Page 21
Liberalisation-Privatisation-Globalisation
Objectives:
Understand the background of the reform policies introduced in India in 1991
Understand the mechanism through which reform policies were introduced
Comprehend the process of globalisation and its implications for India
Understand the impact of the reform process on various sectors
1991
India met with an economic crisis relating to its external debt—
Government was unable to make repayments on its borrowings from abroad
Foreign exchange reserves dropped to levels that were not sufficient
Compounded by rising prices of essential goods
?Inefficient management of the Indian economy in the 1980s
What happens when expenditure is more than income? Government borrows to finance
the deficit from banks and also from people within the country and from international
financial institutions.
India:
Government had to overshoot its revenue to meet problems like unemployment,
poverty and population explosion (revenues were very low; no chance of generating
immediate returns)? No generation of additional revenue even via taxation
Income from public sector undertakings— not very high to meet the growing
expenditure
Borrowed foreign exchange: Spent on meeting consumption needs
Lack of attention: Reduction in profligate spending & boosting of exports to pay for the
growing imports
Page 22
Late 1980s…
Government expenditure exceeded its revenue by large margins? unsustainable
Sharp rise in the prices of many essential goods
Imports grew at a very high rate without matching growth of exports
Foreign exchange reserves declined to a level that was not adequate to finance imports
for more than two weeks.
No sufficient foreign exchange to pay the interest that needs to be paid to international
lenders.
India took a step…
Approached the International Bank for Reconstruction and Development (IBRD)—World
Bank and the International Monetary Fund (IMF) and received $7 billion as loan to manage
the crisis
How to avail the loan: International agencies expected India to liberalise and open up the
economy by
Removing restrictions on the private sector
Reducing the role of the government in many areas
Removing trade restrictions
What did India do—India agreed to the conditionality’s of World Bank and IMF—announced
the New Economic Policy (NEP)
Towards creating a more competitive environment in the economy
Removing the barriers to entry
Growth of firms
The nature of policies—
Stabilisation measures are short-term measures—to correct some of the weaknesses
that have developed in the balance of payments and to bring inflation under
control? need to maintain sufficient foreign exchange reserves and keep the rising
prices under control
Page 23
Structural reform policies are long-term measures, aimed at improving the efficiency
of the economy and increasing its international competitiveness by removing the
rigidities in various segments of the Indian economy? policies fall under three heads
viz., liberalisation, privatisation and globalisation
Liberalisation
Introduced to put an end to these restrictions and open up various sectors of the economy
Liberalisation measures of 1980s: In areas of industrial licensing, export-import policy,
technology upgradation, fiscal policy and foreign investment
Reform policies initiated in 1991: industrial sector, financial sector, tax reforms, foreign
exchange markets and trade and investment sectors
Deregulation of Industrial Sector:
Industrial licensing: abolished for almost all but product categories — alcohol,
cigarettes, hazardous chemicals industrial explosives, electronics, aerospace and
drugs and pharmaceuticals
Reservations for Public sector: defence equipment, atomic energy generation and
railway transport
Private sector was not allowed in many industries
Deregulation of goods produced in small scale industries
Market mechanism to determine the prices.
Financial Sector Reforms:
Financial sector: Financial institutions such as commercial banks, investment banks, stock
exchange operations and foreign exchange market
Controlled by: Reserve Bank of India (RBI); various norms and regulations exists for all the
banks and other financial institutions in India
Major aim of financial sector reforms: Reduce the role of RBI from regulator to facilitator of
financial sector enabling the financial sector to be allowed to take decisions on many
matters without consulting the RBI
Page 24
Reform policies led to—
Establishment of private sector banks, Indian as well as foreign.
Foreign investment limit in banks was raised to around 50 per cent.
Banks fulfilling certain conditions were given freedom to set up new branches
without the approval of the RBI and rationalise their existing branch networks.
Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and
pension funds: allowed to invest in Indian financial markets
Tax Reforms
Concerned with the reforms in government’s taxation and public expenditure policies (fiscal
policy)—
Direct taxes: consist of taxes on incomes of individuals as well as profits of business
enterprises
Witnessing 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
Accepted norm is that the moderate rates of income tax encourage savings and
voluntary disclosure of income
Rate of corporation tax has been gradually reduced
Reforms in the indirect taxes, taxes levied on commodities, in order to facilitate the
establishment of a common national market for goods and commodities
Simplification in terms of procedures and lowering of rates has been incorporated to
encourage better compliance on the part of taxpayers
Foreign Exchange Reforms
To resolve the balance of payments crisis, the rupee was devalued against foreign
currencies, leading to an increase in the inflow of foreign exchange
Also, resolved to free the determination of rupee value in the foreign exchange
market from government control
Page 25
Presently: Markets determine exchange rates based on the demand and supply of
foreign exchange.
Trade and Investment Policy Reforms:
Liberalisation of trade and investment regime was initiated to increase international
competitiveness of industrial production and also foreign investments and technology
into the economy
Aim: To promote the efficiency of the local industries and the adoption of modern
technologies
The trade policy reforms aimed at—
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
Export duties have been removed to increase the competitive position of Indian goods in
the international markets.
Privatisation
What: Shedding of the ownership or management of a government owned enterprise
Can Government companies be converted into private companies—
By withdrawal of the government from ownership and management of public sector
companies
By outright sale of public sector companies
Disinvestment: Privatisation of the public sector undertakings by selling off part of the
equity of PSUs to the public— to improve financial discipline and facilitate modernisation
Page 26
Government envisaged that:
Privatisation could provide strong impetus to the inflow of FDI
Had made attempts to improve the efficiency of PSUs by giving them autonomy in taking
managerial decisions
Globalisation— ‘creating a borderless world’
What: Outcome of the policies of liberalisation and privatisation as well as the set of various
policies that are aimed at transforming the world towards greater interdependence and
integration; involving creation of networks and activities transcending economic, social and
geographical boundaries
Outsourcing: One of the important outcomes of the globalisation process— wherein a
company hires regular service from external sources, mostly from other countries, and this
phenomenon has intensified with the growth of fast modes of communication—the growth
of Information Technology (IT). Most multinational corporations are outsourcing their
services to India where they can be availed at a cheaper cost with reasonable degree of skill
and accuracy
Why in India: The low wage rates and availability of skilled manpower in India have made it
a destination for global outsourcing in the post-reform period.
World Trade Organisation (WTO)
Founded in: 1995, a successor organisation to the General Agreement on Trade and Tariff
(GATT)
GATT: Established in 1948 as the global trade organisation to administer all multilateral
trade agreements by providing equal opportunities to all countries in the international
market for trading purposes
Page 27
WTO’s rule:
Establish a rule-based trading regime in which nations cannot place arbitrary restrictions
on trade
To enlarge production and trade of services
To ensure optimum utilisation of world resources
To protect the environment
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.
India: Has kept its commitments towards liberalisation of trade—by removing quantitative
restrictions on imports and reducing tariff rates
Think: Is India’s membership at WTO useful? Discuss. (Interview based)
Page 28
Indian Economy & Reforms
GDP Growth: The growth of GDP increased from 5.6 per cent during 1980-91 to 6.4 per cent
during 1992-2001? an increase in the overall GDP growth in the reform period
Industries: Growth of agriculture and industrial sectors had declined whereas the growth of
service sector has recently gone up? growth is mainly driven by the growth in the service
sector
Opening up of the economy: Has led to rapid increase in foreign direct investment, foreign
exchange reserves as well as the foreign investment
Lacunaes: There have been wide criticisms over the inability of the reforms to mark a
serious change in the areas of employment, agriculture, industry, infrastructure
development and fiscal management.
Growth and Employment: Has not generated sufficient employment opportunities
Reforms in Agriculture: Did not benefit much
Public investment in agriculture sector especially in infrastructure, which includes
irrigation, power, roads, market linkages and research and extension (played a crucial
role in the Green Revolution) were reduced.
Moreover, the removal of fertiliser subsidy has led to increase in the cost of production
(severely affected the small and marginal farmers)
Several policy changes such as reduction in import duties on agricultural products,
removal of minimum support price and lifting of quantitative restrictions on agricultural
products adversely affected Indian farmers as it laid them bare at the mercy of
international competition.
The export-oriented policy strategies in agriculture led to 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? putting pressure on prices of food grains.
Page 29
Reforms in Industry: Recorded a slowdown?decreasing demand of industrial products due
to various reasons such as cheaper imports, inadequate investment in infrastructure etc.
Cheaper imports had replaced the demand for domestic goods leading to a stiff competition
for the domestic manufacturers. Lack of investment has rendered the infrastructure
facilities and the power supply to remain inadequate due to lack of investment
Disinvestment: Critics point out towards the fact that the assets of PSUs have been
undervalued and sold to the private sector? a substantial loss to the government has thus,
been witnessed and the proceeds from disinvestment were used to offset the shortage of
government revenues rather than using it for the development of PSUs and building social
infrastructure in the country.
Reforms and Fiscal Policies: Economic reforms had placed limits on the growth of public
expenditure especially in the social sectors with the tax reductions aiming at yielding larger
revenue and curbing of tax evasion? did not result in increase in tax revenue for the
government and the scope for raising revenue through customs duties were curtailed
completely. However, tax incentives were provided to the foreign investors to reduce the
scope for raising tax revenues leading to a negative impact on developmental and welfare.
Liberalisation-Privatisation-Globalisation
Objectives:
Understand the background of the reform policies introduced in India in 1991
Understand the mechanism through which reform policies were introduced
Comprehend the process of globalisation and its implications for India
Understand the impact of the reform process on various sectors
1991
India met with an economic crisis relating to its external debt—
Government was unable to make repayments on its borrowings from abroad
Foreign exchange reserves dropped to levels that were not sufficient
Compounded by rising prices of essential goods
?Inefficient management of the Indian economy in the 1980s
What happens when expenditure is more than income? Government borrows to finance
the deficit from banks and also from people within the country and from international
financial institutions.
India:
Government had to overshoot its revenue to meet problems like unemployment,
poverty and population explosion (revenues were very low; no chance of generating
immediate returns)? No generation of additional revenue even via taxation
Income from public sector undertakings— not very high to meet the growing
expenditure
Borrowed foreign exchange: Spent on meeting consumption needs
Lack of attention: Reduction in profligate spending & boosting of exports to pay for the
growing imports
Page 22
Late 1980s…
Government expenditure exceeded its revenue by large margins? unsustainable
Sharp rise in the prices of many essential goods
Imports grew at a very high rate without matching growth of exports
Foreign exchange reserves declined to a level that was not adequate to finance imports
for more than two weeks.
No sufficient foreign exchange to pay the interest that needs to be paid to international
lenders.
India took a step…
Approached the International Bank for Reconstruction and Development (IBRD)—World
Bank and the International Monetary Fund (IMF) and received $7 billion as loan to manage
the crisis
How to avail the loan: International agencies expected India to liberalise and open up the
economy by
Removing restrictions on the private sector
Reducing the role of the government in many areas
Removing trade restrictions
What did India do—India agreed to the conditionality’s of World Bank and IMF—announced
the New Economic Policy (NEP)
Towards creating a more competitive environment in the economy
Removing the barriers to entry
Growth of firms
The nature of policies—
Stabilisation measures are short-term measures—to correct some of the weaknesses
that have developed in the balance of payments and to bring inflation under
control? need to maintain sufficient foreign exchange reserves and keep the rising
prices under control
Page 23
Structural reform policies are long-term measures, aimed at improving the efficiency
of the economy and increasing its international competitiveness by removing the
rigidities in various segments of the Indian economy? policies fall under three heads
viz., liberalisation, privatisation and globalisation
Liberalisation
Introduced to put an end to these restrictions and open up various sectors of the economy
Liberalisation measures of 1980s: In areas of industrial licensing, export-import policy,
technology upgradation, fiscal policy and foreign investment
Reform policies initiated in 1991: industrial sector, financial sector, tax reforms, foreign
exchange markets and trade and investment sectors
Deregulation of Industrial Sector:
Industrial licensing: abolished for almost all but product categories — alcohol,
cigarettes, hazardous chemicals industrial explosives, electronics, aerospace and
drugs and pharmaceuticals
Reservations for Public sector: defence equipment, atomic energy generation and
railway transport
Private sector was not allowed in many industries
Deregulation of goods produced in small scale industries
Market mechanism to determine the prices.
Financial Sector Reforms:
Financial sector: Financial institutions such as commercial banks, investment banks, stock
exchange operations and foreign exchange market
Controlled by: Reserve Bank of India (RBI); various norms and regulations exists for all the
banks and other financial institutions in India
Major aim of financial sector reforms: Reduce the role of RBI from regulator to facilitator of
financial sector enabling the financial sector to be allowed to take decisions on many
matters without consulting the RBI
Page 24
Reform policies led to—
Establishment of private sector banks, Indian as well as foreign.
Foreign investment limit in banks was raised to around 50 per cent.
Banks fulfilling certain conditions were given freedom to set up new branches
without the approval of the RBI and rationalise their existing branch networks.
Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and
pension funds: allowed to invest in Indian financial markets
Tax Reforms
Concerned with the reforms in government’s taxation and public expenditure policies (fiscal
policy)—
Direct taxes: consist of taxes on incomes of individuals as well as profits of business
enterprises
Witnessing 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
Accepted norm is that the moderate rates of income tax encourage savings and
voluntary disclosure of income
Rate of corporation tax has been gradually reduced
Reforms in the indirect taxes, taxes levied on commodities, in order to facilitate the
establishment of a common national market for goods and commodities
Simplification in terms of procedures and lowering of rates has been incorporated to
encourage better compliance on the part of taxpayers
Foreign Exchange Reforms
To resolve the balance of payments crisis, the rupee was devalued against foreign
currencies, leading to an increase in the inflow of foreign exchange
Also, resolved to free the determination of rupee value in the foreign exchange
market from government control
Page 25
Presently: Markets determine exchange rates based on the demand and supply of
foreign exchange.
Trade and Investment Policy Reforms:
Liberalisation of trade and investment regime was initiated to increase international
competitiveness of industrial production and also foreign investments and technology
into the economy
Aim: To promote the efficiency of the local industries and the adoption of modern
technologies
The trade policy reforms aimed at—
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
Export duties have been removed to increase the competitive position of Indian goods in
the international markets.
Privatisation
What: Shedding of the ownership or management of a government owned enterprise
Can Government companies be converted into private companies—
By withdrawal of the government from ownership and management of public sector
companies
By outright sale of public sector companies
Disinvestment: Privatisation of the public sector undertakings by selling off part of the
equity of PSUs to the public— to improve financial discipline and facilitate modernisation
Page 26
Government envisaged that:
Privatisation could provide strong impetus to the inflow of FDI
Had made attempts to improve the efficiency of PSUs by giving them autonomy in taking
managerial decisions
Globalisation— ‘creating a borderless world’
What: Outcome of the policies of liberalisation and privatisation as well as the set of various
policies that are aimed at transforming the world towards greater interdependence and
integration; involving creation of networks and activities transcending economic, social and
geographical boundaries
Outsourcing: One of the important outcomes of the globalisation process— wherein a
company hires regular service from external sources, mostly from other countries, and this
phenomenon has intensified with the growth of fast modes of communication—the growth
of Information Technology (IT). Most multinational corporations are outsourcing their
services to India where they can be availed at a cheaper cost with reasonable degree of skill
and accuracy
Why in India: The low wage rates and availability of skilled manpower in India have made it
a destination for global outsourcing in the post-reform period.
World Trade Organisation (WTO)
Founded in: 1995, a successor organisation to the General Agreement on Trade and Tariff
(GATT)
GATT: Established in 1948 as the global trade organisation to administer all multilateral
trade agreements by providing equal opportunities to all countries in the international
market for trading purposes
Page 27
WTO’s rule:
Establish a rule-based trading regime in which nations cannot place arbitrary restrictions
on trade
To enlarge production and trade of services
To ensure optimum utilisation of world resources
To protect the environment
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.
India: Has kept its commitments towards liberalisation of trade—by removing quantitative
restrictions on imports and reducing tariff rates
Think: Is India’s membership at WTO useful? Discuss. (Interview based)
Page 28
Indian Economy & Reforms
GDP Growth: The growth of GDP increased from 5.6 per cent during 1980-91 to 6.4 per cent
during 1992-2001? an increase in the overall GDP growth in the reform period
Industries: Growth of agriculture and industrial sectors had declined whereas the growth of
service sector has recently gone up? growth is mainly driven by the growth in the service
sector
Opening up of the economy: Has led to rapid increase in foreign direct investment, foreign
exchange reserves as well as the foreign investment
Lacunaes: There have been wide criticisms over the inability of the reforms to mark a
serious change in the areas of employment, agriculture, industry, infrastructure
development and fiscal management.
Growth and Employment: Has not generated sufficient employment opportunities
Reforms in Agriculture: Did not benefit much
Public investment in agriculture sector especially in infrastructure, which includes
irrigation, power, roads, market linkages and research and extension (played a crucial
role in the Green Revolution) were reduced.
Moreover, the removal of fertiliser subsidy has led to increase in the cost of production
(severely affected the small and marginal farmers)
Several policy changes such as reduction in import duties on agricultural products,
removal of minimum support price and lifting of quantitative restrictions on agricultural
products adversely affected Indian farmers as it laid them bare at the mercy of
international competition.
The export-oriented policy strategies in agriculture led to 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? putting pressure on prices of food grains.
Page 29
Reforms in Industry: Recorded a slowdown?decreasing demand of industrial products due
to various reasons such as cheaper imports, inadequate investment in infrastructure etc.
Cheaper imports had replaced the demand for domestic goods leading to a stiff competition
for the domestic manufacturers. Lack of investment has rendered the infrastructure
facilities and the power supply to remain inadequate due to lack of investment
Disinvestment: Critics point out towards the fact that the assets of PSUs have been
undervalued and sold to the private sector? a substantial loss to the government has thus,
been witnessed and the proceeds from disinvestment were used to offset the shortage of
government revenues rather than using it for the development of PSUs and building social
infrastructure in the country.
Reforms and Fiscal Policies: Economic reforms had placed limits on the growth of public
expenditure especially in the social sectors with the tax reductions aiming at yielding larger
revenue and curbing of tax evasion? did not result in increase in tax revenue for the
government and the scope for raising revenue through customs duties were curtailed
completely. However, tax incentives were provided to the foreign investors to reduce the
scope for raising tax revenues leading to a negative impact on developmental and welfare.
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