Events leading to LPG Reforms

In a speech of Prof C Rangarajan, IIM A, Governor of RBI at LPG Reforms time says 1991 is an important year in post independent Indian economic history with the challenge faced by balance of payments. Response set in place to deal with this situation were set of policies. They were stabilization and structural policies.

Stabilization policies were aimed at resolving the balance of payment crisis and structural

reforms were aimed removing rigidities entered that economic system not to get into such crisis once

again.

1940 and 50’s the dominant thought in economic literature was that state has important role to

play in course correcting what later came to be known as market failure. Literature also emphasized

on advantages of coordinated set of projects and investments which lead to nationwide economic

planning not only in India but elsewhere in the world. In experience of 40-50 years national travel it is

in our combined experience that governments can also fail. Government failure not because of faulty

investments, which can happen in private sector also but due to excessive control imposed on resource

allotment.

Can we fault our policy makers of 50s and 60s for the road they took for economic

development? The answer is partly no, because there was no clear model available in world for under

developed and developing counties should take to accelerate the economic development. The only

example available at that time was USSR, which over a span of 4-5 decades lift up country many

times higher in terms of productivity and quality of life. And hence our policy makers took that road

of economic development including Nehru.

By the end of 60s it was clear that this model has some problems, but our policies makers

refuse to take the cognizes until 1991. If we compare China and Indians per capital income in a plot

we can see till 1970s both nations have little difference in per capital income and only after 1970s

Chinas per capital income started to rise at a much faster phase.