What is LPG (Liberalization, Privatization, Globalization) Economic Policy?

In 1991, the central government came out with a new economic policy resolution. The main feature of this policy is:

  1. Liberalization
  2. Privatization
  3. Globalization

The policy is also popularly called the LPG model of development.

Liberalization

Liberalization means withdrawal of controls and regulations by the government on establishment and running of industries in the country. Till 1991, all the public sector units were practically under the government even if they were called autonomous bodies. There were a lot of interventions by the ministries of the government in the functioning of the public sector. This resulted in politicisation and fall in professionalism and inefficiency. In order to overcome this problem, the government decided to stop political intervention in the running of the public sector units by signing a memorandum of understanding. According to this the management of public sector units will be given autonomy to function but they will also be accountable.

Another important feature of liberalization is to do away with the licensing system. Earlier it was mandatory for any private individual or organization to seek permission from the government to start any industrial activity. There were a heavy rush and long queue before the window of the concerned government department to get a license. This system slowly gave rise to delays in getting the license. Government officials started taking bribes to clear files. Such corrupt practices brought a bad name to the government. So in 1991, the government decided to abandon the licensing system and allowed the interested individuals to start their industrial activity without any permission. However, permission is still required only in case of strategic industries such as medicine, defence equipment etc.

Privatization

Privatization implies opening of the door of industrial activities to the private sector which was exclusively reserved for the public sector only except nuclear enemy and defence. Since basic and heavy industries were strictly under the public sector there was no room for competition. The quality of product and services deteriorated due to lack of competition from other companies. As a result, the consumers were the major looser because they did not get quality products and the delivery system and other services were also very poor. So the government decided to allow and encourage the entry of private sector in the areas earlier reserved for the public sector only. As a result, private sector entry was seen in telecommunication, civil aviation etc. The government also decided to disinvest some of the public sector companies by selling part of their assets to the public.

Globalization

Globalization is a process in which attempts are made by the different countries in the world to allow free flow of goods and services, labour technology, investments etc. India is a member of World Trade Organization (WTO) which is the nodal agency to promote globalization. In 1991 industrial policy, India adopted a soft attitude towards foreign companies to do their business in India in order to promote competition. It also committed itself to abolish or reduce the tariff on import of commodities. On the other hand, India also adopted policies to promote exports. The government also allowed foreign companies to hold 51 percent share or more in case of their collaboration with Indian companies so that they can function freely and as the owner. This will also facilitate the transfer of the latest technology into Indian territory.

A. Sulthan

Author and Assitant Professor in Finance

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