services, technologies, and even people across countries, which will eventually enhance the development of the country. The government allowed foreign companies to hold 51 percent or more share of the Indian companies in the case of collaboration so that they can function freely and as the owner. This also promoted the transfer of the latest technologies into Indian territory due to collaboration with MNCs. The reduction of the tariff and non-tariff barriers, adoption of policies to promote exports, increase in Foreign Investments, increase of foreign currency in the country (Forex), growth of the IT industry in India, and several other features came under the globalisation policy.
Impact of LPG
Positive Impacts
- Increase in GDP growth rate in India. After 1991, India’s GDP growth rate increased year by year, and in the year 2015-16, it was estimated to be 7.5%, whereas it was only 1.1% during the year 1990-91. Because of the privatisation, advanced foreign technology, reduction of taxes, and the abolition of industrial licensing, there was major growth in the GDP of the country.
- The rate of unemployment was high before the adaptation of the new economic policy. But, in 1991, the rate of employment increased as the MNCs started investing in India, which resulted in the new job opening, and the requirement for employees was created. And due to the removal of the industrial licensing, many individuals started their businesses.
- An increase in the country’s per capita income. Per capita income refers to the average income earned by a person in a given country. In 1991, the Per capita Income of India was ₹11,235, but in 2014-15 Per Capita Income reached ₹85,533.
- Increase in Foreign Direct Investment from ₹408 Crores in 1991 to ₹106,693 Crores in 2015 after the introduction of the new economic reforms of globalisation.
- Decrease in the Fiscal Deficit. A fiscal deficit refers to a situation where the revenue generated is exceeded by the expenditures made by the government. The fiscal deficit of India before 1991 was 8.5% of Gross Operating Profit, but it came down to 4% of the Gross Operating Profit in 2015.
Negative Impacts
- Agriculture has been the backbone of the Indian economy but, because of NEP, there was a decrease in the growth rate of the agricultural sector. The agricultural sector came from giving employment to 72% of the population in agriculture, and a contribution of 29.02% to GDP in 1991 to a drastic fall of only 17.9% contribution to GDP in 2014.
- Reduction in employment level. Because of the strict labour laws imposed due to the economic liberalisation in the manufacturing industries, the employment level of the country had a downfall.
- The globalisation of the economy caused threats to local businesses and companies. Due to the invasion of MNCs, the level of competition increased, as the Indian market had limited finance, a lack of adequate technologies, and inefficiency of production.
- Because of the emission of harmful gases and chemicals from manufacturing plants and the construction of new companies, there has been an adverse effect on the environment, which resulted in pollution and clearing of the vegetation covers.
- The reforms focused mainly on the formal sector of the economy, thus other sectors such as the urban informal sector, the agricultural sector, and forest-dependent communities were untouched by the reform. As a result of this, there was an uneven growth in the economy.