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Managerial Economics - Economic Environment And Transition In Indian Economy

Liberalisation, Privatisation And Globalisation (LPG) - Economic Environment And Transition In Indian Economy

   Posted On :  30.05.2018 12:36 am

India has vast natural resources and abundant manpower but our contribution in the world trade is less than 1%.

Liberalisation, Privatisation And Globalisation (LPG)

Need For Liberalization:

India has vast natural resources and abundant manpower but our contribution in the world trade is less than 1%. India has low Per capita income and Net National product. To improve the same, liberalization has been recommended. Under the direction of the former Prime Minister P.V. Narashima Rao the economic reform process was resorted to improve the position of the Indian economy in the world and to solve the problems of trade deficit.

Path To Liberalization:

The Government has to release the economy from the restrictive rules and regulations followed earlier. It was appropriate on the part of the government of India to implement globalization strategy to pave the way for economic liberalization.
The Liberalization, Privatization and Globalization (LPG) model was developed in 1991 by the then finance minister Dr. Manmohan singh under the direction of the Prime Minister Shri.P.V.Naraimha Rao . Structural changes in the Indian economy were :
1.      End of the private sector: The government decided to transfer the loss making public sector units to the private, but there were no takers, therefore the government went for disinvestment of the public enterprises including profit making units.

2.      Government permitted private sector to set up individual units without license.
3.      The investment ceiling was lifted and hence the private investment could go up to any level.
4.      The Government approved up to 51% FDI. No permission was required for hiring foreign technicians and technology.
5.      Rehabilitation schemes to reconstruct the sick public sector enterprises. (board for industrial and financial reconstruction) BIFR was established.
6.      Greater autonomy was given to manage Public sector units.
7.      Economy was opened to other countries to encourage exports. Therefore it encouraged private participation and expected the rise in exports from India.

Reasons For Implementing The Policy Of Liberalization, Privatization And Globalization:

1.      Excess consumption and expenditure over revenue have been experienced resulting in heavy government borrowings.
2.      Growing in-efficiency in the use of resources.
3.      Mismanagement of firms and the economy.
4.      Losses of public sector enterprises.
5.      Various distortions like poor technological development, shortage of foreign exchange, borrowing, mismanagement of foreign exchange reserves etc., have distorted the Economic growth.
6.      Low foreign exchange reserves.
7.      Burden of national debt and
8.      Inflationary pressure on the economy.

Weakness Of LPG Model:

The major weaknesses of India’s LPG model were:
1.      Narrow focus
2.      Free entry of MNCs
3.      Agricultural sector was bypassed
4.      Facilitated more imports
5.      Capital intensive development


Relaxation of government restriction in social and economic policies was called as liberalization. Trade liberalization means removing the tariff restriction on the flow of goods and services between countries. Liberalization is a pre requisite for privatization. Capital market should be developed to absorb the changes. In India the people were allowed to start their business without getting license except in limited fields. Due to this, a number of firms have been started domestically which increased the production and expanded the market.


Privatization means transfer of assets or service functions from public to private ownership through franchising, leasing, contracting and divesture. Disinvestment means disposal of public sector units, equity to the private sectors. Privatization helps the public sector to modernize, diversify and make their business more competitive. It increases managerial efficiency of the organization and revives sick units. But it may result in income inequality, causing difficulty in maintaining social justice and public welfare.
Privatization means sale of nationalized industrial units to the private sector and transferring the revenue available from the public sector to the private sector by adopting any one of the following methods.
1.      Sale of part of nationalized industries to the private
2.      Sale of individual assets of Government bodies to the private
3.      Creation of competitive spirit of the private sector to the state enterprises.

Arguments In Favor Of Privatization:

1.      Cost: Private sector has productive efficiency therefore their cost of production have been less than the cost of the goods produced in the public enterprises.
2.      Choice and quality: Private sector spends more on R&D and they can produce more variety with better quality and offer more choice to the customers, due to their allocative efficiency.
3.      Innovation: Private sectors have efficiency in innovating new models.
4.      The Invisible hand of the market: Free market forces will ensure the optimal allocation of resources.
5.      Wider share of ownership: The ownership of the business is well spread throughout the country and not held in one or in a few hands.
6.      Reduction in public borrowing and state spending: Privatization reduces the government borrowings and spending.

Problems Of Privatization

Privatization created more monopoly in the market and inequality in pricing which had led to negative externalities. Only through creation of competition and with regulatory measures we can control and minimize the problems of privatization in the economy.
Why should government own and run firms?

Lower cost: Public sector organizations were productively efficient and have economies of scale.
Better management: Government organizations have better management system than private.
Control of monopolies: Public sector enterprises will reduce and control the monopoly market.
Maximum benefit: Government provides maximum of net social benefits and not profit.
Greater control of the economy: Public sector can control the economy to a greater extent.
Fair distribution of resources: The available resources are allocated in an effective manner.
Apart from the above mentioned reasons Public sector is more efficient than private organizations. Private enterprises exploit workers and consumers more than the public sector enterprises. Profit is not the sole motive for public sector enterprises.


Globalization means integrating the domestic economy with the world economy, moving towards a new world economic order which leads to integrated financial markets and trade. Globalization improves the effective allocation of resources and expenditure of a country along with economic growth. Globalization has helped developed countries more than the developing countries. Globalization has completely transformed the way Indian business used to operate.
Globalization is a process of integration of the world into one market by removal of all the political, geographical trade and business barriers among nations. Indian businesses should formulate the following strategies to overcome the challenges posed by globalization.
1.Behavioral strategy: continuous up gradation of skills, knowledge and technology of Human Resource is important for empowerment. Efforts should be made to develop a comprehensive version of managerial strategy which helps to improve the decision making skills and problem solving skills of the managers.
2.Operational strategy: producing quality products and maintaining the international quality is essential in the globalised market. Organizations must use various methods like TQM, JIT, Kaizen and others to improve the operational efficiency. Therefore organizations should plan a gradual transition in technological up gradation.
3.Marketing strategy: to maximize customer satisfaction, to render better services, and to introduce e-marketing, net marketing etc., Various marketing strategies should be followed to improve retail environment.
4.Investment for growing FDI: Due consideration should be given to the exchange rate, other risks like political risk and economic risk.
5.Governance: the business situation changed dramatically over the last few years. Quality is important for sustainable development in this competitive environment. Business opportunities are more with tough competition. Therefore good governance will maximize the value of shareholders wealth.

6.Risk management strategy: international business is complex in nature and it leads to various types of risks. Which can be managed by insurance, letter of credit, joint ventures, but the top management should consider broader business strategies to define and overcome these risks.

Effects Of Globalization On Indian Economy

1.      India’s share in the world export have increased from .53% (1950) to 1 % (2005)
2.      Foreign exchange reserves had increased to $180billion (2007)
3.      Export growth has increased to a maximum of 20 percent per annum.
4.      Current account deficit of 3% has reduced to 1.1%.
5.      Reduction in external debt crisis from 8 billion in 1990 to $3billion in 2006
Benefits to consumers: Consumers were able to get large variety of goods with improved quality at a reasonable price.

Globalizing - World Evidence:

1.      Expanding Trade
2.      Increasing capital flow
3.      Rising tourism and migration
4.      Linking of farthest corners of the world by new technology.

Forces Of Globalization:

1.      Revolutionary changes have taken place in the field of Information technology.
2.      Advancement in travel and transportation
3.      Liberalization of trade regimes
4.      Emergence of trading blocs

Upshot Of Globalization:

1.      Unprecedented economic growth
2.      Multi-locational manufacturing
3.      Surge in international trade
4.      Explosive growth in capital movements
5.      Increase in labour movement
6.      Emergence of cultural commonalities

The Way Forward:

1.      Build on your strength
2.      Develop a global force
3.      Achieve excellence in areas of one’s comparative advantage
4.      Build up an effective regulatory system
5.      Develop a good social security network
Thus we can conclude by saying that globalization is progressing well world over, whether we like it or not it is bringing together different nations as one. We can see the evidence in the Indian economy. Government of India has also taken many steps towards globalization which has its own merits and demerits. It is evident that India has potential to face the situation. This is the macroeconomic environment prevailing in India as well as in other parts of the world.

Tags : Managerial Economics - Economic Environment And Transition In Indian Economy
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