What are the LPG Reforms?

The LPG Reforms refer to the Liberalisation, Privatisation, and Globalisation policies introduced in India through the New Economic Policy (NEP) on 24 July 1991. The reforms were launched by Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh in response to a severe balance-of-payments crisis that had left India with foreign exchange reserves sufficient for barely two weeks of imports.

The crisis was marked by a fiscal deficit of 8.5% of GDP, critically low forex reserves, and the government pledging 67 tonnes of gold as collateral for emergency IMF loans. The three pillars of reform were: Liberalisation (dismantling the License Raj, easing industrial licensing), Privatisation (disinvestment of public sector enterprises, encouraging private participation), and Globalisation (reducing trade barriers, welcoming foreign investment).

Key measures included devaluing the rupee by 18%, reducing import tariffs from 125% to 30%, raising the FDI equity limit from 40% to 100%, eliminating industrial licensing (except for 18 industries, later reduced to 6), and freeing banks to set their own interest rates. Post-reform, India's GDP growth averaged 6.5% annually (1991-2010), peaking at 8.5% during 2003-2008, and FDI inflows grew from USD 133 million (1991-92) to over USD 81 billion (2022-23).

Key Features

# Feature Details
1 Date New Economic Policy announced 24 July 1991
2 Architects PM P.V. Narasimha Rao and FM Dr. Manmohan Singh
3 Trigger Balance-of-payments crisis; forex reserves for only 2 weeks of imports
4 Liberalisation Dismantled License Raj; eased industrial licensing restrictions
5 Privatisation Disinvestment of PSUs; private sector opened to previously reserved sectors
6 Globalisation Import tariffs slashed from 125% to 30%; FDI limits raised
7 Rupee Devaluation Devalued by 18% to boost exports
8 Gold Pledge 67 tonnes of gold pledged for IMF emergency loans
9 Growth Impact GDP growth averaged 6.5% (1991-2010); peaked at 8.5% (2003-08)
10 FDI Growth From USD 133 million (1991-92) to USD 81 billion (2022-23)

UPSC Exam Corner

Prelims: Key Facts

  • NEP date: 24 July 1991
  • PM: P.V. Narasimha Rao; FM: Dr. Manmohan Singh
  • Crisis: forex reserves for only 2 weeks of imports
  • Gold pledged: 67 tonnes
  • Three pillars: Liberalisation, Privatisation, Globalisation
  • Import tariffs cut from: 125% to 30%
  • FDI equity limit raised from: 40% to 100%

Mains: Probable Themes

  1. Analyse the causes of the 1991 balance-of-payments crisis and the policy response
  2. "The LPG reforms transformed India from a closed economy to a globally integrated one." -- Discuss
  3. Examine the social consequences of liberalization, including rising inequality and jobless growth
  4. Compare India's pre-1991 economic model with the post-reform framework

Sources: Economic Liberalisation in India (Wikipedia) | New Economic Policy 1991 (Vajiram & Ravi) | LPG Reforms (Drishti IAS) | LPG Reforms Impact (RJISS)