The Balance of Payments crisis in 1991 and the subsequent rise in inflation forced India to adopt wide-ranging reforms, popularly known as Liberalization, Privatization, and Globalization (LPG).

The economic reforms of 1991 were a comprehensive structural overhaul of the Indian economy:

• Liberalization
  • Delicensing: The licensing requirement was done away with for most of the industries in a gradual manner and only a few industries are now reserved for the public sector (e.g. atomic energy generation).
  • Relaxation under the Monopolistic and Restrictive Trade Practice (MRTP) Act: Now, it was no longer required to seek prior government approval for the expansion and establishment of new industries. The emphasis has shifted now to restricting unfair trade practices and safeguarding the interests of consumers.
  • Liberalization of capital markets: Under the regulation of SEBI, a new company could be floated with the issuance of shares and debentures without seeking the permission of the government.
  • Foreign exchange market: A flexible exchange rate has been introduced under which the exchange rate is determined by market forces. In 1993-94, the rupee was made fully convertible on trade accounts in terms of foreign currency.
  • Removal of restrictions: Restrictions on mergers, takeovers, separation of industrial units, etc. have been largely removed.
• Privatization: The government started disinvestment by selling off the equities of the PSUs. The purpose behind such a move was to improve financial discipline and facilitate modernization. It helped the PSUs to gain from the efficient functioning of the private sector and improved decision-making at managerial levels.
• Globalization: This paved the way for the integration of the Indian economy with the global economy. In recent times, many services such as voice-based business processes (popularly known as BPO or call centers), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice, and even teaching are being outsourced by companies in developed countries to India.

With these reforms, the focus now has shifted from the earlier ‘License-Permit-Quota’ regime towards a regime under which the government plays the role of a facilitator and enables the private sector to play a proactive role in driving the economic development of India.