Reasons for Economic Reforms
Class 12 Indian Economic Development — Background of the 1991 crisis, the New Economic Policy, and the LPG framework
Background — India’s Pre-1991 Economy
India followed a mixed economic system since independence — a blend of capitalist and socialist economies. In practice, the public sector dominated control and regulation while the private sector was largely ignored.
For nearly four decades, rules and laws originating from public sector dominance hampered growth and development. There was huge public sector investment but very low private sector investment.
Advantages of Public Sector Role
Some scholars note that the public sector achieved:
- Growth in savings
- Development of a diversified industrial sector
- Food security through sustained expansion of agricultural output
The 1991 Crisis — Six Contributing Factors
Six factors that made India’s economic condition miserable by 1991:
IMF & World Bank Intervention
India approached the International Bank for Reconstruction and Development (IBRD) — the World Bank — and the IMF for loans to manage the 1991 crisis. India availed a $7 billion loan from these agencies.
Dr. Manmohan Singh
Conditions for the Loan
International agencies expected India to:
- Remove restrictions on the private sector
- Reduce the role of the government in many areas
- Remove trade restrictions
Key Takeaways
- India agreed to the conditions and announced the New Economic Policy (NEP).
- The NEP marked a fundamental shift from the Licence-Permit-Quota (LQP) regime to Liberalisation, Privatisation and Globalisation (LPG).
The New Economic Policy — LPG Framework
Announced in July 1991. Main aim: Create a more competitive environment and remove barriers to entry and growth of firms.
Stabilisation Measures
Short-term
- •Correct weaknesses of BOP by maintaining sufficient forex reserves
- •Control inflation by keeping rising prices under control
-icensing
for industries and trade
-uotas
for industrialists
-ermits
for exports and imports
-iberalisation
Removal of entry & growth restrictions on private sector
-rivatisation
Shedding ownership or management of govt enterprises
-lobalisation
Integrating national economy with the world economy
Structural Reform Measures
Long-term
- •Improve efficiency of the economy
- •Increase international competitiveness by removing rigidities in various segments
Stabilisation Measures (Short-term)
- •Correct weaknesses of BOP by maintaining sufficient forex reserves
- •Control inflation by keeping rising prices under control
Old: LQP Regime
L-icensing / Q-uotas / P-ermits
New: LPG Framework
L-iberalisation / P-rivatisation / G-lobalisation
Structural Reform Measures (Long-term)
- •Improve efficiency of the economy
- •Increase international competitiveness by removing rigidities in various segments