Economic Reforms Since 1991 (LPG): Full Chapter Notes for Class 12

In 1991, India underwent a radical shift in economic policy known as the New Economic Policy (NEP). Faced with a severe financial crisis, the government moved away from state controls toward a market-driven economy. These notes break down the causes of the crisis and the core pillars of Liberalisation, Privatisation, and Globalisation (LPG).

1. The 1991 Economic Crisis: Why Reforms?

By 1991, India's economy was on the brink of collapse. The government had to pledge 67 metric tons of gold to the Union Bank of Switzerland and the Bank of England to secure a $7 billion loan from the IMF and World Bank.[1, 2]

Key Causes of the Crisis:

• High Fiscal Deficit: The central government’s fiscal deficit was alarmingly high, exceeding 8.5% of the GDP.[3, 1]
• Balance of Payments (BoP) Crisis: Foreign exchange reserves fell to such low levels that they were insufficient to pay for even two weeks of imports.[1, 2]
• Inflationary Pressures: Prices of essential goods rose rapidly (above 10-12%), creating economic instability.[3, 2]
• Gulf War (1990-91): This led to a massive spike in oil prices and reduced remittances from Indians working in the Gulf.[1]

2. Liberalisation (L): Removal of License Raj

Liberalisation means removing direct or physical controls imposed by the government. It aimed to end the "License Raj" and make the economy more competitive.[2, 4]

• Industrial Sector Reforms: Abolition of industrial licensing for almost all products except for five hazardous or socially sensitive industries (e.g., alcohol, cigarettes, electronics).
• Financial Sector Reforms: The role of the RBI shifted from being a regulator to a facilitator, allowing private and foreign banks to enter the market.
• Tax Reforms: Significant reduction in direct taxes (Income Tax and Corporate Tax) to encourage voluntary disclosure and better compliance.[1, 5]

3. Privatisation (P): The Strategy of Disinvestment

Privatisation involves the transfer of ownership, management, and control of public sector enterprises (PSUs) to the private sector.[6, 5]

• Disinvestment: This is the most-searched term in this chapter. It refers to the government selling a portion of the equity (shares) of PSUs to the general public or private players.[7, 6, 4]
• Purpose: To improve efficiency, reduce the financial burden on the government, and introduce modern technology.[3]
• Navratnas: The government granted greater autonomy to high-performing PSUs (like Indian Oil and BHEL) to help them become "global giants."[5]

4. Globalisation (G): Integration with the World

Globalisation refers to the integration of the domestic economy with the world economy through trade and capital flows.

• Outsourcing Hub: India emerged as the "Outsourcing Destination of the World" for BPO and KPO services due to low wage rates and a large pool of English-speaking skilled labor.[4, 8, 9]
• WTO (World Trade Organisation): India became a founding member of the WTO in 1995, committed to removing trade barriers and tariffs.[5, 4]

5. Modern Reforms: GST & Demonetisation

GST: Unified Market Strategy

The Goods and Services Tax (GST) was implemented on July 1, 2017. It is a comprehensive indirect tax that replaced multiple taxes like VAT, Excise Duty, and Service Tax.[3, 10]

• Objective: To create a "One Nation, One Tax, One Market" system and reduce the cascading effect (tax on tax) of previous regimes.[3]

Demonetisation: Contraction of Money Supply

On November 8, 2016, the government declared that ₹500 and ₹1,000 notes would cease to be legal tender.[3, 8]

• Impact: It led to a sudden contraction in the money supply and aimed to curb black money, counterfeit currency, and promote a digital, "cashless" economy.[3]

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