Q.What led to the economic reforms of 1991, and what did the policy of Liberalisation, Privatisation and Globalisation (LPG) involve?
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Start your 14-day free trial to unlock the full solution →For roughly four decades after Independence, the Indian economy operated under an extensively regulated system, often called the 'licence-permit-quota' system, in which the government closely controlled industrial investment, production, trade and foreign exchange as part of the planning process. While this system helped build an initial industrial base, it also came to be associated with inefficiency and limited exposure to international competition over time.
The immediate trigger for major reform came in 1991, when India faced a serious balance-of-payments crisis: 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 significant package of economic reforms, generally grouped under three headings, commonly abbreviated as LPG.
Liberalisation involved reducing government controls and regulations on industry and trade — for example, easing the licensing requirements that had previously restricted how and where businesses could set up or expand. Privatisation involved reducing the public sector's role in areas where private enterprise could function effectively, and opening more sectors to private investment, including foreign investment. Globalisation involved integrating the Indian economy more closely with the world economy, through measures such as lowering trade barriers and encouraging greater foreign trade and investment flows. …
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