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LIBERALISATION, PRIVATISATION AND, CHAPTER 3, , GLOBALISATION, , New economic Policy:, ● In order to overcome the economic crisis and accelerate the pace of, economic growth, new economic policy was introduced in July 1991., ● it is called 'new' because its measures were just opposite to the, economic policy prior to 1991., ● The set of policies can be classified into:, (i) Stabilization measures:these are shorter measures intended to, (a)Correct the weaknesses that developed in balance of payments by, maintaining sufficient foreign exchange reserves., (b) bring inflation under control by keeping the rising prices under control., (ii) structural reforms measures: These are long term measures aimed at, (a) improving the efficiency of the economy
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(b)increasing its international competitiveness by removing the rigidities in, various segments of the Indian economy., The government initiated the variety of policies also known as element of, new economic policy., LIBERALISATION, PRIVATISATION, GLOBALIZATION, , LIBERALISATION, , , Reforms under Liberlisation are:, (I) Industrial sector reforms., (Ii) Fiscal/ tax reforms., (III) Trade and Investment policy reforms., (IV)Financial sector reforms., (V) Foreign Exchange reforms., , Industrial sector reforms:, (I) abolition of industrial licensing, (a)Prior to 1991, every entrepreneur had to get permission from, government to start a firm, close a firm how to decide the amount of, goods that could be produced., (b), , According to new economic policy, industrial licensing was abolished, for almost all products except for some industries which are of, strategic importance for our nation like alcohol, cigarettes, hazardous, chemicals, industrial explosives, aerospace and drugs and, pharmaceuticals., , (II) Decrease in the role of public sector:, (a)Prior to 1991, private sector was not allowed in many industries as, the major control was exercised by the government.
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(b), , It was felt that government cannot control everything so private sector, was allowed to participate in growth object of the country and now the, only industries which are reserved for the public sector (number of, industries reduced from 17 to 3) are defence equipments, atomic, energy generation and railway transport., , (III) Price determination by market forces:, (a)Prior to 1991, there were controls on price fixation by the industry as, per the directive policy of the government., (b), , But now in man industries, market has been allowed to determine the, price through the demand and supply forces., , (IV) De-reservation of production by small scale industries:, (a)Prior to 1991, some goods could be produced only in small scale, industries., (b)But now many goods produced by small scale industries have been, de-reserved., (c), , The investment limit on plant and machinery for small scale industries, have been increased to rupees 1 crore., , (V)Import of capital goods:, (a)Prior to 1991, there were restrictions on import of certain industrial, (capital)goods., (b)But now there is freedom to import capital goods and technology in, order to develop strong infrastructural base of the country, , Financial sector reforms, (I) Role of RBI:
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(a)Prior to 1991, RBI role was a role of a regulator. As a regulator, RBI, used to fix interest rate structure. Also commercial banks were supposed to, consult RBI on almost all financial matters., (b) Now with new economic policy, one of the major aims, of financial, sector reforms was to reduce the role of RBI from regulator to facilitator of, financial sector. This means that the financial sector may be allowed to, take decisions on many financial matters without consulting RBI., (II) Establishment of private sector banks:, (a)Prior to 1991, private sector banks were not encouraged, as public, sector was given more importance in government policies., (b)But the reform policies led to the establishment of private sector banks,, Indian as well as foreign which increase the size of competition and, provided better services to the consumer., , (III) Foreign investment:, (a) Prior to 1991, foreign investment in India financial market was, restricted., (b)with the reform policies, now foreign investment limit in banks was, raised to around 51%. Foreign institutional investors (FIR) such as, merchant bankers, mutual funds and pension funds are not allowed to, invest in Indian financial markets under strict guidelines of RBI., (IV) Setting up new branches:, (a) Prior to 1991, approval of RBI was required to set up new branches by, the banks., (b)Now, those banks which fulfill certain conditions are given freedom to, set up new branches without the approval of RBI and rationalize their, existing branch networks., , Fiscal tax reforms:, (I) Reduction in direct taxes:
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(a)Prior to 1991 and also after that there has been a continuous, increasing Direct taxes i.e. the taxes on incomes of individuals and, profits of business enterprises., (b)With economic reforms, it was felt that high rate of income tax were, responsible for tax evasion. It is now widely accepted that moderate, rate of income tax encouraged savings and voluntary disclosure of, income., (II) Reforms in indirect taxes:, (a)Prior to 1991 their work complexities in imposing the indirect taxes, and recovering them., (b) Now efforts have been made to reform the indirect taxes i.e. taxes, levied on commodities.this was initiated to facilitate the establishment, of a common national market for goods and services., (III) Simplification of tax paying procedure:, (a)Prior to 1991 it was a very complex procedure to make text, payment in term of long distance, fix time period etc., (b)Now in order to encourage better compliance on the part of text, payers many procedures have been simplified., , Foreign Exchange Reforms, This was the first important reforms in the external sector to bring reforms, in foreign exchange market., The measures are:, (I) Devaluation of rupee, (a)In 1991, India was very badly hit by balance of payment crisis. In other, words, outflow of foreign exchange was more than inflow foreign exchange.
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(b) The reform in this regard was devaluation of rupee. Devaluation refers, to reduction in the value of domestic currency in relation to foreign, currency by the government this encourage exports and discourage, imports. It lead to an increase in the inflow of foreign exchange., (II) Determination of foreign exchange rate:, (a)Earlier determination of foreign exchange rate was controlled by the, government., (b)Now the government allowed market forces(demand and supply of, foreign exchange/currencies) to determine foreign exchange rate., , Trade and investment policy reforms:, Liberalization of trade and investment policy was initiated to increase, efficiency and increase competitiveness in the international market and to, increase foreign investment and technology into the Indian economy. The, aim was also to promote the efficiency of the local industries and the, adoption of modern technologies. The reforms undertaken were:, (I) dismantling of quantitative restrictions on import and export:, (a)Prior to 1991, India followed the policy of quantitative restrictions on, imports and exports . This was done through rigid control over imports and, by keeping the tariff very high., (b)Now liberalization aimed at removal of quantitative restrictions on import, and export. Quantitative restrictions on imports of manufactured consumer, goods and agricultural products were also fully removed., (II) Reduction of tariff rates:, (a)There were very high tariff imposed on imports to favour the policy of, protection, prior to 1991.
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(b)Now tariff on imports was reduced to enhance the domestic trade and, economic growth., (III)Removal of licensing procedures for imports:, (a)Prior to 1991, there were use restrictions to obtain import licence in, order to keep strict control over imports., (b) Now import licensing was abolished except in case of hazardous and, environmentally sensitive industries., (IV) Removal of export duties, (a)Earlier, there were heavy export duty is imposed to encourage domestic, production for domestic demand only., (b)Now export duties have been removed to increase the competitive, position of Indian goods in the international market., , PRIVATISATION, privatisation implies shedding of ownership for management of a, government owned enterprise. It means removal of rigid control over, private sector and giving it freedom to take necessary decisions. Prior to, 1991, public sector was according greater degree of priority and, importance but the desired result could not be achieved., The new economic policy aims at expanding private sector by removing, strict control over it and making it free to innovate and progress., Thus,, *, Privatisation refers to transfer of ownership, management and, control of government sector enterprises to the private sector., *It is done to improve efficiency and increase competitiveness of the, private sector.
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*Government also tried to improve efficiency of some public sector, companies bi granting them special status of Navratna and miniratna., These were given greater managerial and operational autonomy, in, various decisions to run the company efficiently., *Privatisation can be done in two ways:, (a)By withdrawal of the government from ownership and management, of public sector companies., (b)By outright sale of public sector companies., *"Privatisation of the public sector undertakings by selling of part of, equity of PSUs to the private sector is known as Disinvestment.", *The purpose of privatization is to improve financial discipline and, facilitate modernization by encouraging private sector to invest and, participate in economic development with their administrative, efficiency. It was also envisaged that private capital and managerial, capabilities could be effectively utilised to improve the performance, of PSUs., , Positive Impact of Privatization, (I) Improve the efficiency of management:, (a)Privatisation supports managerial efficiency as there would be no, political pressure and unnecessary formalities., (b) Privatization will make the entrepreneurs free to make quick decisions, without interference by the government., , (II) Financial discipline
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(a)Privatization maintains financial discipline by regular support of, funds., (b)There were undue delays in sanctioning of funds prior to 1991 due, to complexities in the administrative setup., (III)Reduction in deficit, (a)In the late 1980s, government expenditure begin to exit its revenue, by large margin causing deficit in government budget., (b)Privatisation reduces the financial burden of the government as it, does not have to spend on non development expenditure. Rather by, earning sufficient profits, it can support government by paying taxes., (IV)Competitiveness, (a)Privatization targeted that private capital and managerial, capabilities could be effectively utilised to improve the performance., (b)This would further encourage competitiveness (required for the, development of economy) in domestic as well as international market., (V)Diversification of products, (a)Private sector will function efficiently to satisfy the unlimited wants, of consumers in order to create a market for its production., (b)It will result in diversification and expansion of production. It will, also promote consumer's sovereignty., (VI)Increase in Foreign direct Investment
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(a)Privatisation provides strong Impetus to the inflow of FDI as, financial discipline improves in the country due to capital invested by, the private sector., (b)Other countries would like to invest because of expanded domestic, market., , Negative impact of privatisation, (I)Neglect of social interest, (a)Private sector functions mainly with the objective of profit, maximization which may be done at the cost of social welfare of, people., (b)Thus, socialistic pattern of society main just be a dream reality as a, social interest is not the primary objective of private sector., (II)Highly priced goods, (a)Privatisation functions on the basis of market mechanism. When, price rise, demand by those who cannot pay this price, would fall. If it, continues, this may become a major problem of inflation., (b)If inflation is not controlled, it may affect the majority adversely., (III)Monopolistic control, (a)Privatisation if remained uncontrolled mein turn into Monopoly,, where private honour may have Monopoly control over the market., (b)This situation may also be characterized by concentration of power, in few hands.
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(IV)Hindrance in achieving the objective of full employment., (a)Privatisation does not work towards achieving the objective of full, employment as it is guided by profit motive and in order to cut down, cost, it may cause retrenchment and consequent unemployment., (b)Privatisation in many PSUs resulted in voluntary retirement of many, workers because of unsatisfactory job condition laid by the Private, sector., , Globalisation, Globalisation is the outcome of policies of liberalization and privatization., Globalisation aims at turning the world into one whole for creating a, borderless world. Globalisation refers to free interaction among all the, countries of the world in various fields like trade, technology, loans,, investment, outsourcing, etc., Thus,, **Globalisation is defined as a system related to increasing, interaction, growing economic interdependence and widening, economic integration in the world economy., ** It encourage integration of the economy of the country with the, world economy., ** It is an outcome of the set of various policies that are aimed at, transforming the world towards greater interdependence and, integration., ** It involves creation of networks and activities transcending, economic, social and geographical boundaries., , Policy measures undertaken under Globalisation.
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(I)Rise in equity limit participation of foreign investment., , (a)Prior to 1991, foreign equity limit was restricted by lot of formalities, regarding approvals, sanctions and constraints., (b)This limit has been raised from 40 % to 51% fullstop approvals,, sanctions and constraints on foreign investments have been relaxed after, economic reforms., (II)Devaluation of rupee, (a)At the end of 1991 balance of payment situation was adverse, employing, lack of foreign exchange reserves as outflow of foreign exchange was more, than inflow foreign exchange., (b)Rupee was devalued in July 1991 by nearly 20%. Devaluation of rupee, encouraged exports and discouraged imports., (III)Convertibility of Indian rupee, (a)Partial convertibility of rupee was allowed by the government in, 1992-1993 budget and full convertibility of rupee was allowed in 1993-1994, budget in current account., (b)It refers to purchase and sale of foreign currencies at a price determined, by the market., (c)It was allowed for import and export of goods and services, payment of, interest etc., (IV)Removal of control on foreign trade., (a)A new 5 years foreign trade policy was announced to establish the, framework of trade with rest of the world.
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(b)It removed almost all the restrictions on external trade. Open, competition has been increased. All source of goods can be traded except, for some goods which are of strategic importance for the nation., (V)Modification of tariffs, (a)In conformity with new economic policy, custom duties and tariffs, imposed on import and exports have been gradually reduced., (b)The ones which are still prevailing have been modified to encourage, competitiveness and promote international trade., (VI)Modification in technology agreements:, (a)Prior to 1991, there were restrictions for hiring foreign technology of, foreign technicians., (b)According to new economic policy, all foreign collaborations concerning, higher technology have been made easy by the government., (c)According to new economic policy no permission is required for testing, domestically developed technology abroad., , Positive impact of globalisation:, 1.Globalisation has been able to establish links in such a way that the, happenings (advancement) in India can be influenced by events happening, miles away.(Rest of the world)., 2. Globalisation has been able to turn the world into one hole for creating a, borderless world as it provides easy access to global markets., 3.We are now exposed to advance technology and are able to develop, indigenous production in the international market.
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4.Globalisation should be seen as an opportunity in terms of greater access, to global markets and increased possibility of large industries of developing, countries to become important players in the international arena ., , Negative impact of Globalisation, 1.Globalisation is a strategy of the developed countries to expand there, markets in other countries., 2. Market driven Globalisation has widened the economic disparities, among nations and people., 3.Globalisation has compromised the welfare and identity of people, belonging to poor countries., , Outsourcing:, this is one of the important outcomes of globalisation process. It is an, emerging business activity. As information technology is growing, faster, outsourcing has become an important need of the present time, in the international arena., 1. In outsourcing, a company hires regular service from external sources,, mostly from other countries. The services used to be previously provided, internal or from within the country., 2.It is a form of economic activity, which has intensified in present times, because of the growth of communication, specifically the growth of IT, sector., 3.Most Multinational Corporations and even small companies are, outsourcing their services to India because these can be availed at a, cheaper cost with reasonable degree of skill and accuracy.
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4.The main services which are being outsource to India by the other, countries are voice based business process(known as BPO)record, keeping, accountancy, banking services, film editing, book transcription,, clinical advice or even teaching., 5.With the help of modern telecommunication links including the internet,, the data regarding these services is digitised and transmitted in real time, over continents and national boundaries., 6. India has become a destination for global outsourcing in the post reform, period because of:, a) Low wage rates, b) Availability of skilled manpower., , World Trade organisation (WTO), the World Trade organisation was founded in 1995 as the successor, organisation to the general agreement on trade and tariffs, (GATT).GATT was established in 1948 with 23 countries as the global, Trade organisation to administer all multilateral trade agreements by, providing equal opportunities to all countries in the international, market for trading purposes., Functions performed by WTO:, 1.The WTO agreements cover trade in goods and services to facilitate, bilateral and multilateral trade by removing tariff and non tariff barriers., 2.WTO aims at enlarging production and trade of services to ensure, optimum utilisation of world resources.
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3.It helps in providing greater market access to all member countries as it, provides equal opportunities to all countries in the international market., India being an important member of WTO, has been in the forefront of, framing fair global rules and advocating the interest of developing, World. India has removed quantitative restrictions on imports and, reduce tariff rates.
