By Nageshwar Patnaik in Bhubaneswar, June 30 2021: India has come a long way to wriggle out of The Hindu rate of growth to the present LPG era. In 1978, economist Professor Rajkrishna used the term The Hindu rate of growth to mark the slow growth rate of India after independence. Indian economic policy after independence was influenced by the colonial experience, which emphasized on state monitored industrialization, state intervention in labour and financial markets, a large public sector, business regulation, and central planning. Indian economy was a closed one. License Raj was prevalent to set up business in India. The Indian rupee was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market.

The policy then primarily banked upon import substitution. There was total curb on foreign investment and technology and government controlled finance and capital markets. There were high duties and taxes with multiple rates and large dispersion. PSUs were considered as the engine of growth. There were restrictions on Foreign Direct Investment (FDI) and Multinational corporations (MNCs). This led to the country into a severe crisis in 1991 like never before forcing the then government to think differently.

Exactly three decades ago, India’s New Economic Policy was announced on July 24, 1991 known as the LPG or Liberalisation, Privatisation and Globalisation (LPG) model. This economic liberalization remains a milestone with few parallels. Few young Indians realize today how lucky they are and how those landmark reforms have changed our lives. From one Telecom Company, today we have a plethora of service providers; from one airline, we today have a large number of carriers at different price points; the transformation has been dramatic. What led to the paradigm shift in the economic policy?

For one thing, the inflation rate increased from 6.7% to 16.7% due to rapid increase in money supply and the country’s economic position became worse and due to increase in non-development expenditure fiscal deficit of the government increased. In 1991 interest liability became 36.4% of total government expenditure.

For another, there had been swift increase in adverse Balance of Payments.  In 1980-81 it was Rs. 2214 crore and rose in 1990- 91 to Rs. 17,367 crore. To cover this deficit large amount of foreign loans had to be obtained and the interest payment got increased. To make things worse, in 1990-91, war in Iraq broke, which led to a rise in petrol prices. The flow of foreign currency from Gulf countries stopped and this further aggravated the problem.

On top of that the state owned public sector units were not performing well due to political interference and became big liability for government. Consequently, India’s foreign exchange reserve fell to low ebb in 1990-91 and it was insufficient to pay for an import bill for only two weeks. To tide over the Balance of Payment (BoP) issues, India borrowed huge amount from International Monetary Fund (IMF).

In 1991, the new government led by the then Prime Minister, P V Narasimha Rao and finance minister, Dr Manmohan Singh moved urgently to implement a programme of macroeconomic stabilization through fiscal correction. Besides this, structural reforms were initiated in the field of trade, industry and the public sector. The main objective was to plunge Indian economy into the arena of “Globalization” and to give it a new thrust on market orientation. The policy was intended to move from the Hindu rate of growth to higher economic growth rate and to build sufficient foreign exchange reserves.

It wanted to achieve economic stabilization and to convert the economy into a market economy by removing all kinds of unnecessary restrictions. The policy aimed at increasing the participation of private players in all sectors of the economy. The LPG policy paved the way for abolition of Industrial licensing/ Permit Raj, dilution of PSU’s role, doing away with MRTP, initiating privatization, free entry to foreign investment and technology, liberalization of industrial location policy, abolition of phased manufacturing programmes for new projects, abolition of Industrial licensing/ Permit Raj, removal of mandatory convertibility cause, reduction in import tariffs, deregulation of markets, reduction of taxes etc.

The outcome of the LPG reforms was simply stupendous. During 1990-91 India’s Gross Domestic Product (GDP) growth rate was only 1.1% but after 1991 reforms GDP growth rate increased year by year. The Central Statistics Office (CSO) has estimated the GDP growth to be 6.8% in 2018-19 as compared to 7.2% in 2017-18. The GDP growth in 2016-17 was 8.2%. In the last fiscal the GDP had come down drastically primarily due to the outbreak of COVID-19 Pandemic.

More importantly, India has firmly established itself as a lucrative foreign investment destination and FDI equity inflows in India in 2019-20 (till August) stood at US$ 19.33 billion. In 1991 the unemployment rate was high but after India adopted new LPG policy more employment got generated as new foreign companies came to India and due to liberalisation many new entrepreneurs started companies. Per Capita income increased due to an increase in employment. Exports have increased and stood at USD 26.38 billion as of October, 2019.

The 1991 economic reforms were focused primarily on the formal sector, and as a result, we have seen significant boom in those areas that were liberalized. Sectors such as telecom and civil aviation have benefited greatly from deregulation and subsequent reforms. However, liberalisation and economic reforms still have a long way to go, especially for the informal sector—including the urban poor who hold jobs as street vendors or rickshaw pullers, the agricultural sector, Micro, Small and Medium Enterprises (MSMEs) and tribals. The slow growth and stagnation in these sectors which have not seen any reform further highlights the significant role of the 1991 reforms in helping India’s economy become what it is today.