Chapter 3

Liberalization, Privatization, And Globalization an Appraisal

A. Economic Reforms in1991 and New Economic Policy (LPG)

Why were economic reforms introduced in India?

1. A severe Balance of Payments problem triggered an acute economic crisis in 1991.

The government was not able to make repayments on its borrowings from abroad.
Foreign exchange reserves declined to a level that was not adequate to finance imports
for more than two weeks. Imports grew at a very high rate without matching growth of
export.

2. Mounting fiscal deficit:

In the late 1980s, government expenditure began to exceed its revenue by
such large margins that meeting the expenditure through borrowings became
unsustainable.

3. High rate of inflation:

The crisis was further compounded by sharp rising prices of essential goods.

4. Pressure from international organizations:

India Approach the International Bank for Reconstruction and Development (IBRD),
popularly known as World Bank, and the International Monetary Fund (IMF) and
received $7 million as loan to manage the crisis.
Reform policies can be classified into two groups – the stabilization measures and
the structural reform measures.
 Stabilization measures are short-term measures, intended to correct the balance of
payments problem, reduction in fiscal deficit, to bring inflation under control, etc.

 Structural reform measures are long-term policies (liberalization, privatization, and

globalization), aimed at improving the efficiency of the economy and increasing its
international competitiveness by removing the rigidities in various segments of the
Indian economy.

B. Liberalization Measures
Liberalization means putting an end to the unnecessary controls and restrictions on
industry and trade, and open various sectors of the economy.
1. Deregulation of industrial sector

 Industrial licensing was abolished for almost all products except alcohol,
cigarettes hazardous chemicals, industrial explosives, electronics, aerospace and
drugs and pharmaceuticals.

 De reservation – The only industries which are now reserved for the public sector
are a part of atomic energy generation and railway transport, Similarly, many goods
produced by small-scale industries have now been de-reserved.

 Market-determined pricing – In most industries, the market has been allowed to

determine the prices.

2.Financial sector Reforms

 Redefining the role of the Reserve Bank of India (RBI) from ‘a regulator’ to ‘a
facilitator’ in the financial sector;
This means that financial sector was given greater autonomy (to take
decisions) on many matters without consulting the RBI. E.g., freedom to setup new
branches without the approval of the RBI.

 Origin of Private Sector Banks:

The reform process led to establishment of private sector banks of India as
well as foreign investment limit in banks was raised to around 74%.

3. Tax Reforms
 Rationalization of direct taxes:
Since 1991, there has been a continuous reduction in income tax as it was felt
that high rates of income tax were an important reason for tax evasion. Moderate
rates of income tax will encourage savings and voluntary disclosure of income.
Similarly, the rate of corporation tax has been reduced.

 Simplification of tax payment procedures

In order to encourage better tax compliance: many procedures have been
simplified and the rates also substantially lowered.

4. Foreign Exchange Reforms

 Devaluation of Rupee:
 In 1991, as an immediate measure to resolve the balance of payments crisis,
the rupee was devalued against foreign currencies. It led to an increase in exports
and thus, the inflow of foreign exchange.

 Market-determined exchange rate system:

Now, markets determine exchange rates based on the demand and supply of
foreign exchange, it means freeing the determination of foreign exchange rate from
govt control.

5. Trade and Investment Policy Reforms

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

Objectives of liberalization of trade and investment regime:

(i) To increase the competitiveness of industrial production

(ii) To increase foreign investments and technology into the economy
(iii) To promote the efficiency of local industries, and
(iv) To adapt modern technologies.

C. Privatization
Privatization refers to shedding of the ownership or management of a government
owned enterprises.
Government companies are converted into private companies in two ways
(1) By withdrawal of the government from ownership and management of public sector
companies, and/or
(2) By outright sale of public sector companies.
Privatization of the Public Sector Enterprises (PSEs)/Public Sector Undertakings
(PSUs) by selling off a part/whole of the equity to the general public or any
private sector player is known as Disinvestment.
Purposes /advantages of privatization and disinvestment
1. To improve financial discipline and facilitate modernization.
2. To effectively utilize private capital and managerial capabilities to improve the
performance of the PSUs.
 3. To provide strong impetus to the inflow of FDI.
Disinvestment during reforms
Every year, the government fixes a target for disinvestment of PSEs. For
instance, in 1991-92, it was targeted to ₹2,500 crore through disinvestment. the
government was able to mobilize ₹3,040crore more than the target. In 2017-18, the
target was about ₹1,00,000 crore, and the disinvestment was about ₹ 1,00,057 crore.
Critics point out that the assets of PSEs have been undervalued and sold to the
private sector. This implies a substantial loss to the government. Moreover, the proceeds
from disinvestment are used to offset the shortage of government revenues rather than
using it for the development of PSEs and building social infrastructure in the country.
Government attempts to improve of PSUs
1.Granting Special Status:
In order to improve efficiency, infuse professionalism and enable them to more
effectively, the government identifies profit-making PSEs and grants them special
status as:
Maharatnas (e.g. Indian oil Corporation Limited ,Steel Authority of India Limited)
Navratnas (e.g. Hindustan Aeronautics Limited, Mahanagar Telephone Nigam Limited)
&
Miniratnas (e.g., Bharat Sanchar Nigam Limited, Airport Authority of India)
The granting of special status resulted in better performance of these PSUs, and they
have established themselves as market leaders.
2.Greater managerial and operational autonomy:
PSUs were given greater managerial and operational autonomy, in taking
various decisions to run the business efficiently and thus increase their profits.

D. Globalization
Globalization means an integration of the economy of the country with the world
economy However, it is a complex phenomenon. It is an outcome of the set of various
policies that are aimed at transforming the world towards interdependence and
integration. It involves creation of networks and activities transcending economics,
social and geographical boundaries. It is turning the world into one whole or creating a
boundaryless world.
Positive results of globalization
 Some scholars argue that globalization should be seen as an opportunity in terms of
greater access to global markets, high technology and an increased possibility of large
industries of developing countries to become important players in the international arena.
Negative results of globalization
(i) Globalization is a strategy of the developed countries to expand their markets in
other countries.it has compromised the welfare and identity of people belonging to
poor countries.
(ii) Market-driven globalization has widened the economic disparities among nations
and people.
(iii) Globalization has increased the income and quality of consumption of only high -
income groups
(iv) The growth has been concentrated only in some select areas in the service sector
such as telecommunication, information technology, finance, entertainment, etc.
rather than vital sectors such as agriculture and industry.

Outsourcing
Outsourcing means hiring of regular from external sources, mostly from
foreign countries, which was previously provided internally or from within the
country (like legal services, computer service, advertisement etc)
Outsourcing has intensified, in recent times, because of the growth of fast modes
of communication, particularly the growth of Information Technology (IT). Many of the
services are being outsourced by companies in developed countries to India, such as:
voice-based business processes (popularly known as BPO or call centers), Record
keeping, Banking services, music recording, etc.
India is often called the “outsourcing Hub or Outsourcing Destination” of the World
because of the prime reasons:
1. Availability of skilled manpower:
India has vast skilled manpower which enhances the path of MNCs
2. Low wage rates:
In India, manpower can be availed at a cheaper cost with reasonable degree of
skill and accuracy.

World Trade Organization (WTO)

The WTO was founded in 1995 as the successor organization to the General
Agreement on Trade and Tariff (GATT), which was established in 1948 with 23
countries as global trade organization to administer all multilateral trade agreements by
providing equal opportunities to all countries in international market.
Objectives / Purposes / Role of WTO
1. It provides greater market access to all member countries:
WTO establishes a rule-based trading regime in which nations cannot place
arbitrary restrictions on trade. It provides equal opportunities to all countries to all
countries in the international market.
2. It facilitates international trade (bilateral and multilateral):
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.

Usefulness of India as a member of WTO

As an important member of WTO, India has been in the forefront of
(i) Framing fair global rules, regulations and safeguards, and
(ii) Advocating the interests of the developing world. India has kept its commitments
towards liberalization of trade by
(a) Removing quantitative restrictions on imports
(b) Reducing tariff rates
Some scholars question the usefulness of India being a member of the WTO
because of the following reasons;
1. A major volume of international trade occurs among the developed nations only
2. Developing countries are forced to open their markets for developed countries but
are not allowed access to developed countries markets because of high non-tariff
barriers. For example, although all quota restrictions on exports of textiles and clothing
have been removed in India, USA has not removed their quota restrictions on import
of textiles from India and China.

E. Indian Economy during Reforms: An Assessment

Growth of GDP: The post-1991 India witnessed a rapid growth in GDP on a

continual basis for two decades. The growth of GDP increased from 5.6%nduring
1980-91 to 8.2% during 2007-12.
Reforms in Agricultural Sector
During the reform period, the agricultural sector was adversely affected because of
the following reasons:
1. Reduction in public investment in agriculture sector especially in
infrastructure like irrigation, power, roads etc.
2. Partial removal of fertilizer subsidy has led to an increase in the cost of
production, which has severely affected the small and marginal farmers.
 3. Increased international competition due to liberalization measures such as
reduction in import duties on agricultural products, low minimum support price
and removal of quantitative restrictions on the imports of agricultural products.
4. Shift from production for the domestic market towards production for the
export market because of export-oriented policy strategies in agriculture,
focusing on cash crops in lieu of production of food grains. This led to a raise in
prices of food grains.

Reforms in Industrial Sector

Industrial growth has also recorded a slowdown because of decreasing
demand for industrial products due to various reasons such as;
 Availability of cheaper imports :
Domestic manufacturers are facing competition from imports. Cheaper
imports have, thus, replaced the demand for domestic goods.
 Inadequate investment in infrastructure:
The infrastructure facilities, including power supply, have remained
inadequate due to lack of investment.

Reforms in service sector:

The service sector continued to witness a high level of growth of 9.8%. This
indicates
that GDP growth in India is mainly driven by growth in the service sector.

Growth and Employment:

Though the GDP growth rate has increased in the reform period, it has not
generated sufficient employment opportunities in the country.
Effect on Price Level: Rising prices have been kept under control
The opening of the economy has led to a rapid increase in foreign direct investment and
foreign exchange reserves.
 Foreign Investment, both foreign direct investment (FDI) and foreign institutional
Investment (FII), have increased from about US $100 million in1990-91 to US $
30
Billion in 2017-18
 India has become one of the largest foreign exchange reserve holders in the
world. There has been an increase in the foreign exchange reserves from about
US $ 6 billion in 1990-91 to about US $ 413 billion in 2018-19.

Reforms and Fiscal Policies:

  Economic reforms have placed limits on the growth of public expenditure
especially, in social sectors
 Tax reductions has reduced the scope for raising revenue through custom duties.
 Tariff reduction, aimed to curb tax evasion, have not resulted in increase in tax
revenue for the government.
 In order to attract foreign investment, tax incentives were provided to foreign
investors which further reduced the scope for raising tax revenues. This has a
negative impact on developmental and welfare expenditures.

F. Demonetization
Demonetization was a new initiative taken by the government of India on November
8,2016 to tackle the problem of corruption, black money, terrorism and circulation of
fake currency in the economy .old currency notes of ₹ 500, and ₹ 1000 were no longer
legal tender. New currency notes in the demonetization of ₹ 500 and ₹ 2000 were
launched.

Positive impacts;
 It improved tax compliance as a large number of people were bought in the tax
ambit.
 Savings were channelized into the formal financial system. Banks could
provide more loans at lower interest rates .
 It puts a curb on black money and tax evasion.
 It helps in shifting cash transactions into electronic payment technologies.

G. GST: One Nation, One Indirect Tax, One Market

 Goods and Service Tax (GST) is the single comprehensive indirect tax on
supply of goods and services, right from the manufacturer / service provider
to the customer.
 It s applicable throughout the country with one rate for one type of
goods/service. Under GST, there are 6(six) standard rates applied i.e. 0%, 3%,
5%, 12%, 18%, and 28%, on supply of all goods and /or services across the
country.
 It has amalgamated a large number of taxes and cesses on production/ sale
of goods of provision of services, levied by the central and State / UT
Government. For example, Central Excise Duty, Central Sales Tax, VAT (Value
Added Tax) etc. have been subsumed in GST.

Impacts of GST on the Indian Economy

1. GST has simplified the multiplicity of taxes on goods and services.
2. It reduced the cost of business operations and the overall cost of
production, which made Indian Products/services more competitive in the
domestic and international markets.
3. It will also result into higher economic growth as GDP is expected to rise by
about 2%.