Liberalisation, privatisation, and globalisation

The concepts of Liberalisation, Privatisation, and Globalisation—often abbreviated as LPG reforms—represent a landmark transformation in India’s economic policy that began in 1991. These reforms marked a decisive shift from a closed, centrally controlled economy towards a market-oriented, globally integrated one. Collectively, they aimed to accelerate economic growth, improve efficiency, and integrate India into the world economy.

Background and Context

Following independence, India adopted a mixed economy model with strong state control over major industries, extensive regulation, and import substitution policies. Over time, this system led to inefficiencies, low productivity, and limited competition.
By the late 1980s, India faced a severe balance of payments crisis. Foreign exchange reserves fell to less than a fortnight’s import cover, fiscal deficits widened, and inflation rose sharply. In this context, the Government of India, under Prime Minister P. V. Narasimha Rao and Finance Minister Dr Manmohan Singh, launched the New Economic Policy (NEP) in July 1991.
The policy’s three pillars—liberalisation, privatisation, and globalisation—were designed to stabilise the economy, stimulate growth, and align India with the global economic order.

Liberalisation

Liberalisation refers to the process of reducing government restrictions and regulations in economic activities to allow for greater participation of private enterprise and market forces.

Key Features of Liberalisation in India:

1. Industrial Policy Reforms:
   • The Industrial Policy of 1991 abolished the Licence Raj, reducing the number of industries requiring industrial licensing from 18 to just a few (such as defence, atomic energy, and hazardous chemicals).
   • Restrictions on capacity expansion and location were relaxed.
2. Financial Sector Reforms:
   • Interest rates were gradually deregulated.
   • The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) were reduced to enhance banking efficiency.
   • Private and foreign banks were allowed greater participation.
3. Fiscal and Tax Reforms:
   • Rationalisation of direct and indirect taxes.
   • Introduction of Value Added Tax (VAT) and later Goods and Services Tax (GST) for greater efficiency and uniformity.
4. Foreign Exchange Reforms:
   • The Foreign Exchange Regulation Act (FERA) was replaced by the Foreign Exchange Management Act (FEMA) in 1999, liberalising foreign currency transactions.
   • The rupee was made convertible on the current account to facilitate trade.
5. Trade Policy Reforms:
   • Import licensing was abolished for most goods.
   • Tariff barriers were reduced, and export promotion replaced import substitution as a core policy principle.

Impact of Liberalisation:

• Increased efficiency and competition.
• Growth in industrial output and productivity.
• Reduction in bureaucratic control and delays.
• Expansion of the private sector and inflow of foreign capital.

Privatisation

Privatisation involves the transfer of ownership, management, or control of enterprises from the public sector to the private sector. It was intended to improve efficiency, accountability, and profitability of enterprises while reducing the fiscal burden on the government.

Key Measures Introduced:

1. Disinvestment of Public Sector Undertakings (PSUs):
   • The government began selling shares of PSUs to private investors and the public through the Disinvestment Commission.
   • Strategic sales were undertaken in key enterprises such as BALCO, VSNL, and Hindustan Zinc.
2. Public–Private Partnerships (PPP):
   • The government encouraged joint ventures between the public and private sectors in infrastructure, telecom, and energy.
3. Corporatisation and Professional Management:
   • Many state-owned enterprises were restructured and corporatised to operate on commercial principles.
4. Reduction in Public Sector Monopoly:
   • Key sectors such as banking, insurance, aviation, and telecommunications were opened to private players.

Impact of Privatisation:

• Enhanced efficiency and innovation in industries such as telecom, aviation, and manufacturing.
• Reduction in the government’s administrative and financial burden.
• Creation of a competitive environment leading to improved service quality.
• However, criticism persisted over job losses, valuation disputes, and social inequalities arising from large-scale disinvestment.

Globalisation

Globalisation is the process of integrating domestic economies with the global economy through trade, investment, technology, and the movement of goods, services, and labour.
In India, globalisation became a reality through policy reforms that encouraged foreign trade and investment, supported technological collaboration, and opened up markets to global competition.

Key Features of Globalisation in India:

1. Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII):
   • The government permitted FDI in a wide range of sectors, such as manufacturing, retail, and infrastructure.
   • Automatic approval routes were created for foreign investors, with limits gradually increased to 100% in many sectors.
2. Trade Liberalisation:
   • Reduction of import tariffs and quantitative restrictions.
   • Promotion of export-oriented growth with incentives for exporters.
3. Technology and Knowledge Transfer:
   • Collaboration with foreign companies enabled access to modern technologies, management practices, and global supply chains.
4. Integration with International Institutions:
   • India became an active member of the World Trade Organization (WTO) in 1995, aligning its trade policies with global norms.
5. Growth of the IT and Services Sector:
   • Liberalisation of telecommunications and IT policies led to a boom in the software and services industry.
   • Global outsourcing and business process management (BPM) became major sources of foreign exchange and employment.

Impact of Globalisation:

• India’s share in global trade and investment increased significantly.
• Rapid expansion of industries like IT, pharmaceuticals, and automobiles.
• Growth of urbanisation and emergence of a large middle class.
• Exposure to global competition improved quality standards and productivity.
• However, it also led to income inequality, cultural homogenisation, and greater vulnerability to global economic shocks.

Interrelationship among Liberalisation, Privatisation, and Globalisation

These three components are interconnected and mutually reinforcing:

• Liberalisation provides the policy environment and freedom necessary for private participation and foreign trade.
• Privatisation enhances efficiency and competitiveness, making the economy more attractive to investors.
• Globalisation allows integration with international markets, enabling access to foreign capital, technology, and best practices.

Together, the LPG reforms created a self-sustaining cycle of investment, productivity, and global integration.

Achievements and Challenges

Achievements:

• Accelerated GDP growth from around 3–4% (pre-1991 average) to over 7% in the post-reform decades.
• Expansion of the private sector and reduction in fiscal deficits.
• Integration into global supply chains and expansion of exports.
• Technological advancement and diversification of industries.

Challenges:

• Uneven distribution of growth benefits leading to regional and social disparities.
• Jobless growth in some sectors due to capital-intensive industries.
• Dependence on global markets made India vulnerable to external shocks such as financial crises.
• Persistence of bureaucratic hurdles and corruption in some areas despite deregulation.