CHAPTER 3: LIBERLISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

➢ NEED FOR ECONOMIC REFORMS

Following points describe the need for economic reforms:

1. Mounting Fiscal Deficit: Prior to 1991, fiscal deficit of the government was increasing continuously due to
increase in government’s non-developmental expenditure. To cope with fiscal deficit, government was
borrowing and paying interest. Therefore, due to increase in fiscal deficit, there was corresponding rise in
public debt and interest payment liability.
2. Adverse Balance of Payments (BoP): Our exports did not rise to the desired extent and imports grew
rapidly. This created a deficit in BoP. To cope with deficit, huge loans had to be raised from rest of the world.
Accordingly, the burden of foreign debt increased tremendously.
3. Gulf Crisis: On account of Iraq war in 1990-91, prices of petrol shot up. In the wake of war, BoP took a
serious hit. Gulf crisis further deepened the BoP crisis.
4. Fall in Foreign Exchange Reserves: In 1990-91, India’s foreign exchange reserves fell to such a low level that
these were not enough to pay for imports for even 15 days. India had to mortgage its gold reserves with
world bank to discharge its foreign debt servicing obligation and resort to the policy of liberlisation.
5. Rise in Prices: Prices of essential goods rose sharply. Due to inflation, economic crisis deepened from bad to
worse.
6. Poor Performance of PSUs: Most of the PSUs were incurring losses during 1991 which made them liability
for the government. These PSUs were not generating enough revenues to cope up with its non-
developmental expenditures.
Due to all these reasons, Indian government approached the International Bank for
Reconstruction and Development (IBRD), popularly known as World Bank and International Monetary Fund
(IMF) and received $7 billion as loans to manage the crisis. But it was a tied loan – tied to a set of reforms.
For availing these loans, these international organisations expected India to liberlise its economy by
removing various restrictions.
India agreed to the conditions of World Bank and IMF and announced the New Economic Policy
(NEP) in 1991. Liberlisation, Privatisation and Globalisation were the key elements of this NEP.

NEP consisted of two sets of policies namely stabilisation measures and structural measures. Following are the
differences:

ELEMENTS OF NEP

LIBERLISATION PRIVATISATION GLOBALISATION

➢ LIBERLISATION:
Liberlisation of the economy means its freedom from direct or physical control imposed by the government.
It is simply removing the various kinds of restrictions imposed by the government and open up various
sectors of the economy. Some important areas of liberlisation are:
• Industrial sector reforms
• Financial sector reforms
• Tax reforms
• Foreign exchange markets reforms
• Trade and investment sector reforms

1) Industrial Sector Reforms:

Liberlisation reforms in industrial sector includes the following:

a) Industrial licensing was abolished for all product categories except alcohol, cigarettes, hazardous chemicals,
industrial explosives, electronics, aerospace and drugs and pharmaceuticals.
b) Private sector was allowed in all the sectors except defence equipments, atomic energy generation and
railways.
c) Many goods produced by SSI have been de-reserved. Now big industries could also produce these goods.
d) Now the markets have been allowed to determine the prices.

2) Financial Sector Reforms:

Financial sector includes financial institutions such as commercial banks, investment banks, stock exchange
operations and foreign exchange market.

Financial sector reforms included the following:

a) The role of RBI was changed from being regulator to facilitator of financial sector. It means the financial
sector can take decisions on many matters without consulting the RBI.
b) Many private sector banks were established.
c) Foreign investment limit in banks was raised to around 50 percent.
d) Those banks which fulfil certain conditions have been given freedom to set up new branches without the
approval of the RBI.
e) Inspite of these freedoms, certain managerial aspects have been retained with the RBI to safeguard the
interests of the account holders and the nation.
f) Foreign Institutional Investment (FII) such as merchant banker, mutual funds and pension funds are now
allowed to invest in Indian financial markets.

3) Tax Reforms:

Tax reforms are concerned with reforms in government’s taxation and public expenditure policies (known as fiscal
policy). Tax reforms includes the following:

a) Since 1991, there has been continuous reduction in the taxes on individual incomes as it was felt that high
taxes on income are reason for tax evasion.
b) The rate of corporation tax, which was very high earlier has been gradually reduced.
c) Efforts have also been made to reform the indirect taxes.
d) Tax structure was simplified.

4) Foreign Exchange Reforms:

a) In order to resolve the BoP crisis, the rupee was devalued against foreign currencies. This led to increase in
the inflow of foreign exchange.
 b) Foreign exchange rate determination was freed from government’s control. Now market forces of supply
and demand would determine the foreign exchange rate.

5) Trade and Investment Policy Reforms:

a) Import licensing was abolished except in case of hazardous and environmentally sensitive industries.
b) Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also
fully removed from April 2001.
c) Export duties have been removed to increase the competitive position of Indian goods in international
markets.

➢ PRIVATISATION:

Privatisation is the general process of involving the private sector in the ownership or operation of a state owned
enterprise. It is simply changing of ownership or management of government owned enterprises from
government to the private sectors. It happens in two ways:

a) Withdrawals of the government from ownership and management of public sector companies.
b) Outright sale of public sector companies.

Disinvestment:
It is a variant of privatisation. It refers to a situation when the government sells of a part of its equity of PSEs to
the private investors.

The arguments in favour of privatisation

a) To improve financial discipline and facilitate modernisation.

b) Using capital and managerial capabilities of private sector to improve the performance of the PSUs.
c) To encourage the inflow of FDI.

Attempts made to improve the efficiency of PSUs

a) Privatisation
b) These PSUs were given autonomy in taking managerial decisions.
c) Some PSUs were given special status as Maharatnas, Navratnas and Miniratnas.
➢ GLOBALISATION:

Globalisation means integrating the economy of a country with the economies of other countries under conditions
of free flow of trade and capital and movement of persons across borders. Globalisation, in fact, is the outcome of
the policies of liberlisation and privatisation.

Outsourcing:

This is an important outcome of the process of globalisation. It refers to a system of hiring business services from the
outside world. These services include: call centres, transcriptions, clinical advice, record keeping, accountancy,
banking services, music recording, film editing, teaching etc.

India is emerging as an important destination of outsourcing particularly BPO (Business Process

Outsourcing also called call centres). This is because:

a) There is availability of cheap labour in India or relatively low wage rate for the skilled workers.
b) There is a revolutionary growth of IT industry in India.

➢ WORLD TRADE ORGANISATION (WTO)

a) WTO was founded in 1995. It is successor of General Agreement on Trade and Tariff (GATT) which was
established in 1948 with 23 countries.
b) It was established to administer all multilateral trade agreements by providing equal opportunities to all
countries in the international market for trading purposes.
c) WTO is expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions
on trade.
d) The WTO agreements covers trade in goods and services to facilitate international trade through removal of
tariff as well as non-tariff barriers and providing greater market access to all member countries.

➢ Assessment of Reforms of 1991

Achievements:

a) The growth of GDP increased from 5.6% during 1990-91 to 8.2% during 2007-12.
b) During the reform period, the growth of agricultural sector has declined. The industrial sector has shown
fluctuations and service sector has grown. It means growth is mainly driven by service sector.
c) The foreign investment (FDI and FII) has increased from about US $100 million in 1990-91 to US $30 billion in
2017-18.
d) Foreign exchange reserves have increased from US $6 billion in 1990-91 to US $413 billion in 2018-19.
e) India became a successful exporter of auto parts, engineering goods, IT software and textiles.
f) Rising prices have also been kept under control.

Criticism:

Reforms have not been able to address some issues in the following sectors.

a) Growth and Employment:

Scholars point out that reform led growth has not generated sufficient employment opportunities in the
country.

b) Reforms in Agriculture:
a) Public investment in agriculture sector especially in infrastructure like irrigation, power, roads, market
linkages, research has fallen in the reform period.
b) Removal of fertiliser subsidy increased cost of production which has adversely affected the farmers.
c) Policy changes such as reduction in import duties on agricultural products, removal of MSP and lifting of
quantitative restrictions on agricultural products have adversely affected farmers as they now have to
face increased international competition.
 d) There is a shift from production for the domestic market to the production for the export markets. It has
reduced the production of food grains in domestic country which put pressure on their prices.

c) Reforms in Industry:
a) Cheaper imports from foreign countries replaced the demand for domestic goods.
b) Domestic producers are facing competition from imports.
c) The infrastructure facilities including power supply have remained insufficient due to lack of investment.
d) Free movement of goods and services from abroad has severely affected the local industries and
employment opportunities in developing countries.
e) Developing countries like India still does not have access to developed countries’ markets due to high
non-tariff barriers by such countries.

d) Disinvestment:
a) The assets of PSEs have been devalued and sold to private sector. This means there has been a substantial
loss to the government.
b) Proceeds from disinvestment were used to offset the shortage of government revenues rather than using it
for the development of PSEs and building social infrastructure in country. It simply means that revenue
generated from disinvestment has been spent on non-development works.

e) Fiscal Policy and Reforms:

a) Public expenditure on social sectors have decreased.
b) The tax reduction have not resulted in the increase in tax revenue for the government.
c) Reform policies such as tariff reduction, tax incentives to foreign investors have reduced the revenue for the
government.