LPG Model | ICSE Class 9 Economics Notes

This note covers the LPG model of economic reform in India. LPG stands for liberalisation, privatisation and globalisation. It explains the 1991 crisis and the New Economic Policy, the meaning of each of the three terms and their main reform measures, multinational corporations, outsourcing and the World Trade Organisation, the positive impact of the reforms on the Indian economy, and the limits that critics point out.

What is the LPG model?

The LPG model is the name for the reforms that India introduced in and after 1991. The government grouped a variety of policies under three heads: liberalisation, privatisation and globalisation.

Before 1991, India followed a mixed economy framework, combining the advantages of the capitalist economic system with those of the socialist economic system. In 1991 an economic crisis led the government to introduce a new set of policy measures. These changed the direction of the country's developmental strategies.

What do the three terms mean in brief?

Globalisation is the outcome of the policies of liberalisation and privatisation. It means an integration of the economy of the country with the world economy. A few liberalisation measures were introduced in the 1980s, but the reforms of 1991 were more comprehensive.

Why did India change its economic policies in 1991, and what was the New Economic Policy?

What was the crisis of 1991?

After forty years of planned development, India had a strong industrial base and was self-sufficient in the production of food grains. In 1991, however, it met with an economic crisis relating to its external debt, which is money borrowed from abroad. The government was not able to make repayments on its borrowings from abroad.

Foreign exchange is foreign currency, such as dollars, which a country earns from its exports and uses to pay for imports. India's foreign exchange reserves, which it generally maintains to import petroleum and other important items, dropped to levels that were not sufficient for even a fortnight, which is two weeks. The crisis was compounded by rising prices of essential goods.

How did the crisis build up?

The origin of the crisis can be traced to the inefficient management of the Indian economy in the 1980s. It built up in these steps.

1. When government expenditure was more than income, the government financed the deficit, the gap between expenditure and income, by borrowing from banks, from people within the country and from international financial institutions.
2. Development policies required spending to meet challenges such as unemployment, poverty and population explosion, but the spending did not generate additional revenue. Income from public sector enterprises (PSEs), which are government owned enterprises, was also not very high.
3. In the late 1980s, meeting expenditure through borrowings became unsustainable. Prices of many essential goods rose sharply, and imports (goods bought from other countries) grew at a very high rate without matching growth of exports (goods sold to other countries).
4. Reserves fell too low to finance imports for more than two weeks or to pay interest to international lenders. No country or international funder was willing to lend to India.

How did India respond?

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

For the loan, the agencies expected India to liberalise and open up the economy. India was to remove restrictions on the private sector (businesses owned by individuals and private companies), reduce the role of the government in many areas and remove trade restrictions between India and other countries.

India agreed and announced the New Economic Policy (NEP). It consisted of wide-ranging reforms, with a thrust towards a more competitive environment and the removal of barriers to the entry and growth of firms.

What are stabilisation and structural reform measures?

The NEP policies can broadly be classified into two groups. Stabilisation measures deal with weaknesses in the balance of payments, which is the record of a country's payments to and receipts from the rest of the world, and with inflation, which is a sustained rise in the general level of prices.

In simple words, stabilisation meant maintaining sufficient foreign exchange reserves and keeping rising prices under control.

What is liberalisation, and why did India liberalise?

Definition: Liberalisation is the removal of barriers or restrictions set by the government. With liberalisation of trade, businesses are allowed to make decisions freely about what they wish to import or export, and the government imposes much less restrictions than before.

Rules and laws aimed at regulating economic activities had become major hindrances to growth and development. Liberalisation was introduced to put an end to these restrictions and to open various sectors of the economy. The reforms of 1991 gave greater attention to the industrial sector, the financial sector, tax reforms, foreign exchange markets, and trade and investment.

Why had India put barriers on trade and investment?

After Independence the government put barriers on foreign trade and foreign investment. This was considered necessary to protect producers within the country from foreign competition. Industries were just coming up in the 1950s and 1960s, and competition from imports would not have allowed them to come up. India allowed imports of only essential items such as machinery, fertilisers and petroleum.

India followed a regime of quantitative restrictions on imports, with tight control over imports and very high tariffs. These policies reduced efficiency and competitiveness, which led to slow growth of the manufacturing sector.

What are trade barriers?

A tax on imports is a tariff. A limit on the number of goods that can be imported is a quota, also called a quantitative restriction. Both are trade barriers. Barriers other than tariffs, such as quota restrictions, are called non-tariff barriers. Governments use trade barriers to regulate foreign trade.

Consider an illustration. Chinese plastic toys with cheaper prices and new designs enter the Indian market, and within a year 70 to 80 per cent of toy shops replace Indian toys with them. Buyers gain choice and lower prices, but Indian toy makers face losses. A tax on imported toys would keep them dearer and let Indian toy makers prosper.

Why did the government remove the barriers?

Starting around 1991, the government decided that the time had come for Indian producers to compete with producers around the globe. It felt that competition would improve their performance, since they would have to improve their quality. This decision was supported by powerful international organisations.

Barriers were therefore removed to a large extent. Goods could be imported and exported easily, and foreign companies could set up factories and offices in India.

How did liberalisation change industry and the financial sector?

How was the industrial sector deregulated?

Before the reforms, every entrepreneur, a person who sets up and runs a business, needed government permission for many decisions. The reforms of 1991 removed many of these restrictions.

How was the financial sector reformed?

The financial sector includes commercial banks, investment banks, stock exchange operations and the foreign exchange market. It is regulated by the Reserve Bank of India (RBI), which decides the amount of money banks can keep with themselves, fixes interest rates and sets the nature of lending.

One major aim of the reforms was to reduce the role of the RBI from regulator to facilitator, so that the financial sector may take decisions on many matters without consulting the RBI.

• Private sector banks, Indian as well as foreign, were established, and the foreign investment limit in banks was raised to around 74 per cent.
• Banks that fulfil certain conditions were given freedom to set up new branches without the approval of the RBI.
• Banks may generate resources from India and abroad, but certain managerial aspects were retained with the RBI to safeguard the interests of account-holders and the nation.
• Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and pension funds, are now allowed to invest in Indian financial markets.

How did liberalisation change taxes, foreign exchange, trade and investment?

What were the tax reforms?

Tax reforms deal with the government's taxation and public expenditure policies, which together are its fiscal policy. Direct taxes are taxes on the incomes of individuals and the profits of business enterprises. Indirect taxes are taxes levied on goods and services.

• Since 1991 there has been a continuous reduction in taxes on individual incomes, because high rates of income tax were felt to be an important reason for tax evasion, which means avoiding tax by hiding income. It is now widely accepted that moderate rates encourage savings and voluntary disclosure of income.
• The rate of corporation tax, the tax on the profits of companies, was very high earlier and has been gradually reduced.
• In 2016 the Constitution was amended to empower the state governments and the Union Government to make laws imposing the Goods and Services Tax (GST). GST is expected to generate additional revenue, reduce tax evasion and create 'one nation, one tax and one market'.

What were the foreign exchange reforms?

In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies, which means its value in foreign currencies was lowered. This led to an increase in the inflow of foreign exchange. It also set the tone to free the determination of the rupee's value from government control. Now, more often than not, markets determine exchange rates based on the demand and supply of foreign exchange.

What were the trade and investment policy reforms?

These reforms aimed to increase the international competitiveness of industrial production and to bring foreign investment and technology into the economy. They had three aims: dismantling quantitative restrictions on imports and exports, reducing tariff rates and removing licensing procedures for imports.

Import licensing was abolished except for hazardous and environmentally sensitive industries. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were fully removed from April 2001. Export duties, which are taxes on goods sold abroad, were removed to improve the competitive position of Indian goods abroad.

Governments also took special steps to attract foreign companies. Special Economic Zones (SEZs) are industrial zones with world class facilities such as electricity, water, roads, transport and storage. Companies that set up production units in the SEZs do not pay taxes for an initial period of five years.

What is privatisation?

Definition: Privatisation implies shedding of the ownership or management of a government owned enterprise.

Government companies are converted into private companies in two ways: by the withdrawal of the government from the ownership and management of public sector companies, or by the outright sale of public sector companies.

What is disinvestment?

Privatisation of public sector enterprises (also called public sector undertakings, or PSUs) by selling off part of their equity to the public is known as disinvestment. Equity means the ownership shares of a company.

The government's stated purpose was mainly to improve financial discipline and facilitate modernisation. It was also envisaged that private capital and managerial capabilities could be effectively utilised to improve the performance of PSUs.

The government envisaged that privatisation could give a strong impetus to the inflow of foreign direct investment (FDI), which is investment by a foreign company in assets in India, such as the land, buildings and machines of a factory. Every year the government fixes a target for disinvestment. In 2022-23 it was able to mobilise (raise) about Rs 46,000 crore, where a crore is ten million.

What are maharatnas, navratnas and miniratnas?

To improve efficiency, infuse professionalism and help them compete in the liberalised global environment, the government identifies PSEs and declares them maharatnas, navratnas and miniratnas. They were given greater financial, managerial and operational autonomy, and the granting of status resulted in better performance of these companies.

Scholars allege that, instead of helping public enterprises expand and become global players, the government partly privatised them through disinvestment.

What is globalisation?

Definition: Globalisation is the process of rapid integration or interconnection between countries. It happens through greater foreign trade and foreign investment, and multinational corporations play a major role in it.

Globalisation is generally understood to mean integration of the economy of a country with the world economy, but it is a complex phenomenon. It is an outcome of a set of policies aimed at greater interdependence and integration. It involves networks and activities that go beyond economic, social and geographical boundaries, so happenings in India can be influenced by events miles away.

In what ways can countries be linked?

More and more goods, services, investments and technology are moving between countries. The movement of people is one more link. People usually move in search of better income, better jobs or better education, but in the past few decades there has not been much increase in such movement, due to various restrictions.

How does foreign trade integrate markets?

With the opening of trade, goods travel from one market to another and the choice of goods rises. Prices of similar goods in the two markets tend to become equal, and producers in the two countries compete closely, even though they are thousands of miles apart. Foreign trade thus results in connecting, or integrating, markets in different countries.

In the past two to three decades, more and more MNCs have looked for cheap locations for production. Foreign investment by MNCs has been rising, and foreign trade between countries has been rising rapidly.

How do multinational corporations spread production across countries?

Until the middle of the twentieth century, production was largely organised within countries, and trade was the main channel connecting distant countries. Colonies such as India exported raw materials and food stuff and imported finished goods.

Definition: A multinational corporation (MNC) is a company that owns or controls production in more than one nation.

MNCs set up offices and factories in regions where they can get cheap labour and other resources, so that the cost of production is low and they can earn greater profits.

How does one MNC spread its production?

Take a large MNC producing industrial equipment. It designs its products in research centres in the United States and has the components manufactured in China. These are shipped to Mexico and Eastern Europe, where the products are assembled and then sold all over the world. Its customer care is carried out through call centres in India.

Draw a world outline with five labelled points joined by arrows: design in the United States, components made in China, assembly in Mexico and Eastern Europe, sales all over the world, and customer care from call centres in India.

China is a cheap manufacturing location. Mexico and Eastern Europe are close to the markets in the United States and Europe. India has highly skilled engineers who can understand the technical aspects of production, and educated English-speaking youth who can provide customer care services. All this probably can mean 50 to 60 per cent cost savings for the MNC.

Where do MNCs set up production?

MNCs set up production where it is close to the markets, where skilled and unskilled labour is available at low cost, and where the availability of other factors of production is assured. They might also look for government policies that look after their interests.

The money spent to buy assets such as land, buildings, machines and other equipment is called investment. Investment made by MNCs is called foreign investment.

How do MNCs link up with local producers?

Large MNCs have tremendous power to determine price, quality, delivery and labour conditions for the distant producers who supply them.

Share of exports = exports ÷ total × 100

Worked example 1: share of exports in the cars Ford handled in 2017. By 2017 Ford was selling 88,000 cars in the Indian market, and another 1,81,000 cars were exported from India. What share of the total came from exports? The total is the cars sold in India plus the cars exported.

Answer: Total = 88,000 + 1,81,000 = 2,69,000 cars. Share of exports = 1,81,000 ÷ 2,69,000 × 100 = about 67 per cent.

What has made globalisation possible?

Three factors have helped globalisation: rapid improvements in technology, liberalisation of trade and investment policies, and pressure from international organisations such as the WTO.

How has technology helped?

Improvements in transportation technology over the past fifty years have made much faster delivery of goods across long distances possible at lower costs. Goods are placed in containers that can be loaded intact onto ships, railways, planes and trucks, which has greatly reduced port handling costs and increased the speed with which exports reach markets.

Information and communication technology (IT), including telecommunications, computers and the Internet, has played a major role in spreading out the production of services. Consider a news magazine for London readers that is designed and printed in Delhi. The text is sent through the Internet, the designers get their orders from the London office by telecommunication, the designing is done on a computer, the printed copies are sent by air to London, and the payment from a bank in London to a bank in Delhi is made instantly through the Internet (e-banking).

How has liberalisation helped?

Removing barriers to trade and investment has facilitated globalisation. Some powerful international organisations say that all barriers to foreign trade and investment are harmful, that trade between countries should be 'free' and that all countries should liberalise their policies.

What is the World Trade Organisation?

The World Trade Organisation (WTO) was founded in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT). GATT had been established in 1948 with 23 countries as the global trade organisation to administer all multilateral trade agreements, which are agreements among many countries.

The WTO is expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade. It also aims to enlarge the production and trade of services, to ensure optimum utilisation of world resources and to protect the environment.

Its agreements cover trade in goods as well as services. They aim to facilitate international trade through removal of tariff as well as non-tariff barriers and by providing greater market access to all member countries.

About 160 countries of the world are members. India has kept its WTO commitments by removing quantitative restrictions on imports and reducing tariff rates. Though the WTO is supposed to allow free trade for all, in practice, it is seen that the developed countries have unfairly retained trade barriers.

What is outsourcing, and why is India a destination for it?

Definition: Outsourcing is the hiring of regular service by a company from external sources, mostly from other countries, which was previously provided internally or from within the country.

Legal advice, computer service, advertisement and security are examples of services that companies once provided through their own departments. Outsourcing is one of the important outcomes of globalisation, and it has intensified because of the growth of fast modes of communication, particularly Information Technology.

Companies in developed countries outsource many services to India: voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice and even teaching. Text, voice and visual data are digitised and transmitted in real time across continents.

Most multinational corporations, and even small companies, are outsourcing their services to India, where they can be availed of at a cheaper cost with a reasonable degree of skill and accuracy. The low wage rates and the availability of skilled manpower have made India a destination for global outsourcing in the post-reform period.

A line drawing shows a globe with a satellite above it. A thin line runs from the satellite to each of two framed pictures. In each frame a person wearing a headset works at a computer whose screen shows lines of text, and the person in the left frame is typing on a keyboard.

See Fig. 3.1 in your NCERT textbook

What are the positive impacts of the LPG model on growth, investment and trade?

The reform process has completed three decades. Its performance can be judged on growth, investment, foreign exchange reserves, exports and prices.

Did growth of the economy rise?

The growth of an economy is measured by the Gross Domestic Product (GDP), the value of all final goods and services produced within a country in a year. Post-1991 India witnessed a rapid growth in GDP on a continual basis for two decades.

Table: Growth of GDP and major sectors (in per cent).

Values marked with an asterisk are for Gross Value Added (GVA), which is estimated from GDP as follows. A subsidy is a payment by the government that lowers the cost of producing or buying something.

GVA = GDP + subsidies on production − indirect taxes

The growth of GDP increased from 5.6 per cent during 1980-91 to 9.4 per cent during 2021-22. During the reform period the growth of the service sector has gone up, which indicates that GDP growth is mainly driven by growth in the service sector. The industrial sector witnessed a steep decline in 2012-13 but began to show continuous positive growth in the subsequent years.

Put the seven periods in order along the horizontal axis and the growth rate in per cent on the vertical axis. Plot 5.6, 6.4, 7.8, 8.2, 5.6, 6.6 and 9.4 and join the points. The periods are of different lengths, so treat them as labelled categories.

Use the same axes and draw one line for each sector from the table. The 2021-22 values marked with an asterisk are Gross Value Added, so label them separately.

Change in growth rate = later growth rate − earlier growth rate

Worked example 2: rise in the total growth rate. The total growth rate was 5.6 per cent during 1980-91 and 9.4 per cent during 2021-22. By how many percentage points did it rise? A percentage point is the difference between two percentage figures.

Answer: Change in growth rate = 9.4 − 5.6 = 3.8 percentage points.

Did foreign investment and foreign exchange reserves rise?

The opening of the economy has led to a rapid increase in foreign direct investment and foreign exchange reserves. The foreign investment, which includes FDI and foreign institutional investment (FII), has increased from about US $100 million in 1990-91 to US $23 billion in 2022-23.

Foreign exchange reserves have increased from about US $6 billion in 1990-91 to about US $646 billion in 2023-24. India is one of the largest foreign exchange reserve holders in the world, whereas in 1991 the reserves had not been sufficient for even a fortnight.

Times increase = later value ÷ earlier value

Worked example 3: growth of foreign investment. Foreign investment was about US $100 million in 1990-91 and US $23 billion in 2022-23. How many times larger is the later figure? Use 1 billion = 1,000 million.

Answer: US $23 billion = 23 × 1,000 = 23,000 million. Times increase = 23,000 ÷ 100 = 230, so the later figure is about 230 times the earlier one.

Worked example 4: growth of foreign exchange reserves. Reserves were about US $6 billion in 1990-91 and about US $646 billion in 2023-24. How many times larger are they?

Answer: Times increase = 646 ÷ 6 = about 108, which is more than 100 times.

What happened to exports and prices?

Since 1991, India is seen as a successful exporter of auto parts, pharmaceutical goods, engineering goods, IT software and textiles. Rising prices have also been kept under control. The removal of export duties was meant to improve the competitive position of Indian goods abroad.

How have consumers, producers and the service sector gained?

How have consumers gained?

Globalisation and greater competition among local and foreign producers have been of advantage to consumers, particularly the well-off sections in urban areas. There is greater choice, improved quality and lower prices for several products, so these people enjoy much higher standards of living than was possible earlier. Gone are the days when Ambassador and Fiat were the only cars on Indian roads.

How have producers and workers gained?

MNCs have increased their investments in India over the past twenty years. They have been interested in industries such as cell phones, automobiles, electronics, soft drinks and fast food, and in services such as banking in urban areas, where there are many well-off buyers. New jobs have been created in these industries and services, and local companies supplying raw materials to them have prospered.

Several top Indian companies have benefited from the increased competition. They invested in newer technology and production methods and raised their production standards, and some gained from successful collaborations with foreign companies.

How have Indian companies become global?

Globalisation has enabled some large Indian companies to emerge as multinationals themselves. Tata Motors (automobiles), Infosys (IT), Ranbaxy (medicines), Asian Paints (paints) and Sundaram Fasteners (nuts and bolts) are some Indian companies spreading their operations worldwide.

How have services gained?

Globalisation has created new opportunities for companies providing services, particularly those involving IT. Data entry, accounting, administrative tasks and engineering are now done cheaply in countries such as India and exported to developed countries.

What limits do critics point out, and how can globalisation be made fairer?

Globalisation through liberalisation and privatisation has produced positive as well as negative results, both for India and for other countries. Some scholars see it as an opportunity: greater access to global markets, high technology and the possibility of large industries of developing countries becoming important players internationally. Critics argue that it is a strategy of the developed countries to expand their markets.

Has the impact been uniform?

The impact has not been uniform. People with education, skill and wealth have made the best use of the new opportunities, while many people have not shared the benefits.

Small manufacturers of batteries, capacitors, plastics, toys, tyres, dairy products and vegetable oil have been hit hard by competition, and several units have shut down, leaving many workers jobless. Small and medium industries employ the largest number of workers (11 crore) in the country, next only to agriculture. Scholars also point out that reform-led growth has not generated sufficient employment opportunities.

What is said about agriculture, industry and public finances?

• Agriculture: reforms have not been able to benefit the sector, where the growth rate has been decelerating (3.6 per cent in 1980-91, 3.3 per cent in 1992-2001 and 2.3 per cent in 2002-07 in the table above, although the table also shows a high 4.2 per cent in 2013-14). Public investment in agriculture has fallen, and the partial removal of the fertiliser subsidy has raised the cost of production.
• Industry: growth has recorded a slowdown, for reasons such as cheaper imports and inadequate investment in infrastructure.
• Public finances: critics point out that the assets of PSEs have been undervalued and sold to the private sector, and that disinvestment proceeds are used to offset the shortage of government revenues rather than to develop PSEs and build social infrastructure.

How can globalisation be made fairer?

Fair globalisation would create opportunities for all and ensure that the benefits are shared better. The government can ensure that labour laws, which are rules that protect workers' rights, are properly implemented. It can support small producers until they become strong enough to compete, and it can negotiate at the WTO for fairer rules, aligning with other developing countries with similar interests.

Glossary

• Liberalisation — Removal of barriers or restrictions set by the government, so that businesses can make decisions freely, for example about what they wish to import or export.
• Privatisation — Shedding of the ownership or management of a government owned enterprise, either by the government withdrawing from it or by outright sale of public sector companies.
• Globalisation — The process of rapid integration or interconnection between countries through greater foreign trade and foreign investment, in which multinational corporations play a major role.
• New Economic Policy (NEP) — The wide-ranging reforms announced after the 1991 crisis, aimed at a more competitive economy and at removing barriers to the entry and growth of firms.
• Stabilisation measures — Short-term measures meant to correct weaknesses in the balance of payments and to bring inflation under control.
• Structural reform measures — Long-term measures meant to improve the efficiency of the economy and increase its international competitiveness by removing rigidities in various segments.
• Disinvestment — Privatisation of public sector enterprises by selling off part of their equity, the ownership shares of a company, to the public.
• Tariff — A tax on imports, which is one kind of trade barrier and makes imported goods dearer for buyers.
• Quota — A limit set by the government on the number of goods that can be imported, also called a quantitative restriction.
• Multinational corporation (MNC) — A company that owns or controls production in more than one nation.
• Outsourcing — A company hiring regular service, mostly from other countries, that it earlier provided internally or from within the country, such as call-centre work or legal advice.
• World Trade Organisation (WTO) — The organisation founded in 1995 as the successor to GATT, expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade.

Common errors and misconceptions

• Misconception: LPG in economics is the cooking gas. Correct: In this topic LPG stands for liberalisation, privatisation and globalisation, the three heads of the reform policies introduced in and after 1991.
• Misconception: Liberalisation began only in 1991. Correct: A few liberalisation measures were introduced in the 1980s, but the reform policies initiated in 1991 were more comprehensive.
• Misconception: Liberalisation means the government has no rules at all. Correct: Industrial licensing remains for some product categories, import licensing remains for hazardous and environmentally sensitive industries, and certain managerial controls over banks remain with the RBI.
• Misconception: Privatisation and disinvestment mean exactly the same thing. Correct: Privatisation is shedding the ownership or management of a government owned enterprise. Disinvestment is privatisation of public sector enterprises by selling off part of their equity to the public.
• Misconception: Globalisation is only about trade in goods. Correct: It links countries through foreign trade and foreign investment, and also through services and technology. The movement of people between countries has not increased much, due to restrictions.
• Misconception: Globalisation has benefited everyone equally. Correct: The impact has not been uniform. People with education, skill and wealth have made the best use of the new opportunities, while many small producers and workers have faced major challenges.

Exam-style questions with model answers

Q1. What is meant by liberalisation? Give one example of a liberalisation measure in industry. [2 marks]

1. Liberalisation is the removal of barriers or restrictions set by the government, so that businesses can make decisions freely.
2. Example: industrial licensing was abolished for almost all product categories, so entrepreneurs no longer needed official permission to start a firm or decide the amount of goods to produce.

Q2. Define disinvestment and state two purposes of the government in selling part of the equity of public sector enterprises. [3 marks]

1. Disinvestment is the privatisation of public sector enterprises, which are government owned, by selling off part of their equity (ownership shares) to the public.
2. One stated purpose was to improve financial discipline in the public sector enterprises.
3. The other stated purpose was to facilitate modernisation. It was also envisaged that private capital and managerial capabilities could improve their performance.

Q3. Distinguish between stabilisation measures and structural reform measures. [4 marks]

1. Stabilisation measures are short-term measures, whereas structural reform measures are long-term measures.
2. Stabilisation measures aim to correct the weaknesses that have developed in the balance of payments.
3. Stabilisation measures also bring inflation under control. In simple words, they maintain sufficient foreign exchange reserves and keep rising prices under control.
4. Structural reform measures aim to improve the efficiency of the economy and increase its international competitiveness by removing rigidities in various segments of the economy.

Q4. State four changes made in industry and banking after 1991. [4 marks]

1. Industrial licensing was abolished for almost all product categories, except a few such as alcohol, cigarettes, hazardous chemicals and drugs and pharmaceuticals.
2. Only a part of atomic energy generation and some core activities in railway transport remain reserved for the public sector.
3. Many goods produced by small-scale industries were dereserved, and in most industries the market was allowed to determine prices.
4. Private sector banks, Indian and foreign, were established, and the reforms aimed to reduce the role of the RBI from regulator to facilitator.

Q5. Explain five reasons why India introduced economic reforms in 1991. [5 marks]

1. The government's expenditure began to exceed its revenue by such large margins that meeting it through borrowings became unsustainable.
2. Imports grew at a very high rate without matching growth of exports.
3. Foreign exchange reserves dropped to a level that was not adequate to finance imports, and there was not enough foreign exchange to pay the interest due to international lenders.
4. Prices of many essential goods rose sharply.
5. No country or international funder was willing to lend to India. India therefore approached the World Bank and the IMF for a loan, and agreed to their expectation that it liberalise and open up the economy.

Q6. Total GDP growth rose from 5.6 per cent in 1980-91 to 9.4 per cent in 2021-22. Foreign investment rose from about US $100 million in 1990-91 to US $23 billion in 2022-23. Foreign exchange reserves rose from about US $6 billion in 1990-91 to about US $646 billion in 2023-24. Using these facts and others, explain five positive impacts of the LPG reforms on the Indian economy. [5 marks]

1. Growth: the growth of GDP increased from 5.6 per cent during 1980-91 to 9.4 per cent during 2021-22, with the service sector growth going up.
2. The opening of the economy led to a rapid increase in foreign investment, from about US $100 million in 1990-91 to US $23 billion in 2022-23.
3. The opening of the economy also led to a rapid increase in foreign exchange reserves, from about US $6 billion in 1990-91 to about US $646 billion in 2023-24.
4. Consumers gained greater choice, improved quality and lower prices, and India is seen as a successful exporter of auto parts, pharmaceutical goods, engineering goods, IT software and textiles.
5. MNC investment created new jobs, local suppliers prospered, new opportunities opened for services such as call centres, and some large Indian companies emerged as multinationals themselves.

Q7. The total GDP growth rate was 5.6 per cent in 1980-91, 6.4 per cent in 1992-2001, 7.8 per cent in 2002-07 and 8.2 per cent in 2007-12. Which period shows the highest growth, by how many percentage points did growth rise from 1980-91 to 2007-12, and did the rate fall in any of these periods? [3 marks]

1. The highest growth among these periods is 8.2 per cent, in 2007-12.
2. The rise from 1980-91 to 2007-12 is 8.2 − 5.6 = 2.6 percentage points.
3. The rate did not fall in any of these periods, because each figure (5.6, 6.4, 7.8 and 8.2) is higher than the one before it.

Q8. India's foreign exchange reserves were about US $6 billion in 1990-91 and about US $646 billion in 2023-24. About how many times larger are the later reserves, and what does this show? [2 marks]

1. Times increase = 646 ÷ 6 = about 108, so the later reserves are more than 100 times the earlier ones.
2. It shows that the opening of the economy was followed by a rapid increase in foreign exchange reserves, compared with 1991 when they were not sufficient for even a fortnight.

Key takeaways

• LPG stands for liberalisation, privatisation and globalisation, the three heads under which India grouped its economic reform policies in and after 1991.
• Behind the 1991 crisis were government expenditure above income financed by borrowing, imports growing without matching exports, rising prices, and foreign exchange reserves that could not pay for imports for even a fortnight.
• India took a $7 billion loan from the World Bank and the IMF, accepted their conditions and announced the New Economic Policy of stabilisation and structural reform measures.
• Liberalisation removes government barriers and restrictions. It abolished industrial licensing for almost all categories, reduced tariffs, removed quantitative restrictions and aimed to change the RBI's role from regulator to facilitator.
• Privatisation means shedding the ownership or management of government owned enterprises. Disinvestment sells part of their equity to the public, while maharatna, navratna and miniratna status gave some enterprises autonomy.
• Globalisation is the rapid integration of countries through foreign trade and foreign investment, helped by MNCs, technology, liberalisation and the WTO, and it includes outsourcing of services to India.
• Positive impacts include GDP growth rising from 5.6 per cent in 1980-91 to 9.4 per cent in 2021-22, much larger foreign investment and reserves, more consumer choice and new jobs.
• The benefits have not been uniform. Many small producers and workers have faced major challenges and critics say agriculture has not benefited, so fair globalisation needs government support, fair WTO rules and better-shared benefits.

Test yourself

What does LPG stand for in the context of Indian economic reforms?

LPG stands for liberalisation, privatisation and globalisation, the three heads under which the government grouped its reform policies introduced in and after 1991.

Which two international institutions gave India a loan in 1991, and how much?

The International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund (IMF). India received $7 billion as a loan to manage the crisis.

What is a tariff, and what is a quota?

A tariff is a tax on imports. A quota is a limit on the number of goods that can be imported, also called a quantitative restriction. Both are trade barriers.

In which two ways are government companies converted into private companies?

By the withdrawal of the government from the ownership and management of public sector companies, and by the outright sale of public sector companies.

When was the WTO founded, and which organisation did it succeed?

The WTO was founded in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT), which had been established in 1948 with 23 countries.

Name two Indian companies that have emerged as multinationals.

Tata Motors (automobiles) and Infosys (IT) are two examples. Ranbaxy, Asian Paints and Sundaram Fasteners are three more Indian companies spreading their operations worldwide.