LPG reforms – Liberalisation
The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the LPG or Liberalisation, Privatisation and Globalisation model. The primary objective of this model was to make the economy of India the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world. The concepts of liberalization, globalization and privatization are actually closely related to one another. This LPG phenomenon was first initiated in the Indian Economy in 1990 when the Indian Economy experienced a severe crisis.At that time the government decided to introduce the New Industrial Policy (NIP) in 1991 to start liberalizing the Indian economy. The chain of reforms that took place with regards to business, manufacturing, and financial services industries targeted at lifting the economy of the country to a more proficient level. These economic reforms had influenced the overall economic growth of the country in a significant manner.
Highlights of the LPG Policy
Given below are the salient highlights of the Liberalisation, Privatisation and Globalisation Policy in India:
Foreign Technology Agreements
Foreign Investment
MRTP Act, 1969 (Amended)
Industrial Licensing
Deregulation
Beginning of privatisation
Opportunities for overseas trade
Steps to regulate inflation
Tax reforms
Abolition of License -Permit Raj
Liberalisation
Liberalisation refers to the slackening of government regulations. The economic liberalisation in India denotes the continuing financial reforms which began since July 24, 1991. orin other words you can say that Liberalization means elimination of state control over economic activities. It implies greater autonomy to the business enterprises in decision-making and removal of government interference. It was believed that the market forces of demand and supply would automatically operate to bring about greater efficiency and the economy would recover. This was to be done internally by introducing reforms in the real and financial sectors of the economy and externally by relaxing state control on foreign investments and trade
Objectives
To boost competition between domestic businesses
To promote foreign trade and regulate imports and exports Improvement of technology and foreign capital
To develop a global market of a country To reduce the debt burden of a country
To unlock the economic potential of the country by encouraging the private sector and multinational corporations to invest and expand.
To encourage the private sector to take an active part in the development process.
To reduce the role of the public sector in future industrial development.
To introduce more competition into the economy with the aim of increasing efficiency
Reforms under Liberalisation
Deregulation of the Industrial Sector
Financial Sector Reforms
Tax Reforms
Foreign Exchange Reforms
Trade and Investment Policy Reforms
External Sector Reforms
Foreign Exchange Reforms
Foreign Trade Policy Reforms
Economic Reforms during Liberalisation
Several sectors were affected by the outburst of the impact of Liberalization. Few economic reforms were:
Financial Sector Reforms
Tax Reforms / Fiscal Reforms
Foreign Exchange Reforms / External Sector Reforms
Industrial Sector Reforms
Impacts of Liberalisation in India
Positive impacts of liberalisation in India
1) Free flow of capital:
Liberalisation has improved flow of capital into the country which makes it inexpensive for the companies to access capital from investors. Lower cost of capital enables to undertake lucrative projects which they may not have been possible with a higher cost of capital pre-liberalisation, leading to higher growth rates.
2) Stock Market Performance:
Generally, when a country relaxes its laws, taxes, the stock market values also rise. Stock Markets are platforms on which Corporate Securities can be traded in real time. Impact of FDI in Banking sector: Foreign direct investment allowed in the banking and insurance sectors resulted in decline of government’s stake in banks and insurance firms.
3) Political Risks Reduced:
Liberalisation policies in the country lessens political risks to investors. The government can attract more foreign investment through liberalisation of economic policies. These are the areas that support and foster a readiness to do business in the country such as a strong legal foundation to settle disputes, fair and enforceable laws.
4) Diversification for Investors:
In a liberalised economy, Investors gets benefit by being able to invest a portion of their portfolio into a diversifying asset class.
5) Impact on Agriculture:
In the area of agriculture, the cropping patterns has undergone a huge modification, but the impact of liberalisation cannot be properly measured. It is observed that there are still all-pervasive government controls and interventions starting from production to distribution for the produce