Liberalization, Privatization, Globalization (LPG Model) in India

LPG Model in India

After Independence in 1947 Indian government faced a significant problem to develop the economy and to solve the issues. Considering the difficulties pertaining at that time government decided to follow LPG Model. The Growth Economics conditions of India at that time were not very good. This was because it did not have proper resources for the development, not regarding natural resources but financial and industrial development. At that time India needed the path of economic planning and for that used ‘Five Year Plan’ concept of which was taken from Russia and feet that it will provide a fast development like that of Russia, under the view of the socialistic pattern society. India had practiced some restrictions ever since the introduction of the first industrial policy resolution in 1948.

Liberalization is defined as making economics free to enter the market and establish their venture in the country. Privatization is defined as when the control of economic is sifted from public to a private hand. Globalization is described as the process by which regional economies, societies, and cultures have become integrated through a global network of communication, transportation, and trade.

Liberalization:

Soon after independence, the period was known as License Raj. As a result of the restriction in the past, India’s performance in the global market has been very dismal; it never reached even the 1% in the worldwide market. India has vast natural resources with high-efficiency labor, but after all this, it was still contributing with 0.53% till 1992.

IMPACT BEFORE LIBERALIZATION

  • The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from the 1950s to 1980s, while per capita income averaged 1.3%. At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and in Taiwan by 12%.
  • Only four or five licenses would be given for steel, power, and communications. License owners built up substantial powerful empires
  • A substantial public sector emerged. State-owned enterprises made significant losses.
  • Infrastructure investment was weak because of the public sector monopoly.
  • License Raj established the “irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country” and corruption flourished under this system

After liberalization, India became the second world of development and became the 7th largest economies. It contributed 1.3 trillion in the world’s GDP. Dr. Manmohan Singh, the former finance minister, opened the way for a free economy in the country which led to the significant development of the country.

PRIVATIZATION

India is leading towards privatization from government raj. As a result, it led to the development of country 500 faster than previous. Now India is in the situation of world fastest developing economy and maybe chance that India will be at the top till 2050.

GLOBALIZATION

The term is sometimes used to refer specifically to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. However, globalization is usually recognized as being driven by a combination of economic, technological, sociocultural, political, and biological factors.

 

LPG Model of Development & LPG reforms

(a) This has a very narrow focus since it mostly concentrates on the corporate sector which accounts for only 10 percent of GDP.

(b) The model bypasses agriculture and agro-based industries which are a significant source of generation of employment for the masses. It did not delineate a concrete policy to develop infrastructure. Financial and technological support, particularly the infrastructural needs of agro-exports.

(c) By permitting free entry of the multinational corporations in the consumer goods sector. LPG model hit the interests of the small and medium sector engaged in the production of consumer goods. There is a danger of labor displacement in the small industry if the unbridled entry of MNCs is continued.

(d) By facilitating imports, the Government has opened the import window too wide. Consequently, the benefits of rising exports are more than offset by the much higher rise in imports leading to a more significant trade gap.

(e) Finally, the model emphasizes a capital-intensive pattern of development, and there are severe apprehensions about its employment-potential. It is being made out that it may cause unemployment in the short run but will take care

“Liberalization, Privatization and Globalization” (LPG Model & LPG Policy) approach followed by Government of India

For an understanding of liberalization, privatization and globalization or LPG Model in the Indian context, it is essential to detail out the eighth five-year plan, since it was the inception of a host of  LPG policy that was instrumental in allowing India to unshackled its economy and engage in global trade and commerce.

The period before liberalization in India

The annual growth rate of the economy of India before 1980 was low. It stagnated around 3.5% from the 1950s to 1980s, while per capita income averaged 1.3%. Only four or five licenses would be given for steel, electrical power, and communications. License owners built up substantial, powerful empires. A vast public sector emerged. State-owned enterprises made large losses. Income Tax Department and Customs Department manned by IAS officers became efficient in checking tax evasion. Infrastructure investment was weak because of the public sector monopoly.  Licence Raj established the “irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country” and corruption flourished under this system.

The context of Five Year Plans in Liberalization Privatization and Globalization 

The Eighth Five Year Plan (1992-1997) was formulated after a period of political instability which gripped the country for two years after the completion of the Seventh Five Year Plan. In 1991, the country faced a major foreign exchange crisis which made the economic position of the country very vulnerable. As a result of this instability in the country, there were two Annual Plans for 1992 and 1993. The eighth five-year plan measures such as privatization and liberalization which were to have a far-reaching impact later were introduced during the Eighth Five Year Plan. India also became a member of the World Trade Organisation (WTO) during this Plan period.

Eighth five-year plan during LPG policy

The main aim of the Eighth Five Year Plan was –

  • To modernize the industrial sector through modern technology.
  • Opening up of the Indian economy to counter the foreign debt burden which was a significant threat for the country.
  • Taking significant initiatives to increase the rate of employment and reduce poverty.

During this plan focus was on implementing plans and policies which would help in attaining objectives like the modernization of the industrial sector, increase the rate of employment in the country, reduce poverty and improve self-reliance on domestic resources. Also, the Eighth Five Year Plan also focused on human resource development based on the reasoning that healthy and educated people could contribute more effectively to economic growth. Most important, the Eighth Five Year Plan marked the beginning of privatization and liberalization of the economy in the country.

Plan performance  

  • The target growth for the Eighth Five Year Plan was taken as 5.6 percent but by the end of the Plan, India achieved an actual growth rate of 6.78 percent, higher than that of the target.
  • Increase in the rate of employment.
  • Reduction in the poverty rate.
  • The Gross Domestic Product (GDP) rate increased from 5.7 percent to 6.5 percent.
  • The inflation rate rose from 6.7 percent to 8.7 percent.
  • The rate of growth in the agriculture sector increased from 3 percent to 4.8 percent

Post liberalization in India

The economic reforms lead to a certain amount of stability in the economy and high growth rate. In the ninth five-year plan it was envisaged to have balanced development. For this, the focus was on speedy industrialization, human development, full-scale employment, poverty reduction, and self-reliance on domestic resources.

The main objectives directly related to liberalization and privatization as a continuation of the previous plan period were

  • to generate adequate employment opportunities and promote poverty reduction
  • to stabilize the prices to accelerate the growth rate of the economy
  • to create a liberal market for an increase in private investments

Other objectives served the purpose of human development. They were

  • To ensure food and nutritional security.
  • to provide for the necessary infrastructural facilities like education for all, safe drinking water, primary health care, transport, energy
  • to check the growing population increase
  • to encourage social issues like women empowerment, conservation of certain benefits for the Special Groups of the society

Conclusion

The fruits of liberalization reached their peak in 2007 when India recorded its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China. There has been a significant debate, however, around liberalization as an inclusive economic growth strategy. Since 1992, income inequality has deepened in India. Whereas consumption is among the poorest staying stable while the wealthiest generate consumption growth.

For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings. Hence, on the one hand, it witnessed high economic development, infrastructure development, and urbanization and on the other hand had a widening cleft between the rich and poor and class divide continues to plague the country. Social and human development remains absurdly low leading to a profoundly fragmented nation.

20 Replies to “Liberalization, Privatization, Globalization (LPG Model) in India”

  1. nice article and very much useful . you have gone deep into the topic and explained it very deeply.

  2. This LPG Model has brought unemployment, corruption, low standard of education (i.e. downgrading the HRD concept) and social-insecurity in India. The economy should grow in proportion of the living standard of people of the nation. Today, more than 40% population is BPL which is bound to lead to mal-nutrition and subsequently going to yield un-healthy India. This is due to lack of weakness of the LPG Model that it missed accountability of the Governments (i.e. lack of political and big-babu’s will).

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