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23 Oct

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


Beginning of privatisation

Opportunities for overseas trade

Steps to regulate inflation

Tax reforms

Abolition of License -Permit Raj


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


 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

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