The 1991 Reforms — LPG Transformation

3.1 Background: The Balance of Payments Crisis

India's 1991 economic crisis was triggered by several converging factors:

• Gulf War (1990–91): Oil price surge + loss of remittances from NRIs in Gulf
• Fiscal deficit: ~8.4% of GDP in 1990–91
• Foreign exchange reserves: Fell to $1.2 billion (barely 3 weeks of import cover)
• Emergency measure: India pledged 67 tonnes of gold to Bank of England and Union Bank of Switzerland for emergency loans
• Currency overvaluation: Led to export uncompetitiveness

Under PM Narasimha Rao and Finance Minister Dr. Manmohan Singh, India negotiated an IMF bailout and simultaneously launched comprehensive structural reforms.

3.2 Liberalisation

Industrial licensing reform:

• New Industrial Policy, July 1991: Industrial licensing abolished for all industries except 18 (later reduced to just defence and atomic energy by 2013)
• MRTP Act restrictions on large companies abolished
• Public sector reservation: 17 sectors → currently only 2 sectors

Trade liberalisation:

• Import licensing dismantled; quantitative restrictions replaced by tariffs
• Peak tariff reduced from ~300% to ~25–40% by late 1990s; further to ~13% by 2024
• EXIM Policy (now Foreign Trade Policy): liberalised every 5 years

Financial sector liberalisation:

• Private banks allowed (HDFC Bank, ICICI Bank, Axis Bank formed post-1993)
• Capital markets liberalised; SEBI given statutory powers (1992)
• Interest rate deregulation (except savings bank deposits)

3.3 Privatisation

Disinvestment history:

• Phase 1 (1991–99): Minority stake sales; Rs 14,000 crore raised in NDA-1 era
• Phase 2 (1999–2004): Strategic sales; Maruti Udyog stake sold to Suzuki
• Phase 3 (2014–present): Atmanirbhar emphasis on monetisation; Air India privatisation

Air India Privatisation (2022):

• Tata Sons won the bid in October 2021; transaction completed January 27, 2022
• Air India had debts of ~Rs 61,000 crore; government absorbed part; Tatas took Rs 15,300 crore
• Government retained all land and non-operational assets
• First major airline privatisation; symbolically returned to Tata Group (Air India was founded by JRD Tata in 1932)

National Monetisation Pipeline (NMP):

• Announced August 2021; target: Rs 6 lakh crore over 4 years (2021–25)
• Covers roads, railways, power transmission, pipelines, telecom, warehouses, airports
• Mechanism: Not selling assets but leasing/concessioning to private operators

3.4 Globalisation

FDI policy evolution:

• FERA 1973 (Foreign Exchange Regulation Act): FDI capped at 40% equity in most sectors → repealed 2000
• FEMA 2000 (Foreign Exchange Management Act): replaced FERA; liberalised approach
• FDI through automatic route (no prior approval needed) in most sectors
• Current FDI ceiling: 100% in most sectors; 49–74% in defence, media, insurance (specific rules)

FDI Inflows:

• 2014–15: $44.9 billion → 2021–22: $83.6 billion (peak) → 2023–24: $70.9 billion
• India is 5th largest FDI recipient globally (UNCTAD 2023)
• Top source countries: Mauritius (via treaty routing), Singapore, USA, Netherlands

Export growth:

• Merchandise exports: $18 billion (1991) → $437 billion (2023–24)
• Services exports: $309 billion (2023–24); IT services = $227 billion
• Total exports (goods + services): ~$776 billion (2023–24)

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