Commerce After Independence: Planned Economy to Liberalisation

After Independence in 1947, India adopted a mixed economy in which the government took on a leading role in shaping industrial and trade policy through a series of Five-Year Plans. The dominant strategy for roughly the first four decades was import substitution — deliberately building domestic industries to manufacture goods that India would otherwise have had to import, protected by high tariffs, strict import licensing, and, for much of this period, an extensive system of industrial licensing (popularly called the 'License Raj') that required government permission for setting up or expanding most large businesses. The stated goals were self-reliance and protecting India's young industries from foreign competition while they grew.

By the late 1980s, this heavily controlled, inward-looking approach had produced slow industrial growth, widespread inefficiency in protected industries that faced little competitive pressure, and mounting fiscal problems. These pressures came to a head in 1991, when India faced a severe balance-of-payments crisis — its foreign exchange reserves fell to a level barely sufficient to cover a few weeks of essential imports.

In response, the Government of India introduced the New Economic Policy of 1991, built around three connected reforms commonly referred to together as LPG: Liberalisation (removing many of the licensing controls and easing restrictions on private business), Privatisation (reducing the exclusive role of the public sector in many industries), and Globalisation (integrating the Indian economy more closely with the world economy by lowering trade barriers and welcoming foreign investment). The rupee was devalued, import tariffs were substantially reduced, and industrial licensing was abolished for all but a small list of industries. …