After attainment of independence, India adopted economic planning with a vision for a resurgent India aiming for progress along with equitable wealth distribution. Early policies focused on public sector growth, licensing, trade barriers under infant industry arguments, and import-substitution strategies. However, these led to over-protection, inefficient resource use, high deficits, mismanagement, poor technology development, and foreign exchange shortages.
The pressures forced policy revision resulting in economic reforms aimed at globalisation characterized by:
The focus shifted from import substitution to an export-led growth strategy, integrating India with the world economy.
During 1950–1990, the economy was heavily regulated with five-year plans emphasizing public sector development, self-reliance, import substitution, nationalization, and state intervention. While this led to establishment of key industries like SAIL, ONGC, IOC, and BHEL, it restricted private sector growth, encouraged bureaucratic corruption, and resulted in sick public enterprises and trade deficits.
By the early 1990s, India faced economic and financial crisis, forcing it to borrow from IMF and implement conditionalities involving stabilization, structural reforms, reduced trade barriers, fiscal and monetary policy revisions, market liberalization, and global integration.
The three pillars of reforms became liberalisation, privatisation, and globalisation (the LPG strategy).
The New Economic Policy (NEP) of 1991 embodied neo-liberalism, summarized as ‘continuity with change’. Its main objectives were:
A liberal policy adopted on both domestic and external fronts aimed to counter the financial crisis of the early 1990s included the following measures:
Privatisation refers to any process that reduces the involvement of the state/public sector in economic activities of a nation. Contrary to the post-independence thrust on enlargement of public sector, the economic reforms of 1991 recognised private sector as the engine of growth. Policies were framed to increase the role of private sector in the process of development. Privatisation in a mixed economy like India can take several forms such as:
The Government announced a new policy on November 5, 2009 with two components: one dealing with listed profit-making units and another extending to all other government-owned companies. While the former will have to offload a minimum 10 per cent equity stake, unlisted ones (meeting 3 criteria – a positive net worth, no accumulated reserves, and a net profit for three consecutive years) will have to opt for listing on stock exchanges by divesting similar amounts.
Globalisation is the process of integrating the various economies of the world without creating any barriers in the flow of goods and services, technology, capital, and labour/human capital. It involves four components:
Essentially, globalisation is an extension of the process of liberalisation in the international domain. It therefore signifies internationalisation plus liberalisation.
In India, the process of globalisation began with the adoption of the LPG model during economic reforms since the 1990s. Some of the key features in this context are:
India is setting out a successful example of PPP projects and encouraging private participation in key development projects. The main advantages of public-private partnerships are:
Various models of PPP followed in India include:
These models are being tailored to suit projects in highways (expressways, flyovers, subways, and foot-over-bridges), railways (IRCTC), metro rails, and airports.
As of now, 450 PPP projects are under implementation.
The key transformation in various policy-making during the economic reforms period (1991–2012) can be summarised as follows:
| Pre-Reform Strategies | Economic Reform Strategies |
|---|---|
| Liberalisation: License dominated regime | Delicensing, deregulations, debureaucratisation |
| Politically administered prices | Market determined prices at large |
| State-led economic growth | Market-determined economic growth |
| Not much concern for deficits | Contain all kinds of deficits |
| Development by inflationary process | Deflationary monetary and fiscal policies |
| Restrictions on currency movement | Liberalisation of restrictions |
| State-controlled interest rates | Deregulation of interest rates |
| State controlled credit | Credit policy reforms |
| Under-developed capital market | Reforms in capital market |
| Huge public sector budgetary resources (PSBR) liability on government | Minimise PSBR |
| High tax rates | Tax reforms |
| PSUs as engines of growth | Private investment as engine of growth |
| Frequent state interventions | Selective and effective state interventions |
| Dominance of PSUs | Withdrawal from the areas of private interest |
| Philosophy of natural monopoly | Minimise gap between public and private sectors |
| Globalisation: Closed economy, self-reliance, import-substitution strategies, restrictions on FDI and MNCs | Open economy, integration with world markets, export-oriented strategies, inducement to FDI and MNCs |