LIBERALIZATION, PRIVATIZATION AND GLOBALISATION: AN APPRAISAL

• In 1991, India met with an 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. It led the government to introduction of a new set of policy measures which changed the direction of our developmental strategies.
• The origin of the financial crisis can be traced to the inefficient management of the Indian economy in the 1980s.
• Expenditure is more than income; result government borrows to finance the deficit from banks and also from people within the country and international financial institutions.
• Governmental overshoot its revenue to meet challenges like unemployment, poverty and population explosion.
• The continued spending on development programmes of the government did not generate additional revenue. It was unable to generate sufficiently from internal sources such as taxation.
• The government spent a large share of its income on the social sector and defence, resulting in foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs.
• Due to unsustainable borrowings, very few foreign reserves are left.
• 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 a loan to manage the crisis.
• For availing of the loan, India liberalizes and opens up the economy.
• Remove 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 conditions and announced the New Economic Policy (NEP). It consists of a wide range of economic reforms.
• The policies were a more competitive environment in the economy and removed the barriers to entry and growth of firms. It can be classified into two groups
• The stabilization measures and the structural reform measures are short term and intended to correct some of the weakness that has developed in the balance of payments and to bring inflation under control.
• The structural reform measures are long-term and 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 liberalization, privatization and globalisation.

1. Liberalization

Deregulation of the Industrial Sector

In India, regulatory mechanisms were enforced in various ways

• Industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or decide the number of goods that could be produced.
• private sector was not allowed in many industries
• some goods could be produced only in small-scale industries,
• Controls on price fixation and distribution of selected industrial products.
• After 1991 many of these restrictions were removed
• Industrial licensing was abolished for almost all but product categories alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals.
• Atomic energy generation and some core activities in railway transport were reserved for the public sector.
• Many goods produced by small-scale industries have now been deserved.
• In most industries, the market has been allowed to determine the prices.

Financial Sector Reforms

• It includes financial institutions, such as commercial banks, investment banks, stock exchange operations and foreign exchange markets.
• All banks and other financial institutions in India are regulated through various norms and regulations of the RBI.
• It decides the amount of money that the banks can keep with themselves, fixes interest rates and lands to various sectors etc.
• Financial sector reforms reduce the role of RBI from the regulator to facilitating. It takes decisions without consulting the RBI.
• The reform policies led to the establishment of private sector banks, Indian as well as foreign.
• The foreign investment limit in banks was raised to around 74 per cent.
• It fulfils certain conditions that have been given the freedom to set up new branches without the approval of the RBI and rationalize its existing branch networks.
• Though banks have been permitted to generate resources from India and abroad.
• Certain managerial aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation.
• Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and pension funds, are now allowed to invest in Indian financial markets.

Tax Reforms

• These are concerned with the reforms in the government’s taxation and public expenditure policies, which are collectively known as its fiscal policy.
• There are two types of taxes: direct and indirect.
• Direct taxes consist of taxes on the incomes of individuals, as well as, the profits of business enterprises.
• Since 1991, there has been a continuous reduction in the taxes on individual incomes.
• It was felt that high rates of income tax were an important reason for tax evasion.
• It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income.
• The rate of corporation tax, which was very high earlier, has been gradually reduced.
• Efforts have also been made to reform the indirect taxes, and taxes levied on commodities, to facilitate the establishment of a common national market for goods and commodities.
• In 2016, the Indian Parliament passed a law, the Goods and Services Tax Act 2016, to simplify and introduce a unified indirect tax system in India.
• This is expected to generate additional revenue for the government, reduce tax evasion and create ‘one nation, one tax and one market’.
• Another component of reform in this area is a simplification.
• To encourage better compliance on the part of taxpayers, many procedures have been simplified and the rates have also been substantially lowered.

Trade and investment policy reforms

Liberalisation of the trade and investment regime was initiated to increase the international competitiveness of industrial production and also foreign investments and technology into the economy.  To promote the efficiency of local industries and the adoption of modern technologies

Qualitative restrictions on imports are imposed to protect the domestic industry. The tight control over imports and keeping the tariffs very high policies reduced efficiency and competitiveness which led to slow growth of the manufacturing sector.

Trade policy reforms aimed at

• Dismantling of quantitative restrictions on imports and exports
• Reduction of tariff rates
• Removal of licensing procedures for imports

Import licensing was abolished except in the case of hazardous and environmentally sensitive industries. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001.

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

2. Privatization

The shedding of the ownership or management of a government-owned enterprise in two ways

• By withdrawal of the government from ownership and management of public sector companies
• By direct sale of public sector companies
• Selling part of the equity of public sector enterprises to the public is called disinvestment.
• The purpose of the sale is to improve financial discipline and facilitate modernization.
• Private capital and managerial capabilities could be effectively utilized to improve their performance.
• Privatization could provide a strong impetus to the inflow of FDI.
• The government has also made attempts to improve the efficiency of PSUs by giving autonomy in taking managerial decisions.
• For instance, some PSUs have been granted special status as maharatnas, navratnas and miniratnas.
• The Navaratnas in the imperial court of King Vikramaditya were eminent persons of excellence in the fields of art, literature and knowledge.
• In the liberalized global environment, the government identifies PSEs and declares them as maharatnas, navratnas and miniratnas.
• Greater operational, financial and managerial autonomy has also been granted to profit-making enterprises referred to as miniratnas.

The Central Public Sector Enterprises are designated with different statuses.

1. Maharatnas- Indian Oil Corporation Ltd and Steel Authority of India Ltd
2. Navratnas- Hindustan Aeronautics Ltd and Mahanagar Telephone Nigam Ltd
3. Miniratnas- Bharat Sanchar Nigam Ltd and Airport Authority of India and Indian Railway Catering and tourism corporation Ltd

3. Globalisation

Outsourcing

• The company hires regular services from external sources, mostly from other countries.
• Because of the growth of fast modes of communication, particularly the growth of Information Technology (IT)
• Many of the services such as voice-based business processes known as BPO or call centres record-keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching is being outsourced by companies in developed countries to India.
• With the help of modern telecommunication links including the
• Internet, the text, voice and visual data in respect of these services is digitized and transmitted in real-time over continents and national boundaries.

4. 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 23member countries global trade organisation.
• To administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes.
• WTO is expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade.
• The purpose is to enlarge the 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 (bilateral and multilateral) through the removal of the tariff as well as non-tariff barriers and providing greater market access to all member countries.
• India has been in the forefront of framing fair global rules, regulations and safeguards and advocating the interests of the developing world.
• India has kept its commitments toward liberalisation of trade by removing the quantitative restriction on imports and reducing tariff rates.

5. Indian Economy during Reforms: An Assessment

• In economics, the growth of an economy is measured by the Gross Domestic Product.
• During the reform period, the growth of agriculture declined; the industrial sectors reported fluctuation the growth of the service sector has gone up.
• The Twelfth five-year plan (2012-2017) envisages the GDP growth rate at 9 or 9.5 per cent.
• The agriculture, industrial and service sectors have to grow at the rates of 4 to 4.2, 9.6 to10.9 and 10 per cent respectively.
• The opening up of the economy has led to a rapid increase in foreign direct investment and foreign exchange reserves.
• The foreign investment (FDI and FII) increased from about the US $100 million in 1990-91 to US$467 billion in 2012-23.
• India is exporting auto parts, engineering goods, IT software and textiles during the reform period.
• The basic problems of employment, agriculture, industrial infrastructure development and fiscal management are lack behind.

6. Growth and employment

GDP growth rate is increased but failed to provide sufficient employment opportunities.

The process of globalisation through liberalisation and privatisation policies has produced positive as well as negative results both for India and other countries.