A severe balance-of-payments crisis in 1991 forced India to abandon the inward-looking, licence-driven model of the planning era and adopt the New Economic Policy, summarised as LPG: Liberalisation (removing internal controls on industry, finance and trade), Privatisation (a larger role for private capital and disinvestment of public-sector firms), and Globalisation (integrating with the world economy). Growth accelerated, led by services, but the gains were uneven across sectors and regions.
- By 1991 the fiscal deficit had ballooned, inflation was high, and foreign-exchange reserves had fallen to a point where they could cover only about two weeks of imports. India was on the brink of default and had to physically pledge gold to raise emergency funds.
- The roots were structural: years of high public spending without matching revenue, an over-protected and inefficient industry, weak exports, and external shocks (the Gulf War of 1990 to 1991 raised oil prices and cut remittances).
- India approached the International Monetary Fund and the World Bank for a bailout. The loans came with conditions of structural adjustment and stabilisation, which became the New Economic Policy announced in 1991 (the Finance Minister of the day was Dr Manmohan Singh).
- Stabilisation measures were short-term: correcting the balance of payments and controlling inflation.
- Structural reform measures were long-term: improving efficiency and competitiveness by removing the rigidities of the old regime. These are the LPG reforms.
Removing unnecessary controls and licensing so that markets, not bureaucrats, allocate resources. Its components:
- Industrial sector: abolition of industrial licensing for all but a short list of strategic industries (alcohol, cigarettes, hazardous chemicals, defence equipment and a few others); ending the public-sector monopoly in many areas; removal of the small-scale reservation over time; and freedom to expand and set prices.
- Financial sector: the Reserve Bank moved from a controller to a regulator. Private banks were allowed, the Statutory Liquidity Ratio and reserve requirements were eased, and foreign institutional investors were permitted into Indian markets.
- Tax reform: lower and simpler direct-tax rates (to improve compliance), and reform of indirect taxes, the long road that culminated in the Goods and Services Tax in 2017.
- Foreign-exchange reform: the rupee was devalued in 1991, and the economy moved toward a market-determined exchange rate and current-account convertibility.
- Trade and investment: import licensing was dismantled for most goods, tariffs were reduced, and quantitative restrictions were removed in stages.
- Giving the private sector a larger role and reducing the State's. The main instrument was disinvestment, the sale of part of the government's equity in public-sector undertakings.
- Loss-making units could be referred for restructuring or closure, and the principle of granting greater autonomy to profit-making public firms (the Maharatna, Navratna and Miniratna categories) was introduced.
- Integrating the domestic economy with the world economy through trade, capital flows, technology and labour movement.
- India became a founding member of the World Trade Organization when it came into being on 1 January 1995 (succeeding the GATT framework), committing to lower tariffs and freer trade.
- Outsourcing became a visible face of globalisation: India's low-cost, English-speaking, skilled workforce attracted business-process and IT services from abroad.
- Gains: growth rose to the 6 to 8 percent range over the following two decades; foreign-exchange reserves rose from near-zero to comfortable levels; inflation moderated; the services sector (especially IT and IT-enabled services) boomed; and India became a significant exporter of software and services.
- Criticisms raised in the NCERT: agriculture was neglected (lower public investment, reduced subsidies, exposure to global price swings), industrial growth was uneven and import competition hurt some domestic firms, employment did not grow in step with output ("jobless growth"), inequality and regional disparity widened, and the disinvestment proceeds were sometimes used to plug the deficit rather than to invest.
- LPG: Liberalisation, Privatisation, Globalisation.
- Disinvestment: selling part of the government's stake in a public-sector firm.
- Devaluation: a deliberate official reduction in the value of the currency.
- Outsourcing: contracting out work to an outside (often overseas) agency.
- WTO (from 1 January 1995): the body governing world trade rules, which India joined as a founding member.
The reform debate over jobless growth, agrarian distress and rising inequality is directly relevant to internal security, because regions left behind by the post-1991 boom (parts of central and eastern India) overlap with the left-wing-extremism belt. Globalisation also reshaped the CAPF mandate: protecting critical infrastructure, ports, airports and industrial assets (a core CISF role) grew in importance as private and foreign investment expanded. For the human-rights lens, the link between economic exclusion and unrest is the standard CAPF essay theme.
- The immediate trigger for the 1991 economic reforms was: (a) a banking collapse (b) a balance-of-payments crisis with reserves covering only weeks of imports (c) a stock-market crash (d) a famine. (Answer: b.) Authored practice, not a verbatim PYQ.
- India became a founding member of which body on 1 January 1995? (Answer: the World Trade Organization.) Authored practice, not a verbatim PYQ.