Environment Management

Module 4
Political and Legal Environment
India’s Economic Reforms
Liberalisation Globalisation and
Privatisation
 India Scenario before 1991
 After 1947- problems of widespread poverty and crises in
agriculture/industries.
 The First Five Year Plan 1951 - Primary sector.
 Second Five Year Plan 1956, - Mahalanobis Model-government-led
industrialization. i.e “The public sector must grow not only absolutely but
also relatively to the private sector”
 License Raj –Government control –which company would produce what!
 MRTP 1969s- preventing- economic power –of few business houses
 The BOP crisis arose in the 1970s and worsened -1980s and collapse in
1991 current account deficits were financed by borrowings from abroad
 India’s foreign exchange reserves at USD 1.2 billion exhausted and India
was in the need of IMF bailout.
 In short Indian Economy before 1991
 Influenced by protectionism and Public ownership
 Existence of License Raj (Red Tape)
This refers to the period between 1947 (independence of India) and
1990 when the economy was centrally planned. Rigid rules and
Regulation
 Decline in Growth rate of India
 More focused on Heavy Industries and Agriculture
 Less attention towards Service sector
 BOP Crisis
 Indian Economy since 1991
• 24 July 1991: Economic liberalisation in India was initiated in 1991
by Prime Minister P. V. Narasimha Rao and Finance Minister Dr.
Manmohan Singh then.
• The Balance of Payment (BoP) crisis was over by the end of March
1994 and foreign exchange reserves rose to from 1.2 billion Jan 1991
to USD 15.7 billion.
• The downturn compelled the acceptance of deregulation
• As a result Inflows of both FDI and FII into India increased
massively.
 India’s Economic Reform
Economic reforms?
refers to deregulation, or to remove distortions caused by regulations.

• The neo-liberal polices introduced by the government in 1991

• A move away from Inward looking economy to a more open
economy or export oriented strategy of growth.
• That in turn means doing away with government intervention as much
as possible and giving greater freedom to private enterprise
operations.
• The central point of the reforms was liberalization of the economy,
simplifying regulations, giving more role to the private sector and
opening up of the economy to competition
 India’s Economic Reform -Contd…

Focus of Economic Policy –

• Deregulating Indian industry;
• Allowing the industry freedom and flexibility in
responding to market forces
• Providing a policy regime that facilitates and fosters growth
of Indian industry to let the entrepreneurs make investment
decisions on the basis of their own commercial judgment.
• Attainment of technological dynamism and international
competitiveness
Main features of New Economic Reforms
oDe-reservation of basic industries, power, transport, banking etc.
oIndustrial delicensing policy and Abolition of MRTP Act
oOpening up of the economy to foreign competition
oReduction in quantitative restrictions in imports as well as rate of
import duties;
oReductions in control on foreign exchange;
oReductions in the level of corporate and personal income taxes;
oLiberalization of trade and investment
oBanking and Financial Sector Reforms
oReforms related to the Public sector enterprises
Concept of Liberalisation, Privatisation and
Globalisation
• LPG initiative 1991 as a result of
Indian economy experienced severe crisis
Current Account deficit and Decline in country's export earnings
Decline in National Income and industrial output
BoP crisis
Govt. Seeks financial aid from IMF to resolve the debt problem
As a result it was decided to introduce the New Industrial Policy
(NIP) in 1991 to start liberalizing the Indian economy
• Liberalisation
• Liberalization means elimination of state control over economic
activities.
Greater autonomy to the business enterprises in decision-making and
removal of government interference.
Based on ‘market forces of demand and supply would automatically
operate to bring about greater efficiency and the economy would
recover. This was introduced as a reforms internally in the real and
financial sectors of the economy and externally by relaxing state
control on foreign investments and trade.
Improving the efficiency and productivity of the public sector. For
attaining this objective, existing government regulations and restrictions
on industry were removed.
 Major aspects of Liberalization in India
• 1.Abolition of licensing : Abolition of License Raj except 6 categories alcohol,
cigarettes, industrial explosives, defence products ,drugs and pharmaceuticals,
hazardous chemicals .
• 2.Liberalization of Foreign Investment : approvals were given for Foreign Direct
Investment (FDI) to flow into the country
• 3.Relaxation of Locational Restrictions : urban/ rural relaxation and population
limit for industrial development
• 4.Liberalization of Foreign Technology imports
• 5.Phased Manufacturing Programmes : Foreign investments
• 6.Public Sector Reforms : Autonomy for PSUs and restricting interference of the
government officials and allowing their managements greater freedom in decision-
making.
• 7.MRTP Act : Industrial Policy 1991 restructured the MRTP act 1969
• Privatisation
• is a process by which the government transfers the productive
activity from the public sector to the private sector. i.e public to
private ownership and control. Also known as disinvestment
Privatisation will also lead to the closing down of unviable and sick
public sector enterprises.
• The objectives of disinvestment were to raise resources through
sale of PSUs to be directed towards social welfare expenditures,
raising efficiency of PSUs through increased competition, increasing
consumer satisfaction with better quality goods and services,
upgrading technology and most importantly removing political
interference.
• Main aspects of privatization in India are as follows;
Problem Autonomy to Public sector:
Dereservation of Public Sector: opening up of those industries for
the private sector that were exclusively reserved for the government
sector
Disinvestment Policies :
Rationale for Privatisation
• Improvement in efficiency and performance
• Fixing responsibility easier
• Private units are subject to capital market discipline
• Unavoidable political interference is in public enterprises
• Succession planning
• Response time in the case of public sector is less
• Remedial measures are taken early in private sector
• Privatisation leads to better service to customers
• Unviable and sick public sector enterprises
• Globalisation
• refers to the integration of national economy with the world
economy, leading to the increased interconnectedness of economies.
• It implies a free flow of information, ideas, technology, goods and
services, capital and even people across different countries and
societies. It increases connectivity between different markets in the
form of trade, investments and cultural exchanges.
• Major aspects/elements of Globalisation are :-
 To open the domestic markets for inflow of foreign goods in
India through reduced customs duties on imports.
 Inflow of foreign capital in a country
 Foreign Exchange Regulation Act (FERA) 1973 and later
Foreign Exchange Management Act (FEMA) 1999
 WTO agreements and Trade liberalisation
• FERA 1973 -to regulate certain payment dealings in foreign
exchange and securities transactions that indirectly affects
foreign exchange of import and export of currency and to
optimize the proper utilization of foreign exchange so as to
promote the economic development of the country
• FEMA 1999-to consolidate and amend the law relating to
foreign exchange with the objective of facilitating external
trade and payments and for promoting the orderly
development and maintenance of foreign exchange market
in India
 Measures towards Globalisation
1. INVESTMENT REFORMS
• Allowing entry of MNCs by scrapping restrictive laws like
Foreign Exchange Regulation Act (FERA) and changing into
Foreign Exchange Management Act (FEMA)
• Permitting Indian companies to collaborate with foreign
companies in the form of joint ventures
• Liberalising inflow of foreign direct investment,
• Incentives for MNCs and NRIs for investing in India
2. TRADE REFORMS
oImport liberalisation – reduction of import tariffs,
replacing import licenses with import tariffs, removing
quantitative restrictions on imports
oRemoving export subsidies, replacing licenses of exports
with export duties, low flat tax on export income
oDecanalising oil and agricultural trade-
i.e, end of public sector channelized imports
3. FINANCIAL AND BANKING REFORMS
o Allowing FIIs to invest in Indian Capital Market;
o Allowing Indian companies to procure capital from foreign
countries
o Allowing Mutual Funds to invest in foreign companies
o Interest Rate to be market Determined
o Lowering SLR and CRR in banks
o Allowing private sector into banking
4. EXCHANGE RATE REFORMS
oMove towards flexible exchange rate; Liberalized Exchange
Rate Management System
oFlexible Exchange Regime
o5. FISCAL CONSOLIDATION
oReduce Fiscal Deficit
oReduction in Public Expenditure
oTax reforms: VAT and Income tax and Corporate taxes
oGST
• 6. INDUSTRIAL REFORMS
o De-Licensing;
o De-reservation;
o Dilution of MRTP Act