LPG REFORMS

LPG REFORMS

India initially embraced a mixed economy. The Liberalization, Privatization and Globalization (LPG) reforms were introduced in India in the early 1990s to deal with economic and financial crisis.

India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis.

Causes of the Balance-of-Payment Crisis?

• Weak Fiscal Position: In 1990 and 1991, the fiscal deficit was about around 8.4% of GDP.
  
  
  
• Oil prices: The gulf war in 1990 and 1991 due to the Iraqi invasion of Kuwait spiked up oil prices.
  
  
  
• Huge rise in inflation: 6.7% to 16.7 due the fast increases of money supply into circulation
  
  
  
• Growing Government Internal Debt: The high fiscal deficit led to a skyrocketing internal debt of the government. It jumped from 35% of GDP in 1985-86 to a staggering figure at the highest amidst all recorded spending levels equal to53% of GDP.
  
  
  
• Depletion of Forex Reserves: India had specific less than $1 billion in forex reserves.
  
  
  
• Capital Flight: The worsening economic condition panicked investors to pull their investments out from India. This has in turn made the crisis worse and caused an economic down.
  
  

Adoption of the New Economic Policy, 1991:

In response to the crisis, the Indian government announced the New Economic Policy in 1991, which served as a foundation for economic reforms known as the LPG reforms (Liberalization, Privatization, Globalization).

• Industrial Policy Liberalisation : In the liberalized economic regime, imports tariffs have been reduced or eliminated.

The license permit raj (restrictive industrial licensing) has come to an end and other various lead measures intended for contributing towards industrial growth and competitiveness.

• Privatization Programmes: Market deregulation, banking sector reform and other steps to facilitate private involvement in regard with increasing the efficiency.
  
  
  
• Globalization: Changes in exchange rates, liberalization of trade and foreign direct investment policies, and removal of mandatory convertibility to stimulate international trade and investment.

LIBERALISATION:

OBJECTIVES OF LIBERALISATION:

• To increase competition between the domestic industries.
  
• To regulate imports and exports that can encourage foreign trade with different countries.
  
• Foreign capital and technology enhancement.
  
• Expanding the global market frontiers of the country.
  
• To get rid of the country of debts.
  

IMPACT:

1) Industrial Sector Deregulation:

Before 1991: Stringent regulations like extensive industrial licensing, limited private sector participation, reservations for small-scale industries and price controls/distribution.

Industrial licensing: abolished in all but 9 industries (alcohol, industrial explosives and chemicals road transport) kept under govt.

Goods Unrestricted From Small Scale Industries

It introduced decontrol of most prices.

2) Financial Sector Reforms:

Regulation of financial sector: The pre-1991 period witnessed an extensive regulation by RBI, which was focusing on regulating (or controlling) commercial banks, investment banks(the development finance institutions), the stock exchanges and even foreign exchange market.

Post-1991 Reforms:

Moved RBI from being a Regulator to Facilitator, leaving the financial sector with decision autonomy.

Introduction of private sector banks (Indian and foreign) with higher caps(around 74%) for FII/FDI

3) Tax Reforms:

Post 1991 Tax Reforms: Mainly Fiscal policy, i.e., altering a government's taxation and public expenditure policies

Repeal of Income and Corporation Taxes;

Individual income taxes and corporation tax rates managed to stay low after 1991.

4) Indirect Tax Reforms:

Initiatives to streamline the indirect taxes on goods.

Planned to create a common trade union with regard of goods.

The GST Act 2016:

Efforts bore fruit in 2016, leading up to the introduction of a comprehensive indirect tax system under the Goods and Services Tax Act 2016.

Applicable from July 2017 Intended to make tax administration smoother and curtail evasion.

5) Foreign Exchange Reforms: Immediate devaluation of the rupee to address the crisis, boosting foreign exchange inflow.

6) Exchange Rate Reforms:

Based on foreign exchange demand and supply, reducing government control over the rupee’s value

7) Free- Trade and Investment Policies:

Targeted at promotion of international competitiveness, fostering foreign investments and technology infusion.

Privatisation:

Privatisation denotes the transition from government ownership or management to private sector control of enterprises.

OBJECTIVES OF PRIVATISATION:

• Improve the government’s financial condition.
  
• Lessen the work pressure on the public sector companies.
  
• Increase the orderliness of the government organizations.
  
• Provision of improved goods and better services to the consumer.
  
• Creation of healthy competition in the society.
  
• Encourage foreign direct investments (FDI).
  

Disinvestment and complete privatization are two arms. Disinvestment can be achieved through the sale of shares on stock exchanges or by directly selling shares to interested buyers.

Where as In complete privatization Govt. sell the whole stake or share to the private parties.

Disinvestment Process in India: In India, the Department of Investment and Public Asset Management (DIPAM), under the Ministry of Finance, oversees the disinvestment process.

Privatization: some positive aspects

• Improved Efficiency: Private companies can be more efficient and likely to react faster to market forces, ultimately providing cost savings with better service delivery.
• Improved Innovation: Private competition drives innovation and technological advancement.
  
• Reduced Government Burden: Privatization helps to reduce the burden of state as no resources funding is required by government that can be used in other development activities.
  
• Increased Variety: There are more options and choices for consumers who have greater availability of private providers.

Arguments Against Privatization:

• Private vs. Public Interest: For-profit businesses, without the pressures of meeting public goals can be led to ignore social welfare and service .

It can lead to job losses as Private companies usually focus on the efficiency and cost-cutting means privatization may avoid them in running business.

• Market Monopolies: Privatization could create monopolistic markets which means lesser competition and can potentially drive up prices.
  
• Absence of Transparency: Private procedures can be less translucent as more secrecy is possible and there are care businesses where improvements may not always serve the public wellbeing but instead benefit personal interests.

GLOBALISATION:

Globalization is an ongoing economic reform which connects the country's economy with that of World.

Globalization is broadly perceived as the integration of a nation’s economy with the global economy, fostering greater interdependence and integration.

Objectives Of Globalisation:

• Reducing Import Duties
  
• Encouraging Foreign Investments
  
• Encouragement To The AgreementIn Foreign Technology.

EFFECT OF REFORMS ON THE INDIAN ECONOMY:

1) Higher growth rates: National income increased to 9.3 per cent during the year 2007-08 from 5 percent in 1990-91

2) Changes in Composition of the National Income: The composition of the sectors in post-reform period had each its turn to be dramatically changed.

While the share of agri has fallen, industrial and service sector have increased.

3) Savings and investment:

The Post-reform period saw a striking rise in savings and investment.

4) Foreign trade:

Export sector has gradually become one of the main forex earner.

For instance, India's total Exports (Merchandise + Services) in 2023 62.58 Billion USD by November of 2023

5) Foreign exchange reserves:

Improvement in Balance of Payments (BoP); post reforms lead to resurgence. As a result, India's foreign exchange reserves grow quickly. In 2022 India's Forex Reserves stand at around $647 billion.

6) Foreign Direct Investment:

India also welcome 100% FDI in sector, other than few like lottery Business, chit funds atomic energy etc. Further, India also permitted foreign institutional investors to invest in the Indian regulated capital market.

7) Rise of Middle Class: The arrival of MNCs and supply-demand dynamics has led to rising of the Middle Class in the India Economy.

Negative effects:

Although the LPG reforms in India did quite some damage control, they had some harmful side-effects which cannot be overlooked.

1. Price Volatility:

The transition to market-determined pricing left consumers vulnerable to volatile prices.

Impact on Small Businesses: Businesses heavily reliant on LPG faced unpredictable costs, which affected their profitability and long-term viability.

2. Market Concentration:

The initial aim to encourage competition was not fully realized, as the market became dominated by a few large players, like Reliance and Essar.

Less Competition: Consolidating regional companies under a single corporate entity resulted in fewer entities controlling the distribution and sale of products to consumers.

However, the dominance of a few players still restricted consumer choice and so their bargaining power.

3. Safety Concerns:

Increased Accidents: A fast expansion of the LPG distribution network and a growing number of traditional outlets increased safety threats resulting in accidents.

Lack of Regulation and Oversight: The initial focus on liberalization led to a less stringent regulatory environment, which in some cases, contributed to accidents and safety hazards.

4. Uneven Development:

Regional Disparities: While LPG reforms benefited certain places, they failed to achieve others owing to inadequate infrastructure support and distribution network connectivity together with the perpetually limited investment.

Exclusion of Marginalized Communities: A few marginalized communities still found it difficult to get LPG in view of the fact that due to economic background, geographical remoteness and unawareness.

5. Environmental Concerns:

Leakage and Emissions : Despite being a cleaner fuel compared to conventional fuels, apprehensions persisted regarding leakage and emissions at the production, transportation and utilisation stages that could affect air quality as well result In climate change.

Dependence on Fossil Fuels: LPG is still a fossil fuel, and an ongoing dependence upon it has potential long-term economic viability as well as sustainability issues.

NEED FOR ECONOMIC REFORMS 2.0:

Indian economy slowed down since the early 2010s, with slowdown only getting worse by COVID-19 pandemic. Simply, the economy needs far more reform to make up for all its patently harmful legislation in order that it can reach $5 trillion GDP by 2025.

Key Reforms to Reach the Target

• Simplify and Streamline the Tax System: As per The World Bank's Ease of Doing Business Report 2022, India has been placed at 115 from a total of 190 countries in ease to paying taxes.
  
  
  
• Boost Manufacturing: Concerted efforts to accelerate the contribution of manufacturing to GDP, which falls far short vis a vis other major economies.
  
  
  
• Boost Foreign Investment: India needs to focus on upcoming reforms and more specifically on building the perception of a good investment viability.
  
  
  
• Promote Entrepreneurship: Inhibitive factors for entrepreneurs to be able startup and expansion of operations should me mitigated.
  
  
  
• Boosting Agriculture Industry: India is agriculturally rich, but it has been barely scratched.
  
  
  
• Allocate Resources for Education and Skills: With a Human Capital Quality rating of 116 out of the total sampled countries on WEF's Human Capital Index (HCindex), India is poised to capitalizing on its human resources dividend in order to leapfrog into competitive processes.
  
  
  
• Boost Exports: To emerge as a competitor in international markets, India needs to improve its export performance.

5.Trillion Economy by 2025- What to do?

Introduction The Government of India had kept the goal to have a $5 trillion economy by 2025 for rapid economic growth in the country. These are how the target will be met:

1) Infrastructure Development: Major investments in infrastructure are underway, mainly to boost job creation and foreign investment as well besides enhancing productivity.

2) Digital Transformation: In most sectors, digitalization can lead to innovation and greater efficiency, generating new types of business opportunities.

3) Skilling Programs : The objective of the skilling programs is to cater industry demand moving up in skilled work force while pushing forward economic growth.

4) IT sector expansion: Champions of Silicon Valley are those that champion the 'they sell out capabilities', which as does supporting entrepreneurs through giving them access to funding, mentorship and resources which aid innovation and businesses.

5) Provide Simplified Regulations: Reduce red Tapism and Make the Indian Businesses Easier to Do Business in India

Government Schemes

The Government of India has launched various economic programs for growth and development at the national level or to promote social welfare. A few of the popular programs are:

Make in India: Announced in 2014 to boost manufacturing and FDI.

Digital India: Launched in 2015 to digitally empower Indian society and knowledge economy.

Skill India : Launched in 2015 with an objective of training and education of youth for qualification.

PradhanMantri Jan DhanYojana: Launched in 2014 to provide banking facilities for all and promote financial inclusion.

Even as the goal of $5 trillion economy will not be easy, the government has been taking steps and initiating measures to propel economic growth and development in India.

IN SHORT: Features

Liberalization	Privatization	Globalization
Deregulation	Transfer of PSU ownership	Trade liberalization
Tariff reduction	Disinvestment of PSUs	Foreign direct investment
Market-oriented policies	Public-private partnerships	Integration into global markets
Financial sector reforms	Asset monetization	Technology transfer
Competition promotion	Market competition	Cross-border trade
Easing of licensing norms	Private sector participation	Access to global capital
Removal of trade barriers	Strategic sales	Economic diplomacy
FDI promotion	Commercialization of assets	International collaborations
Exchange rate reforms	Capital market reforms	Export-oriented policies