Q.Discuss the background and the main features of the economic reforms of 1991 in India.

A shorter version of this question asks only for the LPG components without the balance-of-payments background.

Background: By 1991, India faced a severe balance of payments crisis — foreign exchange reserves had fallen to a critically low level, barely sufficient for a few weeks of essential imports, fiscal deficits were persistently high, and inflation was rising. The country was compelled to pledge part of its gold reserves and seek emergency assistance from the International Monetary Fund. This crisis exposed the structural weaknesses of the earlier, tightly regulated 'license-permit-quota' regime, under which industrial licensing, high import tariffs, and extensive public-sector dominance had limited efficiency, competition, and export competitiveness over the preceding decades.

Main features (the LPG reforms): In response, the government launched a New Economic Policy in 1991, built on three pillars:

• Liberalisation: Industrial licensing was abolished for most industries under the New Industrial Policy of 1991; the list of industries reserved for the public sector was sharply reduced; import tariffs were lowered and simplified; and controls on interest rates and foreign exchange transactions were progressively eased, giving market forces and private enterprise a much larger role in resource allocation.

• Privatisation: The government reduced its direct role in production, primarily through disinvestment — selling a portion of its equity holdings in public sector undertakings to private investors and the public — aimed at improving PSU efficiency and profitability, reducing the fiscal burden of loss-making units, and mobilising resources, generally without transferring full ownership.

• Globalisation: India progressively dismantled quantitative restrictions on imports and exports, actively encouraged Foreign Direct Investment and Foreign Institutional Investment across an expanding range of sectors, moved toward rupee convertibility on the current account, and became a founding member of the World Trade Organisation in 1995, committing to further trade liberalisation. …

Students often omit the balance-of-payments crisis background and jump straight to listing LPG, losing marks for context; examiners also penalise describing priv …