LPG

India, after independence followed mixed economy

But in reality, public sector was dominated by public

sector

Private sector was ignored

Reasons for Economic Reforms

In 1991, India’s economic condition was miserable

1. Poor performance of public sector

In 40 yrs, only few public enterprises developed and rest

suffered huge loss

Overall performance was disappointing

2. Deficit in BOP

imports far more than exports

despite heavy taxes and quotas imports were rising

slow growth of exports due to expensive but low quality

products of India

3. Inflationary pressure

increase in money supply and shortage of essential goods

4. Fall in foreign exchange reserves

FER fell to lowest level

India couldn’t get more loan

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 couldn’t pay off interest to lenders

5. Inefficient management

lack of finance

huge expenditure on developing programmes

reckless spending

Why LPG, reasons?

India faced crisis on 1991, had to approach IMF and IBRD

(world bank)

got 7 billion instead of following conditions:

reducing role of govt.

removing trade restrictions

removing restriction on pvt. sector

New Economic Policy, NEP

announced in July 24 1991

aim- create more competitive environment

remove barriers to growth

Classified into 2 types of measure

1. Stabilisation Measures

also known as short term measures

correcting weakness in BOP by maintaining Forex Reserves

controlling inflation by controlling prices

2. Structural Reforms

long term reforms

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 improving efficiency of economy

increasing international competitiveness by removing

rigidity

Main Policies of NEP

LPG replaced LQP

Liberalisation for licensing

Privatisation for quotas

Globalisation for permits

Liberalisation

It means removal of entry and growth restrictions on private

sector enterprises.

involves derugulation and reduction of govt. control

introduces competition

It includes (FFITT)

i. Financial sector reforms

ii. Foreign exchange reforms

ii. Industrial sector reforms

iv. Tax reforms

v. Trade and investment policy reforms

1. Financial Sector Reforms (FARE/face)

i. Foreign investment limit- it was raised by around 74%

ii. Autonomy to bank- freedom to setup new branches

ii. Change in role of RBI- from facilitator to regulator, banks

allowed to take decision with consulting RBI

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 iv. Establishment of private banks- increases competition,
benefitting the customer

2. Foreign Exchange Reforms (DM)

i. Devaluation of rupee- to overcome BOP crisis, led to an

icrease in inflow of foreign exchange

ii. Market domination of exchange rate- govt. allowed rupee to

be free from its control

3. Industrial Sector Reforms (DRIP)

i.

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