India and LPG

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 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. 

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.

Privatisation and Globalisation
Privatisation refers to the participation of private entities in businesses and services and transfer of ownership from the public sector (or government) to the private sector as well. Globalisation stands for the consolidation of the various economies of the world.

LPG and the Economic Reform Policy of India
Following its freedom on August 15, 1947, the Republic of India stuck to socialistic economic strategies. In the 1980s, Rajiv Gandhi, the then Prime Minister of India, started a number of economic restructuring measures. In 1991, the country experienced a balance of payments dilemma following the Gulf War and the downfall of the erstwhile Soviet Union. The country had to make a deposit of 47 tons of gold to the Bank of England and 20 tons to the Union Bank of Switzerland. This was necessary under a recovery pact with the IMF or International Monetary Fund. Furthermore, the International Monetary Fund necessitated India to assume a sequence of systematic economic reorganisations. Consequently, the then Prime Minister of the country, P V Narasimha Rao initiated groundbreaking economic reforms. However, the Committee formed by Narasimha Rao did not put into operation a number of reforms which the International Monetary Fund looked for.

Dr Manmohan Singh, the present Prime Minister of India, was then the Finance Minister of the Government of India. He assisted. Narasimha Rao and played a key role in implementing these reform policies. 

Narasimha Rao Committee's Recommendations
The recommendations of the Narasimha Rao Committee were as follows:

• Bringing in the Security Regulations (Modified) and the SEBI Act of 1992 which rendered the legitimate power to the Securities Exchange Board of India to record and control all the mediators in the capital market.


• Doing away with the Controller of Capital matters in 1992 that determined the rates and number of stocks that companies were supposed to issue in the market.


• Launching of the National Stock Exchange in 1994 in the form of a computerised share buying and selling system which acted as a tool to influence the restructuring of the other stock exchanges in the country. By the year 1996, the National Stock Exchange surfaced as the biggest stock exchange in India.


• In 1992, the equity markets of the country were made available for investment through overseas corporate investors. The companies were allowed to raise funds from overseas markets through issuance of GDRs or Global Depository Receipts.


• Promoting FDI (Foreign Direct Investment) by means of raising the highest cap on the contribution of international capital in business ventures or partnerships to 51 per cent from 40 per cent. In high priority industries, 100 per cent international equity was allowed.


• Cutting down duties from a mean level of 85 per cent to 25 per cent, and withdrawing quantitative regulations. The rupee or the official Indian currency was turned into an exchangeable currency on trading account.


• Reorganisation of the methods for sanction of FDI in 35 sectors. The boundaries for international investment and involvement were demarcated.

The outcome of these reorganisations can be estimated by the fact that the overall amount of overseas investment (comprising portfolio investment, FDI, and investment collected from overseas equity capital markets ) rose to $5.3 billion in 1995-1996 in the country) from a microscopic US $132 million in 1991-1992. Narasimha Rao started industrial guideline changes with the production zones. He did away with the License Raj, leaving just 18 sectors which required licensing. Control on industries was moderated. 

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

This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.

The term “Liberalization” stands for “the act of making less strict”. Liberalization in Economy stands for “The process of making policies less constraining of economic activity." And also “Reduction of tariffs and/or removal of non-tariff barriers.”Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with neo-liberalism. The arguments for economic liberalization include greater efficiency and effectiveness that would translate to a "bigger pie" for everybody.

The term “Privatization” refers to “The transfer of ownership of property or businesses from a government to a privately owned entity.”The transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange. When a publicly traded company becomes private, investors can no longer purchase a stake in that company. The process of converting or "selling off" government-owned assets, properties, or production activities to private ownership. After several decades of increasing government control over productive activities, privatization came into vogue in the 1980s, along with business deregulation and an overall movement toward greater use of markets.”Privatization helps establish a "free market", as well as fostering capitalist competition, which its supporters argue will give the public greater choice at a competitive price. Conversely, socialists view privatization negatively, arguing that entrusting private businesses with control of essential services reduces the public's control over them and leads to excessive cost cutting in order to achieve profit and a resulting poor quality service.”

Impact of liberalisation on different sectors

The size of the economy can often give the first impression of the might of a country. GDP gives the total worth of the goods and services produced in a country in one particular year. India’s GDP stood at Rs 5,86,212 crore in 1991. About 25 years later, it stands at Rs 1,35,76,086 crore, up 2216 percent. In dollar terms, India’s GDP crossed the $2 trillion mark in 2015-16. Currently, the country is ranked ninth in the world in terms of nominal GDP. India is tipped to be the second largest economy in the world by 2050.

Before 1991, foreign investment was negligible. The first year of reform saw a total foreign investment of only $74 million. However, investments have steadily risen since then, except for occasional blips between 1997 and 2000 and 2008 and 2012 – owing to the global economic slowdown. As of 31 March 2016, the country has received total FDI of $371 billion, since 1991. The year 2008 recorded the highest FDI inflow of $43.40 billion. The biggest spurt in inflow was between 2005 and 2006 – 175.54%. As of March 2016, India has attracted $10.55 billion worth of FDI. In 2015, India received $63 billion (nearly Rs 4.19 lakh crore) and replaced China as the top FDI destination, according to The Financial Times.

Per capita income is the average income of every citizen arrived at by dividing the GDP by the country’s population. Though purely a statistical exercise which may not necessarily show the true picture of a country’s development, nevertheless the data makes for an interesting read. Between 1991 and 2016, per capita income rose from Rs 6,270 to Rs 93,293. This is a whopping 1388 percent jump. However, there’s nothing to be euphoric about the number. As ex RBI governor Raghuram Rajan says, with this number we are nowhere near ending poverty. “...We are still a $1,500 per capita economy. All the way from $1,500 per capita to $50,000, which is where Singapore is, there is a lot of things to do. We are still a relatively poor economy and to wipe the tear from every eye, one would at least want to be middle-income around $6,000-7,000 which, if reasonably distributed, will have dealt with extreme poverty. And that is two decades worth of work to be even moderately satisfied,” he said in a recent interview to The Times of India.

The post-reform period shows the gradual decline in the agriculture sector’s contribution to the Indian economy. India’s traditional occupation, agriculture now contributes only about 15% to the GDP, down from 29 percent in 1991. The services sector has taken the lead role in propelling the economy at the global stage. The IT sector has been the torchbearer of the service sector in India. Currently, it contributes around 53 percent to the national economy. In the meanwhile, the industrial sector has undergone marginal growth in the last 25 years.

The automotive and pharmaceutical sectors have become the shining template of our global connect. The most significant change, growth wise, has been the share of exports in our gross domestic product which has increased from 13% (1990) to 25%. The overall savings has also gone up from around 24% of GDP to 31%, there by bolstering private investment.

There are two main premises on which our economic reform mosaic was predicated. The first is that it would unfetter the economy and spur economic growth and development. The second was that growth would create wealth and jobs through a trickle-down effect and erase poverty, hunger and want. On the growth front, the neo-liberal reforms have increased our annual growth from less than 5% in 1990 to an average of 7% during 2000-2015. However, the growth process has been asymmetric between different sectors of the economy.

The real wage in agricultural sector (which accounts for 70% of the population) has fallen from 2% to virtually zero percentage in the post liberalisation period. Further, based on a poverty line of 2$ a day, more than 80% of the rural sector continues to remain impoverished. The SECC Report (2011) has brought out how nearly 75% of India’s 895 million rural population earns less than `5000. The human development story is even more disquieting, as 42.7% of our children remain undernourished and as per the Human Development Report (2015), the infant mortality rate is at 4.4% as against 0.1% for the developed economies.