Do you remember the 1991 Economic crisis which led to Liberalisation, Privatisation and Globalisation (LPG) reforms ?

So lets us compare the India of 1991 with the India of 2021 which also marks 30 years of LPG Reforms

• The Crisis of 1991 & Reforms:
  • 1991 Crisis: In 1990-91, India faced a severe Balance of Payments (BOP) crisis, where its foreign exchange reserves were just adequate to finance 15 days of imports. There were many factors that led to the BOP crisis:
    • Fiscal Deficit: The fiscal deficit during 1990-91 was around 8.4% of GDP.
    • Gulf War I: In 1990-91, the situation was aggravated by the rise in the price of oil due to Iraq’s invasion of Kuwait.
    • Rise in Prices: The inflation rate increased from 6.7% to 16.7% due to a rapid increase in money supply and the country’s economic position became worse.
  • Nature and Scope of 1991 Reforms: In order to get out of the macro-economic crisis in 1991, India launched a New Economic Policy, which was based on LPG or Liberalisation, Privatisation and Globalisation model.
    • Then Finance Minister, Manmohan Singh, was the prime architect of the historic 1991 liberalisation.
    • The broad range of reforms under the LPG model included:
      • Liberalising Industrial Policy: Abolition of industrial license permit raj, Reduction in import tariffs, etc.
      • Beginning of Privatisation: Deregulation of markets, Banking reforms, etc.
      • Globalisation: Exchange rate correction, liberalising foreign direct investment and trade policies, Removal of mandatory convertibility cause, etc.
    • These reforms are credited and applauded for the high economic growth seen from 1991 to 2011 and substantial reduction of poverty from 2005 to 2015.

• The Crisis of 2021 :
  • The World Economic Outlook Report 2021, states that the Indian economy is expected to grow by 12.5% in 2021 and 6.9% in 2022.
    • However, the pandemic has led to massive unemployment in the informal sector and poverty is increasing after decades of decline.
  • The social sectors of health and education have lagged behind and not kept pace with our economic progress.
    • Too many lives and livelihoods have been lost that should not have been, during the pandemic.
  • Inspector Raj is set to make a comeback through the policy for e-commerce entities.
  • India is back to the old habits of borrowing excessively or extracting money (in form of dividends) from the RBI to finance the fiscal deficit.
  • The migrant labour crisis has laid bare the gaps in the growth model.
  • India foreign trade policy is again suspecting trade liberalisation, as India has already decided to opt-out of the 16-nation Regional Comprehensive Economic Partnership (RCEP) trade deal.

Way Forward

The 1991 reforms helped the economy stave off a crisis and then bloom. It is time to outline a credible new reform agenda that will not just bring GDP back to pre-crisis levels, but also ensure growth rates higher than it had when it entered the pandemic.