CHAPTER-3

LIBERALISATION,
PRIVATISATION,
GLOBALISATION
1) INTRODUCTION
Since independence - india followed MIXED ECONOMY
But in reality PUBLIC SECTOR DOMINATED
Huge license and restrictions hampered the Growth of
indian economy.

But according to some scholar :

Diversified Industrial sector
Food security
 2) REASONS FOR ECONOMIC REFORMS
a) Poor performance of public sector -
Main role was assigned to public sector for
the development.
But overall performance was disappointing
and was occuring huge losses.

b) Deficit in BOP
Even after imposing heavy taxes and quotas, there
was sharp rise in imports.
Exports were low because of high price and low
quality indian products

c) Inflationary pressures-
Prices were increasing due to shortage of essential goods
and money supply.
d) Fall in foreign exchange reserves -
a) To finance imports for more than 2 weeks
b) To pay interest on international debts

d) Huge burden of debts -

Expenditure > Revenue
Due to which govt. used to borrow.

e) Inefficient Management -

Inadequate revenue even from taxes and PSU

Expenditure > Revenue
Borrowed money was used for consumption needs
rather than on technologies.
 CRISIS OF 1991
Indian govt. approached for loan to :
a) IBRD (International Bank For Reconstruction and Development ) / WORLD BANK
b) IMF (International monetary fund

Took 7 Billion $ Loan

Dr Manmohan Singh ( Finance Minsiter ) - Steer away

the economic crisis

They demanded
Liberalisation
Privatisation
Globalisation

3) MEASURES OF NEW ECONOMIC POLICY :

NEP can be classified into 2 measures :

a) Stabilisation measures -
Refers to short term measures
Includes - Correcting BOP deficit
Controlling Inflation

b) Structural Reform measures -

Refers to Long term measures

Includes - Improving efficiency of economy.
Increasing international competitiveness
4) NEW ECONOMIC POLICY :
It was launched on July 1991.
Includes

a) Liberalisation
Removal of entry and growth restrictions on the private sector

b) Privatisation
Transfer of ownership from public sector to private sector.

c) Globalisation
Integrating the national economy with World economy
5) LIBERALISATION :
Previously restrictions in area of licensing,
Import and export, dealing in foreign
exchange.

Liberalisation means removal of entry and

growth restrictions on the private sector.

Under this business is allowed to run freely.

Freedom to fix prices.

 Purpose of Liberalisation :
To unlock the economic potential of the country by encouraging the
private sector and MNC to invest and expand.
To increase Efficiency by introducing competition.
 Reforms under Liberalisation :

a) Industrial sector reforms

b) Financial sector reforms
c) Tax reforms
d) Foreign exchange reforms
e) Trade and investment policy reforms

A) Industrial Sector Reforms:

a) Reduction in industrial licensing -
Removed license except for 18 industries.
Further it was reduced to 5 Industries.
EG. Alcohols, Cigarettes, Defense items, Industrial explosives,
Specified chemicals.

b) Decrese in role of public sector -

Industries reserved for public sector was reduced.
17 8 3
Atomic energy, railways, Defence equipments.
c) De-reservation under SSI -
Investment increased from 5 lakh to 1
crore
Many products have been now de -
reserved.
Market was allowed to determine price
and not directive policy of govt.

d) MRTP Act (1969 )

No license required for expansion,

establishments, merger etc.
MRTP Act - Competition (Amendment Act )
2009
B) FINANCIAL SECTOR REFORMS :

Financial sector includes commercial

banks, stock exchange operations.
RBI is the apex bank.
 Reforms under financial sectors are :

a) Change in role of RBI -

RBI'S role was shifted from Regulator to Facilitator.
Hence, financial sector was allowed to make
decisions without consulting the RBI (LIKE Interest
rate )

b) Origin of private banks -

Like ICICI and HSBC

It benefitted the consumer by
increasing competition.
c) Increase in limit of foreign investment -
Raised to around 74 %.
FII like merchant bankers, mutual funds were now
allowed to invest in indian financial markets.

d) Ease in expansion process -

Banks were allowed to set up new branches
without the approval of RBI.
C) Tax Reforms :
Means changes in the tax structure of government.
Taxes are of 2 types :

a) Direct Taxes -
Taxes on income of individuals and
profits of business.

b) Indirect taxes
Taxes on consumption expenditure.
Imposed on good and services ( GST )
 The major tax reforms are :

a) Rationalisation of direct taxes -

Reduction in taxes to increase govt. income
People voluntary disclosed their income.

b) Reforms in indirect taxes-

To facilitate a common tax system.
EG. GST

c) Simplification in process-
Inorder to encourage people to pay taxes, many
procedures have been simplified.
D) Foreign exchange reforms
a) Devaluation of Rupee
Lead to increase in exports.
Hence resulted in Increased forex.

b) Market determination of exchange rate

Market forces were allowed to determine the exchange rate.

Now government didnt decided the exchange rate.
E) Trade and investment policy reforms :
Previously there were lot of taxes and quotas on import
and export.
To protect domestic industries.

It was initiated :
To increase international competitiveness.
To promote foreign investments and technology in the economy.
To promote effeciency of local industries and adoption of modern
technologies.
E) Trade and investment policy reforms :

a) Removal of quantitative restrictions on imports and exports-

Quatas on imports and exports were reduced.
Eg. Quatas removed in import of agricultural and consumer
goods. ( APRIL 2001)

b) Removal of export duties-

To increase competitive position of indian goods in
the international market.
 c) Reduction in import duties -
Improved the competition.
Enabled domestic industries to import
raw material at low rate.

d) Relaxation in import licensing system -

Import licensing system was abolished.

Except in case of hazardous industries.
Encouraged domestic industries to import raw
materials at better prices and be more competitive.
6) PRIVATISATION :
Privatisation means transfer of ownership, management and
control of public sector enterprises to private sector.

Greater role of private sector in the economic activities.

Eg. Maruti Udyog, IPCL, etc.

It can be done in 2 ways : Purpose:

Transfer of ownership To improve financial discipline.

Disinvestments To bring modernisation
 PRIVATISATION

Merits Demerits
Reduction in budgetary deficit. Social Welfare neglected
Competitive Environment Lopsided economic development
Quick decision making Concentration of economic power
Profit oriented business
Good quality
Increase in employment
opportunities.
7) GLOBALISATION :

Globalisation means Integrating national

economy with the world economy through
removal of barriers on international trade
and capital movements.

It aims to create borderless world

 Changes made by globalisation in Indian Economy

FDI Investment increased to 51 %

No permission required for hiring technicians and
technology .
Devaluation of currency was done nearly by 20 %
( EXPORTS)
Custom Duty has been reduced from 250 % to 10 %
A new 5 year import - export policy was announced
( Removed restrictions on foreign trade )
 GLOBALISATION
BENEFITS
Greater access to Global Markets
Advanced technology
Better prospects for skilled people
Better future prospects for large
industries of developing industries
DEMERITS
Benfit more to developed countries
CompromIses welfare of people belonging
to poor countries.
Increases economic disparities
Domestic companies have to face
competition.
 8) OUTSOURCING
Outsourcing refers to contracting out some of its activities to
a third party which was earlier performed by the
organisation.

India has become a favourable outsourcing destination

Availabilty of skilled manpower

Favourable government policies
Cheap labour availability
9) WORLD TRADE ORGANISATION (WTO) :
Founded - 1995
Successor of GATT (1948) (23 countries)
An organisation that regulates and facilitates international trade.
WTO has 164 members.
India is a part of WTO due to which it has to liberalise its trade.

Major functions of WTO :

To facilitate international trade
To enlarge production and trade of services
To protect the environment
To ensure optimum utilisation of resources
 Should India be a member of WTO ?

Some scholars say no because :

Major volume of international trade occurs
between developed countries.
Developing countries are being cheated.

TERMS :
a) Bilateral Trade
b) Multi-Lateral trade
10) MERITS OF LPG POLICIES

a) Increase in rate of economic growth -

GDP increased from 5.6% to 6.7%
During reforms service sector has
grown the most.
Service sector - 10.3%

b) Inflow of foreign investment -

FDI increased from 100 million US $ to 30
billion US $
Due to MAKE IN INDIA FDI increased by 48%

c) Rise in foreign exchange reserves

443 Billion US $ - 637 Billion US $
One of the largest forex reserves
holder.
d) Rise in exports :
Engineering goods, textiles , pharmaceutical goods etc.

e) Control on inflation -
Increase in producion, tax reforms etc resulted in control of
inflation.
Reduced from 17 % to 5.48 %

f) Increase in role of private sector -

Abolition of license, removal of restrictions
11) DEMERITS OF LPG POLICIES :
a) Growing Unemployment

b) Neglect of agriculture -
Reduction in public investment
Removal of subsidy
Reduction in import duties
Shift to cash crops

c) Low level of industrial growth -

Cheaper imported goods
Lack of infrastructure facilities
Non tarrif barriers by developed countries
 d) Ineffective disinvestment policy-
Govt always exceeded the disinvestment
target
For eg . Target - 2500 crore
Actual - 3040 crore

e) Ineffective tax policy -

Tax reform did not result in increasing tax
revenue .
Tax reduction reduced the scope for raising
revenue through custom duties.

f) Spread of consumerism -
Dangerous trend of luxury items

g) Unbalanced Growth
Service sector - Major focus
12) DEMONETISATION :
Demonetisation is the act of removing a currency
unit of its status as Legal tender.
8 th November 2016 - Rs. 500 and Rs. 1000
These notes accounted 86% of the country's cash.

BENEFITS DEMERITS
Find out Black money Slowdown of economy
Check on terrorist 90% workforce - Informal
funding. sector
Created Digital economy Long queues
13) GOODS AND SERVICES TAX :

GST came into effect on 1 JULY 2017.

It was the combination of various indirect taxes like VAT, Sales Tax etc.
One of the most important Tax Reform.
Motto - ONE NATION ONE TAX
TYPES OF GST :
a) CGST - Applied on INTRA-STATE
supply of goods and services by the
centre.

b) SGST - Applied on INTRA - STATE

supply of goods and services by the
state.

b) IGST - Applied on INTER - STATE

supply of goods and services and
collected by the centre.
IMPORTANT DATES :
GATT - 1948
NEP - 1991
WTO - 1995
Removal of quantitative restrictions on imports - April 2001
Make In India - September ( 2014 )
Demonetisation - 8 Nov 2016
THANK YOU
PURPOSE OF PRIVATISATION :

To improve financial discipline.

To facilitate modernisation