1991 Economic Reforms — LPG
Background and Crisis
Pre-reform India (1947–1991): Mixed economy — large public sector, heavy regulation, Import Substitution Industrialisation (ISI).
Problems by 1990–91:
- License Raj: Every industry needed government licence — delays, inefficiency, corruption
- High fiscal deficit: Government borrowing crowded out private investment
- Foreign exchange crisis: Reserves fell to $1.2 billion (2 weeks of imports) by June 1991
- BOP deficit: India pledged 67 tonnes of gold to IMF/Bank of England for emergency loans
Trigger: Gulf War (1990–91) caused oil price spike and reduced remittances from Gulf workers.
Reform architects: PM P.V. Narasimha Rao + Finance Minister Dr. Manmohan Singh.
Liberalisation
- Industrial licensing abolished (except 6 hazardous/strategic industries)
- MRTP Act weakened (Monopolies and Restrictive Trade Practices Act — size limits removed)
- Public sector reserved list reduced — only defence, atomic energy, railways remain reserved
- Price controls reduced — fertilisers, pharmaceuticals gradually deregulated
- FDI allowed in most sectors (up to 49–100% depending on sector)
- Capital account convertibility: Partial — FDI and FII investments allowed; full convertibility not yet implemented
Privatisation
- Disinvestment: Government selling shares of PSUs to reduce stake
- Minority stake disinvestment (government retains majority)
- Strategic sale (control passes to private buyer)
- DIPAM (Department of Investment and Public Asset Management): Nodal agency for disinvestment
- Air India disinvestment (2022): Sold to Tata Group — marquee privatisation after 1991
- PSU performance: Navaratna, Maharatna, Miniratna status for well-performing PSUs
Globalisation
- WTO membership (1995): India joined World Trade Organization replacing GATT
- Import tariff reduction: Average tariff reduced from 87% (1990) to 20–30% (2000s)
- Export promotion: SEZs (Special Economic Zones), EXIM policy, Export credit
- Rupee convertibility: Current account convertible (1994) — not capital account
- FDI flows: Increased from negligible to $80+ billion annually by 2020s
Banking System in India
Structure
RBI (Central Bank — Apex)
│
├── Scheduled Commercial Banks
│ ├── Public Sector Banks (PSBs) — 12 (after mergers)
│ │ └── SBI + 11 nationalised banks
│ ├── Private Sector Banks — HDFC, ICICI, Axis, Kotak, etc.
│ ├── Foreign Banks — Citibank, HSBC, Standard Chartered
│ └── Small Finance Banks + Payments Banks
│
├── Cooperative Banks
│ ├── Urban Cooperative Banks
│ └── Rural Cooperative Banks (supervised by NABARD)
│
└── Regional Rural Banks (RRBs) — 43 (supervised by NABARD)
Bank Nationalisation
- 1st nationalisation (1969): 14 large private banks nationalised by PM Indira Gandhi — banks with deposits > ₹50 crore. Constitutional amendment followed after Supreme Court challenge.
- 2nd nationalisation (1980): 6 more banks nationalised — banks with deposits > ₹200 crore.
- Recent consolidation (2019–2020): Government merged 10 PSBs into 4:
- Oriental Bank + United Bank → Punjab National Bank
- Syndicate Bank → Canara Bank
- Allahabad Bank → Indian Bank
- Andhra + Corporation Bank → Union Bank
Reserve Bank of India (RBI)
Established: 1935 (under Reserve Bank of India Act, 1934). Private at first. Nationalised: 1949
Headquarters: Mumbai
Governor: Appointed by Central Government for 3-year term.
Monetary Policy Tools
| Tool | Full Form | What it means | Current approximate level |
|---|---|---|---|
| Repo Rate | Repurchase Rate | Rate at which banks borrow from RBI | ~6.5% |
| Reverse Repo | — | Rate at which RBI borrows from banks | Repo – 0.25% |
| CRR | Cash Reserve Ratio | % of deposits banks must keep with RBI (no interest) | ~4% |
| SLR | Statutory Liquidity Ratio | % of deposits banks must hold in govt securities | ~18% |
| MSF | Marginal Standing Facility | Emergency overnight borrowing from RBI | Repo + 0.25% |
| Bank Rate | — | Rate for long-term lending from RBI | ~6.75% |
Monetary Policy Committee (MPC): Set up in 2016 (RBI Amendment Act). 6 members: 3 from RBI (Governor, 2 Deputy Governors) + 3 external members appointed by Government. Meets bi-monthly to set policy rates. Majority vote; Governor has casting vote. MPC mandated to maintain inflation at 4% (±2%).
Development Finance Institutions (DFIs)
| Institution | Year | Focus |
|---|---|---|
| NABARD | 1982 | Agriculture and rural development |
| SIDBI | 1990 | Small and medium enterprises (MSMEs) |
| NHB | 1988 | Housing finance |
| EXIM Bank | 1982 | Export-import financing |
| NaBFID | 2021 | Infrastructure (new DFI) |
External Sector
Balance of Payments (BoP)
BoP records all economic transactions between India and the rest of the world.
Two accounts: 1. Current Account — trade in goods (Merchandise), services (software, BPO), income (remittances, dividends), transfers 2. Capital Account — FDI, FII/FPI, external borrowings, forex reserves changes
India's BoP position:
- Merchandise trade deficit: India imports more goods than it exports (mainly oil and electronics)
- Services surplus: IT/BPO exports make India a net exporter of services
- Remittances: India is the world's largest recipient of remittances (~$80–90 billion/year)
Foreign Exchange Management
- FEMA 1999: Foreign Exchange Management Act — replaced FERA 1973. Civil offence (not criminal) for violations.
- Foreign exchange reserves: RBI manages India's forex reserves. Includes gold, foreign currency, SDRs. India's reserves: ~$580–600 billion (2024).
- Exchange rate: India has a managed float (dirty float) — RBI intervenes to prevent extreme volatility but market determines rate.
Recent Economic Initiatives
| Scheme | Year | Purpose |
|---|---|---|
| Make in India | 2014 | Boost manufacturing, attract FDI |
| Startup India | 2016 | Ecosystem for startups — tax holidays, faster registration |
| Atmanirbhar Bharat | 2020 | Self-reliance — COVID-19 economic package + industrial policy |
| PLI Scheme | 2020 | Production Linked Incentive — 14 sectors, ₹2 lakh cr |
| Digital India | 2015 | Digital infrastructure, e-governance, digital literacy |
| UPI | 2016 | Unified Payments Interface — real-time bank transfers via NPCI |
| Jan Dhan Yojana | 2014 | Financial inclusion — zero-balance bank accounts for all |
| PM Mudra Yojana | 2015 | Micro-loans (up to ₹10 lakh) for small businesses |
Board Exam Tips
- 1991 crisis trigger: BOP crisis, gold pledge, oil prices. Reforms: Narasimha Rao + Manmohan Singh.
- LPG: Liberalisation (remove controls), Privatisation (sell PSUs), Globalisation (open trade).
- RBI established 1935; nationalised 1949; HQ Mumbai.
- Repo rate = banks borrow FROM RBI. Reverse Repo = banks lend TO RBI.
- Bank nationalisation: 14 banks in 1969, 6 more in 1980.
- NABARD (1982) = apex bank for agriculture and rural development.
- India joined WTO in 1995 (replaced GATT).
- MPC: 6 members, sets repo rate, inflation target = 4% ±2%.
Frequently Asked Questions
The 1991 reforms introduced three inter-linked policies: (1) Liberalisation — removing industrial licensing (License Raj), allowing private participation, deregulating prices. (2) Privatisation — disinvestment of Public Sector Undertakings (PSUs), allowing FDI. (3) Globalisation — opening India to international trade and investment, reducing import tariffs, making the rupee convertible on current account. The reforms were initiated by Finance Minister Manmohan Singh under PM Narasimha Rao.