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LPG - Liberalisation, privatization, Globalization | Structural Reform | New

Economic Policy

LPG - Liberalization, privatization, Globalization | Structural Reform | New Economic Policy

LPG =Liberalization, privatization, Globalization
Other names
1. Structural Reforms
2. New Economic Policy (NEP)

What is it?
in 1990-91-, Govt. was very low on cash, so they changed their economic policy, that's called

Why should I learn it?

1. Economy worth 100+M in Mains GS
2. International Relations worth 100+ Marks (GS paper 2 in Mains)
Whenever You want to understand india's Diplomatic relations with other nations, you've to see
it pre & post cold war. same way
India's economic relation with others, you need to understand from pre & post LPG phase. that's
why LPG is imp for international relation questions as well.

Why Govt. was low on cash?

1. First Gulf War = High crude oil prices
2. Fall of USSR (no one to help/ protect us)
3. Loss making Public sector undertakings (PSU)
4. Govt. was investing heavily in PSU, Development schemes, defence sectors.
5. these areas need lot money and it takes long gestation period after you see the recovery /
benifit of that invested money.
6. + the usual Licence-Quota-Inspector raj. (explained later)
= Govt. has to borrow a lot from inside and outside the nation to run itself.
= We were so much out of money, that we could buy only 7 day's crude oil for the nation !

How did we get through it.

We borrowed 7 billion Dollars from IBRD (Internation board of reconstruction &

Development ) aka world bankBut for that, we had to obey World bank's conditions they wanted us to change our economic policies.
thus came the LPG.

Liberalization what does that mean?

to put end on rules / Regulation to control economy

Open up various sectors of Economy

wasn't our economy opened before LPG? : No we had Licence-Quota-Inspector Raj.

What is License Raj? : you want to open a new mobile phone making company
you need to get licence from Govt..

Quota Raj.: even after you get the license, you can't produce as many phones as you wish,
you'll be given a quota, say 1000 mobiles per month - you can't manufacture more than that.

Inspector Raj: there will be a factory inspector, who will come and check how many
phones you actually made, he gives you the certification only then you can take out your phones
from warehouse to retail shops! so when all 3 combine -its heavy delay, red tape and corruption.

Methods for Liberalization .(Govt. used following)

End of License Raj (Libzn Method #1)
no more license required for
starting factory
closing it or,

deciding amount of production (= end of Quota Raj)

However you still need license for starting

1. Wine
2. Cigar
3. Hazardous Chem
4. Explosive
5. Drug-Pharma
6. Electronic
7. Aerospace

Dereservation of many things produced by Small scale industries

sectors reserved for PSU -are now only limited to
1. Defense
2. Atom
3. Railways
= means pvt players can't open machine gun making factory.

Financial Sector Reformed (Libzn method #2)

RBI role reduced from regulator to facilitator
Financial institutions (Stock market, Forex market etc) can take decision with out consulting RBI
1. freedom to setup new Branches
2. generate resources from India- Abroad
Result = introduction of
1. pvt Sector Banks,
2. Foreign Institutionl investors
3. Merchant Bankers
4. Mutual / Pension Funds

Tax Reform (Libzn method #3)

Earlier income tax was high, so people used every trick to evade it.
Now tax rates were reduced, more people came in Tax net.

Method to collect indirect Taxes - also simplified.

Forex Reform (Libzn method #3)

to solve BOP Crisis

Rupee was Devalued = increased inflow of Forex

Market to Determine Exchange Rate based on supply & demand of foreign currency.
(earlier RBI was doing that)

Trade investment reform

Quota barriers removed

you don't have to pay high taxes on imported luxery items (gold watches / perfumes) like
you had to do previously.

no more import licence required except for Harardous materials.

Privatization ( the 'P' of LPG)

Means Sheeding of Ownership / Management of Govt. owned companies.
How? = by Disinvestment = Privatization of PSU
by Govt. ,Selling of part of Equity to Public

Benefit of privatization
1. increased finacial discipline
2. modernisation
3. increased performance of PSU by
4. pvt Capital
5. Managerial tech.
6. FDI incoming

1. instead of making Navaratna a Global Player,
2. income generated from Disinvestment used to fill Revenue deficit


= profit making PSUs were given Nav ratna statuts = they get more autonomy in their
(Govt. doesn't interfere much when they're buying raw material or taking other

Globalization (the 'G' Of LPG)

its result of L+P
e.g. Outsourcing = Co. hires regular service from External Source (country ) due to Cheap -

Skilled Labour Force

Globalisation is facilitated via WTO

What is the use of WTO?

1. to administrater Multilateral Trade Agrement
2. provide Equal opportunity to all in international market
3. Govt.s can't put arbitrary restriction on imports.

Criticism of Globalization / WTO

1. Major volume of International trade betn Developed Nations
2. 3rd World has to open up for 1st world but their products can't get access to 1st world.

How LPG changed India's international relations?

Before LPG we were doing 'Import Substitution' strategy.

Means Govt. would either prevent entry of foreign players in our local market or put so
much tax on imported items that we can't afford to buy it.

Import substitution is when we'll (or have to) buy Bajaj Scooter even when Japanese
Honda (foreigner) has a cheaper / better vehicle to offer. (but Honda prevented by Govt.
using above methods.)

this sounds great from patriotic point of view,but citizens are denied all luxeries of life,
even when they want to enjoy it.

Result of Import Substion strategy was that we were not importing any luxery electronic
items , walkman, VHS players, Stereos, cars etcs from Japan, Taiwan, America, etc.

thus we didnot have any high business relations with ASEAN or any other nation.

After LPG, our market was flooded with cheap electronic goodies. Our trade relations
with Japan, Singapore, ASEAN, & America improved.

Once Established, the Economic ties are harder to break than diplomatic / military pacts.

Thus more economic relations we have with the world= more friends we make.

How LPG changed your life?

Today you're able to surf internet, buy computer, mobile phones,

have dozens of toothpastes, cars, bikes to select from...

all that thanks to LPG.