Introduction

Since 1991, Government of India has introduced diverse economic reforms to pull the
country out of economic crisis and to accelerate the rate of growth. These reforms
hinge upon: (i) The policy of liberalisation (L) in place of Licensing (L) for the
industries and trade. (ii) The policy of privatisation (P) in place of quotas (Q) for the
industrialists. (iii) The policy of globalisation (G) in place of ‘Permits’ (P) for exports
and imports.

These reforms are often described as the New Economic Policy or the policy of LPG
in place of the policy of LQP.

1. Need for Economic Reforms

Launching its First Five Year Plan (April 1, 1951), India had commenced upon its
journey to economic development on the path of socialistic pattern of society and
mixed economy. By far, India has completed ten five-year plans and five one-year
plans. There is no denying the fact that in these five decades, Indian economy has
achieved many successes but the number of failures is by no means small. During the
period of planning public sector was given the utmost importance. Private sector was
largely kept under government control. Trade and industry were subjected to many
restrictions. Bureaucratic delays and red tapism have been the normal features of
work culture.

The cumulative effect of all these factors was that in the end of June 1991, our
country was faced with an unprecedented economic crisis,
Reserves of foreign exchange were merely enough to pay for two weeks’ imports.
New loans were not available.

Large amounts were being withdrawn from the account of non-resident Indians
(NRIs). Faith of international community in Indian economy was shaken. Industrial
progress was very slow and prices were touching the sky. In order to pull the economy
out of economic crisis and to put it o the path to rapid and steady economic growth, it
was most essential to correct financial disequilibrium, check rising prices, correct
adverse balance of payments and replenish foreign exchange reserves. To achieve all
these objectives, introduction of economic reforms or an appropriate economic policy
was considered inevitable. Need for economic reforms or the new economic policy
was felt mainly because of the following reasons:

(i) Increase in Fiscal Deficit

Prior to 1991, fiscal deficit of the government had been mounting year after year on
account of continuous increase in its non-development expenditure. Fiscal deficit
means difference between the total expenditure and total receipts minus loans. It is
equivalent to total expenditure and total receipts minus loans. It is equivalent to total
borrowings by the government. In 1981-82, it was 5.4 per cent of gross domestic
product. In 1990-91, it rose to 8.4 per cent of GDP. With a view to meeting fiscal
deficit, the government was obliged to borrow and pay interest thereon. Thus, due to
persistent rise in fiscal deficit there was corresponding rise in public debt and interest
payment liability. In 1980;81, interest payment on public debt amounted to 19 per
cent of total government expenditure. In 1991, amount of interest liability rose further
to 36.4 per cent of total government expenditure. There was serious apprehension that
the government was fast moving towards debt trap. Faith of international financial
institutions like World Bank, etc., in the fiscal state of the government had been
shaken. It, therefore, became inevitable for the government to substantially reduce its
non – developmental expenditure so as to bring down fiscal deficit.

(ii) Mounting Adverse Balance of Payments (BOP)

Balance of payments is the difference between total exports and total imports of a
country. When total imports exceed total exports, the balance of payment becomes
adverse.

Our country needs foreign exchange to pay for the import of goods and services . The
required foreign exchange is earned by exporting goods and services. Another source
of foreign exchange is the remittances by Non-resident Indians (NRIs). When receipts
of foreign exchange fall short of their payments or when the value of total imports is
greater than the value of total exports, the problem of adverse balance of payments
arises. Although government granted diverse kinds of incentives and concessions to
the exporters under export promotion programme, the export did not rise to the
desired extent.

It was mainly due to the fact that in international market our exports could not
compete in price and quality. All this was the direct result of the policy of protection
so liberally pursued by the government and for so long. As against slow growth of
exports there was rapid increase in imports. As a result, balance of payment deficit
increased tremendously. Deficit of balance of payments had been rising continuously
since 1980-81. For instance, in 1980-81, balance of payments on current account was
adverse to the tune of Rs. 2,214 crore and it rose in 1990-91 to Rs. 17,367/- . To meet
this deficit large amount of foreign loans had to be obtained. Thus, foreign loans that
amounted in 1980-81 to 23 per cent of gross domestic product. Accordingly, the
burden of foreign debt service, i.e., repayment of loan instalments and payment of
interest increased tremendously. In 1980-81, foreign debt service constituted 15% of
our export earning while in 1990-91 it rose to 30 per cent. All this led to Further
deterioration of balance of payments position.

(iii) Gulf Crisis

On account of Iraq war in 1990-91, prices of petrol shot up, India used to receive huge
amount of remittance s from gulf countries in foreign exchange; all that stopped
totally. Gulf crisis thus further accentuated the already adverse balance of payments
position.

(iv) Fall in Foreign Exchange Reserves

In 1990-91 India’s foreign exchange reserves fell to such a low level that the same
were not enough to pay for an import bill for even 10 days. Foreign exchange reserves
that were Rs. 8,151 crore in 1986-87, declined sharply to Rs. 6,252 crore in 1989-90.
the situation grew so acute that Chandrashekhar government had to mortgage
country’s gold to discharge its foreign debt servicing obligation. In such a
predicament government felt compelled to adopt the policy of liberalisation as
proposed by international financial institutions, in order to secure loans from them.

(v) Rise in Prices

In India prices continued to rise rapidly. Average annual rate of inflation increased
from 6.7 per cent to 16.7 per cent.
Prior to 1991, despite good monsoon for three consecutive years, prices of food grains
rose substantially. Because of increasing pressure of inflation, country’s economic
position deteriorated further. Min reason for inflation or annual rate of increase in
prices was rapid increase in the supply of money. This, in turn, was due to excessive
resort to deficit financing. Deficit financing refers to borrowing from Reserve Bank of
India by the government to meet its deficit. Reserve Bank offered this loan by printing
new currency notes. Cost of production goes up due to high rate of inflation. It
adversely affects domestic and foreign demand for our products.

(vi) Poor Performance of Public Sector Undertakings (PSUs)

In 1951 there were just 5 enterprises in public sector in India but in March 2006 their
number rose to 239. Several thousand crores of public funds were invested therein. In
the initial 15 years, their functioning was quite satisfactory but thereafter most of
these suffered losses. Because of their poor performance, public sector undertakings
degenerated into a liability.
On account of these factors, it became inevitable for the government to adopt new
Economic Policy or initiate Reform Policies. Our government was left with no
options but to approach World Bank and IMF (International Monetary Fund) for
economic asylum. To manage the crises, India was granted an loan of $7 billion, but it
was a tied loan – tied to set of reform policies. Liberalisation, Privatisation and
Globalisation were the three basic elements of the new reform policy.

2. Elements of NEP (New Economic Policy)

Liberalisation, privatisation and globalisation are the three main elements of

NEP.
 Three Main Elements of NEP

Liberalisation
Privatisation
Globalisation

Liberalisation

Liberalisation of the economy means its freedom from direct or physical controls
imposed by the government. Prior to 1991, government had imposed several types of
controls on Indian economy, e.g., industrial licensing system, price control or
financial control on goods, import licence, foreign exchange control, restrictions on
investment by big business houses, etc. It was experienced by the government that
several shortcomings had crept into the economy on account of these controls. They
had dampened the enthusiasm of the entrepreneurs to establish new industries. These
control had given rise to corruption, undue delays and inefficiency. Rate of economic
growth of the economy fell sharply and high-cost economic system came into being.
Economic reforms therefore made a bid to reduce restrictions imposed on the
economy. Economic reforms (with liberalisation as its epicentre) were based on the
assumption that market forces would guide the economy in a more effective manner
that government control. Examples of other underdeveloped countries like Korea,
Thailand, Singapore, etc. that had achieved rapid economic development as a result of
liberalisation were worthy of emulation.

Economic reforms (with liberalisation as its epicentre) were based on the

assumption that market forces would guide the economy in a more effective
manner that government control.

Economic Reforms under Liberalisation

Important economic reforms under liberalisation are as under:

(i) Industrial Sector Reforms

Liberalisation virtually implied de-regulation of industrial sector of the economy.

Following observations highlight how it happened:

Abolition of Industrial Licensing: In July 1991, a new industrial policy was

announced, abolishing the requirement of licensing except for the following six
industries: (i) liquor, (ii) cigarette, (iii) defence equipment, (iv) industrial explosives,
(v) dangerous chemicals, and (vi) drugs and pharmaceuticals.
De-reservation of Production Areas: Many production areas which earlier were
reserved for SSI (small scale industries) have now been de-reserved. Forces of the
market are allowed to determine allocation of resources to different uses rather that
the directive policy of the government.

Expansion of Production Capacity: Earlier production capacity was linked with

licensing. Now, freedom from licensing implied freedom from capacity constraints
‘what to produce and how much to produce’ was now a matter of producer’s choice
depending on market conditions.

Freedom to Import Capital Goods: Liberalisation also implied freedom for the
industrialists to import capital goods with a view to updating their technology.
International agreements on the import of technology no longer required permission
from the government.

(ii) Financial Sector Reforms

Financial sector includes (i) banking and non-banking financial institutions (ii) stock
exchange market and (iii) foreign exchange market. In India financial sector is
regulated and controlled by the RBI (Reserve Bank of India). Liberalisation implied a
substantial shift in role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial
sector. Example: As a regulator, the RBI (prior to liberalisation) would itself fix
interest rate structure for the commercial banks. But as a facilitator (after
liberalisation) the RBI would only facilitate the free play of the market forces and
leave it to the commercial banks to decide their interest rate structure. Now,
competition prevails rather that controls.

Consequent upon the policy of Liberalisation, there has been a substantial shift
in role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector. Now
competition prevails rather that controls.

Free play of the market forces has led to the emergence of private bankers – both
domestic as well as international – in the Indian banking industry. Liberalisation has
also allowed FII (Foreign Institutional Investors) to invest in Indian financial markets.
(Examples of FII: merchant bankers, mutual funds and pension funds). Consequent
upon these changes, financial sector in India has shown a multi – dimensional growth
and is serving as a life-line of economic activity in the economy.

(iii) Fiscal Reforms

Fiscal reforms relate to revenue and expenditure of the government. Tax reforms are
the principal component of fiscal reforms. Broadly taxes are classified as (a) direct
taxes and (b) indirect taxes Direct taxes are those taxes, the burdent of which cannot
be shifted onto others. (Examples: sales tax on goods, service tax). One who pays
such a tax (Example: a shopkeeper paying sales tax to the government) can shift the
burden of this tax on to the final buyers of the goods by adding the tax amount to the
basic price of the goods sold.
Prior to liberalisation, tax structure in the country has been highly complicated and
evasive. Fearing a heavy burden of taxation, people would often evade the payment of
taxes. Now tax structure has been fairly simplified and moderated. This has raised tax
compliance and therefore tax revenue of the government.

It is a widely recognized fact that a simple and moderate tax structure raises tax
compliance and therefore tax revenue of the government.

Efforts are being made to ensure uniform application of VAT (value added tax) in all
states of the country. Once this is achieved, it will go a long way in establishing a
common national market in the country. Implying a balanced regional growth

(iv)External Sector Reforms

External sector reforms include:

(a) foreign exchange reforms and

(b) foreign trade policy reforms

Foreign exchange reforms were triggered in 1991 with the devaluation of the Indian
rupee against foreign currencies. Devaluation implies a fall in the value of repee vis-à-
vis (say) US dollar or English pound. Implying a US $ can be exchanged for more
rupees than before. Or, implying that a US $ can buy more goods in the Indian
markets. This accelerated the flow of foreign currency into the Indian economy. This
is what we desperately desired to solve the foreign exchange crises.

Devaluation

Devaluation implies lowering the value of our currency in relation to other

currencies of the world. Consequently, a US dollar or an English pound can be
exchanged for more rupees than before. Implying that a US dollar or an English
pound can buy more goods in the Indian markets. It is expected to decelerate the
flow of foreign exchange into the Indian economy.

Followed by devaluation in 1991, the exchange value of the Indian rupee in the
international money market (or foreign exchange market) was left to the free play of
the market forces. Presently, exchange rate is determined by the forces of supply and
demand in the international exchange market. Foreign Trade Policy underwent a
comprehensive change in the wake of liberalisation. Tariff restrictions have been
considerably moderated, rather withdrawn from many items of export and imports.
Instead of policy of protection to the domestic industry now there is the policy of
‘survival of the fittest’. Presently, it is the competition that prevails and not the quotas
and tariffs. Efficiency is the benchmark of growth, not merely expansion.
Salient Features of Trade policy After Liberalisation

(i) abolition of import quotas

(ii) abolition of import licensing (except in case of goods which are not
environment-friendly and are hazardous)
(iii) moderation / reduction of import duty to enhance competitiveness in the
domestic market
(iv) withdrawal of export-duty to enhance competitiveness of Indian goods in the
international market.

Briefly, trade policy after liberalisation is to facilitate integration of the Indian

markets with rest of the world with a view to enhancing economic growth
through global competition rather than non-competitive controls and protection.

Privatisation

“ Privatization “ is the general process of involving the private sector in the ownership
or operation of a state owned enterprise.”

It implies parting with government ownership or management of the public sector

enterprises. It may happen in two ways: (i) outright sale of the government enterprises
to the private entrepreneurs or (ii) withdrawal of the government ownership and
management from the mixed enterprises (the enterprises jointly owned and managed
by the government and the private entrepreneurs).

Disinvestment

Disinvestment is a variant of privatisation. It refers to a situation when the

government sells off a part of its share capital of PSUs (public sector
undertakings) to the public. Argument in favour of disinvestment is the same as
in favour of privatisation. It is taken as a remedial measure to improve
production and managerial efficiency, as well as to facilitate modernisation.

Case for Privatisation

Case for privatisation is based on an inefficient performance of PSUs. The process of

industrialisation was embarked upon during second Five Year Plan with an all round
dependence and reliance on PSUs. The Industrial Policy Resolution (1956) clearly
and categorically stated the significance of PSUs in the process of growth and
development. And, it is beyond doubt that it was through the spread of PSUs that
India could diversify its industrial base between the period 1951-1991. It was on
account of the spread of PSUs that the Indian economy underwent a structural
transformation: people started shifting from agriculture to industry as their source of
livelihood, and there was a gradual increase in the per cent contribution of industry to
GDP. PSUs gave us “navratanas” (nine jewels of the Indian industry, besides a host of
mini ratanas).

But, towards the close of 1990s, the government seemed to have finally realised that
the PSUs were more of a social burden and less of a social gain. Mounting losses of
PSUs became unsustainable. Leakage, pilferage, inefficiency and corruption had
become so rampant in PSUs that their privatisation was considered as the only
alternative. Thus, barring ‘navratanas’, (Where the government is enhancing
functional freedom with a view to upgrading their performance), the ownership of
PSUs is being gradually sold off to the private entrepreneurs.

Obvious Gains and Imperative Losses of Privatisation

Obvious Gains

(1) privatisation implies supremacy of ‘self-interest’ over ‘social

interest’. When ‘self-interest’ prevails, the entrepreneurs work with 100
per cent commitment, and ‘ Efficiency’ becomes the condition of survival
for the workers. High productivity is the obvious result.
(2) Privatisation expects private enterprises to work in a competitive
environment – both domestic as well as international. Competition
induces up gradation and modernisation. These are the essential
conditions of growth and development.
(3) Privatisation promotes diversification of production: Unlike PSUs,
private enterprises invariably generate high profits. These are used for
expansion and diversification of production. MNCs (Multinational
Corporations) are a testimony to the fact that private sector enterprises
are capable of redefining the benchmark of growth.
(4) Privatisation promotes consumers’ sovereignty Production is undertaken
to the satisfaction of consumer wants. Higher degree of consumers’
sovereignty implies better quality of life.

Imperative Losses

(i) Socialistic pattern of the society (in which ‘social interest’ is upheld as
a supreme interest) is left to survive only as an academic concept. It loses
its practical validity once PSUs are sold off to the private players.
(ii) Privatization encourages the free play of market forces. But in the
process, goods are produced only for those who have the means to buy
them. When prices rise (which is an obvious tendency in a system driven
by the free play of market forces) weaker sections of the society suffer
deprivation.
Globalisation

Globalisation means integrating the economy of a country with the economics of

other countries under conditions of free flow of trade and capital, and movement of
persons across borders.

Globalisation may be defined as a process associated with increasing openness,

growing economic interdependence and deepening economic integration in the world
economy.

Economic Reforms assume that Indian economy should be integrated with world
economy. As a result, there will be unrestricted flow of goods and services,
technology and expertise among different countries of the world. Capital and
technology will flow from the developed countries of the world towards India.

Outsourcing

This is an important outcome of the process of globalisation. It refers to a system of

hiring business services from the outside world. These services include: call centres,
transcription, clinical advice, teaching/coaching, and the like.
India is emerging as an important destination of outsourcing particularly, BPO
(business process outsourcing, also called call centres). This is because of two
important reasons: (i) availability of cheap labour in India, or relatively low wage rte
for the skilled workers, and (ii) a revolutionary growth of IT industry in India.

Policy Strategies Promoting Globalisation of the Indian Economy

Following are some important policy strategies that have influenced the process of
globalisation of the Indian economy:

(i) Increase in Equity Limit of Foreign Investment: Equity limit of foreign

capital investment has been raised from 40 per cent to 51 to 100 per cent.
In 47 high priority industries foreign direct investment to the extent of 100
per cent will be allowed without any restriction and red-tapism. Export
trading houses will also be allowed foreign capital investment up to 100
per cent. In this regard Foreign Exchange Management Act (FEMA) will
be enforced. In matters of import of spare parts, raw materials and
technical know-how, these foreign capital investment units will be subject
to normal rules.

(ii) Partial Convertibility : To achieve the objective of globalisation, partial

convertibility of Indian rupee was allowed. It was in conformity with
economic reforms. Partial convertibility means to buy or sell foreign
currency like dollar or pound sterling, for foreign transactions at a price
determined by the market. This convertibility was valid for the following
transactions: (a) Import and export of goods and services; (b) payment of
 interest or dividend on investment; (c) Remittances to meet family
expenses. It is called partial convertibility because it does not cover capital
transactions.

(iii) Long-Term trade Policy: In conformity with economic reforms, foreign

trade policy was enforced for long duration, viz., five years. Main
characteristics of this policy is that it is a liberal policy. Under this policy,
all restrictions and controls on foreign trade have been removed. Open
competition has been encouraged and all facilities are being provided to
this end. Barring some specific goods, any other good can be imported or
exported.

(iv) Reduction in Tariffs: In order render Indian economy beneficial

internationally, custom duties and tariffs imposed on imports and exports
are being reduced gradually.

Two Parameters of Economic Reforms: Macroeconomic Stabilisation and

Microeconomic Structural Adjustments

(i) Macroeconomic Stabilisation

Macroeconomic stabilisation measures refer to those set of measures which affect the
entire economy and are therefore pervasive in nature (spreading across all sectors of
the economy). These measures included review of: (a) monetary policy, (b) fiscal
policy and (c) exchange rate policy. The focus of these measures was to cope with the
crises of confidence relating to ability of the government to manage the country’s
dwindling BOP status, particularly its ability to repay the loans taken from the rest of
the world.

(ii) Microeconomic Structural Adjustments

These refer to those measures by the government which focused on structural changes
in the economy and which bad specific bearing on different sectors of the economy.
The measures included reforms in (a) industrial policy, (b) trade policy, (c) public
sector policy, (d0 price policy, (e) tariff policy, etc.

It may be noted that while Macroeconomic Stabilisers are short-team measures to

correct overall imbalances in the system, Microeconomic adjustments are long-team
measures aiming at improving the level of efficiency and productivity in different
sectors of the economy.

First Generation Reforms and Second Generation Reforms

Distinction is sometimes drawn between First Generation Reforms and Second

Generation Reforms. First Generation Reforms are those which do not require any
legislative action. These reforms can be carried out simply through the executive and
administrative machinery of the government. Second Generation Reforms on the
other hand are those which require legislative action. These reforms just cannot be
carried out through the existing administrative and executive setup of the government.
Accordingly, Second Generation Reforms are often delayed.

3. An Appraisal of LPG Policies

Briefly referred to as LPG policies, the term implies policies related to liberalisation
(L), Privatisation (P) and globalisation (G). an appraisal of LPG policies implies and
appraisal of NEP (New Economic Policy) or an appraisal of Economic Reforms
initiated since 1991. appraisal of LPG or NEP requires that the reader appreaciates or
understands the merits and demerits of this policy on the Indian economy or that he
analyses the positive and negative impact of this policy on the Indian economy.

Positive Impact of the LPG Policies

Following observations highlight the positive impact of LPG policies on the Indian
economy:
(i) A Vibrant Economy: Indian economy has definitely become a more
vibrant economy. Overall level of economic activity has definitely picked
up after the introduction of the policies of liberalisation, privatisation and
globalisation. Results are evident in terms of an impressive increase in the
growth rate of GDP. Currently, the growth rate of GDP is estimated to be
more that 8 per cent, and the planners and the politicians are expecting
that, in the near future, it should get close to 9 per cent per annum.

(ii) A stimulant to Industrial Production: LPG policies have worked as a

great stimulant to industrial production in the Indian economy. Presently,
industrial production is hovering around 10 per cent which is a big jump
from the pre-1991 level. It is only after LPG policies, that IT industry in
India has become the point of discussion throughout the world.

(iii) A Check on Fiscal Deficit: Mounting fiscal deficit has been a serious
threat to the process of investment in the Indian economy. It was as high as
8.5 per cent prior to 1991. Thanks to the LPG policies, there has been a
significant increase in Government Revenue. Consequently, fiscal deficit
has been contained to around 5 percent of GDP. This is not sufficiently low
yet significantly lower than before.

(iv) A Check on Inflation: Owing to a greater flow of goods and services in

the economy, there has been a check on the rate of inflation. Till 2007-08,
it ranged between 4-5 per cent which is not seriously threatening, even
though it is very significantly low.
(v) Consumer’s Sovereignty: Consumers sovereignty has definitely widened
over time. This is evident from the fact that a large variety of goods and
services from the diverse global markets are now within the easy reach of
the buyers. Producers are widely responding to the consumers choice and
preference. Consequently, overall level of expenditure of the households
has tended to rise. Implying and overall rise in the welfare status of the
people.

(vi) A Substantial Increase in Foreign Exchange Reserves: Depletion of

forex-reserves was one of the compulsions of the Government to introduce
LPG policies. Thanks to these policies, forex reserves of the country are
now placed at a comfortable level. Good amount of forex reserves reflects
robustness of the economy and enhances economic confidence of the
global investors in the Indian markets.

(vii) Flow of Private Foreign Investment: Private foreign investment has

taken a quantum jump after the adoption of LPG policies. This has been a
great relief to the Indian planner and the politicians in view of the facts
that, (i) domestic economy was not generating enough of surplus for
reinvestment, and (ii) indigenous technology was getting obsolete. It is
significant to note that private foreign investment not only implies influex
of capital in the domestic economy, it also implies influx of technology.

(viii) Recognition of India as an Emerging Economic Power: It is owing to

LPG policies that the consequent rise in the overall level of economic
activity, that India is now being recognised as an emerging economic
power in the world. This recognition (particularly by developed nations of
the world) not only raises India’s economic ranking in the world, but also
impacts psychology of the global investors to choose India as their
preferred destination.

(ix) A Drift from Monopoly Market to Competitive Market: Launch of

LPG policies has caused a significant shift in the structure of the Indian
markets. Indian markets are now increasingly shedding its monopolistic
character, and becoming more and more competitive in nature. For
instance, a couple of decades back, products like cars, refrigerators, ACs
and PCs were the monopoly markets of select brands only. Now a variety
of these products are available at competitive rates.

Briefly, owing to LPG policies the Indian economy has definitely got a long
awaited kick-start. The process of growth has not only accelerated, but has also
become more diversified. Here is a definite change in welfare level of the people.
Recognition of the Indian economy as an emerging economic power in the world
is of crucial significance.

Negative Impact of LPG Policies

All the glitters is not gold. There is a negative side of the story as well. Following
observations highlight negative impact of LPG policies in India:

(i) Neglect of Agriculture: Growth of GDP has primarily been owing to a

substantial growth of industrial sector. In the wake LPG policies, focus
shifted from agriculture to industry. Consequently, growth rate in
agriculture suffered a set-back.
Set-back to agricultural sector, implies a set-back to the principal source of
livelihood of the masses in India. Indeed neglect of agriculture implies
spread of poverty. And it is pertinent to note that slow growth of
agriculture sector (which presently is just about 2 per cent) must ultimately
hinder the process of growth of the industrial sector as well. This because:
(i) agricultural sector is an important source of raw material for the
industrial sector, (ii) agricultural sector is the principal source of labour
supply to the industrial sector, and (iii) agricultural sector offers a huge
demand base for the industrial products like tractors and thrashers.

As noted earlier, rise in prices of agricultural goods has triggered a rise in

general price line. Presently, the rate of inflation being more that 6 per
cent, and interest rates tending to rise, there is a serious threat to
inducement to invest. If the existing trends continue, GDP growth rate may
fall short of expectations.

(ii) Urban Concentration of Growth Process: LPG policies have resulted in

the concentration of growth process in urban areas. Think of any MNC,
you will hardly find its trace in the rural areas of the country. All MNCs
are focusing only on urban areas, where they find conducive infrastructural
facilities. Consequently ‘rural-urban gulf’ is widening. Any such economic
dualism deepens social dualism as well. Any social dualism ultimately
threatens the process of growth.

(iii) Economic Colonialism: India suffered nearly 200 year of political

colonialism during the British rule. Now, while MNCs are dominating the
Indian economy, we might suffer a sort of economic colonialism. Implying
a situation where MNCs are exploiting the Indian markets to sell their
products, and in the process, domestic producers are being marginalised
owing to their poor competitive strength.

(iv) Spread of Consumerism: Spread of MNCs is the country as a

consequence of LPG policies has resulted in a large-scale spread of
consumerism. A variety of global brands in the market has lured the
masses to become spend thrift, even beyond their means the Indian society
is fast adapting itself to the western culture, of spending through
borrowing. This may expand size of the market for the traders and the
manufactures but certainly enhances vulnerability of the households as
consumers. They become the victim of demonstration effect which
enhances materialism but robs the peace of mind.
(v) Lopsided Growth Process: LPG has accelerated the growth process of the
Indian economy, but it is lopsided. It is not an Inclusive Growth Process. It
 is a growth process that does not include balanced growth across all
sectors of the economy. Rather, it is a growth process that centres around
service sector of the economy. It is just and ‘IT-based’ growth process.
While industrial growth is retarding, that of agriculture is becoming
negative. It is alarming to note that, owing to liberalisation and
globalisation, the Indian farmer is shifting to production of cash crops for
the foreign markets, causing a shortfall of domestic supplies of foodgrains.
Alas! We are forced to import foodgrains despite Green Revolution.

(vi) Cultural Erosion: Globalisation has also caused cultural erosion of the
Indian society. Economic prosperity has taken a lead over all other
parameters of life. Everybody wants to be economically independent and
well-off regardless of his responsibility towards the family or the society.
Loyalty towards the family and loyalty towards the society which, used to
be the strongholds of the Indian social culture are being surrendered as
useless virtues in the wake of materialism.

Which Way to Go?

Should we or should we not subscribe to the LPG policies? It is a debatable issue. But
avoiding the intricacies of the debate, the students of economics at the senior
secondary level can definitely make on concrete observation:
The LPG policies are the only way out to economic growth and development. Indeed
pursual of LPG policies was to a great extent a matter of economic compulsion rather
that a matter of choice for the politicians of the country.
However, a compulsion should never mean a complete surrender. It is strongly
recommended that LPG policies are pursued with guarded precautions. We must see
to it that we do not compromise with economic interest of our domestic producers,
while holding negotiations in the areas of international trade and tariffs. Also we must
see to it that we do not become economically subservient to the multinational
corporations. We must remain in the commanding position to direct foreign
investment in the areas of infrastructure rather that consumer goods offered by KFC
or Dominos.