Globalization And Its Discontents: Analysing LPG Reforms

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Manmohan Singh was the Finance Minister during LPG reforms. Photo: Hindustan Times

Introduction: The LPG (Liberalization, Privatization, Globalization) reforms were a set of measures introduced in 1991 as a response against severe economic distress affecting Indian economy characterized by balance of payments  (BoP) crisis, low GDP growth, high inflation and widening fiscal deficit.

Background of LPG Reforms:

  • Economic Crisis:
  1. Foreign currency reserves declined to $1.2 billion, just enough to manage 3 weeks of import cover.
  2. Fiscal deficit widened to 8.4% of GDP, indicating government expenditure exceeding income.
  3. BoP crisis thanks to Gulf War that resulted in a surge in oil prices and drop in remittances.
  4. Rising prices of essentials as inflation reached 13.7% (double digit growth for two consecutive years).
  • Political Factor: Instability at the Union level due to coalition politics. This was the advent of  Coalition Era in Indian politics which did not create a conducive environment for long-term policymaking.
  • Governance Factors: Pre-1991, India followd a socialist model of economic growth leading to:
  1. Excessive government control over industries.
  2. License Raj disrupting the growth of industrial sector.
  3. Protectionism (high tariffs and import restrictions) hindering full integration with global economy.
Components of LPG Reforms:
  • Liberalization:
  1. Industry: Abolition of License Raj and dilution of  MRTP Act encouraged private investment.
  2. Trade: Reduction in tariffs (customs duty: 300% in 1991 to 10% in 2007) and market-determined exchange rate promoted trade e.g trade-to-GDP ratio increased to 48% (2023) from 15% (1991).
  3. Reforms in banking sector (deregulation of interest rates) and SEBI Act 1992 boosted credit flow and enabled stock market modernization.
  • Privatization:
  1. Disinvestment of key Public Sector Undertakings (PSUs) (e.g BPCL, VSNL and BALCO) introduced better management practices.
  2. Navratna status was granted to nine high-performing PSUs enhancing their autonomy.
  3. Private players were allowed in key sectors like telecom, aviation etc.
  • Globalization:
  1. Liberalization of FDI such as automatic approval up to 51% FDI in 34 priority sectors.
  2. Full convertibility was introduced for current account in 1994 for efficient management of exchange rates.
  3. Foreign Exchange Regulation Act (FERA) 1973 was replaced with Foreign Exchange Management Act (FEMA) 1999 to simplify foreign exchange flow.
Impacts of LPG Reform:
  • Positive Impacts:
  1. GDP increased from 3.5% (1991) to 7-8% (2000s).
  2. Forex Reserves - $1.2B (1991) to $642B (2024).
  3. Software Exports -  $150M (1990) to $200B (2024).
  4. Poverty Reduction - 45% (1993) to 22% (2023).
  5. Entrepreneurship Boom - Sunil Mittal's Airtel, Narayana Murthi's Infosys.
  6. Automobile Sector - India became 4th largest auto market internationally (entry of Suzuki, Hyundai).
  7. FDI Inflows: $1.4B (1948-91) to $967B (1991-2024).
  8. WTO Membership (1995): Access to global markets, diversification of export basket.
  9. Banking Reforms (Narashimham Committee): Increased lending activity to productive sectors.
  10. Shift in government's role from 'regulator' to 'facilitator'.
  • Negative Impacts:
  1. Removal of subsidies and import restrictions exposed Indian farmers to international competiton and price volatility.
  2. Preference for cash crops (BT Cotton) raised input costs and indebtness, leading to farmer suicides.
  3. Privatization and strategic stake sale of PSUs resulted in massive layoffs in sectors like textile mills, coal sector etc.
  4. De-reservation of items for small scale industries such as toys and garments led to their rapid decline.
  5. Concentration of growth in urban areas exacerbated urban-rural divide.
  6. Aggravated inequality e.g top 1% Indians hold 58% of wealth as of 2021 (Oxfam), encouraging crony capitalism.
  7. Jobless growth as formal employment stagnated in sharp contrast to increasing GDP growth.
  8. Informalisation of Indian economy as 90% of Indian workforce is in informal sector today (NSSO - 76.7% of non-agricultural workers by 2018).
  9. Declining welfare spending e.g public health spending fell to 1.2% of GDP by 2000.
  10. Integration with global markets exposed India to external shocks e.g 2008 financial crisis, 2013 taper tantrum.
Way Forward:
  • Industrial & Agricultural Reforms:
  1. Strategic mplementation of Production Linked Incentive (PLI) Scheme to create champion sectors and target raising manufacturing share in GDP.
  2. Support Farmer Producer Organizations (FPOs), increase public spending on R&D for climate resilient crops.
  3. Expand the network of Kisan Rail and cold chain for better storage of perishables and to deal with emergency situations.
  • Employment & Inclusive Growth: 
  1. Ensure strict enforcement of Labour Codes, expand the coverage of e-Shram Portal to provide social security to gig workers.
  2. Enhance skill development frameworks to meet future demands in secors like AI, renewable energy through National Skill Qualification Framework (NSQF).
  3. Seamless credit access to MSMEs through CGTMSE (Credit Guarantee Trust Fund).
  • Sustainable Development:
  1. Promote renewable energy through national and international partnerships e.g International Solar Alliance (ISA).
  2. Enforce Business Responsibility Framework (BRSR) for Environment, Social & Governance (ESG) metric.
  • Social Security:
  1. Raise pubic spending on health and education to 3% and 6% of GDP respectively.
  2. Introduce paid maternity leave in all sectors e.g Maternity Benefit (Amendment) Act 2017 provides 26 weeks of paid leave for first two children and 12 weeks for subsequent children.
  • Governance Reforms:
  1. Replicate Singapore's Temasek Model for governance reforms in PSUs i.e professional boards, performance-linked pay.
  2. Implement 15th Finance Commission (FC) recommendations to mitigate inter-state inequality.
  • Self-reliance/Atmanirbhar Bharat:
  1. Reduce export dependence for critical sectors including semiconductors, Active Pharmaceutical Ingredients (APIs) etc.
  2. Secure supply chain for critical minerals e.g initiatives by Khanij Bidesh India Ltd.
Conclusion: LPG reforms, though necessitated by India's economic woes in 1991, prioritized growth over equity. Future reforms must be based on an inclusive formula anchored in social justice. 

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