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Pre-LPG Era

It is LPG(Liberalization, Privatization and Globalization) era in India. It started in early 1980's with pro-business measures like removing restrictions on capacity expansion, price controls and reducing corporate taxes. Second phase of liberalization started in early 1990's which ended many public monopolies and allowed foreign direct investment in many sectors.

After independence from British colonial rule in 1947, India opted a socialist economy with government control over private sector participation, foreign trade and foreign direct investment. This economic policy aimed to substitute products which India imports with locally produced substitutes, industrialization, state intervention in labour and financial markets, a large public sector, business regulation and centralized planning. It expected the creation and growth of capital and technology intensive heavy industries as well as subsidizing manual, low skill collage industries simultaneously.

Jawaharlal Nehru, who formulated and oversaw this economic policy expected a favourable outcome from this strategy because it features both capitalist market economy and socialist command economy. But the outcome was unfavourable to the country and leads to liberalization and privatization in India.

Government made large investments in heavy industries and expects these industries will produce enough capital for investment in other sectors of the economy. But it didn't happened. In the other hand, government has to invest more money for the survival of these companies because of poor management and low productivity. For example, the public sector steel company losses were more than its initial investment while the private sector steel company was making profit.

India's average annual growth rate from 1950-1980 was 3.5%. At the same time other Asian countries like Hong Kong, Singapore, South Korea and Taiwan recorded an annual growth rate of 8%. Now 'Hindu rate of growth' is an expression to refer low annual growth rate.

The failure of pro-socialist economic policy to produce an annual growth rate comparable to its neighbours leads to the economic reforms going on now.