Liberalization

and
Privatization
Definition-Liberalization

 It refers to loosening or removal of controls so that

economic development gets encouragement.
 It includes abolition of those economic policies,
rules, regulations, administrative controls and
procedures which impede economic development
 In other words economic liberalisation is a new
economy policy of promoting market determined
economic decisions rather than bureaucratic
arbitrary economic decisions
Genesis
• 1980s, the root cause of the crisis was the large and growing fiscal
imbalance.

• Large fiscal deficits emerged as a result of mounting government

expenditures, particularly during the second half of the 80s.

• These fiscal deficits led to high levels of borrowing by the

government from the Reserve Bank of India (RBI), IMF, World
Bank.

• Government expenditure in India grew at a phenomenal rate,

faster than what government earns as a revenues.

• The subsidies grew at a rate faster than government expenditures.

• Expenditure on subsidies rose from Rs.19.1 billion in 1980-81 to

Rs. 107.2 billion in 1990-91.
Continued……
• The Indian economy was indeed in deep trouble.

• Lack of foreign reserves .

• Gold reserve was empty.

• Before 1991, India was a closed economy.

• The government was close to default and its foreign exchange

reserves had reduced to the point that India could barely finance
three weeks’ worth of imports.

• The Government of India headed by Chandra Shekhar, with

Manmohan Singh (appointed as a special economical advisor)
decided to usher in several reforms that are collectively termed as
liberalisation in the Indian media.
Economic Reforms

• Industrial delicensing and simplification and rationalization of tax structure

to promote investment and expansion.

• Liberal FDI regime to supplement domestic resources.

• Current account convertibility to have a liberal trade regime.

• Public sector disinvestment to ensure government does what it does best.

• WTO compatibility to plug into the global economy.

Reforms in Industrial Policy

• Industrial policy has seen the greatest change, with most central
government industrial controls being dismantled. The list of industries
reserved solely for the public sector -- which used to cover 18 industries,
including iron and steel, heavy plant and machinery, telecommunications
and telecom equipment, minerals, oil, mining, air transport services and
electricity generation and distribution -- has been drastically reduced to
three: defense aircrafts and warships, atomic energy generation, and
railway transport. Industrial licensing by the central government has been
almost abolished except for a few hazardous and environmentally
sensitive industries.
• The requirement that investments by large industrial houses needed a
separate clearance under the Monopolies and Restrictive Trade
Practices Act to discourage the concentration of economic power was
abolished and the act itself is to be replaced by a new competition law
which will attempt to regulate anticompetitive behavior in other ways.
MRTP Act and License Raj

• The Monopolistic and Restrictive Trade Practices Act, 1969, aims

to prevent concentration of economic power to the common
detriment, provide for control of monopolies and probation of
monopolistic, restrictive and unfair trade practice and protect
consumer interest.
• License Raj refers to the elaborate licenses, regulations and
accompanying red tape that were required to set up business in India
between 1947 and 1990. the license Raj was a result of India’s
decision to have a planned economy, where all aspects of the
economy are controlled by the state and licenses were given to a
select few.
Reforms in Trade Policy

• Import licensing was abolished relatively early for capital goods and
intermediates which became freely importable in 1993, simultaneously
with the switch to a flexible exchange rate regime. Import licensing had
been traditionally defended on the grounds that it was necessary to
manage the balance of payments, but the shift to a flexible exchange rate
enabled the government to argue that any balance of payments impact
would be effectively dealt with through exchange rate flexibility .
Foreign Investment In India

• After reforms in 1992, huge amounts of foreign direct investment

came into India
• In 1993, foreign institutional investors were allowed to purchase
shares of listed Indian companies in the stock market
• Foreign direct investments in India are approved through two
routes:
a) Automatic approval by RBI
b) The FIPB Route
Thank You