Liberalisation, Privatisation and Globalisation (LPG Reforms 1991) — Practice

Question 1

What were the immediate causes of India's 1991 balance of payments crisis? What drastic action did India take?

Accepted Answer

Immediate causes of 1991 crisis: 1. Gulf War (1990–91): Iraq's invasion of Kuwait caused global oil prices to spike. India's oil import bill increased sharply. 2. Remittances from Gulf fell: Indian workers in Kuwait and Iraq returned home, cutting off remittances. 3. Foreign exchange reserves collapsed: Fell to ~$1 billion — barely 2 weeks of import cover. India was on the verge of defaulting on its international debt payments. Drastic action taken: India physically AIRLIFTED 47 tonnes of gold to the Bank of England and 20 tonnes to the Bank of Japan as collateral to secure an emergency loan. This was a national humiliation that forced the government to implement structural reforms.

Question 2

Explain the three pillars of the New Economic Policy (NEP) 1991 with two measures under each: Liberalisation, Privatisation, and Globalisation.

Accepted Answer

1. Liberalisation (freeing the economy from state controls): (a) Industrial licensing abolished for all industries except a short list — private firms no longer needed government permission to start, expand, or diversify business. End of Licence Raj. (b) Financial sector reforms — banks given autonomy; interest rates decontrolled; private and foreign banks allowed. 2. Privatisation (reducing the state's role in production): (a) Disinvestment — government sold part of its equity stake in PSUs (Air India, ONGC, NTPC, etc.) to raise funds and improve efficiency. (b) Navratna status — profitable PSUs like ONGC, BHEL given operational autonomy to compete commercially; loss-making PSUs referred to BIFR for restructuring. 3. Globalisation (integrating with the world economy): (a) Rupee devalued (June 1991) to make Indian exports cheaper and boost foreign exchange earnings. (b) Foreign Direct Investment (FDI) allowed in most sectors — foreign companies could set up factories, bring capital and technology; FII (Foreign Institutional Investors) allowed to invest in stock markets.

Question 3

Evaluate the outcomes of the 1991 LPG reforms for India. What did India gain? What were the costs? Is the reform consensus now universal?

Accepted Answer

Positive outcomes of 1991 reforms: 1. GDP acceleration: Growth increased from ~3.5% (pre-1991) to 6–8% post-reforms. India became one of the fastest-growing major economies. 2. IT/ITeS boom: Liberalisation created space for India's information technology sector. Companies like Infosys, Wipro, TCS emerged as global players. India became the 'back office of the world.' 3. FDI and FII: Foreign investment poured in. India integrated with global capital markets. Forex reserves grew from $1 billion (1991) to $650+ billion (2026). 4. Consumer choice: Imports liberalised — cars, electronics, FMCG products diversified dramatically. Indian consumers gained access to global brands. 5. Indian MNCs: Indian companies went global — Tata acquired Jaguar Land Rover and Corus Steel; Mittal became the world's largest steelmaker. Negative outcomes / Criticisms: 1. Agriculture neglected: Reforms concentrated on industry and services. Agricultural investment and support declined. Farm distress worsened. 2. Rising inequality: The top 1% captured a disproportionate share of post-reform growth. Gini coefficient rose. 3. Jobless growth: GDP grew but formal employment did not keep pace. Growth was capital-intensive (IT, finance). 90% of workers remain in the informal sector. 4. Small industry pressure: Chinese and other imports devastated small Indian manufacturers in sectors like textiles and electronics. Political consensus: The reforms were started by a Congress government (Rao-Manmohan Singh) and continued by every subsequent government — NDA (Vajpayee), UPA (Manmohan Singh), NDA (Modi). No government has reversed liberalisation. The debate is about pace, safeguards, and who benefits — not about whether to reform.

Practice — Liberalisation, Privatisation and Globalisation (LPG Reforms 1991)

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