Liberalisation, Privatisation and Globalisation: An Appraisal- NCERT Notes UPSC

Liberalisation, Privatisation Blog

In 1991, India met with a severe economic crisis relating to its external debt — the government was not able to make repayments on its borrowings from abroad; foreign exchange reserves dropped to levels that were not sufficient for even a fortnight. The crisis was further compounded by the rising prices of essential goods. All these led the government to introduce a new set of policy measures. 

Read this in-depth article on the major economic reforms (Liberalisation, Privatisation, and Globalisation) taken by the then government to control the economic crisis. Navigate through the article to get detailed insights on the topic and enhance your UPSC exam preparation Online

Background

The origin of the financial crisis can be traced to the inefficient management of the Indian economy in the 1980s.

  • During the said period the government’s expenditure remained more than its income (revenue) due to high spending on development programmes. 
  • The income from public sector undertakings was also not very high to meet the growing expenditure.
  • At times, India’s foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs. 
  • Imports grew at a very high rate without matching the growth of exports.
  • In the late 1980s, government expenditure began to exceed its revenue by such large margins that meeting the expenditure through borrowings became unsustainable.
  • Foreign exchange reserves of the country dropped to dangerous levels. Moreover, meeting consumption needs and fulfilling interest obligations became difficult for the country. 
  • To tackle the situation, India 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 to manage the crisis. 
  • For availing the loan, these international agencies expected India to liberalise and open the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions between India and other countries. 
  • India agreed to the conditionalities of the World Bank and the IMF and announced the New Economic Policy (NEP)
  • This set of policies can broadly be classified into two groups: 
  • Stabilisation measures: These were the short-term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control.
  • Structural reform measures: These are the long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy. 

The government initiated a variety of policies which fall under three heads viz., liberalisation, privatisation and globalisation. 

Liberalisation

Liberalisation was introduced to put an end to economic restrictions and open various sectors of the economy. Various policies under liberalisation were as follows: 

Deregulation of Industrial Sector:

Earlier in India, mechanisms such as industrial licensing, reserving certain industries for the public sector, policies permitting only small-scale industries allowed in certain areas, controls on price fixation and distribution of certain products were used to regulate the industry. Later, the reforms made the following changes: 

  • Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals. 
  • Only defence equipment, atomic energy generation and railway transport were left reserved for the public sector.
  • Many goods produced by small-scale industries have now been de-reserved. 
  • In many industries, the market has been allowed to determine the prices. 

Financial Sector Reforms

  • Financial sector in India, which includes financial institutions such as commercial banks, investment banks and foreign exchange markets, regulated by the RBI. 
  • One major aim of the financial sector reform is to reduce the role of RBI from regulator to facilitator of financial sector.
  • It led to the establishment of private sector banks both Indian as well as foreign private banks. 
  • Foreign Institutional Investors, such as merchant bankers, mutual funds and pension funds, were also allowed to invest in Indian financial markets.
  • Tax Reforms: Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies, collectively known as fiscal policy.  Some of the changes made under tax reforms are:
  • Taxes on individual income has been continuously reduced as it was felt that high rates of income tax were an important reason for tax evasion. It is a fact that moderate rates of income tax encourage savings and voluntary disclosure of income
  • The rate of corporation tax has been gradually reduced as it was very high earlier.
  • Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities. 
  • In 2016, the Indian Parliament passed Goods and Services Tax (GST) Act, to simplify and introduce a unified indirect tax system in India, which came into effect from July 2017.  This is expected to generate additional revenue for the government, reduce tax evasion and create ‘one nation, one tax and one market’. 
  • Moreover, to encourage better compliance on the part of taxpayers, many procedures have been simplified and the rates also substantially lowered.

Foreign Exchange Reforms

  • As an immediate measure to tackle the BOP crisis the Rupee was devalued against foreign currencies. Leading to an increase in foreign exchange inflow. 
  • Reforms also set the tone for market-based determination of the value of Rupee, instead of the earlier system of government determined value. 
  • Trade and Investment Policy Reforms: It aimed at increasing the efficiency and international competitiveness of the local industry along with the inflow of foreign investment and technology. The following steps were undertaken: 
  • Removal quantitative restrictions on imports and exports. 
  • Reduction of tariff rates.
  • Removal of licensing procedures for imports. Although, not in the case of environmentally sensitive industries.
  • Removal of export duties to increase the global competitiveness of domestic goods.
  • Further the quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001.

Privatisation

  • Privatisation is the process of transfer of ownership and control of an asset from government to any private entity.
  • This can be done either by withdrawal of the government from the management or by outright sale of public sector companies. 
  • Privatisation of the public sector enterprises by selling off part of the equity of Public Sector Enterprises (PSEs) to the public is known as disinvestment, which was undertaken with an aim of improving financial discipline and facilitating modernisation, by using private capital and managerial capability
  • The government envisaged that privatisation could provide strong impetus to the inflow of FDI.
  • Also, to increase the efficiency of the PSU’s managerial autonomy in decision making has been provided to them, for instance by granting them special status such as Maharatnas, Navratnas and Miniratnas.

Globalisation

  • It is the process of integration of the economy of a country with the world economy. 
  • It is a complex phenomenon aiming to transform the world into greater interdependence and integration, by creating networks and activities transcending economic, social, and geographical boundaries thus creating a borderless world. 
  • The globalisation process has had the following outcomes:

Outsourcing

  • In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country (like legal advice, computer service, advertisement etc.). 
  • Growth of Information Technology has given impetus to outsourcing of many of the services, and today 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. 
  • The low wage rates and availability of skilled manpower have made India a destination for global outsourcing, post reforms. 

Useful links for UPSC IAS preparation:

Macroeconomics- Indian Economy Notes: NCERT Notes UPSCElection and Representation- NCERT Notes UPSCCold War: Origin, Causes and Phases- NCERT Notes UPSCPopulation Composition- NCERT Notes UPSC
Acids, Bases and Salts- NCERT Notes UPSCFundamental Rights in the Indian Constitution- NCERT Notes UPSCHuman Geography: Nature and Scope- NCERT Notes UPSCMetals and Nonmetals- NCERT Notes UPSC

World Trade Organisation (WTO)

  • The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade and Tariff (GATT) which was an earlier global trade organisation, formed in 1948.
  • GAAT was established in 1948 with 23 countries as the global trade organization to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes.
  • It is expected to establish a rule-based trading regime free of arbitrary restrictions on trade
  • And enlarge production and trade of services, to ensure optimum utilisation of world resources and to protect the environment
  • The WTO agreements cover trade in goods as well as services to facilitate international trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing greater market access to all member countries.

Indian economy during reforms: An assessment 

The reforms have had a positive impact for the Indian economy, although at the same time have gone through criticism as well. 

Positive impacts of the Reforms

  • During the reform period, the growth of agriculture has been declined, industrial sector reported fluctuations and the growth of the service sector has gone up.
  • India witnessed a rapid growth in GDP on a continual basis for two decades. This growth has mainly been driven by growth in the service sector.
  • The opening of the economy has led to a rapid increase in foreign direct investment and foreign exchange reserves
  • India is now seen as a successful exporter of auto parts, engineering goods, IT software and textiles. 
  • Rising prices have also been kept under control.

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Criticism of the reforms

  • Growth and Employment: Though the GDP growth rate has increased in the reform period but not created sufficient employment. 
  • Reforms in Agriculture: 
  • Unlike the green revolution, public Investment in agricultural Infrastructure has fallen.
  • Partial removal of fertilizer subsidy has increased costs for small & marginal farmers.
  • Due to import relaxations, Indian farmers are facing adverse competition from cheaper foreign produce. 
  • Pressure on food prices due to shift of focus to cash crops, resulting from export orientation. 
  • Reforms in Industry: Industrial growth has also recorded a slowdown, reasons include:
  • Cheaper imports replacing domestic demand. 
  • Increased competition from imports. Due to it, there is an adverse impact on domestic industry and job generation.
  • Lack of investment in infrastructure such as power facilities. 
  • Developed countries have not provided the same kind of market access, as the developing countries. 
  • Disinvestment: The assets of the Public sector enterprises have been undervalued and sold, leading to loss of the government and the proceeds from such sales have often been used to meet revenue shortfalls, instead of further investments. 
  • Reforms and fiscal policies: The reforms led to tax rationalization, but are criticized on the following grounds: 
  • Tax rate reduction has not led to increased tax revenue. 
  • Other measures like tariff reduction, have reduced the scope to raise tax from imports.
  • Tax benefits provided for attracting foreign investment have further impacted tax revenue.
  • The limitation of tax revenue has placed limits on Public expenditure especially in the social sector. 

In a nutshell the globalization and the reforms process, has afforded both opportunities and challenges. The reforms were based on an externally advised policy to tackle the crisis and have led to a concentrated growth for the high-income groups and services related to them, instead of the sectors vital to the Indian economy and the Indian people. 

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