From Planning to Reforms: The 1991 Shift and NITI Aayog

For roughly four decades after Independence, the Indian economy operated under a heavily regulated framework, often described as a 'licence-permit-quota' system, in which the government exercised extensive control over industrial investment, production, trade and foreign exchange through the planning process. While this approach did help build a domestic industrial base and infrastructure that did not exist at Independence, it also came to be associated, over time, with inefficiencies, slow growth in some sectors, and limited exposure of Indian industry to international competition.

Matters came to a head around 1991, when India faced a serious balance-of-payments crisis — a situation in which the country's foreign exchange reserves fell to a critically low level, threatening its ability to pay for essential imports. In response, the government introduced a major package of economic reforms, generally summarised under three headings:

• Liberalisation — reducing government controls and regulations on industry and trade (for example, easing licensing requirements for setting up or expanding businesses).
• Privatisation — reducing the role of the public sector in areas where private enterprise could operate, and opening more sectors to private and, in some cases, foreign investment.
• Globalisation — integrating the Indian economy more closely with the world economy, through steps such as lowering trade barriers and encouraging foreign investment and trade.

This set of reforms is commonly referred to by the shorthand LPG (Liberalisation, Privatisation, Globalisation). The 1991 reforms marked a genuine turning point: they moved India away from a heavily regulated, largely inward-looking mixed economy and toward a more market-oriented economy that was more open to trade and investment, even as the government continued to play an important role in areas such as social welfare, infrastructure and regulation. …