1

Project
On
Impact Of LPG Policy On Indian Economy
by
Parmeet Singh and Himanshu Puri
M.B.A EP (Batch 2023-2025)

Under the supervision of

Dr Tilak Raj
Professor
University Business School

University Business School

Arts Block 3, Sector 14
Panjab University, Chandigarh.
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DECLARATION

I hereby declare that the work, which is being presented in the project entitled “Impact of
LPG Policy on Indian Economy” submitted to University Business School is a record of
my own investigations carried under the Guidance of Dr Tilak Raj.

I have not submitted the matter presented in this report anywhere and I affirm that the matter
presented is my own work.

Name of Candidate: Parmeet Singh, Himanshu Puri

Programme: M.B.A EP
Batch: 2023-2025

Name of Faculty Guide: Dr Tilak Raj

Department – UBS
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ACKNOWLEDGEMENT

I would like to take this opportunity to express my standard my profound gratitude and deep
regard to Dr Tilak Raj for his exemplary guidance, valuable feedback, and constant
encouragement throughout the duration of the project. His valuable suggestions were of
immense help throughout my research work.

I would also like to give my sincere gratitude to all the friends and colleagues who helped me
with their valuable insight without which this research would not have been possible.
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TABLE OF CONTENTS

S.No TOPIC PAGE NO.

1. Title Page 1
2. Declaration 2
3. Acknowledgement 3
4. Abstract 5
5. Introduction 6
6. Review of Literature 7
7. Objectives of Study 8
8. Research Methodology 8
8.1 Source Of Data 8
8.2 Limitations Of Study 8
9. Economic Reforms 1991 and Why They Were Needed 9-10
9.1 What is LPG and Highlights 10-15
10 Positive Impacts Of LPG Policy 15-18
10. Limitations Of LPG Policy 18-20
11. Conclusion 21
12. References 22
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Abstract

This paper studies the Impact of Liberalization, Privatization and Globalization on

Indian economy. The Economic Reforms that made by government by New Economic
Policy in 1991made significant impact on the Indian Economy. In terms of Increasing
GDP, per capita Income, Increase in Foreign Direct Investment etc. also covers some
negative impact of LPG policy on Indian Economy like Increase in Competition,
growing personal disparities etc. This study is important to understand impact of LPG
on Indian Economy.
Key Words- Impact of LPG, Economic Reforms, Indian Economy.

Introduction
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India opened up the economy in the early nineties following a major crisis that
led by a foreign exchange crunch that dragged the economy close to defaulting on
loans. The country ran out of foreign exchange reserves. To face the crisis situation,
the government decided to bring about major economic reforms to revive Indian
economy. These reforms were popularly known as 'structural adjustments' or
'liberalization' or 'globalization’. The government announced a New Economic
Policy on July 24, 1991.This new model of economic reforms is commonly
known as the LPG or Liberalisation, Privatisation and Globalisation model.
Liberalisation refers to process of making policies less constraining of economic
activity and also reduction of tariff or removal of non-tariff barriers. The term
“Privatisation” refers to the transfer of ownership of property or business from a
government to a private owned entity. Globalisation refers to the expansion of
economic activities across political boundaries of nation states. More importantly
perhaps it refers economic interdependence between countries in the world economy.
Prime Minister of the country, P V Narasimha Rao initiated ground breaking
economic reforms. DR. Manmohan Singh was Finance Minister at that time he
assisted Narsimha Rao and played a key role in implementing these reform policies.
The reforms did away with the License Raj, reduced tariffs and interest rates and
ended many public monopoly allowing automatic approval of foreign direct
investment in many sectors. The primary objective of this model was to make the
economy of India the fastest developing economy in the globe with capabilities that
help it match up with the biggest economies of the world.

Literature Review
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Mukesh Kumar (2014) in their paper entitled ‘’Impact of Economic reforms on India”
made study with objective to find out the impact of Globalization on India and also
study Performance of the corporate sector after 1991. Finding shows that during the
11-year period 1995-2006 India’s merchandise exports increased at the rate of 13.3
percent per annum and corporate sectors growth rate in sales and net profits is
increased.

Dr. Thakur B., Sharma VK., Som Raj (2012) in their paper entitled “Had Economic
Reforms had an Impact on India’s Industrial Sector?” Through the light on impact of
Economic reforms on Industrial sector. Findings shows that Economic reforms had
started showing positive impact on current Indian industrial performance in the last
few years in terms of increase in level of productivity and reasonable rate of
growth of industrial sector because of Liberalisation.

Vaghela Dharini Ishwar Singh (2014) in their paper entitled “New Economic
Policies: Liberalization, Privatization, Globalization ” made study on new economic
policy of India under this descriptive study made on basis of secondary data he had
given conceptual study of Liberalization, Privatization and Globalization concepts and
advantages and disadvantages of those concepts.

DR. Meenu (2013) in their paper entitled “Impact of Globalisation and

Liberalisation on Indian Administration” study was made with objective to
analyse the impact of globalisation and liberalisation on different aspects of Indian
administration and changes introduced at different levels in Indian administration due
to globalisation and liberalisation

In this paper researcher has attempted to analyse the impact of LPG on Indian
Economy on various elements like GDP, Per capita Income, Employment, Foreign
Direct Investment etc

Objectives of the Study

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1) To know what is LPG policy

2) To understand the impact of LPG policy on Indian Economy.

3) To know the negative effect of LPG policy on Indian Economy after 1991.

Research Methodology

For the completion of research paper has used Descriptive research method.
Data collection: In this study the data has been collected from secondary sources.
Research methodology for secondary data involves the systematic collection, analysis,
and interpretation of existing data that was originally collected by someone else for a
different purpose. Secondary data can be obtained from various sources, such as
published literature, government reports, academic journals, databases, and more.

Secondary Data

Secondary data collected from the Books, Internet, magazines, Journals and different
types of research papers etc. Secondary data refers to data that is collected by
someone other than the researcher for a purpose other than their current research
project. It is one of the two main types of data used in research, with the other being
primary data.

Limitations of the Study

The study was conducted through secondary data sources only.

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Economic reforms
In 1991 after India faced a balance of payments crisis it had to pledge 20 tons of gold
to Union Bank of Switzerland and 47 tons to Bank of England as part of a bailout deal
with the International monetary fund. In addition the IMF required India to undertake
a series of structural economic reforms so Government had decided to bring about
major economic reforms to revive Indian economy. These reforms were popularly
known as structural adjustments' or 'liberalization', Privatization and 'globalization

Why Economic Reforms Were Needed?

 In order to lessen the burdens of the control regime (the licensing Raj),
the Rajiv Gandhi administration (1984–1999) undertook a number of
reforms in the latter part of the 1980s.
 These included loosening license requirements, lowering import
restrictions, implementing export incentives, etc. However, these
modifications were minor rather than fundamental, more about easing
restrictions and operating them more flexibly than a
thorough withdrawal of the control system.
 However, it pushed India’s GDP growth in the 1980s to over 5.5
percent, breaking the previous record of 5 percent growth known as
the “Hindu rate of Growth” that had stood for the preceding three
decades.
 While the Indian economy appeared to be performing well in the
1980s, there were long-term structural vulnerabilities developing in the
system as a result of widespread industrial control through the license
raj, Monopolies and Restrictive Trade Practices Act (MRTP) of 1969,
nationalization of banks and other industries, self-sufficiency and an
inward-looking trade strategy, as well as Import Substitution
Industrialization (ISI).
 Due to the fact that imports were nearly two times as high as exports,
there was a massive trade deficit in the second half of the 1980s
(export earnings were only 55 percent of imports). All of this
prompted India to borrow money in the short term more and more by
the late 1980s.
 Up until the early 1980s, the government had wisely managed the
fiscal (revenue and expenditure) situation, but it started to engage in
fiscal profligacy (recklessly wasting money) by taking on large
amounts of debt to support various development programs and
maintain growth, which caused issues in the late 1980s and early
1990s.
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 As a result, the macroeconomic foundations of the economy turned

bad (fiscal deficit of 8.4%, current account deficit of 3.14%, high
inflation of 17%, huge foreign debt, etc. in 1990–1991); this puts a lot
of pressure on the Balance of Payment (Bop) front.

New Economic Policy 1991

The government announced a New Economic Policy on July 24, 1991.This new model
of economic reforms is commonly known as the LPG or Liberalisation,
Privatisation and Globalisation model. Prime Minister of the country, P V Narasimha
Rao initiated economic reforms with the help of Dr Manmohan Singh. The reforms
did away with the License Raj, reduced tariffs and interest rates and ended many
public monopolies, allowing automatic approval of foreign direct investment in
many sectors.

What is LPG?

Liberalization- Liberalisation refers to process of making policies less constraining

of economic activity and also reduction of tariff or removal of non-tariff barriers.

Privatization- The term “Privatisation” refers to the transfer of ownership of

property or business from a government to a private owned entity.

Globalization- Globalisation refers to the expansion of economic activities across

political boundaries of nation states. More importantly perhaps it refers economic
interdependence between countries in the world economy.

The major objective of the new policy-

 Utilizing fully the indigenous capabilities of entrepreneurs.

 Fostering research and development efforts for the development of indigenous
technologies.
 Raising investments.
 Removing regulator system and other weaknesses.
 Improvement in efficiency and productivity.
 Controlling monopolistic power.
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 Assigning the right areas for the public sector undertakings.

 Ensuring welfare as also skills and facilities to the workers to enable them to
face new technologies.
 Retaining the capacity to earn our own foreign exchange through exports.
 As per the Discussion Paper on Economic Reforms brought out by the Ministry
of Finance in July 1993, the objectives of the reforms were:
 “…to bring about rapid and sustained improvement in the quality of the people
of India. Central to this goal is the rapid growth in incomes and productive
employment… The only durable solution to the curse of poverty is sustained
growth of incomes and employment… Such growth requires investment: in
farms, in roads, in irrigation, in industry, in power and, above all, in people.
And this investment must be productive. Successful and sustained development
depends on continuing increases in the productivity of our capital, our land and
our labour.
 Within a generation, the countries of East Asia have transformed themselves.
China, Indonesia, Korea, Thailand and Malaysia today have living standards
much above ours… What they have achieved, we must strive for.”

Highlights of the LPG Policy-

Major Steps in the 1991 Reforms

The major policy initiatives taken by the Government to fundamentally address the
balance of payments problem and the structural rigidities were as follows:

 Fiscal Reforms: A key element in the stabilization effort was to restore fiscal
discipline. The data reveals that fiscal deficit during 1990-91 was as large as
8.4 percent of GDP. The budget for 1991-92 took a bold step in the direction of
correcting fiscal imbalance. It envisaged a reduction in fiscal deficit by nearly
two percentage points of GDP from 8.4 percent in 1990-91 to 6.5 percent in
1991-92.

The budget aimed at containing government expenditure and augmenting

revenues; reversing the downtrend in the share of direct taxes to total tax
revenues and curbing conspicuous consumption. Some of the important policy
initiatives introduced in the budget for the year 1991-92 for correcting the
fiscal imbalance were: reduction in fertilizer subsidy, abolition of subsidy on
sugar, disinvestment of a part of the government’s equity holdings in select
public sector undertakings, and acceptance of major recommendations of the
Tax Reforms Committee headed by Raja Chelliah. These recommendations
aimed to raise revenue through better compliance in case of income tax and
excise and customs duties, and make the tax structure stable and transparent.
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 Monetary and Financial Sector Reforms: Monetary reforms aimed at doing

away with interest rate distortions and rationalizing the structure of lending
rates.

The new policy tried in many ways to make the banking system more efficient.
Some of the measures undertaken were:

o Reserve Requirements: reduction in statutory liquidity ratio (SLR) and

the cash reserve ratio (CRR) in line with the recommendations of the
Narasimham Committee Report, 1991. In mid-1991, SLR and CRR
were very high. It was proposed to cut down the SLR from 38.5 percent
to 25 percent within a time span of three years. Similarly, it was
proposed that the CRR br brought down to 10 percent (from the earlier
25 percent) over a period of four years

o Interest Rate Liberalisation: Earlier, RBI controlled the rates payable on

deposits of different maturities and also the rates which could be
charged for bank loans which varied according to the sector of use and
also the size of the loan. Interest rates on time deposits were
decontrolled in a sequence of steps beginning with longer term deposits,
and liberalisation was progressively extended to deposits of shorter
maturity

o Greater competition among public sector, private sector and foreign

banks and elimination of administrative constraints

o Liberalisation of bank branch licensing policy in order to rationalize the

existing branch network

o Banks were given freedom to relocate branches and open specialized

branches

o Guidelines for opening new private sector banks

o New accounting norms regarding classification of assets and provisions

of bad debt were introduced in tune with the Narasimham Committee
Report

 Reforms in Capital Markets: Recommendations of the Narasimham

Committee were initiated in order to reform capital markets, aimed at removing
direct government control and replacing it with a regulatory framework based
on transparency and disclosure supervised by an independent regulator. The
Securities & Exchange Board of India (SEBI) which was set up in 1988 was
given statutory recognition in 1992 on the basis of recommendations of the
Narasimham Committee. SEBI has been mandated to create an environment
which would facilitate mobilization of adequate resources through the
securities market and its efficient allocation.
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 Industrial Policy Reforms: In order to consolidate the gains already achieved

during the 1980s, and to provide greater competitive stimulus to the domestic
industry, a series of reforms were introduced in the Industrial Policy. The
government announced a New Industrial Policy on 24 July 1991. The New
Industrial Policy established in 1991 sought substantially to deregulate industry
so as to promote growth of a more efficient and competitive industrial
economy. The central elements of industrial policy reforms were as follows:

o Industrial licensing was abolished for all projects except in 18

industries. With this, 80 percent of the industry was taken out of the
licensing framework.

o The Monopolies & Restrictive Trade Practices (MRTP) Act was

repealed to eliminate the need for prior approval by large companies for
capacity expansion or diversification.

o Areas reserved for the public sector were narrowed down and greater
participation by private sector was permitted in core and basic
industries. The new policy reduced the number of areas reserved from
17 to 8. These eight are mainly those involving strategic and security
concerns. (Example, railways, atomic energy etc.)

o The policy encouraged disinvestment of government holdings of equity

share capital of public sector enterprises.

o The public sector units were provided greater autonomy and

professional management that could be helpful for generating reasonable
profits, through an MOU(Memorandum of Understanding) between the
enterprise and the concerned Ministry, through which targets that the
enterprise had to achieve were set up

 Trade Policy Reforms: Under trade policy reforms, the main focus was on
greater openness. Hence, the policy package was essentially an outward-
oriented one. New initiatives were taken in trade policy to create an
environment which would provide a stimulus to export while at the same time
reducing the degree of regulation and licensing control on foreign trade.

The main feature of the new trade policy as it has evolved over the years since
1991 are as follows:

o Freer imports and exports: Prior to 1991, in India imports were regulated
by means of a positive list of freely importable items. From 1992,
imports were regulated by a limited negative list. For instance, the trade
policy of 1 April 1992, freed imports of almost all intermediate and
capital goods. Only 71 items remained restricted.
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o Rationalization of tariff structure and removal of quantitative

restrictions: The Chelliah Committee’s Report had suggested drastic
reduction in import duties. It had suggested a peak rate of 50 percent. As
a first step towards a gradual reduction in the tariffs, the 1991-92 budget
had reduced the peak rate of import duty from more than 300 percent to
150 percent. The process of lowering the customs tariffs was carried
further in successive budgets.

o Trading Houses: The 1991 policy allowed export houses and trading
houses to import a wide range of items. The Government also permitted
the setting up of trading houses with 51 percent foreign equity for the
purpose of promoting exports. For instance, under the 1992-97 trade
policy, export houses and trading houses were provided the benefit of
self-certification under the advance license system, which permits duty
free imports for exports.

 Promoting Foreign Investment: The government took several measures to

promote foreign investment in India in the post-reform period. Some of the
important measures are:

o In 1991, the government announced a specified list of high technology

and high-investment priority industries wherein automatic permission
was granted for foreign direct investment (FDI) up to 51 percent foreign
equity. The limit was raised to 74 percent and subsequently to 100
percent for many of these industries. Moreover, many new industries
have been added to the list over the years.

o Foreign Investment Promotion Board (FIPB) has been set up to

negotiate with international firms and approve direct foreign investment
in select areas.

o Steps were also taken from time to time to promote foreign institutional
investment (FII) in India.

 Rationalization of Exchange Rate Policy: One of the important measures

undertaken to improve the balance of payments situation was the devaluation
of rupee. In the very first week of July 1991, the rupee was devalued by around
20 percent. The purpose was to bridge the gap between the real and the
nominal exchange rates that had emerged on account of rising inflation and
thereby to make the exports competitive.

Abolition of phased manufacturing programmes fo

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PG-10
Positive Impacts of LPG on Indian Economy
1) Increase in GDP growth rate
India’s GDP growth rate is increased. During 1990-91 India’s GDP growth rate was
only 1.1% but after 1991 reforms due LPG policy India’s GDP growth rate is
increased year by year and in 2015 it was recorded 7.26 and in 2015-16 it is estimated
to be 7.5% by IMF. Because of the Abolition of Industrial licensing, privatisation,
advanced foreign technology and Reduction of taxes India’s GDP is increased after
1991 reforms.

2) Increase in Foreign Direct Investment (FDI)-

India has already marked its presence as one of the fastest growing economies of the
world. It has been ranked among the top 3 attractive destinations for inbound
investments. Since 1991, the regulatory environment in terms of foreign
investment has been consistently eased to make it investor-friendly India has also
firmly established itself as a lucrative foreign investment destination, with foreign
capital inflows of over US$ 31 billion in 2015 - surpassing the US and China. India
has allowed 100% FDI in medical services, Telecom sector, and single brand retail
etc. FDI cap increased in insurance & sub-activities from 26% to 49% and also in
Private Sector Banking- Except branches or wholly owned subsidiaries (74%) FDI is
allowed and in Public sector banking 20% FDI is allowed under Make in India
scheme.in 1991 FDI inflow was 408 crores only but after India made those reforms of
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Globalization and privatization and free entry policy as a result FDI inflow in India
was 106,693croresin 2015.as a result FDI inflow in India was 106,693croresin 2015.

3)Increase in per capita income-

Per capita income or average income measures the average income earned per person
in a given area (city, region, country, etc.). It is calculated by dividing the area's total
income by its total population. In 1991 India’s Per capita Income was Rs. 11235 but
in 2014-15 Per Capita Income is reached to Rs. 85533. Per Capita income is increased
due to Increase in Employment, due to new economy policy of globalization and
privatization many job opportunities are created so, people’s income was increased.

4) Unemployment rate is reduced-

In 1991 unemployment rate was 4.3% but after India adopted new LPG policy more
employment is generated because of globalisation many new foreign companies
came in India and due to
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liberalisation many new entrepreneurs have started new companies because of a

abolition of Industrial licensing / Permit Raj so, employment is generated, and
due to which India’s
unemployment rate is reduced from 4.3% in 1991 to 3.6% in 2014.

Limitations of LPG policy

1) Low Growth of Agriculture Sector-

Agriculture has been and still remains the backbone of the Indian economy. It plays a
vital role not only in Providing food and nutrition to the people, but also in the supply
of raw material to
industries and to export trade. In 1991, agriculture provided employment to 72 per
cent of the population and contributed 29.02per cent of the gross domestic product.
However, in 2014 the
share of agriculture in the GDP went down drastically to17.9 per cent. This has
resulted in a lowering the per capita income of the farmers and increasing the rural
indebtedness.
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2) Threat from foreign competition-

Due to opening up of the Indian economy to foreign competition through

Liberalization and FDI policy more MNC’s are attracted towards India after 1991
reforms and they are competing local businesses and companies. Since, these
MNC’s have lot of financial capacity or those are big organizations with advanced
foreign technology so, they have large production capacity and huge money for
promotion and other research activities they are easily defeating our Indian
local companies. They acquired many Indian companies as well. Because of financial
constraints, lack of advanced technology and production inefficiencies our Indian
companies are facing problem in this globalization period.

3) Adverse Impact on Environment-

Globalization has also contributed to the destruction of the environment through

pollution and clearing of vegetation cover With the construction of companies,
the emissions from manufacturing plants are causing environmental pollution which
further affects the health of many peoples. The construction also destroy the
vegetation cover which is important in the very survival of both humans and other
animals.

4)Regional Disparities-
LPG policies have led to rapid economic growth in certain urban and industrialized
regions, but many rural areas continue to lag behind. This has created significant
regional disparities in terms of development and access to opportunities.

5)Foreign Dependency-
Globalization has made India more interconnected with the global economy, but it has
also increased dependency on foreign markets for trade and investments. This can
make the Indian economy vulnerable to global economic fluctuations.
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6)Healthcare and Education-

While private investment has increased in these sectors, the quality and accessibility
of healthcare and education services can vary widely, leading to disparities in access
to these essential services.

7)Cultural Impact-
The influence of globalization has led to the spread of Western culture and values,
which has both positive and negative cultural implications. Some argue that it can
erode traditional values and cultural diversity.

8)Trade Imbalances:
India's trade deficit has grown as it imports more than it exports. This trade imbalance
can put pressure on the country's foreign exchange reserves and overall economic
stability.

Conclusion
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Economic reforms have an important impact on Indian economy. There are many
changes in Indian Economy after adaptation of the policy of LPG i.e. Liberalisation,
Privatisation and Globalisation in 1991. Because of these reforms many good thing
are happen like increase in the India’s GDP growth rate Foreign direct Investment and
Per Capita Income. Policy was facilitated the flow of foreign capital, technology and
managerial expertise thereby improving efficiency of industry. Also,
unemployment rate is reduced. Though there are certain negative impacts are also
there like low growth of agriculture sector, adverse impact on environment etc. In
conclusion, the LPG policy of 1991 has had a profound and generally positive impact
on India's economy and its role in the world. It set the stage for India's emergence as a
major economic player on the global stage. However, it also brought challenges and
inequalities that need to be addressed through further policy reforms to ensure more
equitable and sustainable growth. Lastly we can say that development in India is takes
place because of implementation of this policy.

References
1) Mukesh Kumar (2014), “Impact of Economic reforms on India” IJIFR Volume1
Issue-7.
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2)Vaghela Dharini Ishwar Singh (2014), “New Economic Policies: Liberalization,

Privatization, Globalization” Journal of Social Sciences Year-2, Issue-5

3)DR. Babita Thakur, Vinod Kumar Sharma, Som Raj(2012), “ Had Economic
Reforms had an Impact on India’s Industrial Sector?” IOSR Journal Of Humanities
And Social Science (JHSS) Volume 4, Issue 2,PP 01-07.

4). Dr. Meenu (2013), “Impact Of Globalisation And Liberalisation On Indian

Administration” International Journal of Marketing, Financial Services &
Management Research, Vol.2, No. 9, PP 120-125. 5. Puri. Misra S.K. “Economic
Environment of Business”,2013 Edition, Himalaya Publishing House. 6.
http://statisticstim

Abolition of Industrial licensing / Permit Raj

