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The importance of LPG Reforms of 1991and its underlying controversy

November 01, 2021
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This article has been written by Adithya Prasad pursuing the Diploma in International Business Law from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho) and Zigishu Singh (Associate, Lawsikho). 

Introduction

“Decisions shape the tree, which is history. With each root having had the possibility to go a certain way that would never benefit its own future. Therefore, every decision taken must be examined a thousand times over but never regretted once it has been taken.” A perfect example of the above quote is India’s LPG policy which shifted India from a near-isolated state to a global economic powerhouse. LPG – liberalization, privatization and globalization was the much-needed approach by the  Indian government to counter a failure, which was the public sector. So, what made the LPG so important? Does the decision still live up to what was promised or is it time for a newer policy for our future?

This article will seek to discuss and answer the following:

The great fall

India, over the last century, has evolved beyond  comparison. With 75 years of independence, India went from a country that had absolutely nothing to becoming one of the biggest powerhouses in the world. However, as much as this potential is captured in our history textbooks, there is a lot that is never taught.

As the years went by, the focus on the public sector grew rapidly past the initial few 5 years plans. The idea was, if India could create an environment where the public sector could do everything and have them all under a certain objective, national growth would be ensured. Despite the initial success, the plan soon began to crumble. Workers in the Indian public sector enjoyed many benefits with a near concrete security against any form of layoff or ability to be fired. The literal idea for society was to create a perfect government employee who had a stable income, could enjoy the benefits of the public sector, and live a secure life. This outlook failed to encourage industries to improve. While some did still operate but with a passion to expand and increase their profit margins, the lack of a competitive environment halted the progress of the Indian economy. 

The Government at the time needed to consider that the lack of productivity was impacting India’s global standing on technological development and trade possibilities. This showed through the numbers, the fiscal deficit in the year of 1990 and 1991 was 8.4% of the GDP. The rapid inflation bounced by 10 percent from 6.7% to 16.7% due to the increased money supply. The Iraq war which led to increased gasoline prices and the rise in total government expenditure to 36.4% cemented what could have been the worst case in India’s economic history. India knew it was in trouble, deep trouble!

LPG: a changed perspective was our saviour?

LPG which stands for Liberalization, Privatization and Globalization is a form of an economic liberalization policy, adopted by then Finance Minister of India, Manmohan Singh and other members of the government, which gave the Indian economy the upgrade that it needed desperately. The concept solely focused on the opening of the Indian economy to the outside world. The Indian economy up until then was solely focused on a more isolationist approach and operation of its economy. The possibility of investing within the Indian subcontinent was near impossible considering the required permits and costs required to establish any foreign influence. Some companies, like Reliance and Tata did take advantage of this isolation to create for themselves a solid foundation that still stands stronger than ever. However, the current standing and influence of both the companies came after the LPG reforms of 1991. So, in summary, the LPG policy covered:

  1. Abolition of Industrial licensing/ Permit Raj.
  2. Public sector roles opened.
  3.  Beginning of privatisation.
  4. Free entry to foreign investment and technology.
  5.  Industrial location policy liberalized.
  6.  Abolition of phased manufacturing programmes for new projects.
  7. Removal of mandatory convertibility cause.
  8. Reduction in import tariffs.
  9. Deregulation of the market.
  10.  Reduction of taxes.

 The robust list of changes was  at first predicted to impact the security of the government workers and employees. This however quickly died down as the benefits of globalization revealed itself through the Indian subcontinent. From 1991 where the Indian growth rate or the GDP was at 1.1%, a far dismal number than what it was in 2015 – 2016, 7.5%. It appears small on paper but considering the population rise and the growth of industry, the ground reality resulted in the development of most of the things that we hold dear to our daily life.

Apart from the increase in GDP, employment, standard of living, education and other aspects of welfare also saw a significant boost. Exports continued to increase up until the recent 2019 readings which indicated near 26-billion-dollar exports from India in  that year. In the year of 1992, the equity markets after being made accessible for overseas corporate investors saw Foreign Direct Investment numbers rise to nearly 5 billion dollars by the year of 1995 from was 132 million dollars just 4 years prior. 

What the LPG policy showed is the enormous potential and interest that the world had towards the Indian economy. These interests began paying for itself eventually, with all the benefits that most developed nations enjoyed at the time. This included better health care, better technology, and a more focused nation towards development through private companies which delivered the results that the public sectors could not. This development was on a pan-India scale; however, this upgrade was not without its shortcomings.

The great shift 

There was a great shift in mentality across the Indian societal structure, where people now viewed welfare through a unique perspective. This new model focused more on career migration, educational focus for the youth and so on. These changes seemed small at first but over the course of nearly 30 years has seen major shifts and a complete overhaul of what India was and what India is right now.

  1. The Job-cultural impact: India for most of her history has had limited understanding of  the concept of working and a career. The idea was simple: study hard and get into any area of the public sector which covered anything from railways to atomic energy. This diversity saw people opting for mostly public sector career paths available at the time. The incursion of the FDI and privatization changed that, the mental understanding of the society now changed to achieving  a corporate job at any Multinational Corporation (MNC).

With this, the education system focused more towards serving international needs and declined in all other aspects. Students were less aware of home-sciences, paid less attention to the humanities subjects and the focus was all towards crafting the perfect employee for every MNC. One can say that this was out of pure desperation, that the economy had been through such a rough patch, such methods of recuperation was the only way that remained to regain what was lost.

Agriculture now contributes only about 15% to GDP. The international norms imposed by WTO and other multilateral organizations have reduced government support to agriculture. Greater integration of global commodities markets leads to constant fluctuation in prices. To put into perspective, this sector at a point held nearly half  the Indian economy on its shoulders employing nearly 70% of the Indian population.

  1. The educational impact: The opportunity of working for an MNC has triggered an education perspective shift. Educational Institutions now, whether run by MNCs or other high profile personnel, often pride  themselves on crafting the perfect student for the perfect employer. This as an issue has been highlighted through the years by many as a  great deficiency in the India education system. This includes important exposure to life skills, independence over oneself and a need to ace a test over learning the subject itself. This is but a general statement, one that holds merit on a case-to-case basis, but numbers turn to support this statement. Nearly 70 to 80% of students do not possess key life skills or claim that they do not get enough exposure in their schools to prepare them for the world outside .

When they speak about CRT or a cathode ray tube, a very outdated design that does not require an in-depth study is still looked at as a theoretical concept. This cannot be  the fault of FDI incursion but what was an unwanted by-product of the same due to opening of high-profile jobs which created a fixed study pattern to attain that job and not learn the concept itself.

  1. The sociological impact: Often cited by many as the degradation of Indian culture, the LPG has had a major impact on the Indian sociological environment. What was a conservative, authoritarian and preconceived society where a decision was made to satisfy desperate needs to a metamorphic state and now where people are working towards a more liberal understanding and approach to career and life itself?

Another major impact that is often cited, is the ability to question. This has been seen as a boon in recent decades, where younger generations due to the LPG policy, have been introduced to the world much earlier than what was before the policy change itself. This has brought younger generations to the table on conversations often reserved for the old, aged cabinet and government. This coupled with the ability and opportunities for most to work, the notion of following a family or joint family decision was out of the question. A frowned look by many of the time, claiming that this policy change in all its tiny repercussions has shifted India from what it was, a fragile state held together under the promise of prosperity to what is, a thriving diverse country where people can speak and work the way they want. 

Conclusion

It is safe to say that LPG came in at the right time as a redeeming feature for the Indian economy. It gave most citizens a second chance and many young citizens the right boost to their careers. Despite the small prices paid, not directly caused by the policy itself but from our interpretation of LPG in India, does not entirely justify an evil that was caused . The repercussions are purely what we have crafted and are for us to solve. Outside this, LPG was the right tactic that catapulted the Indian economy into what is now, more than a trillion-dollar economy. 

References

  1. https://www.magadhuniversity.ac.in/download/econtent/pdf/LPG%20Policy%20of%20India%20and%20its%20Effects.pdf
  2. https://www.drishtiias.com/daily-updates/daily-news-analysis/30-years-of-economic-liberalisation
  3. https://www.thehindu.com/opinion/op-ed/indias-1991-liberalisation-leap-and-lessons-for-today-montek-singh-ahluwalia/article35066035.ece.

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