Chapter 3 Liberalisation, Privatisation and Globalisation

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.

Q. Why there was a need for Economic Reforms?

 Mounting fiscal deficit
 Adverse balance of payment
 Poor performance of public sector undertakings
 Fall in foreign exchange reserves
 Rise in prices
 Gulf crisis increases crude oil prices which negatively affected BOP.

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

Objectives of Liberalisation

 To boost competition between domestic businesses

 To promote foreign trade and regulate imports and exports
 Improvement of technology and foreign capital
 To develop a global market of a country
 To reduce the debt burden of a country
 To unlock the economic potential of the country by encouraging the private sector and multinational
corporations to invest and expand.
 To encourage the private sector to take an active part in the development process.
 To reduce the role of the public sector in future industrial development.
 To introduce more competition into the economy with the aim of increasing efficiency.

Economic Reforms Under Liberalisation

(i) Industrial Sector Reforms

 Abolition of industrial licensing- Govt. abolished licensing requirement from all the industries except
liquor, cigarettes, defence equipment, industrial explosives. Dangerous chemicals, drugs and explosives.
 De-reservation of production areas- Many goods produced by small-scale industries have now been
dereserved. And their investment limit increased to Rs. 1 Crore. In many industries the market has been
allowed to determine the prices
 MRTP Act – the need for the large companies to seek prior approval for its expansion, merger ,
amalgamations were removed.
 Limiting the role of public sector- the no. of industries reserved for public sector was reduced from 17
to 3.
(ii) Financial Sector Reform
 Shift in the role of the RBI from a regulator to a facilitator - This means that the financial sector
maybe allowed to take decisions on many matter without consulting the RBI.
  Establishment of private sector banks, Indian as well as foreign- led to lower interest rates and better
services.
 Foreign investment limits in banks was raised to around 51% - Foreign Institutional Investors {FII}
such as merchant bankers, mutual funds and pension schemes are allowed to invest in Indian financial
markets.
 Freedom to open the branches and ATM’s without any approval from RBI- Those banks which
fulfill certain conditions have been given the freedom to set up new branches without the approval of the
RBI and rationalize their existing networks.
(iii) Tax reforms/ Fiscal reforms
 Moderate and simplified income tax structure
 Reduction in income tax rate and corporate tax.
 Introduction of GST- to simplify and introduce a unified indirect tax system in India. This law came into effect
from July 2017.

(iv) External Sector Reforms/ Foreign Exchange Reforms

 Devaluation of Rupee- to increase exports and decrease imports. It was a source of earning foreign
exchange.
 Determination of exchange rate by market forces.

(V) Trade and investment reforms

 Removal of quantitative restrictions
 Export duty was completely withdrawn.
 Policy of import licensing was abolished
 Tariff rates were reduced.

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

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

Objectives of Privatisation
 Improving the financial condition of the government
 Raising funds through disinvestment
 Reducing the workload of public sector
 Increasing the efficiency of the government undertakings
 Making ways for foreign direct investment FDI
 Improving the efficiency of public sector undertakings by giving them the autonomy to make decisions

Methods of privatisation
1. Transfer of Ownership
 By withdrawal of the government from ownership and management of public sector companies.
 By outright sale of public sector companies.
2. Disinvestment 

 Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the private
sector is known as disinvestment.
  The purpose of the sale is mainly to improve financial discipline and facilitate modernization.

However, there are six other methods of Privatisation:

 The public sale of shares

 Public auction
 Public tender
 Direct negotiations
 Transfer of control of State or municipally controlled enterprises
 Lease with a right to purchase
Positive Impact of Privatisation:

i. Privatization supports managerial efficiency as there would be no political pressure and unnecessary
formalities.
ii. It will make entrepreneurs free to make quick decisions without interference of the govt.
iii. It maintains financial discipline by regular supply of funds.
iv. It reduces financial burden of the govt. as it does not have to spend on non-developmental expenditures.
v. Privatization encouraged competitiveness in domestic as well as international markets.
vi. Privatization provides strong reason to the inflow of FDI
Negative Impact of Privatisation:

i. Private sector functions mainly with the objective of profit maximization which may be done at the cost
of social welfare of the people.
ii. It leads to inflation.
iii. It if remained uncontrolled may turn into monopoly, where private owners may have control over the
market.
iv. It does not work towards achieving the objectives of full employment as it is guided by profit motive
and in order to cut down the cost may cause consequent unemployment.

Globalisation
It may be defined as integrating the national economy with the world economy through the removal of barriers
on international trade and capital movements.

Strategies for promoting Globalisation in the Indian Economy

 Increase in equity limit of foreign investment
 Partial convertibility
 Long term trade policy
 Reduction in tariffs
 Withdrawal of quantitative restriction

Objectives of globalisation
 To help the economy to adopt new and flexible method of production
 To increase the flow of foreign capital into the country
 To improve the quality of goods produced in the economy
 To improve the working of the banking and the foreign sector
  To accelerate the rate of human development in the country
 To enhance global integration and create a new World order which encourages free trade between
Nations

Ques: What is meant by outsourcing ?Is it good for a developingcountry like India ? Why are developed
counties opposing it ?

Outsourcing can be categorized as one of the most important outcomes of globalization. In this process the
company hires regular services from other countries like legal advice, computer service. Outsourcing has
recently intensified in recent times because of the growth of fast modes of telecommunication through
which data can be transmitted in real time over geographical boundaries. Due to its cheap labor and skilled
manpower India is one of the favorite destinations for business outsourcing.

e.g. accountancy, Voice Based Business Processes, music recording etc.

It is good for India because :
i) provides employment.
ii) exchange of technical know how.
iii)increase in international worthiness.
iv)by generating employment and thus rise in income, it provides better standard of living of the people.

The developed counties are opposing it because :

i)it leads to outflow of the funds from the developed country to India.
ii) it reduces the employment in the developed countries.

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.

At present it has 164 members.

 Its main purpose is to enhance production and trade of services to ensure optimum utilization of world
resources and to protect the environment.
 The WTO agreements cover trade in goods as well as services to facilitate international trade through
removal of tariff as well as non-tariff barriers.
 It provides greater market access to all member countries.
 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’.

Achievements of economic reforms

 Increase in growth rate of the economy during the reform period. The growth of GDP increased from
5.6% during 1980-91 to 8.2% during 2007-2012.
 It was noted that growth rate of about 8% is mainly driven by growth in service sector.
 There has been an increase in FDI and FII from 100 million $USD to 400 billion $USD
 There has been an increase in foreign exchange reserves. At present India is the 6th largest foreign
exchange holder.
  It made possible to create a marketable surplus along with meeting the requirements of domestic
demand of goods and services in the country.
 India is now seen as a successful exporter of auto parts, IT software and textiles.
 Due to LPG policies inflation is brought under control.

Criticisms of economic reforms

Though the GDP growth rate has increased in the reform period it has not generated sufficient
employment opportunities.
a) Reforms have not been able to benefit agriculture. There was more focus on production of cash crops
instead of food grains because of export oriented policy. It resulted in increase in prices of food
grains.
b) Due to globalization our economy was open to greater flow of goods and services from developed
countries. Cheaper imports replaced the demand for domestic goods.
c) The disinvestment initiated by the govt. policies was not of much success as the proceeds from
disinvestment were used to offset the shortage of govt. revenues rather than using it for the
development of the country.
d) The tax reduction was done to curb tax evasion and increase in govt. revenues but this policy did not
actually result in increase in tax revenue of the govt.
e) Tariff reduction also reduced the scope of generating revenues through custom duties.
f) Economic reforms increased the income and quality consumption of only high income groups and
widened the economic disparities among nations and people.

Failures of Economic Reforms (Detailed)

I- Neglect of Agriculture

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

An Appraisal of LPG Policies

1. Increase in foreign investment.

2. Increase in foreign exchange reserves.
3. A check of inflation.
4. Increase in national income.
5. Increase in exports.
6. Consumer sovereignty.
Negative Impact:
1. Neglect of agriculture.
2. Jobless growth.
3. Increase income inequalities.
4. Adverse effect of disinvestment policy.
5. Spread of consumerism.
6. Cultural erosion.
7. Encourages economic colonialism