Posted 23 December 2009 - 04:40 PM

[Economy for newbies] LPG - Liberalisation, privatization,
Globalisation | Structural Reform | New Economic Policy
LPG =Liberalisation, privatization, Globalisation
Other names
 Structural Reforms
 New Economic Policy (NEP)
[h1]What is it?[/h1]
in 1990-91-, Govt. was very low on cash, so they changed their
economic policy, that's called LPG.
[h1]Why should I learn it?[/h1]
 Economy worth 100+M in Mains GS
 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.
[h1]Why Govt. was low on cash?[/h1]
 First Gulf War = High crude oil prices
 Fall of USSR (no one to help/ protect us)
 Loss making Public sector undertakings (PSU)

so LPG is one thing? No its 3 different things [h1]Liberalization [/h1] 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. . has to borrow a lot from inside and outside the nation to run itself.  these areas need lot money and it takes long gestation period after you see the recovery / benifit of that invested money. defence sectors. Development schemes. that we could buy only 7 day's crude oil for the nation ! [h1]How did we get through it.  thus came the LPG. (explained later) [h1] Govt. Govt. was investing heavily in PSU. [/h1] We were so much out of money. we had to obey World bank's conditions .they wanted us to change our economic policies.[/h1]  We borrowed 7 billion Dollars from IBRD (Internation board of reconstruction & Development ) aka world bank  But for that.  + the usual Licence-Quota-Inspector raj.

[h1]Methods for Liberalisation .  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. [h2]Quota Raj[/h2] . who will come and check how many phones you actually made. deciding amount of production (= end of Quota Raj) .  even after you get the licence.[h2]what is Licence Raj?[/h2]  you want to open a new mobile phone making company you need to get licence from Govt. used following)[/h1] [h2]End of Licence Raj (Libzn Method #1) [/h2] no more licence required for    starting factory closing it or. [h2]Inspector Raj[/h2]  there will be a factory inspector..(Govt. you'll be given a quota  say 1000 mobiles per month . you can't produce as many phones as you wish. red tape and corruption.you can't manufacture more than that.

Abroad Result = introduction of  pvt Sector Banks. [h2]Finacial Sector Reformed (Libzn method #2) [/h2] RBI role reduced from regulator to facilitator Financial institutions (Stock market. Forex market etc) can take decision with out consulting RBI like  freedom to setup new Branches  generate resources from India.However you still need license for starting  Wine  Cigar  Hazardous Chem  Explosive  Drug-Pharma  Electronic  Aerospace Dereservation of many things produced by Small scale industries sectors reserved for PSU -are now only limited to  Defence  Atom  Railways = means pvt players can't open machine gun making factory.  Foreign Institutionl investors .

. owned companies.Selling of part of Equity to Public [h2]Benifit of privatization [/h2] . [h2]Forex Reform (Libzn method #3) [/h2]    to solve BOP Crisis Rupee was Devalued = increased inflow of Forex Market to Determine Exchange Rate based on supply & demand of foreign currency. so people used every trick to evade it. Merchant Bankers  Mutual / Pension Funds [h2]Tax Reform (Libzn method #3) [/h2]    Earlier income tax was high. Now tax rates were reduced.  no more import licence required except for Harardous materials. (earlier RBI was doing that) [h2]Trade investment reform[/h2]   Quota barriers removed you don't have to pay high taxes on imported luxery items (gold watches / perfumes) like you had to do previously. [h1]Privatisation ( the 'P' of LPG) [/h1] Means Sheeding of Ownership / Management of Govt. Method to collect indirect Taxes . How? = by Disinvestment = Privatization of PSU by Govt.also simplified. more people came in Tax net.

doesn't interfere much when they're buying raw material or taking other decisions.g.) [h1]Globalisation (the 'G' Of LPG) [/h1] its result of L+P e.Skilled Labour Force Globalisation is facilitated via WTO [h2]What is the use of WTO?[/h2]  to administrater Multilateral Trade Agrement  provide Equal opportunity to all in international market  Govt. increased finacial discipline  modernisation  increased performance of PSU by  pvt Capital  Managerial tech.s can't put arbitrary restriction on imports. [h2]Criticism of Globalization / WTO[/h2] .  income generated from Disinvestment used to fill Revenue deficit [h2]NavRatna[/h2]  [h1] profit making PSUs were given Nav ratna statuts [/h1] they get more autonomy in their work  (Govt.  FDI incoming [h2]Problem[/h2]  instead of making Navaratna a Global Player. hires regular service from External Source (country ) due to Cheap . Outsourcing = Co.

) this sounds great from patriotic point of view. thus we didnot have any high business relations with ASEAN or any other nation. the Economic ties are harder to break than diplomatic / military pacts. [h1]How LPG changed your life?[/h1]  Today you're able to surf internet. & America improved. . Import substitution is when we'll (or have to) buy Bajaj Scooter even when Japanese Honda (foreigner) has a cheaper / better vehicle to offer. 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. Once Established. Thus more economic relations we have with the world= more friends we make. buy computer. Singapore. [h1]How LPG changed India's international relations?[/h1]          Before LPG we were doing 'Import Substitution' strategy. After LPG. even when they want to enjoy it. Taiwan. Result of Import Substion strategy was that we were not importing any luxery electronic items . VHS players. mobile phones. ASEAN. Stereos. Major volume of International trade betn Developed Nations  3rd World has to open up for 1st world but their products can't get access to 1st world. (but Honda prevented by Govt. Our trade relations with Japan. cars etcs from Japan.but citizens are denied all luxeries of life. etc. America. our market was flooded with cheap electronic goodies. walkman. using above methods.

cars. bikes to select from. all that thanks to LPG.  have dozens of toothpastes.. ..