LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN

APPRAISAL

• Since independence, India followed the mixed economy framework by combining the advantages of the
capitalist economic system with those of the socialist economic system.
• This policy resulted in the establishment of a variety of rules and laws, which were aimed at controlling and
regulating the economy, ended up instead in hampering the process of growth and development.
In 1991, India met with an economic crisis relating to its external debt:-
• The government was not able to make repayments on its borrowings from abroad.
• Foreign exchange reserves, which we generally maintain to import petrol and other important items, dropped
to levels that were not sufficient for even a fortnight.
• The crisis was further compounded by rising prices of essential goods.

All these led the government to introduce a new set of policy measures which changed the direction of our
developmental strategies.

BACKGROUND OF CRISIS

The origin of the financial crisis can be traced from the inefficient management of the Indian economy in
the 1980s.:-

i. The continued spending on development programmes of the government did not generate additional revenue.
ii. Moreover, the government was not able to generate sufficiently from internal sources such as taxation.
iii. The income from public sector undertakings was also not very high to meet the growing expenditure.
iv. At times, our foreign exchange, borrowed from other countries and international financial institutions, was
spent on meeting consumption needs.
v. Sufficient attention was not given to boost exports to pay for the growing imports.
vi. In the late 1980s, government expenditure began to exceed its revenue by such large margins that meeting
the expenditure through borrowings became unsustainable.
vii. Prices of many essential goods rose sharply.
viii. Imports grew at a very high rate without matching growth of exports.
ix. Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two
weeks.
x. There was also not sufficient foreign exchange to pay the interest that needs to be paid to international
lenders.

Why India adopted New Economic Policy?

No country or international funder was willing to lend to India.

India approached the International Bank for Reconstruction and Development (IBRD), popularly
known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to
manage the crisis.

For availing the loan, these international agencies expected India to liberalise and open up the
economy by removing restrictions on the private sector, reduce the role of the government in many
areas and remove trade restrictions between India and other countries.
 India agreed to the conditionalities of World Bank and IMF and announced the New Economic
Policy (NEP) in 1991.

New Economic policy

• The NEP consisted of wide ranging economic reforms.
This set of policies can broadly be classified into two groups

The stabilisation measures The structural reform

To correct some of the They are long-term

weaknesses that has measures, aimed at
developed in the improving the efficiency of
BALANCE OF PAYMENTS the economy and increasing
and to bring INFLATION its international
under control. competitiveness by
removing the rigidities in
various segments of the
To maintain sufficient foreign Indian economy.
exchange reserves

Globalisation.
Liberalisation Privatisation

LIBERALISATION
Liberalisation means to put an end to the rules, restriction and laws which were aimed at regulating the economic
activities.

• A few liberalisation measures were introduced in 1980s in areas of INDUSTRIAL LICENSING, EXPORT-
IMPORT POLICY, TECHNOLOGY UPGRADATION, FISCAL POLICY and FOREIGN
INVESTMENT.
• But reforms in 1991 are more comprehensive.

Reforms Under Liberalisation

INDUSTRIAL Financial Tax reforms or Foreign Exchange Trade and

SECTOR Reforms Investment Policy
sector reforms fiscal reforms Reforms
REFORMS
 INDUSTRIAL SECTOR REFORMS

Before Liberlisation After Liberlisation

Industrial licensing under which Industrial licensing was abolished

every entrepreneur had to get for almost all but product categories
permission from government — alcohol, cigarettes, hazardous
officials to start a firm, close a chemicals, industrial explosives,
firm or decide the amount of electronics, aerospace and drugs
goods that could be produced and pharmaceuticals.

The only industries which are now

reserved for the public sector are a
Private sector was not allowed in
part of defense equipment,
many industries
atomic energy generation and
railway transport.

Some goods could be produced Many goods produced by small-

only in small-scale industries, scale industries have now been
dereserved

Controls on price fixation and

In many industries, the market has
distribution of selected industrial
been allowed to determine the
products
prices.

Financial Sector Reforms

Financial sector includes financial institutions like

Commercial banks Investment banks Stock exchange operations Foreign exchange market
• The financial sector in India is regulated by the Reserve Bank of India (RBI).
a) To reduce the role of RBI from regulator to facilitator of financial sector.
b) The financial sector may be allowed to take decisions on many matters without consulting the RBI.
c) The reform policies led to the establishment of private sector banks, Indian as well as foreign.
d) Foreign investment limit in banks was raised to around 50 per cent.
e) Those banks which fulfill certain conditions have been given freedom to set up new branches without the
approval of the RBI and rationalise their existing branch networks.
f) Certain managerial aspects have been retained with the RBI to safeguard the interests of the account-
holders and the nation.
g) Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and pension funds, are
now allowed to invest in Indian financial markets.

Tax Reforms
Tax reforms are concerned with the
reforms in the

Government’s taxation Public expenditure policies

FISCAL POLICY

• There are two types of taxes: Direct and Indirect.

Reforms in Direct taxes
a) Direct taxes consist of taxes on incomes of individuals, as well as, profits of business enterprises.
b) Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that
high rates of income tax were an important reason for tax evasion.
c) The rate of corporation tax, which was very high earlier, has been gradually reduced.
Reforms in Indirect taxes
a) Simplification of Procedure:- In order to encourage better compliance on the part of taxpayers many
procedures have been simplified and the rates also substantially lowered.
b) Goods and Services Tax Act 2016, to simplify and introduce a unified indirect tax system in India. To
reduce tax evasion and create ‘one nation, one tax and one market’.

Foreign Exchange Reforms

• Devaluation of rupees: In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee
was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange.
• Adoption of flexible exchange rate system:-markets determine exchange rates based on the demand and supply
of foreign exchange.
 Trade and Investment Policy Reforms

• Dismantling of quantitative restrictions on imports and exports.

• Reduction of tariff rates.
• Removal of licensing procedures for imports.
• Import licensing was abolished except in case of hazardous and environmentally sensitive industries.
• Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully
removed from April 2001.
• Export duties have been removed to increase the competitive position of Indian goods in the international
markets.

PRIVATISATION
➢ It implies shedding of the ownership or management of a government owned
enterprise.

Government companies are converted into private

companies in two ways

By withdrawal of the
By outright sale of public
government from ownership
sector companies.
and management of public
sector companies

DISINVESTMENT:- Privatisation of the public sector enterprises by selling off part of the equity of PSEs to
the public.

NEED FOR PRIVATISATION:-

a) To improve financial discipline and facilitate modernisation.

b) Private capital and managerial capabilities could be effectively utilised to improve the performance of
the PSUs.
c) Privatisation could provide strong impetus to the inflow of FDI.
d) The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in
taking managerial decisions.
e) Some PSUs have been granted special status as maharatnas, navratnas and miniratnas.
 GLOBALISATION
Globalisation means integration of the economy of the country with the world economy. It is turning the
world into one whole or creating a borderless world.

➢ It involves creation of networks and activities transcending economic, social and geographical
boundaries.

Outsourcing: In outsourcing, a company hires regular service from external sources, mostly from other
countries, which was previously provided internally or from within the country.

➢ Most multinational corporations, and even small companies, are outsourcing their services to India
where they can be availed at a cheaper cost with reasonable degree of skill and accuracy.
➢ The low wage rates and availability of skilled manpower in India have made it a destination for global
outsourcing in the post-reform period.
➢ Developed IT sector in INDIA is another reason.

WORLD TRADE ORGANISATION (WTO):

GATT was established in 1948 with 23 countries.

The WTO was founded in 1995 as the successor

organisation to the General Agreement on Trade
and Tariff (GATT).

➢ It administers all multilateral trade agreements by providing equal opportunities to all countries in the
international market for trading purposes.
➢ WTO is expected to establish a rule-based trading regime in which nations cannot place arbitrary
restrictions on trade.
➢ In addition, its purpose is also to enlarge production and trade of services, to ensure optimum utilisation
of world resources and to protect the environment.
➢ The WTO agreements cover trade in goods as well as services to facilitate international trade (bilateral
and multilateral) through removal of tariff as well as non-tariff barriers and providing greater market
access to all member countries.

INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT

• The post–1991 India witnessed a rapid growth in GDP on a continual basis for two decades.

In 1980–91 In 2007–12.
5.6% 8.2%
 GROWTH IN THREE SECTORS

AGRICULTURE INDUSTRY SERVICE

DECLINED The industrial sector Continued to

witnessed a steep witness a high
E
decline during 2012–13 level of growth
High growth rate
of 4.2% during
2013–14

The highest ever

it began to show growth rate of
Negative growth
a continuous 10.3 per cent
rate of -0.2%
positive growth during 2014-15
during 2014–15

This indicates that this growth is mainly driven by growth in the service sector.
• The opening of the economy has led to a rapid increase in foreign direct investment and foreign
exchange reserves.

FOREIGN INVESTMENT FOREIGN EXCHANGE

RESERVES

Foreign direct Foreign institutional

investment (FDI) investment (FII)
Has increased Has increased from
from about US $ 6 about US $ 321
billion in 1990-91 billion in 2014-15.

Has increased from To US $ 36 billion

about US $100 million in 2016-17.
in 1990-91

• India is one of the largest foreign exchange reserve holders in the world.
• India is seen as a successful exporter of auto parts, engineering goods, IT software and textiles in the
reform period.
• Rising prices have also been kept under control.
On the other hand, the reform process has been widely criticised for not being able to address some of the
basic problems facing our economy especially in areas of employment, agriculture, industry, infrastructure
development and fiscal management.

Growth and Employment

Though the GDP growth rate has increased in the reform period, scholars point out that the reform-led growth
has not generated sufficient employment opportunities in the country.

Reforms in Agriculture

➢ Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.
➢ Public investment in agriculture sector especially in infrastructure, which includes irrigation, power,
roads, market linkages and research and extension, has fallen in the reform period.
➢ The removal of fertiliser subsidy has led to increase in the cost of production, which has severely
affected the small and marginal farmers.
➢ Reduction in import duties on agricultural products, removal of minimum support price and lifting of
quantitative restrictions on agricultural products; these have adversely affected Indian farmers as they
now have to face increased international competition.
➢ Moreover, because of export oriented policy strategies in agriculture, there has been a shift from
production for the domestic market towards production for the export market focusing on cash crops
in lieu of production of food grains. This puts pressure on prices of food grains.
Reforms in Industry
➢