IMPACT OF LPG (LIBERALISATION PRIVATISATION AND

GLOBALISATION) ON INDIAN ECONOMY

JANA RAVI KIRAN

ABSTRACT
Globalisation refers to the process of integration of world into one huge market. In
this study, why globalisation is important and how India trying to achieve globalisation
through LPG (Liberalisation Privatisation and Globalisation) model is explained. The
measures taken by Indian Government as a part of LPG model are discussed. What are the
different methodologies followed by India are also discussed. And also the impact is also
discussed. Future challenges of indian economy are also discussed.

Keywords: LPG(Liberalisation Privatisation and Globalisation), General Agreement on

Tariff and Trade(GATT) , World Trade Organisation(WTO), Monopolies and Restrictive
Trade Practices (MRTP) act , fiscal policy, monetary policy, Foreign Exchange Management
Act(FEMA)

INTRODUCTION

It has become customary to use the three terms Liberalisation, Privatisation and
Globalisation together (often as an acronym, ‘LPG’) to denote a global economic
phenomenon, often with ideological implications. However, it is important to understand
each of these and how these affect India’s economic development.

Globalisation refers to closer integration of the economies of the world. The principal
instruments are : trade, technology and transfer of capital. There have been waves of global
integration in the past (for instance, during the discovery of the Indies by the west in the 15th
and 16th centuries ; during the Industrial Revolution and colonial occupation by the west of
much of Asia and Africa). The current wave of globalisation started in the mid-1980s with
the revival of the US economy after more than a decade of deep depression. It coincided with
the revamping of the international trade mechanism by converting the General Agreement on
Tariff and Trade(GATT) into the World Trade Organisation(WTO). The revival in the US led
to large flow of capital seeking better returns and China and India were major recipients of
this capital inflow. All this was made possible by the new technological revolution
represented by the Internet which enabled the transfer of large sums of money across
continents with a click of the mouse. Although ideally, goods and services should have
moved freely across the countries under a globalised regime, services are not allowed to
move freely, mainly because of the fear among developed countries that movement of
persons (teachers, doctors, nurses etc.) would create immigration issues and dilute the
standards of living in those countries. The practice of outsourcing of services has evolved as a
practical solution to this problem. Countries like India, Philippines and Thailand are
providing such services to the developed countries through the Internet which enables
transfer of text, voice and visual data. Thus, the developed countries are able to obtain
cheaper services without having to face the complications which physical movement of
persons would have created. It is only in cases where off shore delivery of services is not
possible that persons are allowed into these countries but such flow is restricted through Visa
and other non-tariff barriers.

Privatisation refers to the transfer of ownership of public sector industries and

business from state to private hands. The ideological basis for this approach is the thinking
that ‘the government is best that governs the least’. According to the free market principles
all that the government was required to do is to ensure ‘peace, easy taxes, and a tolerable
administration of justice’. Privatisation also includes opening up areas previously reserved for
the public sector. Privatisation can take many shapes from transfer of full ownership from
public to private hands (as in disinvestment) or permitting joint venture by either partial
disinvestment or taking part in equity contribution of existing or new ventures in the private
sector.

Liberalisation refers to measures taken by the government to simplify and remove

restrictions on investment and entrepreneurship. The Union Government had initiated a
liberalisation programme during the Seventh Five Year Plan (1985-90) to dismantle the
licence-permit-raj which had been built up under the earlier policy of centralised allocation of
scarce resources. The most visible manifestation of this restrictive policy was the Monopolies
and Restrictive Trade Practices (MRTP) act which had laid down a limit of Rs.100 crore as
the limit beyond which a business house could not expand. Any business house (like Tatas
and Birlas) which had to invest in any new venture which would take their total asset beyond
the ceiling was not allowed to do so. Similar other capacity restrictions which existed in the
industrial policy were also relaxed during this period. The number of industries which
required licences for production was brought down to a small number which were either
strategic(railways and atomic energy) or polluting (leather, asbestos etc.). The restriction that
some goods could only be produced in the small scale sector was also removed.
INDIA’S POLICY OF LPG:-

Major liberalisation measures were, however, undertaken in the wake of the 1991
crisis. Indian economy had reached a stage of deep crisis by June 1991, brought on by the
Gulf war, break up of the Soviet Union and the eastern block which accounted for almost
20% of India’s exports, domestic political uncertainty, lack of financial discipline by earlier
governments, failure of monsoons and bunching of external payments obligations. India was,
for the first time, close to defaulting on its international commitments. India’s credit ratings
were downgraded and she could not, therefore, borrow from external commercial markets.

The annual rate of inflation had touched 17 per cent by August 1991; foreign exchange
reserves had plummeted to a little above one billion dollars which was barely sufficient to
meet the country’s import bill for a week. Fiscal deficit had risen to 8.4% of the GDP.
Current account deficit in balance of payments was an unsustainable $9.9 billion.

It was in this context that India launched thee New Economic Policy, announced by
Finance Minister Dr .Man Mohan Singh In his July 1991 budget. Broadly the measures taken
could be classified into two:

 A short term stabilisation programme to bring the economy back on rails; and
 A medium to long term structural adjustment programme to correct the structural
rigidities and bottlenecks in the economy.

The aim of the stabilisation programme was to control inflation and remove the balance
of payment deficit. It consisted of four distinct areas of intervention –

 fiscal policy
 monetary policy
 exchange rate policy and
 social sector policy

In fiscal policy the objective was to reduce the fiscal deficit by cutting down
government expenditure on the one hand and by increasing the tax revenue by broadening the
tax base, on the other. As a result of measures taken in this regard, fiscal deficit came down
from 8.4% in 1990-91 to 6% in 1991-92 and to 5.6% in 1992-93.
 The aim of the monetary policy was to tighten credit by increasing the interest rates.
The Narasimham Committee looked into measures required to be taken for financial sector
reform. A significant measure was to provide autonomy to reserve bank of India and giving
up automatic monetisation of government’s deficit(previously, any gap in budgetary
resources was sought to be made up through deficit financing which meant that RBI would
print currency notes to the extent of the deficit( This was inflationary and also promoted
profligate behaviour by the government.)

In order to correct the exchange rate, the Rupee was devalued by 23%. The Rupee
was made convertible on current account in 1994-95.

In the social sector, the experience of countries in Latin America ad Africa, which had
undertaken stabilisation programmes in the 1980s had shown that due to the ridged control
over public expenditure and demand compression which accompanied stabilisation, the poor
suffered disproportionately. Drastic cuts in subsidies and increase in taxation impoverished
the weaker and vulnerable sections in these countries. International financial institutions like
the World Bank and the IMF, which had recommended stabilisation measures in these
countries, became unpopular in these countries. It was UNICEF which undertook a
systematic study of the social cost of stabilisation and structural adjustment in the late 1980s
and recommended to adopt ‘adjustment with a human face’.

Indian reforms had taken care to build into the reform package measures to protect the
vulnerable sections from the fallout of the macroeconomic adjustment. The allocation for
merit goods and poverty alleviation schemes were increased substantially. A social ‘safety
net’ programme was launched consisting of Employment Assurance Scheme, National Social
Assistance Programme, Mahila Samriddhi Yojana and Indira Mahila Yojana. The Public
Distribution System(PDS) was revamped for targeting the deserving beneficiaries.

Structural adjustment consisted of a set of medium term policy measures which require
stabilisation measures to be first adopted. The main areas covered by this are:

 liberalisation of industrial policy

 reform of the public sector
 financial sector reforms and
 trade policy reforms.
 The industrial policy was revised in 1991 with the abolition of licensing of industries
on virtually all items except those having environmental implications or involving security.
At present only three items require prior licensing – atomic energy, some substances used for
atomic energy and railway transport. A new Competition Act has replaced MRTP Act.
Measures were taken to encourage foreign direct investment(FDI) by replacing the draconian
FERA with the milder Foreign Exchange Management Act(FEMA) and making foreign
investment ad collaboration automatic in most cases.

Public sector reforms included vacation by the state of areas where private sector
would be more efficient through disinvestment of the state share. As public sector units
accounted for a large share in the government’s domestic debt., a drastic reduction in the
budgetary support to such units was another policy option which was exercised.

Financial sector reforms were based on the recommendations of the Narasimham

Committee. The main aims of the reforms were to unshackle the banking system from
excessive government control even without de-nationalising, and to curtail the tendency of
the government to rely on credit control measures (SLR and CRR) as extra-budgetary sources
of inexpensive credit. The signing of an MoU with the RBI on the discontinuation of ad hoc
treasury bills in 1994 was a landmark measure.

Capital market reforms started with the establishment of the Security and Exchanges
Board of India(SEBI) in 1992. Permitting Foreign Institutional Investors(FII) to undertake
portfolio investment and Indian companies to undertake Euro issues were other major steps.

Trade policy reforms led to major changes in the import licensing system. Except for
consumer goods, all Non Tariff Barriers (NTBs) have been lifted. As a signatory of the
WTO India is committed to bring down the tariff levels to lower levels than those that existed
at the time of the signing of the agreement.
Impact of LPG programme on Development

The results have been quite gratifying but there is still much more to do. The economy
responded very well to the reforms in the first half of the 1990s. In fact, India’s growth
performance in the first three years after the start of reform programme was better than
almost all developing countries that have gone through such a reform process. The economy
was inching towards the attainment of a 7 per cent growth path in the mid 1990s,
significantly higher than the 5.5 per cent achieved in the 1980s and the 3 to 3.5 per cent in the
previous three decades. Among the significant achievements of economic policy are the
restoration of external balance; the sustained reduction in inflation; the significant reduction
in poverty to 23-26 percent; the substantial expansion of trade from about 12 to 13 per cent of
GDP in the late 1980s to 22 to 23 per cent now; the introduction of new prudential discipline
in the banking sector; and strengthening of the capital market. Despite all these achievements,
the key disturbing development of the late 1990s is the significant slowdown in the growth
rate of GDP in the last 5 years to about 5.5 per cent, a level not too different to that achieved
in the 1980s, perhaps lower. A particularly disturbing feature of this development is the fall
in the industrial growth rate to less than 5 per cent, which is more characteristic of the slow
rate of growth in the 1960s and 1970s that had then been characterised as industrial
stagnation. Similarly, agricultural performance in the last 5 years has also been exhibiting

It is an undisputed fact that the economic reforms adopted in 1991 had a positive
effect n the country’s economic growth. Between 1992-93 and 2000-01, the economy grew
at an annual average rate of 6.3%. India’s improved foreign exchange management restored
the confidence of foreign investors. Increased foreign investment has helped improve the
current account financing and build healthy foreign reserves. Coupled with a cautious
monetary policy, the foreign reserves helped India protect itself from the South East Asian
crisis of 1997-98 which virtually destroyed the currency system of many of the SE Asian
countries.
 Table 1

India’s Growth Performance

(Percent per year)

Total GDP Sectoral Growth of GDP .

Growth
Agriculture Industry Services

1970-72 to 1980-81
(average) 3.2 2.0 4.0 7.2

1981-82 to 1990-91
5.7 3.8 7.0 6.7
(average)

1991-92 1.3 -1.1 -1.0 4.8

1992-93 5.1 5.4 4.3 5.4

1993-94 5.9 3.9 5.6 7.7

1994-95 7.3 5.3 10.3 7.1

1995-96 7.3 -0.3 12.3 10.5

1996-97 7.8 8.8 7.7 7.2

1997-98 4.8 -1.5 3.8 9.8

1998-99 6.5 5.9 3.8 8.3

1999-2000 6.1 1.4 5.2 9.5

2000-01 4.0 0.1 6.6 4.8

2001-02* 5.4 5.7 3.3 6.5

1992-93 to 1996-97
6.7 4.6 8.0 7.6
(average)

1997-98 to 2001-02
5.4 2.3 4.5 7.8
(average)

Source: Economic Survey 2001-02, Ministry of Finance, Government of India, 2002. Growth
rates for 2001-02 are projections of the Ministry of Finance based on partial information.
 Table 2

Major Macro-Economic Indicators

(percentages of GDP)

Combined Gross Savings Gross Capital Formation

Fiscal Deficit
of Central and Private Public Private Public
State Govts. Sector Sector Sector Sector

1990-91 9.4 22.0 1.1 14.7 9.3

1991-92 7.0 20.1 2.0 13.1 8.8

1992-93 7.0 20.2 1.6 15.2 8.6

1993-94 8.3 21.9 0.6 13.0 8.2

1994-95 7.1 23.2 1.7 14.7 8.7

1995-96 6.5 23.1 2.0 18.9 7.7

1996-97 6.4 21.5 1.7 14.7 7.0

1997-98 7.3 21.8 1.3 16.0 6.6

1998-99 8.9 22.6 -1.0 14.8 6.6

1999-00 9.4 24.0 -0.9 16.1 7.1

2000-01 9.6 25.1 -1.7 15.8 7.1

Note: Public sector capital formation minus public sector savings does not equal the
fiscal deficit because the definition of public sector for estimate of savings and
capital formation includes non-departmental enterprises. Estimates of public sector
savings and capital formation distinguishing general government from non-
departmental enterprises are not readily available for recent years.
 Table 3. Foreign Trade (US $ Million)

Trade 1990-91 2002-03 2003-04 2004-05

Total Exports 18477 52719 63843 79247
Total Imports 27915 61412 73149 107066
Trade Balance -9438 -8693 -14307 -27819
Source: Reserve Bank of India Annual Report 2004-05

Thus we find that the economic reforms in the Indian economy initiated since July
1991 have led to fiscal consolidation, control of inflation to some extent, increase in foreign
exchange reserve and greater foreign investment and technology towards India. This has
helped the Indian economy to grow at a faster rate, Presently more than 100 of the 500
fortune companies have a presence in India as compared to 33 in China.
However, the impact of the reform programme on poverty reduction was less positive.
Stabilisation programmes are by definition designed to compress demand by reducing the
expenditure of the government. The impact is bound to fall more on social security and other
pro-poor heads, as the government will find it difficult to control spending on items like
defence and salaries of its own employees. Similarly, reducing the burden of subsidies –
another measure under any stabilisation programme – will affect the poor disproportionately.

This is often referred to as ‘the social cost of adjustment’. Governments take steps to
prevent the impact of this social cost on the poor by building in adequate ‘safety nets’ like
social security payments, targeted public distribution system etc.

A study conducted in 1995 by Tendulkar and Jain on the poverty scenario in the pre- and
post- reform period observed the following facts:

 Rural poverty rose considerably in the first three years of reform(1991,92 and 93).
After reaching 43% in 1993, it declined to 40% in 1994. But this was still higher than
the 1991 figure.
 Urban poverty rose in 1992 and 1993 before declining to 31% in 1994 which was
lower than the pre-reform percentage of 35.
 The authors explained the rise in rural poverty in terms of a bad harvest and the resultant
decline in incomes and employment. The problem might have been aggravated by the steep
rise in the price of wheat and rice caused by withdrawing subsidies and increasing the
procurement price to compensate for the losses. According to them the urban poor were not
as severely affected as they were covered by a more efficient PDS.

However, several subsequent studies clearly indicated that while poverty on the whole
has declined, it has not been even across social groups. Among the disadvantaged sections,
Scheduled Tribes have been the worst affected as there has been no decline in their poverty
figures. Another conclusion is that there are prominent regional disparities in the reduction of
poverty, with some states achieving better results than others. Thus, while there has been
growth on account of the reforms, there has not been either equity or equality.

The future of our country will not be healthy unless we give greater attention to
enhancement in the quality of education at all levels. We have justly been proud of some of
our institutions of higher learning that have produced some of the best professionals in the
world. We must, however, understand that the rest of the world has gone much further ahead
and unless we give special attention to the enhancement of quality in our institutions, we will
be left behind. A great degree of innovation has taken place in health services in the private
sector in the past decade. This is all for the good. However, the health needs of the majority
of our population remain unmet and we have to provide better methodology for extending
adequate health services in both urban and rural areas. In each of these areas, much greater
local control is required. Centralised control will simply no longer do.

INDIAN ECONOMY:FUTURE CHALLENGES

 Sustaining the growth momentum and achieving an annual average growth of 9-
10% in the next five years.
 Simplifying procedures and relaxing entry barriers for business activities and
 Providing investor friendly laws and tax system.
 Checking he growth of population; India is the second highest populated country in
the world after China. However in terms of density India exceeds China as India’s
land area is almost half of Ch9ina’s total land. Due to a high population growth, GNI
per capita remains very poor. It was only $ 2880 in 2003 (World Bank figures).
 Boosting agricultural growth through diversification and development of agro
processing.
 Expanding industry fast, by at least 10% per year to integrate not only the surplus
labour in agriculture but also the unprecedented number of women and teenagers
joining the labour force every year.
 Developing world-class infrastructure for sustaining growth in all the sectors of the
economy
 Allowing foreign investment in more areas.
 Effecting fiscal consolidation and eliminating the revenue deficit through revenue
enhancement an expenditure management.
 Some regard globalization as the spread of western culture and influence at the
expense of local culture. Protecting domestic culture is also a challenge.
 Global corporations are responsible for global warming, the depletion of natural
resources, and the production of harmful chemicals and the destruction of organic
agriculture.
 The government should reduce its budget deficit through proper pricing mechanisms
and better direction of subsidies. It should develop infrastructure with what Finance
Minister P Chidambaram of India called “ruthless efficiency” and reduce
bureaucracy by streamlining government procedures to make them more transparent
and effective.
 Empowering the population through universal education and health care, India must
maximize the benefits of its youthful demographics and turn itself into the knowledge
hub of the world though the application of information and communications
technology (ICT) in all aspects of Indian life although, the government is committed
to furthering economic reforms an developing basic infrastructure to improve lives of
the rural poor and boost economic performance.
 Government had reduced its controls on foreign trade and investment in some areas
and has indicated more liberalization in civil aviation, telecom and insurance sector
in the future.
REFERENCES

1. Ministry of Finance “Economic Survey 2001-02”, New Delhi 2002.

2. Reserve Bank of India Annual Report-2004-05
3. Indian Government, Economic survey, 2002-03-04-05
4. Ahluwalia, Isher J., “Industrial Growth in India: Stagnation since the mid-
sixties,” Oxford University Press, New Delhi, 1995.
5. Government of India, Planning Commission, 1992. English five year Plan,
1992-97 New Delhi. And Tenth Five Year, plan 2002-07.
6. United Nations- UNCTAD, World Investment report
7. www.planningcommission.com