Key Points

In 1991, India faced a severe balance of payments crisis. Foreign exchange reserves dropped to a level insufficient to cover even a fortnight of imports, and the government was close to defaulting on its international debt.

To manage the crisis, India borrowed $7 billion from the International Monetary Fund (IMF) and the World Bank. These loans came with conditions requiring India to liberalise and open up its economy.

The government announced the New Economic Policy (NEP), which aimed to create a more competitive economic environment and remove barriers to the entry and growth of firms. Its policies are broadly classified as Liberalisation, Privatisation, and Globalisation (LPG).

The NEP included short-term stabilisation measures to control inflation and correct the balance of payments, and long-term structural reforms to improve economic efficiency and competitiveness.

Liberalisation involved ending restrictive rules and laws that hindered economic growth. This included abolishing industrial licensing for most industries and opening up sectors previously reserved for the government.

Reforms reduced the role of the Reserve Bank of India (RBI) from a regulator to a facilitator. This allowed the entry of private and foreign banks and increased the foreign investment limit in the banking sector.

Trade reforms aimed to increase international competitiveness by dismantling quantitative restrictions on imports and exports, reducing tariff rates, and removing import licensing procedures.

Privatisation implies the transfer of ownership or management of a government-owned enterprise to the private sector. This was often done through disinvestment, which is the sale of a part of the equity of Public Sector Enterprises (PSEs).

To improve the efficiency of Public Sector Enterprises, the government granted special status like Maharatna, Navratna, and Miniratna to select profitable PSEs, giving them greater managerial and operational autonomy.

Globalisation is the integration of a country's economy with the world economy. It is a complex process aimed at creating a borderless world with greater interdependence and economic integration.

Outsourcing, where a company hires services from external sources in other countries, is an important outcome of globalisation. India became a major destination for services like BPOs due to its low wage rates and skilled manpower.

The WTO was founded in 1995 as the successor to GATT. It aims to establish a rule-based international trading system and facilitate trade by removing tariff and non-tariff barriers among member countries.

The reform period saw rapid GDP growth driven by the service sector. There was a significant increase in foreign direct investment (FDI) and foreign exchange reserves, and rising prices were kept under control.

The agricultural sector's growth decelerated post-reforms. This was due to a fall in public investment, removal of subsidies which increased costs, and increased international competition from cheaper imports.

Industrial growth also slowed down. This was attributed to decreased demand for domestic goods due to cheaper imports and inadequate investment in infrastructure like power supply.

Critics argue that the reforms led to 'jobless growth' without creating sufficient employment opportunities. They also point out that reforms increased income inequality and compromised social welfare expenditure.