Economic Reforms of 1991: Liberalisation, Privatisation and Globalisation

By 1991, India faced a severe balance of payments crisis: foreign exchange reserves had fallen to a level barely sufficient to cover a few weeks of essential imports, fiscal deficits were high, inflation was rising, and the country was forced to pledge gold reserves to secure emergency loans and approach the International Monetary Fund (IMF) for support. This crisis exposed the limits of the earlier, heavily regulated "license-permit-quota" system, under which industrial licensing, import controls, and public-sector dominance had constrained efficiency and competitiveness.

In response, the government of the day introduced a New Economic Policy in 1991, built around three interlinked strands commonly remembered by the acronym LPG:

Liberalisation refers to reducing government regulations and restrictions on economic activity to give markets a greater role. Key measures included abolishing industrial licensing for most industries (delicensing under the New Industrial Policy, 1991), reducing the number of industries reserved exclusively for the public sector, simplifying and lowering import tariffs, and easing controls on foreign exchange and interest rates. The aim was to let private enterprise respond more freely to market signals.

Privatisation refers to reducing the role of government ownership and management in production, and increasing the role of the private sector. In India this took the form mainly of disinvestment — the government selling a part of its equity holding in public sector undertakings (PSUs) to private investors or the public — rather than outright sale of entire enterprises. The objectives were to improve the efficiency and profitability of PSUs, reduce the fiscal burden of loss-making units, and raise resources for the government.

Globalisation refers to integrating the domestic economy with the world economy through freer flows of trade, investment, capital, and technology. India progressively removed quantitative restrictions on imports and exports, encouraged Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) in an increasing number of sectors, made the rupee more convertible on the current account, and became a founding member of the World Trade Organisation (WTO) in 1995, committing to further trade liberalisation over time. …