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Indian Economy 1
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3. Dismantling of the Industrial Licensing Regime: Industrial licensing was abolished for almost all product
categories. The only industries which are now reserved for public sector are defence equipment, atomic
energy generation and railway transport on account of environmental safety and strategic considerations.
4. Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and encouraging non-debt
flows. The Department has put in place a liberal and transparent foreign investment regime where most
activities are opened to foreign investment on automatic route without any limit on the extent of foreign
ownership. Some of the recent initiatives taken to further liberalize the FDI regime, inter alias, include
opening up of sectors such as Insurance (upto 26%); development of integrated townships (upto 100%);
defense industry (upto 26%); tea plantation (upto 100% subject to divestment of 26% within five years
to FDI); enhancement of FDI limits in private sector banking, allowing FDI up to 100% under the
automatic route for most manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service
Providers (ISPs) without Gateways; electronic mail and voice mail to 100% foreign investment subject to
26% divestment condition; etc. The Department has also strengthened investment facilitation measures
through Foreign Investment Implementation Authority (FIIA).
5. Non Resident Indian Scheme the general policy and facilities for foreign direct investment as available to
foreign investors/ Companies are fully applicable to NRIs as well. In addition, Government has extended
some concessions especially for NRIs and overseas corporate bodies having more than 60% stake by NRIs
6. Throwing Open Industries Reserved for the Public Sector to Private Participation. Now there are only
three industries reserved for the public sector
7. Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion
8. The removal of quantitative restrictions on imports.
9. The Reduction of the Peak Customs Tariff from over 300 per cent prior to the 30 per cent rate that
applies now.
10 Wide-ranging Financial Sector Reforms in the banking, capital markets, and insurance sectors, including
the deregulation of interest rates, strong regulation and supervisory systems, and the introduction of
foreign/private sector competition has been introduced.
Let us now discuss all the three processes-globalization, liberalization and privatization separately and their
impact.
Globalization
Broadly speaking, the term 'globalization' means integration of economies and societies through cross country
flows of information, ideas, technologies, goods, services, capital, finance and people. Cross border integration
can have several dimensions - cultural, social, political and economic.
The Policies and developments in many countries including India are influenced by the globalization.
Globalization is not only a movement of ideas, information, capitals, people, technologies, goods and services,
and labour across the nation-states but has serious implications on socio-economic and political sphere of life.
Limiting ourselves to economic integration only, one can see the three channels of globalization (a) trade in
goods and services, (b) movement of capital and (c) flow of finance and (d) movement of people. The
globalization through economic integration has been presented as the best, natural and universal path towards
development of mankind.
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Process of Globalization
(a) The integration of the national economy with that of the global economy.
(b) The conversation of a national market into an international one, which facilitates the international mobility
of factors like production or commodities.
(c) An economic as well as a political, social, and cultural integration with rest of the world, though it varies
greatly from country to country, which in turn depends on the development of means and modes of
communication in a particular country.
In current economic literature, the term 'globalization' is used to mean liberal "outward oriented" policy, which
includes eliminating anti export biases, lowering of a very high import tariffs, placing lesser reliance on
quantitative restrictions on imports. This is the aim of the liberalization policy adopted by India. However,
the "outward-looking" policy does not mean that government would completely abandon all forms of control
and place the entire economy to remove certain imbalances and restrictions, which hamper free flow of trade.
Globalization also aims at making greater number of goods and services available to the people, at relatively
cheaper prices. Thus, it is believed, globalization would generally improve the economic performance of the
nation.
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Rather than direct investment by first world MNC's in third world through local subsidiaries, there is now
a wide variety of negotiated agreements: joint ventures, marketing agreements, secondary sourcing,
subcontracting various kinds of limited alliances. MNCs look at less developed countries mainly not as
a source of cheap labour and raw materials but as expanding local markets and potential industrial
partners.
5. Financial Markets: IMF has started controlling the finance aspect. As a result of debt crisis, countries turn
to IMF, which then imposes devaluation of currency, structural adjustment programme and other conditions.
Global financial institutions exert enormous control over the domestic policies of member countries and
in 1980's, they started advocating liberalization, privatization and globalization. MNC's have started
demanding free capital movement and opening of capital and other markets.
2. New multilateral agreements for services ,Intellectual properties, communications, and more binding on
national governments than any previous agreements.
3. Market economic policies spreading around the world, with greater privatization and liberalization than in
earlier decades.
4. Growing global markets in services. People can now execute trade services globally -- from medical advice
to software writing to data processing , that could never really be traded before.
5. Physical and geographical boundaries are crumbling and the world is becoming a global village. Nation
states today no longer have to play market-making role, so wool, wine, perfumes can belong to any market
anywhere in the world.
6. With nation states and nationalities disappearing, ethnicities and national loyalties are fading out. Customers
are only concerned about the products quality, price, design, value and appeal.
7. Globalization has created an economically interdependent international Environment. Each country's
prosperity is interlinked with the rest of the world and no nation can exist in isolation solely dependent
on its domestic market. The Interlinked Economy (ILE) of the Triad (the US, Europe and Japan) joined
by aggressive economies such as Taiwan, Hong Kong and Singapore have become a successful union and
has become so powerful that it has swallowed most consumers and corporations, made traditional national
boundaries disappear and pushed bureaucrats, politicians towards that status of declining industries.
8. In an interlinked global economy, the key success factor shifts from resources to the market place, in which
one must participate in order to prosper. People are the only true means to create wealth and therefore
governments everywhere have to only ensure access to the best and the cheapest goods and services from
anywhere in the world. This implies less interference in the business decisions. There is lowering of trade
tariffs and custom barriers and deregulation of certain sectors to increase abundant supply of goods and
market place competitiveness.
9. There has been an increasing trend towards privatization of the manufacturing and service sectors.
Government owned and managed businesses suffered from an attitude of complacency, lack of enterprise
and so were performing poorly. To get rid of loss making units especially public sectors, business were
handed over to private entrepreneurs who were given greater access and freedom and were able to show
better results. Thus privatization becomes the result of economic compulsion.
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Globalization in Brief
The government announced a New Economic Policy on July 24, 1991. The context of huge fiscal deficits,
crisis in the balance of payment situation, falling foreign exchange reserves and conditions imposed by IMF
led to the announcement of the New Economic Policy by the Government of India, in 1991.
The new economic policy resulted in radical change in the structure and direction of Indian economy. The
direction tends towards the market economy and globalization of the country.
The major objective of the new policy is to make Indian economy progressive and also to make Indian
economy a part of the world economy.
Globalization, a new key word of the 21st century to an economic event, a unifying process that has drawn
lives all around that world into its fold. Globalization is best understood in terms of developing markets,
deregulating business activities, privatizing state enterprises, lowering national barriers and expanding world
trade and investment, all creating world community.
Advantages Disadvantages
1. Borderless world 1. Low growth of agriculture sector
2. Powerful corporations 2. Rise in rural-urban divide
3. Global citizens 3. Adverse impact on autonomy of state
4. Interlinked economies 4. Adverse impact on culture
5. Global legal regimes 5. Adverse impact on environment
6. Deregulation and lowering of trade and 6. Change in structure of trade
tariff barriers 7. Bankruptcy of many employment generating firms
7. Privatization and 8. Unemployment
8. Efficient technological innovations 9. Human rights violation
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Liberalization
Liberalization is understood to be the situation of the political economy where the means of production will
be in the hands of the market and the economic efficiency is measured in terms of market-defined objectives.
Major economic activities are opened for private participation keeping only key issues of welfare and other
regulatory mechanism with the state. This opening up of various sectors for private participation and allowing
them to manage the businesses for maximizing the profits will clearly underline the freedom available for the
market to have their own labour participation practices and deployment of human resources. Liberalisation
thus aims minimizing the labour participation and downsizing the workforce in the industry in the name of
removing the dead wood to maximize efficiency.
In the Indian context, economic liberalization includes the following:
1. Dismantling of industrial licensing system
2. Reduction in physical restrictions on imports and import duties
3. Reduction in controls on foreign exchange, both current and capital account
4. Reform of financial system
5. Reduction in levels of personal and corporate taxation
6. Reduction in restrictions on foreign direct and portfolio investments
7. Opening up public sector domains like power, transport, banking etc
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Effects of Liberalization
The economic reforms of the 1990s swept away the oppressive licensing controls on industry and foreign trade,
allowed the market to determine the exchange rate, drastically reduced protective customs tariffs, opened up
to foreign investment, modernised the stock markets, freed interest rates, strengthened the banking system and
began privatisation of public enterprises.
Airline, telecom, TV broadcast and insurance were opened for private players. The consequences have been
far-reaching.
First, the opening up of foreign trade and investment (and a competitive exchange rate) boosted exports,
services and inward remittances enormously; today they account for 20 per cent of the GDP compared to 10
per cent in 1990.
Flourishing external commerce and rising foreign investment dethroned the baleful deity of "foreign exchange
scarcity", which had justified four decades of dreadful economic policy and draconian, corruption-spawning
controls.
Today's open economy is more productive and more resilient to shocks like high oil prices. With over $140
billion of forex reserves, strong exports and low external debt, the recent surge in global oil prices has not
derailed the economy's forward momentum.
Second, the mix of industrial decontrol, greater foreign competition and a modernised capital market fostered
the rise of strong Indian firms, built by unshackled entrepreneurs able to compete globally. Today's household
brands like Infosys, Jet, Airtel and Videocon hardly existed a decade ago.
Established companies like Tata, Reliance and HLL reinvented themselves to meet competition. This led to
larger advertising budgets, which sustained the media explosion (print and TV) of the past decade that has
helped to mould a new mindset.
Third, the post-crisis reforms of the early 1990s restored (then improved) the growth momentum of the 1980s
and ensured a quarter century of nearly 6 per cent economic growth. With average living standards rising at
almost 4 per cent a year, the poverty ratio dropped below a quarter of the population and the catch phrase
of "a rising middle class" gained substance. Today, over a 100 million Indians live in households with incomes
between Rs.2 lakh and Rs.10 lakh a year.
Fourth, the strong improvement in the country's external finances and sustained growth over 25 years also
raised India's economic and political profile in the world. In a real sense, the 1990s' economic liberalisation
freed India's foreign and defence policies from economic weakness and dependence on foreign aid. A more
assertive strategic policy became possible.
1. Liberalization was reinforced by the conclusion of the Uruguay round of multi-lateral trade negotiation
in 1994 and the establishment of WTO.
2. The expansion of regional integration efforts also stimulates the trend towards liberalization.
3. Liberalization policies have significantly widened the effective economic space available to producers and
investors.
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4. Producers and investors behave as if the world economy consisted of a single market and production
platforms with regional or national sub-sections rather than as a set of national economies linked by trade
and investment flows.
5. However, liberalization is also endangered by the rise of national protectionism and the use of economic
sanctions by the leading economic powers.
Privatization
Privatization is a process that reduces the involvement of the state or the public sector in the economic
activities. Privatization implies many on the government sectors are sold or given to private individual hands
to run them.
Privatization is frequently associated with industrial or service-oriented enterprises, such as mining, manufacturing
or power generation, but it can also apply to any asset, such as land, roads, or even rights to water. In recent
years, government services such as health, sanitation, and education have been particularly targeted for
privatization in many countries."
In recent years, privatization has been suggested as a measure to cure problems related to the public sector
such as mounting losses, low profitability, and underutilization of capacity, etc. There has been rising interest
in privatization process in the developing countries in the recent past.
In fact, Bimal Jalan (former RBI Governor) has argued that it is the low return of investment in the public
sector enterprises that is to a large extent, responsible for the fiscal crisis of the Central Government. Serious
problems are observed in the form of:
1. Insufficient growth in productivity
2. Poor project management
3. Lack of continuous technological up-gradation
4. Inadequate attention to research and development and human resources development
In addition, public enterprises have shown a very low rate of return on the capital investment. This had
hindered their ability to regenerate themselves in terms of new investments as well as in technology development.
The outcome is that many of the public enterprises have become a burden rather than being an asset to the
government.
Privatization is an essentially effective tool for restructuring and reforming the public sector enterprises
running without significant aim and mission as private sector is perceived to be fundamentally more self
motivated, prolific and reliable for superior quality of products and services. Privatization can be of three
prominent types:
1. Delegation: Government keeps hold of responsibility and private enterprise handles fully or partly the
delivery of product and services.
2. Divestment: Government surrenders the responsibility.
3. Displacement: The private enterprise expands and gradually displaces the government entity.
Positive Impact of Privatization
Privatization indeed is beneficial for the growth and sustainability of the state-owned enterprises.
The advantages of privatization can be perceived from both microeconomic and macroeconomic impacts that
privatization exerts.
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1. Microeconomic Advantages
a. State owned enterprises usually are outdone by the private enterprises competitively. When compared
the latter show better results in terms of revenues and efficiency and productivity. Hence, privatization
can provide the necessary impetus to the underperforming PSUs.
b. Privatization brings about radical structural changes providing momentum in the competitive sectors.
c. Privatization leads to adoption of the global best practices along with management and motivation of
the best human talent to foster sustainable competitive advantage and improvised management of
resources.
2. Macroeconomic Advantages
a. Privatization has a positive impact on the financial health of the sector which was previously state
dominated by way of reducing the deficits and debts.
b. The net transfer to the State owned Enterprises is lowered through privatization.
d. it can initially have an undesirable impact on the employees but gradually in the long term, shall prove
beneficial for the growth and prosperity of the employees.
e. Privatized enterprises provide better and prompt services to the customers and help in improving the
overall infrastructure of the country.
1. Private sector focuses more on profit maximization and less on social objectives unlike public sector that
initiates socially viable adjustments in case of emergencies and criticalities.
2. There is lack of transparency in private sector and stakeholders do not get the complete information about
the functionality of the enterprise.
3. Privatization has provided the unnecessary support to the corruption and illegitimate ways of
accomplishments of licenses and business deals amongst the government and private bidders. Lobbying
and bribery are the common issues tarnishing the practical applicability of privatization.
4. Privatization loses the mission with which the enterprise was established and profit maximization agenda
encourages malpractices like production of lower quality products, elevating the hidden indirect costs,
price escalation etc.
5. Privatization results in high employee turnover and a lot of investment is required to train the lesser-
qualified staff and even making the existing manpower of PSU abreast with the latest business practices.
6. There can be a conflict of interest amongst stakeholders and the management of the buyer private
company and initial resistance to change can hamper the performance of the enterprise.
7. Privatization escalates price inflation in general as privatized enterprises do not enjoy government subsidies
after the deal and the burden of this inflation affects the common man.
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