Liberalisation, Privatisation and Globalisation: An Appraisal
By the late 1980s, India faced a severe economic crisis. Foreign exchange reserves had fallen dangerously low (enough for only about 2 weeks of imports by 1991), fiscal deficit was high, and inflation was rising. In 1991, the government initiated major economic reforms under Prime Minister Narasimha Rao and Finance Minister Manmohan Singh. These reforms are known as LPG — Liberalisation, Privatisation, and Globalisation.
Liberalisation
Liberalisation means removing government controls and regulations on economic activities.
- Key liberalisation measures:
- Abolition of industrial licensing for most industries (de-licensing).
- Reduction of import duties and removal of quantitative restrictions.
- Deregulation of financial markets.
- Freedom to set prices, production quantities, and investment levels.
Privatisation
Privatisation means transferring ownership or management of public sector enterprises to the private sector.
- Forms of privatisation in India:
- Disinvestment: Government selling part of its shareholding in PSUs to the public or private investors.
- Strategic sale: Transferring majority ownership and management control to a private buyer.
- Contracting out: Allowing private firms to provide services previously provided by government (e.g., toll roads, airports).
- Globalisation
- Globalisation means integrating the domestic economy with the world economy. It involves:
- Reduction of trade barriers (import duties, quotas).
- Free flow of capital across borders.
- Free flow of technology and ideas.
- Increased movement of people for work.
Industrial de-licensing
Before 1991, starting a cement factory required a government licence specifying how much cement you could produce. After de-licensing, any firm with capital could set up a cement plant. This increased competition, cut prices, and raised cement production dramatically.
Disinvestment — a numerical example
The government owned 100% of a steel company worth Rs. 1000 crore. It sells 30% to private investors for Rs. 300 crore. The government retains 70% but the company now has private shareholders who demand efficiency. The Rs. 300 crore can fund government expenditure on schools and hospitals.
Reduction of import duties
In 1991, India had average import tariffs of over 100%. After reforms, these were progressively reduced to around 10-15% for most goods. For example, the tariff on imported electronics fell, making them cheaper for Indian consumers and forcing domestic manufacturers to become more competitive.
Foreign Direct Investment (FDI)
Before 1991, foreign companies could own a maximum of 40% in most Indian ventures. After reforms, sectors like telecom, retail, and insurance opened up to higher FDI. Companies like Suzuki and Samsung increased investments in India, bringing technology and employment.
Globalisation through software exports
India's IT industry grew rapidly after 1991 as Indian firms could freely export services to the US and Europe. Companies like Infosys and TCS grew from small firms to global giants — enabled by removing restrictions on currency convertibility for current account transactions (1994).
Privatisation of airports
The Delhi and Mumbai airports were handed over to private operators (Delhi International Airport Ltd., operated by GMR Group). Investment in infrastructure improved passenger experience and increased capacity — an example of contracting out a government service.
Criticism — inequality post-LPG
While GDP growth accelerated to 6-8% after 1991, benefits were concentrated. The IT sector created high-paying jobs, but millions in agriculture and informal manufacturing saw fewer gains. Income inequality (measured by the Gini coefficient) widened, raising equity concerns.
Common mistakes
- Privatisation does not necessarily mean the government sells 100% — disinvestment can mean selling only a small stake.
- Liberalisation is not the same as abandoning all government regulation; regulatory bodies like SEBI, TRAI, and RBI still regulate their sectors.
- Globalisation is broader than just trade — it includes capital, technology, and people flows.
Summary
The 1991 reforms transformed India from a controlled economy to a more market-oriented one. Liberalisation removed barriers; privatisation reduced the dominance of public enterprises; globalisation opened India to world trade and investment. Growth accelerated and India became a global player in services. However, critics point to growing inequality, neglect of agriculture, jobless growth, and vulnerability to global financial shocks as negative consequences of LPG.