Chapter 3

Liberalisation, Privatisation &

Globalisation
 Meaning of Economic Reforms & New economic Policy

Economic reforms refer to a set of economic policies directed to accelerate

the pace of ‘growth & development’.

In 1991, the government of India initiated a series of economic reforms to pull

the economy out of the crisis of 90s. These reforms came to be known as New
economic Policy (NEP). Three broad components of NEP are:

1) Policy of Liberalization in place of licensing for the industries and

trade

2) Policy of privatization in place of quotas for the industrialists

3) Policy of globalization in place of permits for exports and imports.

 Reasons/Need for economic Reforms

1) Poor performance of public sector: During 1951-1990, public sector was

assigned an important role to work for the economic development of India.
However, except for few public enterprises, the overall performance was very
disappointing. Huge losses were incurred by a good number of public sector
enterprises.

2) Deficit in Balance of Payments (BOP) : Deficit in BOP arises when foreign

payments for imports exceed foreign receipts from exports. Even after imposing
heavy tariffs and fixing quotas, there was a sharp rise in imports. On the other
hand, there was slow growth of exports due to the low quality and high prices
of Indian goods in the international market.

3) Inflationary Pressures: There was a consistent rise in general price level in the
economy due to increase in money supply and shortage of essential goods.
4) Fall in foreign exchange reserves: In 1991, foreign exchange reserves fell to the
lowest level and it led to the foreign exchange crisis in the country. Foreign
exchange reserves declined to a level that was not adequate:
• To finance imports of more than two weeks
• To pay interests that needs to be paid to international lenders.

5) Huge burden of debts: The expenditure of the government was much higher
that the revenue. Hence, the government had to borrow money from banks,
public and from international financial institutions.

6) Inefficient management: The origin of the financial crisis can be traced from the
inefficient management of the Indian economy

• The government was not able to generate sufficient revenue from internal
sources sch as taxation, running of pubic sector enterprises

• Government expenditure began to exceed its revenue by large numbers and it

became unsustainable.
Crisis of 1991 forced India for financial help from IMF and World
Bank
To manage the economic crisis of 1991, Indian government approached the
International bank for reconstruction and Development (IBRD), popularly known
as World Bank and the International Monetary Fund (IMF) and received $7 billion
as loan.

For availing the loan, these international agencies expected India to liberalize
and open up the economy by:

• Removing restrictions on the private sector

• Reducing the role of government in many areas
• Removing trade restrictions
 The New Economic Policy (NEP)

The NEP was announced in July 1991. It consisted of wide range of economic
reforms. The main aim of the policy was to create an more competitive
environment in the economy and remove the barriers to entry and growth of
firms.

The New Economic Policy can be broadly classified into two kinds of measures:

1) Stabilization Measures: They refer to short term measures which aim at:

• Correcting weaknesses that have developed in the balance of

payments by maintaining sufficient foreign exchange reserves

• Controlling inflation by keeping the rising prices under control

2) Structural reform measures: They refer to long-term measures which aim at:

• Improving the efficiency of the economy

• Increasing international competitiveness by removing the rigidities in various

segments of the Indian economy

Main policies of New Economic Policies

Liberalisation Privatisation
Globalisation
Refers to removal of Refers to transfer of
Refers to integrating the
entry and growth ownership, management
National Economy with
restrictions on the and control of public
World Economy
private sector sctor to private sector
 Liberalization
Prior to 1991, there were a large number of government restrictions in India in the
areas of licensing, import and export trade, dealings in foreign exchange etc. In
July 1991, a package of economic reforms were introduced which marked the
beginning of process of liberalization in India. Liberalization means removal of
entry and growth restrictions on the private sector.

• Liberalization involves deregulation and reduction of government controls and

greater freedom of private investment to make economy more competitive

• Under this process, business is given free hand and is allowed to run on
commercial basis

• The purpose of liberalization was:

a) To unlock the economic potential of the country by encouraging private
sector and multinational corporations to invest and expand
b) To introduce much more competition into the economy and creating
incentives for increasing efficiency of operations.

The economic reforms taken by the Government under liberalization include the
following:

i) Industrial sector reforms

ii) Financial sector reforms
iii) Tax reforms
iv) Foreign exchange reforms
v) Trade and investment policy reforms
 Industrial Sector reforms

In order to make necessary reforms in the industrial sector, the government

introduced its new industrial policy on 24 July 1991. The various measures under
industrial policy reforms include:

1. Reduction in Industrial licensing

The new policy of abolished industrial licensing for al the projects, except for a
short list of industries (liquor, defence, explosives etc)
• No licenses were needed i) To set up new units
ii) Expand or diversify the existing line of
manufacture
• However license is required for certain industries, related to security and
strategic considerations.
2. Decrease in Role of Public sector

One of the striking features was the substantive reduction in the role of public
sector in the future industrial development of the country. The number of
industries exclusively owned by the state, reduced from 17 to following 3 industries
i) Defence equipment
ii) Atomic energy
iii) Railway transport

3. De-reservation under Small Scale Industries

Many goods produced by SSI have now been de-reserved

• The investment ceiling on plant and machinery for small undertakings enhance
to rupees one crore
• In many industries, the market was allowed to determine the prices through
forces of the market
4. Monopolies and Restrictive Trade Practices ACT (MRTP ACT)

With the introduction of liberalization and expansion schemes, requirement for

large companies to seek prior approval for expansion, establishment of new
undertakings, merger, amalgamations, etc. were eliminated.

Financial Sector Reforms

Financial sector includes financial institution like commercial banks, investment

banks, stock exchange operations and foreign exchange market, the financial
sector in India is controlled by the central bank-RBI

The reforms introduced in the financial sector are:

1.Change in role of RBI: The role of RBI was reduced from regulator to facilitator
of financial sector. As a result, financial sector was allowed to take decisions on
many matters, without consulting the RBI
2. Origin of private Banks

The reform policies led to the establishment of private sector banks, Indian as well as
foreign. For example: Indian banks like ICICI and foreign banks like HSBC increases
competition and benefitted the consumers through lower interest rates and better
services.

3. Increase in Limit of foreign investment

The limit of foreign investment in banks was raised to around 51%. Foreign
institutional investors like merchant bankers, mutual funds and pension funds were
now allowed to invest in Indian financial markets.

4. Ease in expansion process

Banks were given freedom to setup new branches without the approval of RBI
 Demonetization

Demonetization, introduced in 2016, is closely related to financial sector reforms .

It is a policy action of the government that withdraws the status of legal tender
from the existing currency. Once the status of legal tender is withdrawn, the
existing currency are reduced to merely pieces of paper. These notes lose their
acceptance as a medium of exchange, or they lose their power to buy goods
and services in the market.

It was on November 8, 2016 that the government of India announced

demonetization of the currency notes of 500 and 1000 rupees. The people were
required to deposit the demonetized currency notes with the banks within a
period of 2 months. The demonetized noted were replaced by new currency
notes of 500 and 2000 rupees.

Basic purpose- It aimed at curbing illegal transactions and anti social activities
 Merits of Demonetisation

i) Helps find out black money

ii) Reduction in black money leads to shrinkage of shadow economy
iii) When shadow economy shrinks and tax evasion is reduced,
government revenue tends to rise
iv) Demonetization compels people to depoit their demoentised notes
with the banks. Financial base of the banking sector tends to expand.
v) A check on funding to terrorists helps combat anti social activities in
the economy.
vi) With cash almost disappearing in the market, people were driven to
digital mode of transactions. This was a big move towards cashless
economy. It also promoted banking habits of the people, a big leap
towards financial inclusion
 Demerits of Demonetization

i) In an underdeveloped economy like India, people are used to cash

transactions. With demonetization, people are deprived of cash in hand.
Thus, demonetization in 2016 led to a serios social chaos in India.
ii) Cash crunch affects production activity in the shadow economy.
Accordingly, jobs are lost and poor people are further marginalized.
iii) Decline in production activity hurts the overall level of economic activity
and the economy started facing slowdown.. India is yet to reciver from the
slowdown triggered by demonetization in 2016.
iv) Nearly 90 percent of workforce in India is engaged in informal economy
for their livelihood. And this segment of the economy is highly cash
dependent and cash sensitive. A huge cut in liquidity implied that cash
purchase if inputs and cash payment of wages became impossible. There
was a huge decline in employment.
v) Exchange of demonetized currency with the valid currency led to long
queues at the banks. People feel hurt when they find it difficult to use their
own money. Accordingly, consumption is lowered and inducement to
invest is lost.
 Tax Reforms
Tax reforms refer to reforms in government’s taxation and public expenditure policies,
which are collectively known as fiscal policies. Taxes are of two types:

1) Direct Taxes: Taxes on income of individual s well as profits of business enterprises.

For example: Income tax and corporate tax

2) Indirect taxes: Taxes which affect the income and property of persons through
their consumption expenditure. Indirect taxes are generally imposed on goods and
services. For example: Goods and services tax(GST)

The major tax reforms made are:

1. Reduction in taxes: Since 1991, there has been a continuous reduction in income
and corporate tax as high tax rates were an important reason for tax evasion. It is
now widely accepted that moderate rates of income tax encourages savings and
voluntary disclosure of income.
2) Reforms in Indirect Taxes: Considerable reform have been made in indirect
taxes to facilitate establishment of common national market for goods and
commodities.

3) Simplification of Process: In order to encourage better compliance on the

part of taxpayers, many procedures have been simplified.

Goods and Services Tax (GST)

GST has been introduced in India with a view to providing a uniform structure
across all parts of the country. The GST act was passed in the parliament on 29th
March 2017 and the act came into effect on 1st July 2017. This is expected to
generate additional revenue for the government, reduce tax evasion and
create one nation, one tax and one market.
 Merits of GST
i) A simplified tax structure, as it is one tax for all the indirect
taxes and is a uniform policy across all the parts of the
country.
ii) Since refund of GST on inputs is available to the producers
only when they buy inputs from registered suppliers, it
ensures high degree of transparency in business. Black
money transactions are reduced.
iii) Being a uniform tax across all parts of the country, GST has
enhanced size of the market for the domestic producers
iv) GST has raised government revenue as there is a higher
degree of transparency in business
 Demerits of GST
i) GST is yet to cover all goods produced in the country. Electricity generation,
alcohol, petrol and diesel are some notable products out of the ambit of
GST
ii) GST rates across different goods and services are still not finalized and to that
extent uncertainty looms in the market and in the economy. This uncertainty
hampers decision making and therefore investment in production activity

Types of Tax under GST

i) Central GST: Levied on intra state supply of goods and services by the centre
ii) State GST: Levied on intra state supply of goods and services by the state
iii) Integrated GST: Levied on inter state supply of goods and services and is
collected by the centre. IGST is the sum total of CGST and SGST
 Foreign exchange reforms
1) Devaluation of Rupee: Devaluation refers to the reduction of value of domestic
currency by the government. To overcome balance of payment crisis, the rupee was
devalued against foreign currencies. This led to an increase in the inflow of foreign
exchange

2) Market determination of exchange rate: The government allowed rupee value to be

free from its control. As a result, market forces of demand and supply determine the
exchange value of the Indian rupee in terms of foreign currency.

Trade & Investment Policy Reforms

Before 1991, a lot of restrictions(high tariffs and quotas) were impose on imports to
protect the domestic industries. However, this protection reduced the efficiency and
competitiveness of domestic industries and led to their slow growth. So, the reforms in
the trade and investment policy were initiated:

• To increase the international competitiveness of industrial production

• To promote foreign investments and technology into the economy
• To promote efficiency of local industries and adoption of modern technologies

The important trade and investment policy reforms include:

1. Removal of Quantitative restrictions on Imports & Exports:

Under the New Economic Policy, quantitative restrictions on imports and exports
were greatly reduced. For example: quantitative restrictions on imports of
manufactured consumer goods and agricultural products were fully removed
from April 2001.

2. Removal of Export duties:

Export duties were removed to increase the competitive position of Indian goods
in the international markets.

3. Reduction in Import Duties:

Import duties were reduced to improve the position of domestic goods in the
foreign market.
4. Relaxation in Import Licensing System:

The import licensing was abolished, except in case of hazardous and environmentally
sensitive industries. The encouraged domestic industries to import raw materials at
better prices, which raised their efficiency and made them more competitive.

Privatization
Privatisation means transfer of ownership, management and control of public
sector enterprises to the entrepreneurs in the private sector.

Privatisation implies greater role of the private sector in the economic activities of
the country. Over the years, Indian government has diluted its stake in several
public sector enterprises, including IPCL, IBP, Maruti Udyog etc.
Privatization can be done in two ways:

1. Transfer of ownership and management of public sector companies from the

government to the Private sector.

2. Privatisation of the public sector undertakings(PSU) by selling off part of the

equity of PSUs to the public. This process is known as disinvestment.

What is disinvestment?

• Disinvestment is a policy instrument to promote privatisation

• It occurs when the government sells of f its share capital PSUs to the private
investors.
• Argument in favour of disinvestment is the same as in case of privatisation.
• It is taken as a remedial measure to improve production and managerial
efficiency as well as to facilitate modernisation.
• Of course, disinvestment is also used as a means to manage fiscal deficit by
the government.
 Need for Privatization
Need for privatization was felt mainly because of poor performance of PSUs. Note
the following observation in this regard:

i)The process of industrialisation was initiated during second five year plan
assigning a key role to PSUs

ii) The Industrial policy resolution clearly and categorically stated the significance
of PSUs in the process of growth and development

iii) It is beyond doubt that it was through the spread of PSUs that India could
diversify its industrial base between the period 1951-1991.

iv) It was on account of the spread of PSUs that the Indian economy underwent a
structural transformation: people started shifting from agriculture to industry as their
source of livelihood, and there was a gradual increase in the percentage of
contribution of industry to GDP. PSUs gave us Navratnas(nine jewels) of the Indian
industry, besides a host of mini ratnas)
v) Gradually, most public sector enterprises turned into as social dead weight.
Mounting losses of PSUs became unsustainable.

vi) Leakage, pilferage, inefficiency and corruption had become so rampant in

PSUs that their privatisation was considered as the only remedy.

vii) According to 1991, the government decided to phase out public enterprises
by selling its equity to the private entrepreneurs. Privatisation was to replace public
ownership of a large number of enterprises

viii) However, in view of their efficient performance, Navratnas were to be retained

as public sector enterprises. Indeed, the government decided to upgrade their
functional freedom with a view to enhancing their competitive strength.
 Navratnas and Mini Ratnas

In the context of PSUs in India, Navratnas refer to nine such profit making companies
which are compared with nine courtiers in the court of king Vikramaditya. These nine
industries are:

i) Indian Oil Corporation

ii) Bharat petroleum Corporation
iii) ONGC
iv) SAIL
v) BHEL
vi) IPCL
vii) VSNL
viii) NTPC
ix) Hindustan petroleum

However, with the passage of time, Navratna status was no longer confined to these
nine industries nly. It was accorded to other industries as well like MTNL, Oil India
limited etc. In all 16 industries have earned the distinction of acquiring Navratna status
Maharatnas: In 2009, the government also started according Maharatna status. The
PSUs having earned this status include
i) Coal india
ii) IOCL
iii) NTPC
iv) ONGC
v) SAIL
vi) BHEL
vii) GAIL
viii)BPCL

Miniratnas: Recently, yet another status called miniratna has been created to
encourage PSUs to improve efficiency and profitability. So far 75 PSUs have been
awarded Miniratna status.

Navratnas have often been quoted by the government as the epicentre of growth
in the Indian economy. It is not denying the fact that these enterprises brought
about an exemplary shift in the concept of industrialization in the economy
These enterprises served not only as a significant source of employment, but also as
an infrastructural base that induced private investment in diverse areas of industrial
growth.

In the wake of privatization, the government had initially thought of disinvestment

of Navratnas as well. But, owing to a stiff political resistance, it is now decided to
develop Navratnas as global players in their respective areas of industrialization.

Gains and losses of Privatization

Gains

i) Privatization implies supremacy of self interest over social interest. When self
interest prevails, the entrepreneurs work with 100 % commitment and efficiency
becomes the condition of survival for the workers. High productivity is the
obvious result
ii) Privatization expects private enterprises to work in a competitive environment-
both domestic as well as international. Competition induces upgradation and
modernization. These are the essential conditions of growth and development.
iii) Privatization promotes diversification of [production. Unlike PSUs, private
enterprises invariably generate high profits. These are used for expansion and
diversification of production. MNCs are a testimony to the fact that private sector
enterprises are capable of redefining the benchmark of growth.

iv) Privatization promotes consumer’s sovereignty. Higher degree of consumer's

sovereignty implies wider choice and better quality of life.

Losses
i) Socialistic patter of society is left to survive only as a theoretical possibility. It
loses its practical relevance once the PSUs are sold off to the private
entrepreneurs.

ii) Privatization encourages free play of market forces. But in the process, goods
are produced only for those who have the means to buy them. When prices
rise, weaker sections of the society suffer deprivation. Sircilla tragedy is a
notable evidence to this point
 Globalisation

It means integrating the national economy with world economy through removal
of barriers on international trade and capital movements. Globalisation aims to
create a borderless world.

Policy strategies promoting globalization of the Indian economy.

1) Increase in Equity limit of foreign investment:

Equity limit of foreign investment has been raised from the initial 40 % to between
51% -100%
In 47 high priority industries, Foreign direct investment(FDI) to the extent of 100
percent has been allowed without any restriction and red tapism.

Export trading houses have also been allowed foreign capital investment up to
100%.
2) Partial Convertibility

To achieve the goal of globalization, partial convertibility of Indian rupee has been
allowed for the following transactions:

i) Import & Export of goods and services

ii) Payment of interest
iii) Remittances to meet family expenses. It is called partial convertibility because it
does not cover capital transactions.

Partial convertibility refers to the sale and purchase of foreign currency at the
market price.

3) Long term trade policy

In conformity with the economic reforms, foreign trade policy is enforced for a
longer duration implying that it is a liberal policy.
Under this policy, all restrictions and controls on foreign trade have been removed.
Open competition is encouraged
4) Reduction in tariffs

In order to encourage competitiveness, tariff barriers have been withdrawn on

most goods traded between India and rest of the world.

Tariff barriers refer mainly to barriers on the imports through high import duty. Non
tariff barriers generally refer to quota barriers, implying quantitative restrictions on
imports

5) Withdrawal of Quantitative restrictions

Since 2001, the quantitative restrictions on all import items have been totally
removed. This is in conformity with India’s commitment to WTO

Note: Bilateral trade agreements refer to trade agreements between two countries
whereas multilateral trade agreements refer to trade agreements of one country
with many countries
 World Trade Organization(WTO)

WTO is expected to play an important role in the context of globalization of the

world economies. It is supposed to promote free trade in the international
market by reducing tariff barriers and by removing non tariff barriers. It is
focusing on the competition in the international market and free access to
market across different countries of the world. It is facilitating bilateral as well as
multilateral trade agreements.

Impact of WTO on the Indian Economy

i) It is expected that WTO will offer greater export opportunities to the Indian
economy. Accordingly, our share in international trade is expected to
increase in future.
ii) Under multi fibre arrangements our textile and readymade garment trade
was subject to quota restrictions. As per provisions of WTO, all these
restrictions have been removed. It has helped India to increase its exports of
garments and textiles. Out textile exports to America and European
countries have shown a substantial rise.
It has promoted textile industry and generated employment opportunities.

Due to agreed reduction trade barriers and reduction in subsidies to the domestic
producers of agricultural goods in the developed countries, prices of the goods are
expected to rise in the international markets. Accordingly, India’s exports of
agricultural products are expected to rise.

Outsourcing

Outsourcing refers to contracting out some of its activities to a third party which were
earlier performed by the organisation.. For example: many companies have started
outsourcing security service to outside agencies on a contractual basis.

• Outsourcing is one of the most important outcomes of the globalisation process.

• It has intensified in recent times because of the growth of fast modes of

communication, particularly the growth of Information Technology (IT)
• With the help of modern telecommunication links, the text, voice and visual data
in respect of these services is digitized and transmitted in real time over continents
and national boundaries.

• India has become a favorable destination of outsourcing for the most of MNCs
beuase of low wage rates and availability of skilled manpower. For eample: Indian
business process outsourcing companies are already gaining prominene and
earning precious foreign exchange.

• Some of the services outsourced to India include:

i) Voice based business processes known as BPO or call centres

ii) Record keeping
iii) Accountancy
iv) Banking
v) Music recording
vi) Film editing
vii) Book transcription
viii) Clinical advice
Positive traits of globalization

Globalization resulted in :

i) Greater access to global markets

ii) Advanced technology
iii) Better future prospects for large industries of developing countries

Negative traits of globalization

i) Benefits of globalisation accrue more to the developed countries

ii) Globalisation compromises the welfare and identity of people belonging to
poor countries
iii) Market driven globalisation increases economic development among nations
and people
 An appraisal of LPG policies
Arguments in favour of economic reforms

i) Increase in rate of economic growth: The growth in GDP was 5.6% during 1990-91
as compared to 8% in 2010-11.

ii) Inflow of foreign investment: the opening up of the economy has led to the rapid
increase in foreign direct investment(FDI). The foreign investment increased from
about US $ 100 million in 1990-91 to $73.5 billion in 2014-15.

iii) Rise in foreign exchange reserves: there has been an increase in the foreign
exchange reserves from about US $6 billion in 1990-91 to about US $321 billion in
2014-15. India is one of the largest foreign exchange reserve holders in the world.

iv) Rise in exports: During the reform period, India experienced considerable
increase in exports of auto parts, engineering goods, IT software and textiles.
v) Control on Inflation: Increase in production, tax reforms and other reforms helped
in controlling the inflation. The annual rate of inflation reduced from the peak level
of 17% in 1991 to around 5.48% in 2015-16.

vi) Increase in the role of private sector: Abolition of licensing system and removal
of restrictions on entry of the private sector, in areas earlier reserved for the public
sector, have enlarged the area of operation of the private sector.

Criticism of Economic reforms

i) Growing unemployment: Through the GDP growth rate has increased in the
reform period, but such growth failed to generate sufficient employment
opportunities in the country.

ii) Neglect of agriculture: The new economic policy has neglected the agricultural
sector compared to industry, trade and services sector.
a) Reduction of public investment: Public investment in agriculture sector, especially
infrastructure, which includes irrigation, power, roads, market linkages and
research and extension has been reduced in the reform period

b) Removal of subsidy: removal of fertilizer subsidy increased the cost of production

which adversely affected the small and marginal farmers.

c) Liberalization & Reduction in import duties: This sector has been experiencing a
number of policy changes such as reduction of import duties on agricultural
products, removal of minimum support price and lifting of quantitative restrictions
on agricultural products. All these policies adversely affected the Indian farmers
as they now have to face increased international competition.

d) Shift towards cash crops: Due to export oriented policy strategies in agriculture,
the production shifted from food grains to cash crops for the export market. It led
to rise in the prices of food grains
iii) Low level of Industrial growth: Industrial growth recorded a slowdown due to the
following reasons:

a) Cheaper imported goods: Due to globalization, there was a greater flow of

goods and capital from developed countries and as result, domestic inductries
were exposed to imported goods. Cheaper imports replaced the demand for
domestic goods and domestic manufacturers started facing competition from
imports. For example: cheaper Chinese goods pose a big threat to Indian
manufacturers.

b) Lack of infrastructural facilities: The infrastructure facilities, including power

supply, have remained inadequate due to lack of investment.

c) Non tariff barriers by developed countries: All quota restrictions on exports of

textiles and clothing have been removed from India. But some developed
countries, like USA have not removed their quota restrictions on import of textiles
from India.
iv) Ineffective disinvestment policy: The government has always fixed a target for
disinvestment for Public sector enterprises(PSEs). For instance, in 2014-15, the target
was 56000 crore rupees, whereas, the achievement was about 34500 crore rupees.

However, according to some scholars, the disinvestment policy of government was

not successful because:

• The assets of PSEs were undervalued and sold to the private sector
• Moreover, such proceeds from disinvestment were used to compensate shortage
of government revenues rather than using it for the development of PSEs and
building social infrastructure in the country.

v) Ineffective Tax policy: The tax reduction in the reform period was done to
generate larger revenue and to curb tax evasion. But, it did not result in increase in
tax revenue for the government

vi) Spread of consumerism: The new policy has been encouraging a dangerous
trend of consumerism by encouraging the production of luxuries and items of superior
consumption