LPG Model

V J Sebastian

Economic Crisis-1991
 India was facing a grave Economic
crisis by the end of 1980s.
- forex crisis
- a domestic debt crisis/deficits.
- downgrading of credit rating – by
Moody's, Standard and Poor etc.

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 Economic Crisis-1991
 Forex reserves fell to extremely low level
 Confidence of international financial
institutions badly shaken
 Country on verge on defaulting on
international financial obligations
 In may 91, govt had to lease 20 tons gold
to SBI to enable it to sell the gold with
repurchase option after 6 months.
 RBI pledged 47 tons of gold to bank of
England to raise a loan of $600m
V J Sebastian

Crisis Management
 Structural adjustment loan from IMF; Conditionality
include:
1. Macro-economic stabilisation- partial/ full float of
Rupee; Reducing Deficit through cut in
subsidies/disinvestment etc
2. Deregulation of investment, production and prices.
3. Liberalisation of foreign trade,
4. Privatisation of the public sector,
5. Financial Sector Reforms,
6. Tax reforms,
7. Labour Market Reforms
8. Social Safety Nets.
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 Crisis management
 1991 crisis was not just an economic
crisis; it was a crisis of confidence and
lack of faith in ability of govt. to manage
economy.
 Hence LPG was prescribed, which
meant grater role for pvt. sector in
future.

V J Sebastian

L-P-G: the three pillars of reforms

 LPG model accepts the fact that government
intervention and controls choke the private
enterprise and inhibit growth.

 It further accepts, though tacitly, that there is over

presence of public sector in the economy and it must
be reduced according to the managerial capacity of the
govt and be run on commercial lines to be viable.

 Finally, the philosophy recognises India as an integral

part of the world economy which must adjust
according to the changing circumstances abroad.
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Liberalisation
Definition. Process of freeing
the economy from direct or
physical controls of state and
giving greater freedom to
private enterprise.

V J Sebastian

Liberalisation
Prior to 1991, govt. had imposed many
restriction on the economy:
 industrial licensing, price controls,
licensing of imports, foreign exchange
controls, MRTP etc.
 these dampened entrepreneurship;
 led to bureaucratic controls, corruption,
delays and inefficiency;
 high cost economy ; growth rates came
down
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 Liberalisation
 Reforms (i.e. LPG) - an effort to free the
economy from controls/restrictions.
 Based on the assumption that market
forces could guide the economy in a more
efficient /effective manner compared to
government.
 Examples of other countries like China,
Korea, Thailand, Malaysia, etc. that had
achieved rapid economic development as a
result of liberalization.
V J Sebastian

Liberalisation – many fronts

Liberalisation

Banking &
Industrial Policy Liberalisation of Financial Sector Fiscal Policy
& Licensing Foreign Trade Liberalisation Reforms
/Reforms

Sec F 25/10/2021

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 Liberalisation - Some of the early steps
 New industrial policy in July 1991; Abolition of
industrial licensing
 MRTP Act amended
 FIPB established
 Rupee devaluation; then full float
 Freedom from locational requirements and
government clearance
 Freedom to public sector undertakings to access
capital market
 Automatic permission for foreign technology
agreements
 Freeing no. of products from administered price
mechanism
V J Sebastian

Liberalisation..…
 Corporatisation of departmental undertakings
and public undertakings
 Permission to corporates for buyback of shares
 Increase in investment ceiling of small scale
enterprises
 Freedom to banks to enter insurance sector
 FERA replaced with FEMA
 MRTP being replaced with Competition
commission
 Freedom to import capital goods
Freedom to import technology
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 Liberalisation..…
Direct control by Govt / Ministry replaced with
Regulators who have domain knowledge /
expertise:
1. SEBI- Securities and Exchange Board of India
2. TRAI – Telecom Regulatory Authority of India
3. IRDA – Insurance Regulatory and Development
Authority
4. RERA – Real Estate Regulatory Authority
5. CCI – Competition Commission of India
6. CERC - Central Electricity Regulatory Commission
7. [ DERC / OERC  State Level ]
V J Sebastian
Etc.

Privatisation:
Is it the business of the government to be in business?
 Privatisation is transfer of ownership and control
of state owned enterprises to the private sector by
sale (full or partial) of going concerns or by sale of
assets following their liquidation.
Methods are:
1. Strategic sale (Auction) ( BALCO - 51% sold to Vedanta,
49 % with govt; sale IPCL to reliance; VSNL to Tata Etc.
2. Sale of shares through an IPO/FPO
- Maruti IPO in 2003-04; PSU Banks ( United Bank of India
and Punjab & Sindh Bank; Coal India Ltd in 2010)
- FPO from NTPC, NMDC, Rural Electrification and Power
Grid Corp. - 2010
3. Issue of GDR / ADR (GAIL & ex VSNL GDR)V J Sebastian

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 Privatisation also included:
 Opening up of core sectors earlier
reserved for public sector to private
investment.
 Contracting of a no of services by public
sector units to private sector
 Buy back of shares – PSUs to buy back
Govt.’s stakes – govt. generates revenue
and disinvests its holding.

V J Sebastian

Case for Privatisation

 In addition to: Should the Govt be in Business?
approach, other perceived benefits are:
 Helps maintain budgetary balance – by reducing
subsidies, deficit and thus public Debt
 Capital infusion for the Pub sector- Pvt sector
already raising huge amounts.
 Expand equity culture and equity base; depth to
the capital Mkt.
 Govt could secure consensus on privatisation by
pledging to use:
 1/3 revenue for Social security system
 1/3 Repay Pub. Debt Sec
 1/3 Funding Infrastructure etc. G_25/10/2021
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Disinvestment vs. Privatisation
 Interchangeably used.
 But there is vital difference between the two.
 Disinvestment may or may not result in
privatisation.
 When the Government retains 26% of the
shares carrying voting powers in a PSU while
selling the remaining to a strategic buyer, it
would have disinvested all right but would not
have privatised.
 Because with 26% it can stall vital decisions
for which generally a special resolution (three-
fourths majority) is required. V J Sebastian

Disinvestment

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 Privatisation

V J Sebastian

Privatisation Record (Contd..)

 Proceeds from Disinvestment : Rs.5 lakhs
plus Crore (1991-92 to 2020- 2021)

 Budget 2020-21 Announcements

To raise 1,20,000 crores

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 Receipts from Disinvestment 1991-2021

1,00,057
1,20,000

84,972
1,00,000
V J Sebastian
80,000

50,199
Rs Crores

46,247
60,000

32845
24,349
23,997
23,956
23,553
22,144
40,000

15,547

15,819
13,894
5,658
5,371
4,843

3,348
3,038

2,765

2,366
1,913

1,860
1,871

1,570
20,000 910
380
168
-

-
1991-92

1994-95

1997-98

2000-01

2003-04

2007-08

2011-12

2014-15

2017-18

2020-21
1) http://bsepsu.com/Annual_Table.asp; 2) WHITE PAPER ON DISINVESTMENT OF CENTRAL PUBLIC
SECTOR ENTERPRISES (31ST JULY, 2007), DEPARTMENT OF DISINVESTMENT, MINISTRY OF FINANCE, GOI,
Annexure 7; 3) https://dipam.gov.in/past-disinvestment

Privatisation Potential

 Total listed CPSEs 58; accounted for

about 8 % of Mkt Cap of on BSE and NSE
as on 31 Dec 2019.
 i.e. RS. 12 lakhs crores plus; large potential
to raise revenues.

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 Market Capitalisation of CPSEs

V J Sebastian
https://dipam.gov.in/market-capitalisation-cpses

V J Sebastian
Contd..

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 V J Sebastian

Globalisation
First, it involves a stretching of social, political and
economic activities across political frontiers, regions and
continents.
Second, it suggests the intensification, of
interconnectedness in: trade, investment, finance,
migration, culture, etc.
Third, the evolution of world-wide systems of transport
and communication has increased the velocity of diffusion
of ideas, goods, information, capital, and people leading to
the growing extensity and intensity of global
interconnectedness.
Fourth, due to the growing extensity and intensity of global
interactions, distant events can be highly significant effects
elsewhere.
Even the most local developments may come to have
enormous global consequences V J Sebastian

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Globalisation
 Globalisation in India was the result of
internal economic compulsion, external
pressure from international community, from
institutions as IMF, World bank, WTO, and
the trend towards globalisation in a no. of
developing countries.
Steps:
 Reduction in scope of canalised trade
 FIIs allowed/Increase in FDI limits

 Permission to exporters to keep foreign

exchange accounts abroad to finance trade
V J Sebastian

Contd..
 Creation of FIPB
 Sustained reduction in custom duties
 Reduction/removal of QRs on a no. of items
 Wide range of facilities to export oriented
units
 Removal of import licensing
 FERA replaced with FEMA
 Improved communications/travel and
transport facilities etc.

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 Globalisation

V J Sebastian

Globalization index (0-100), 2017 - Country rankings:

The average for 2017 based on 193 countries was 62.42 points. The highest value was in
Switzerland: 91.28 points and the lowest value was in Eritrea: 30.33 points.

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Globalization index (0-100), 2017 - Country rankings:
The average for 2017 based on 193 countries was 62.42 points. The highest value was in
Switzerland: 91.28 points and the lowest value was in Eritrea: 30.33 points.

V J Sebastian

END NOTES

MRTP, FERA, FEMA

 MRTP 1969 – enacted to prevent the
concentration of economic power to
common detriment, control of monopolies,
prohibition of monopolistic and restrictive
trade.
 Clearance was required by an undertaking
producing ¼ or more of any type of goods
with assets more than 1 cr
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FERA 1973 (contd..)

 FERA applies to all citizens within and outside

India and to branches and agencies of
companies/ corporate bodies registered or
incorporated in India. Its main objective is to
consolidate and amend the law regulating
certain payments, dealings in foreign exchange
and securities, transactions indirectly affecting
foreign exchange and import and export of
currency for conservation of foreign exchange
resources of the country and proper utilisation.
V J Sebastian

FERA 1973 (concld..)

 FERA lays emphasis on exchange regulation and

exchange control
 Necessary to get RBI permission, in most
regulations
 Unbridled power to enforcement directorate to
arrest any person, search premises, seize
documents and start proceedings against any
person for contravention of FERA. Treated as a
criminal offence

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 FEMA 1999

 Lay emphasis on exchange management,

facilitates external trade and payments
 With exceptions, no provision of FEMA
stipulates obtaining RBI permission
 Unlike FERA, violation of laws will not
attract criminal proceedings. It will be
treated as a civil code

V J Sebastian

As on Feb 2020

V J Sebastian
https://www.quora.com/What-country-has-the-largest-economy-Why

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