New Industrial Policy, 1991 and Liberalisation-Privatisation-Globalisation (LPG)

By 1991, the licence-permit regime built up since 1956 had produced serious inefficiencies — slow growth, low competitiveness, chronic sickness in many public sector units, and a severe balance-of-payments crisis that brought India close to default. In response, the Government of India announced the New Industrial Policy, 1991, which marked a decisive shift from state control toward market-oriented reform. The reform package is commonly summarised under three headings, together known as LPG.

Liberalisation freed industry from the older regulatory straitjacket. Industrial licensing was abolished for all except a short list of industries on security, strategic, or environmental grounds; restrictions under the Monopolies and Restrictive Trade Practices (MRTP) Act on the expansion of large business houses were substantially relaxed; and location restrictions on setting up new industrial units were eased outside a few notified metropolitan areas.

Privatisation reduced the exclusive role of the public sector. The number of industries reserved solely for the public sector under Schedule A of the 1956 policy was cut down to a handful of strategic areas (atomic energy, some parts of railways, and specified defence items); loss-making and non-strategic public sector undertakings were opened to disinvestment — the sale of a part of government equity to private and institutional investors — to raise resources and improve managerial efficiency; and private participation was invited into sectors, such as insurance, telecommunications, and civil aviation, that had earlier been closed to it.

Globalisation integrated the Indian economy more closely with the rest of the world. Foreign Direct Investment (FDI) was permitted, and in many industries automatically approved, up to specified equity ceilings; foreign technology agreements were made easier to conclude; tariffs were gradually reduced; and the rupee was made convertible on the current account, encouraging exports and attracting foreign capital. …