Critical Appraisal of LPG Reforms & Exercises

3.7 The Appraisal — Did the Reforms Deliver?

Three decades after 1991, the question is no longer "what did the reforms change?" but "who gained, who lost, and at what cost?". The reforms have been widely criticised for failing to address some basic problems facing our economy, especially in employment, agriculture, industry, infrastructure development and fiscal management. Yet NCERT itself notes that this critique is "not completely true". The honest verdict is mixed — the LPG package produced positive results and negative results, both for India and for other developing economies.

3.7.1 Growth and Employment

Although GDP growth accelerated in the reform period, scholars point out that reform-led growth has not generated sufficient employment opportunities^?. Growth has concentrated in services such as IT, finance and telecom — sectors that employ relatively few workers compared to agriculture and small industry. The link between growth and employment is examined in the next unit (Employment), but the trend is already visible: the size of the cake grew, but the share of jobs lagged.

3.7.2 Reforms in Agriculture — A Sector Left Behind

NCERT is candid: reforms have not been able to benefit agriculture. The growth rate of agriculture has been decelerating. Several factors explain this:

3.7.3 Reforms in Industry — Slower Than Promised

Industrial growth has also slowed. NCERT lists the reasons:

• Cheaper imports have replaced the demand for domestic goods, hurting Indian manufacturers.
• Inadequate investment in infrastructure — power, roads, ports — remained a binding constraint.
• In a globalised world, developing countries are compelled to open up to greater flow of goods and capital from developed countries, leaving their industries vulnerable to imports.
• Domestic manufacturers face direct foreign competition without proportional access to developed-country markets — because non-tariff barriers remain high abroad.

3.7.4 Disinvestment — Has the Government Sold Cheap?

Every year, the government fixes a target for disinvestment of PSEs. In 1991–92, the target was Rs. 2,500 crore; the government mobilised Rs. 3,040 crore more than the target. In 2022–23, the government raised about Rs. 46,000 crore. Critics raise two concerns:

3.7.5 Reforms and Fiscal Policies

Economic reforms placed limits on the growth of public expenditure, especially in social sectors. Tax reductions in the reform period — aimed at yielding larger revenue and curbing tax evasion — have not resulted in higher tax revenue for the government. Tariff reductions further curtailed the scope for raising revenue through customs duties. Tax incentives offered to attract foreign investors shrank tax revenue further. The cumulative impact: a negative impact on developmental and welfare expenditures.

3.8 Conclusion — The Two-Sided Verdict

The process of globalisation through liberalisation and privatisation has produced both positive and negative results, for India and for other countries.

Viewed from the Indian context, some studies note that the crisis of the early 1990s was an outcome of deep-rooted inequalities in Indian society, and that the externally advised reform package further aggravated the inequalities. The reform decades have raised the income and quality of consumption of only high-income groups; growth has concentrated in select areas of the service sector — telecommunication, information technology, finance, entertainment, travel and hospitality services, real estate and trade — rather than in vital sectors such as agriculture and industry, which provide livelihoods to millions.

📖 Key Terms — At a Glance

📝 NCERT Exercises — Model Answers

1. Why were reforms introduced in India?
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   Reforms were introduced because of the 1991 balance-of-payments crisis. India's foreign exchange reserves had fallen to a level adequate for less than two weeks of imports; the government could not service its external debt; inflation was high; and no country or international funder was willing to lend. India approached the IMF and World Bank, received a USD 7 billion loan, and accepted reform conditionalities — leading to the New Economic Policy 1991, which combined short-term stabilisation measures with long-term structural reforms grouped under Liberalisation, Privatisation and Globalisation.
2. Why is it necessary to become a member of WTO?
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   WTO membership lets India participate in a rule-based global trading system instead of facing arbitrary trade barriers. It provides equal opportunities to access international markets, brings discipline to bilateral and multilateral trade through removal of tariff and non-tariff barriers, ensures optimum utilisation of world resources, enlarges trade in services, and gives India a platform to advocate the interests of the developing world. Outside the WTO, India would be exposed to discriminatory treatment in trade.
3. Why did RBI have to change its role from controller to facilitator of financial sector in India?
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   Pre-1991, the RBI controlled almost every aspect of banking — money supply, interest rates, lending norms. Such tight control limited the ability of banks to compete, innovate and respond to customers. Reform aimed to let banks decide many matters on their own, raising efficiency and competitiveness. Hence the RBI's role shifted from regulator to facilitator, retaining only managerial aspects needed to safeguard depositor and national interest.
4. How is RBI controlling the commercial banks?
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   RBI controls commercial banks through several instruments: it decides the amount of money that banks can keep with themselves (cash reserve and statutory liquidity ratios); it fixes interest rates at which it lends to banks; it lays down the nature of lending to various sectors; it issues licences and supervises branch expansion; and it ensures prudential norms to protect account-holders. After reforms, however, banks meeting set conditions can open new branches and rationalise networks without explicit RBI approval.
5. What do you understand by devaluation of rupee?
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   Devaluation of the rupee means a deliberate reduction in the official value of the rupee against foreign currencies. In 1991, as an immediate measure to resolve the BoP crisis, the rupee was devalued against major foreign currencies. This made Indian exports cheaper for foreigners, increasing the inflow of foreign exchange, and set the tone to free the rupee value from government control — moving towards a market-determined exchange rate.
6. Distinguish between (i) Strategic and Minority sale, (ii) Bilateral and Multilateral trade, (iii) Tariff and Non-tariff barriers.
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   (i) Strategic vs Minority sale: In a strategic sale, the government transfers ownership and management by selling more than 51% of equity to a private buyer. In a minority sale, the government sells less than 49%; ownership and management remain with the government.
   (ii) Bilateral vs Multilateral trade: Bilateral trade is an agreement between two countries. Multilateral trade is an agreement among more than two countries, typically administered by bodies like the WTO.
   (iii) Tariff vs Non-tariff barriers: Tariff barriers are taxes imposed on imports/exports, raising prices of foreign goods. Non-tariff barriers are quotas, licences, technical and quality standards that restrict trade volumes without changing prices directly.
7. Why are tariffs imposed?
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   Tariffs are imposed to protect domestic industries from foreign competition by making imported goods costlier than locally produced ones. They also generate revenue for the government. Pre-1991 India used very high tariffs as part of its protectionist regime; reforms lowered tariff rates to push Indian industry to become globally competitive.
8. What is the meaning of quantitative restrictions?
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   Quantitative restrictions (QRs) are restrictions imposed on imports or exports based on the quantity of the product, regardless of its price. They include outright bans, fixed quotas and licensing-based volume ceilings. India removed QRs on imports of manufactured consumer goods and agricultural products from April 2001, in line with WTO commitments.
9. Those public sector undertakings which are making profits should be privatised. Do you agree with this view? Why?
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   No, profitable PSUs should not necessarily be privatised. They earn revenue and serve public objectives — providing infrastructure, employment and quality goods at nominal cost. Selling them risks asset undervaluation (NCERT critique) and transfers a national income stream to private shareholders. Granting them Maharatna, Navratna and Miniratna status with autonomy already improves performance without privatisation. Loss-makers may need restructuring or sale, but profitable PSUs should be allowed to expand and become global players themselves.
10. Do you think outsourcing is good for India? Why are developed countries opposing it?
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    Outsourcing has been broadly good for India: it created millions of jobs in BPOs, IT services and back-offices; raised foreign exchange earnings; built skills in English communication, IT and analytics; and made India the back-office of the world. Developed countries oppose it because outsourcing transfers jobs that were previously held by their domestic workers to lower-wage countries, raising domestic unemployment and political backlash. They also fear loss of know-how when sensitive functions move offshore.
11. India has certain advantages which makes it a favourite outsourcing destination. What are these advantages?
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    India offers a unique combination: (i) low wage rates, allowing services to be supplied at a fraction of developed-country costs; (ii) availability of skilled manpower with reasonable accuracy and English fluency; (iii) modern telecommunication links including the Internet, enabling real-time text, voice and visual data transfer; (iv) a large pool of educated graduates from engineering, management and commerce streams; and (v) a favourable time zone that supports 24/7 service delivery for US and European clients.
12. Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?
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    Yes — the Navratna (and Maharatna, Miniratna) policy has improved PSU performance. By granting greater financial, managerial and operational autonomy, the government allows these enterprises to take quick decisions on capital investment, joint ventures and procurement without seeking prior clearances. This infuses professionalism, raises efficiency and lets them compete in the liberalised global environment. NCERT confirms: "the granting of status resulted in better performance of these companies". Of late, the government has decided to retain them in the public sector and let them raise resources from financial markets.
13. What are the major factors responsible for the high growth of the service sector?
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    Several factors drove service-sector growth: (i) reforms that opened banking, insurance, telecom and aviation to private and foreign players; (ii) a wave of outsourcing that moved IT, BPO, accountancy, banking, clinical advice and other services from developed countries to India; (iii) a young, English-speaking, skilled workforce; (iv) rapid spread of the Internet and mobile telephony; (v) rising domestic demand from a growing middle class for travel, hospitality, finance and entertainment; and (vi) low capital intensity of services, allowing fast scale-up.
14. Agriculture sector appears to be adversely affected by the reform process. Why?
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    Agriculture suffered for several reasons: (i) public investment in agriculture — irrigation, power, roads, market linkages, research and extension — has fallen since 1991; (ii) partial removal of fertiliser subsidy raised cultivation costs, hurting small and marginal farmers; (iii) import duties on agricultural products were reduced and QRs were lifted, exposing Indian farmers to global competition; (iv) minimum support prices have remained low; and (v) export-oriented strategies pushed a shift from food grains to cash crops, putting upward pressure on food-grain prices and reducing diversification at the farm level.
15. Why has the industrial sector performed poorly in the reform period?
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    Industrial growth slowed because: (i) cheaper imports replaced demand for domestic goods; (ii) investment in infrastructure — particularly power supply — remained inadequate; (iii) globalisation forced developing-country industries to face goods and capital flows from developed countries without proportional access in return; and (iv) non-tariff barriers remain high in developed-country markets — the textile quota imposed by the USA on India and China is a clear example. The asymmetry of openness has constrained Indian industry.
16. Discuss economic reforms in India in the light of social justice and welfare.
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    Reforms have been a mixed blessing for social justice and welfare. Positives: rapid GDP growth, large forex reserves, world-class IT and pharma exports, and inflation broadly under control. Negatives: growth has been concentrated in services consumed mainly by high-income groups — telecom, IT, finance, entertainment, travel and hospitality, real estate and trade — rather than in agriculture and industry, which sustain millions of livelihoods. Tax cuts and tariff reductions shrank the resources for welfare and developmental spending; subsidy cuts hit small farmers; PSE assets were sometimes undervalued in disinvestment. NCERT notes that the reform package, advised externally, further aggravated inequalities rooted in pre-existing Indian society. The lesson: growth without equity is incomplete; future reforms must marry openness to robust welfare and human-development policies.