Liberalisation, Privatisation and Globalisation – An

Appraisal Class 11 Notes Chapter 3 Indian Economic

Development

Economic Reforms
These were based on the assumption that market forces would steer the economy into the
path of growth and development. Economic reforms started in 1991 in India.

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Need for Economic Reforms

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Mounting fiscal deficit
Adverse balance of payment
Gulf crisis
Fall in foreign exchange reserves
Rise in prices

Liberalisation
Liberalisation of the economy means its freedom from direct or physical controls imposed
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by the government.

Economic Reforms Under Liberalisation

(i) Industrial Sector Reforms

Abolition of industrial licensing.

De-reservation of production areas.
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Expansion of production capacity.
Freedom to import goods.

(ii) Financial Sector Reforms

Liberalisation implied a substantial shift in the role of the RBI from a regulator to a
facilitator of the financial sector.
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(iii) Fiscal Reforms Fiscal reforms relate to revenue and expenditure of the government.
Tax reforms are the principal component of fiscal reforms. Broadly taxes are classified

Direct Taxes and

Indirect Taxes

(iv) External Sector Reforms It include Foreign exchange reforms and Foreign trade
policy reforms.

Privatisation
Privatisation is the general process of involving the private sector in the ownership or
operation of a state owned enterprise.

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Disinvestment
It refers to a situation when goverment sell off a part of its share capital of PSUs to the
private investors.

Globalisation
It may be defined as a process associated with increasing openness, growing economic
interdependence and deepening economic integration in the world economy.

Policy Strategies Promoting Globalisation of the Indian Economy

Increase in equity limit of foreign investment

Partial convertibility

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Long term trade policy
Reduction in tariffs

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Withdrawal of quantitative restriction

World Trade Organisation (WTO)

The WTO was founded in 1995 as the successor organisation to the general agreement on
Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global
trade organisation.

Positive Impact of the LPG (Liberalisation, Privatisation and Globalisation) Policies

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A vibrant economy
A stimulant to industrial production
A cheek on fiscal deficit
A cheek on inflation
Consumer’s sovereignty
Flow of private foreign investment
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Negative Impact of LPG (Liberalisation, Privatisation and Globalisation) Policies

Neglection of agriculture
Urban concentration of growth process
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Economic colonialism
Spread of consumerism
Lopsided growth process
Cultural erosion

During the tenure of Narasimha Rao Government (1991), India met with an economic
crisis relating to its external debt. The government was unable to make repayments on its
borrowings from abroad; foreign exchange reserves were not sufficient to repay the debts.
The prices of essential goods were rising and the imports were growing at a very high rate.

As a result, the government initiated a new set of policy measures to reform the
conditions of an economy and several economic reform programme were also introduced
in this respect to promote privatisation, liberalisation and globalisation.

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Economic Crisis of 1991 and Indian Economy Reforms
Crisis in India is figured out because of the inefficient management of Indian Economy in
1980s.
The revenues generated by the government were not adequate to meet the growing
expenses. So, the government resorted to borrowing to pay for its debts and was caught is
a debt-trap.
Deficit it refers to the excess of government expenditure over its revenue.
Causes of Economic Crisis
Different causes of economic crisis are given as under

The continued spending on development programmes of the government did not

generate additional revenue.

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The government was not able to generate sufficient funds from internal sources such

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as taxation.
Expenditure on areas like social sector and defence do not provide immediate
returns, so there was a need to utilise the rest of its revenue in a highly effective
manner, which the government failed to do.
The income from public sector undertakings was also not very high to meet the
growing expenditures.
Foreign exchange borrowed from other countries and international financial
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institutions was spent on meeting consumption needs and to make repayments on
other loans.
No effort was made to reduce such increased spending and sufficient attention was
not given to boost exports to pay for die growing needs.

Due to above stated reasons, in the late 1980s, government expenditure began to exceed
its revenue by such large margins that meeting the expenditure through borrowings
became unsustainable.
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Need for Economic Reforms
The economic policy followed by the government upto 1990 failed in many aspects and
landed the country in an unprecedented economic crisis. The situation was so alarming
that India’s reserves of foreign exchange were basely enough to pay for two weeks of
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imports. New loans were not available and NRIs were withdrawing large amounts. There
was an erosion of confidence of international investors in the Indian economy.
The following points highlight the need for economic reforms in the country

Increasing fiscal deficit

Adverse Balance of Payments
Gulf crisis
Rise in prices
Poor performance of Public Sector Units (PSUs).
High rate of deficit financing.
Collapse of soviet block.

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Emergence of New Economic Policy (NEP)
Finally, India approached International Bank for Reconstitution and Development,
popularly known as World Bank and International Monetary Fund (IMF) and received $ 7
million as loan to manage the crisis. International agencies expected India to liberalise
and open up economy by removhfg restrictions on private sector and remove trade
restrictions between India and other countries.

India agreed to conditions of World Bank and IMF and had announced New Economic
Polity (NEP) which consist of wide range of economic reforms.
The measures adopted in the New Economic Policy can be broadly classified into two
groups i.e.,

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Stablisation Measures They are short-term measures which were intended to correct

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some weakness that have developed in the Balance of Payments and to bring
Inflation under control.
Structural Reforms They are longterm measures, aimed at improving the efficiency
of the economy and increasing its international competiveness by removing the
rigidities in various segments of the Indian economy.

The various structural reforms are categorised as

yaLiberalisation
Privatisation
Globalisation

Balance of Payment It is a system of recording country’s economic transactions with the

rest of the world over a period of one year. Inflation It is a situation in which general price
level of goods and services increases in an economy over a period of time.
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Liberalist off, Privatisation and Globalisation
By introducing concept of liberalisation, privatisation and globalisation, government have
revived the condition of Indian Economy.
Liberalisation
Libralisation was introduced with an aim to put an end to those restrictions which became
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major hindrances in growth and development of various sectors. It is generally defined as

the lossening of government regulations in a country to allow for private sector companies
to operate business transactions with fewer ristrictions. In relation to developing
countries, this term refers to opening of economic border for multinationals and foreign
investment.

Objectives of Liberalisation
The main objectives of liberalisation policy are

To increase competition among domestic industries.

To increase foreign capital formation and technology.
To decrease the debt burden of the country.
To encourage export and import of goods and services.
To expand the size of the market.

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Economic Reforms Under Liberalisation
Reforms under liberalisation were introduced in many areas. Let us discuss these now
Industrial Sector Reforms
The following steps were taken to deregulate the industrial sector
(i) Abolition of Industrial Licensing Government abolished the licensing requirement of
all industries, except for the five industries, which are

Liquor
Cigarettes
Defence equipment
Industrial explosives
Dangerous chemicals, chugs and pharmaceuticals.

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(ii) Contraction of Public Sector The number of industries reserved for the public sector
was reduced from 17 to 8.. Presendy, only three industries are ’ reserved for public sector.
They are

Railways
Atomic energy
Defence
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(iii) De-reservation of Production Areas The production areas which were earlier reserved
for SSI were de-reserved.
(iv) Expansion of Production Capacity The producer’s were allowed to expand their
production capacity according to market demand. The need for licensing was abolished.
(v) Freedom to Import Capital Goods The business and production units were given
freedom to import capital goods to upgrade their technology.
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Financial Sector Reforms
Financial sector includes financial institutions such as commercial banks, investment
banks, stock exchange operations and foreign exchange market.
The following reforms were initiated in this sector

Reducing Various Ratio Statutory Liquidity Ratio (SLR) was lowered from 38.5% to
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25%.
Cash Reserve Ratio (CRR) was lowered from 15% to 4.1%.
Competition from New Private Sector Banks The banking sector was opened for the
private sector. This led to an increase in competition and expansion of services for
consumers.
Change in the Role of RBI RBI’s role underwent a change from a ‘regulator’ to a
‘facilitator’.
De-regulation of Interest Rates Except for savings accounts, banks were able to
decide their own interest rates

Tax Reforms/Fiscal Reforms

Tax reforms are concerned with the reforms in government’s taxation and public
expenditure policies which are collectively known as its fiscal policy.

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Moderate and Simplified Tax Structure Prior to 1991, the tax rates in the country were
quite high, which led to tax evasion. The fiscal reforms simplified the tax structure and
lowered the rates of taxation. This reduced tax-evasion and increased government’s
revenues.

Foreign Exchange Reforms/External Sector Reforms

External sector reforms include reforms relating to foreign exchange and foreign trade.
The following reforms were initiated in this sector
(i) Devaluation of Rupee Devaluation implies a fall in the value of rupee against some
foreign currency. In 1991, the rupee was devalued to increase our country’s exports and to
discourage imports.
(ii) Other Measures

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Import quotas were abolished.
Policy of import licensing was almost scrapped.
Import duty was reduced.
Export duty was completely withdrawn.

World Trade Organisation (WTO)

The WTO was founded in 1995 as the successor organisation to the General Agreement on
Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global
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trade organisation to administer all multinational trade agreements by providing equal
opportunities to all countries in international market for trading purpose. However this
had certain problems hence.

WTO was expected to establish a rule based trading regime in which nations cannot place
arbitrary restrictions on trade. Its purpose was mainly to expand production and trade in
order to have optimum utilisation of world resources.
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The WTO agreements cover {rade in goods as well as services to facilitate international
trade through removal of tariff as well as non-tariff barriers and provide better market
access to all countries. Being an important member of WTO. India has been in front to
frame rule and regulations and safeguards interest of developing world.
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India has kept commitments towards liberalisation of trade in WTO by removing

quantitative restrictions on imports and reducing tariff rates.

Functions of WTO

It facilitates the implementation, administration and operation of the objectives of

multilateral trade agreements.
It administers the ‘trade review mechanism’.
It administers the ‘understanding rules and procedures , governing the settlement
disputes’.
It is a watchdog of international trade, it examines the trade regimes of individual
members.
Trade disputes that cannot be solved through bilateral talks are forwarded to the
WTO dispute settlement ‘court’.

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 It is a management consultant for world trade. Its economist keep a close watch on
the activities of the global economy and provide studies on the main issues of the
day.

Privatisation
It refers to giving greater role to private sector thereby reducing the role of public sector.
In other words, it means shedding of the ownership or management of a government
owned enterprise.
It may also mean de-reservation of industries previously reserved for public sector.
Government companies (public companies) are converted into private companies in two
ways

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By withdrawal of the government from ownership and management of the public

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sector companies.
By the method of disinvestment.

Forms of Privatisation
Different forms of privatisation are

Denationalisation When 100% govermffdht ownership of productive assets is

transferred to the private sector, it is called denationalisation. It is also known as
yastrategic sale.
Partial Privatisation When less than 100% or more than 50% ownership is
transferred, it is a case of partial privatisation with private sector owning majority of
shares. In this situation, the private sector can claim to possess substantial
autonomy in its functioning. It is also known as partial sale.
Deficit Privatikation/Token Privatisation When the government disinvests its shares
to the extent of 5 to 10% to meet the deficit in the budget, this is termed as deficit
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privatisation or token privatisation.

Objectives of Privatisation
The most common and important objectives of privatisation are

Improving the financial condition of the government.

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Raising funds through disinvestment.

Reducing the workload of public sector.
Increasing the efficiency of the government undertakings.
Providing better goods and services to consumers.
Bringing healthy competition within an economy.
Making way for Foreign Direct Investment (FDI).

Navratnas and Public Enterprise Policies

In order to improve efficiency, infuse professionalism and enable them to compete more
effectively in the liberalised global environment, the government identifies PSUs and
declare them as maharatnas, navratnas and mininavratnas. They were given greater
managerial and operational autonomy, in taking various decisions to run the company
efficiently and thus increase their profits. Greater operational, financial and managerial

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autonomy has also been granted to profit-making enterprises referred to as
mininavratnas.
In 2011, about 90 public enterprises were designated with different status.
A few examples of public enterprises with their status are as follows

Maharatnas
Indian Oil Corporation Limited
Steel Authority of India Limited
Navratnas
Bharat Heavy Electricals Limited
Mahanagar Telephone Nigam Limited
Mininavratnas

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Bharat Sanchar Nigam Limited

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Airport Authority of India

Globalisation
It means integration of the economy of the'”country with the world economy.
Globalisation encourages foreign trade and private and institutional foreign investment.

Globalisation is a complex phenomenon and an outcome of the set of various policies that
are aimed at transforming the world towards greater interdependence and integration.
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Globalisation attempts to establish links in such a way that the happenings in India can be
in need by events happening miles away. It is turning the into one whole or creating a
borderless world.

Outsourcing
An Outcome of Globalisation
This is one of the important outcome of the globalisauon process. In outsourcing, a
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company hires regular service from external sources, mosdy from other countries, which
were previously provided internally or from within the country like legal advice, computer
service, advertisement, etc. In other words outsourcing means getting a work done on
contract from Someone outside.
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As a form of economic activity, 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 such as voice-based business processes (popularly known as BPO or
call centres), record keeping, accountancy, banking services, music recording, film
editing, book transcription, clinical advice or even teaching are being outsourced by
companies in developed countries to India.

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.

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Economic Growth During Reforms
Growth of an economy is measured by the Gross Domestic Product (GDP). The growth of
GDP increased from 5.6% during 1980-91 to 8.2% during 2007-2012.
Main highlights of economic growth during reforms are given below

During the reform period, the growth of agriculture has declined. While the
industrial sector reported fluctuation, the growth of service sector has gone up. This
indicates that the growth is mainly driven by the growth in the service sector.
The opening up of the economy has led to rapid increase in foreign direct
investment and foreign exchange reserves.
The foreign investment, whiclyincludes Foreign – Direct Investment (FDI) and
Foreign Institutional Investment(FII), has increased from about US $ 100 million

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in 1990-91 to US $ 400 billion in 2010-11.

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There has been an increase in the foreign exchange Reserves from about US $ 6
billion in 1990-91 to US $ 300 billion in 2011-12. In 2011, India is the seventh
largest foreign exchange reserve holder 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.

Failures of Economic Reforms

I- Neglect of Agriculture
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There has been deterioration in agricultural growth rate. This deterioration is the root
cause of the problem of rural distress that reached crisis in some parts of the country.
Economic reforms have not been able to benefit the agricultural sector because

Public investment in agriculture sector especially in infrastructure which includes

irrigation, power, roads, market linkages and research and extension has been
reduced in the reform period.
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The removal of fertiliser subsidy has led to increase in the cost of production which
has severely affected the small and marginal formers.
Various policy changes like reduction in import duties on agricultural products,
removal of minimum support price and lifting of quantitative restrictions have
increased the threat of* international competition to the Indian formers.
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Export-oriented policy strategies in agriculture 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.

II- Uneven Growth in Industrial Sector

Industrial sector registered uneven growth during this period.
This is because of decreasing demand of industrial products due to various reasons

Cheaper imports have decreased the demand for domestic industrial goods.
Globalisation created conditions for the free movement of goods and services from
foreign countries that adversely affected the local industries and employment
opportunities in developing countries.
There was inadequate investment in infrastructural facilities such as power supply.

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 A developing country like India still does not have the access to developed countries
markets because of high non-tariff barriers.

Sirdlla Tragedy
Privatisation of power supply in Andhra Pradesh resulted in substantial increase in
power-rates, causing many powerlooms to shut down in a small town, Sirdlla.
50 workers committed suicide because of loss in means of livelihood.
II- Other Failures
In addition to the above mentioned failures, the other drawbacks of LPG policy were:

It led to urban concentration of growth process.

It encouraged economic colonialism.

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It resulted in the spread of consumerism.

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It led to cultural erosion.

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