Liberalisation,

Privatisation and
Globalisation:
An Appraisal
3. 1 Introduction 3.6 Globalisation
3.2 Reasons for Economic Reforms 3.7 An Appraisal of LPG Policies
3.3 The New Economic Policy (Economic Reforms)
3.4 Liberalisation 3.8 Demonetisation
3.5 Privatisation 3.9 Goods and Services Tax (GST)

3.1 INTRODUCTION
Since independence, India followed the mixed economic system, by combining the advantages
of the market economic system (capitalist economy) with those of the planned economic system
(socialist economy).
But, in reality, the public sector dominated the control and regulation of our economy and private
sector was ignored. There was a huge investment in the public sector and very low investment
in the private sector. The dominance of public sector for about 4 decades led to establishment
of various rules and laws, which hampered the process of growth and development.
According to some scholars, the increasing role of public sector has helped Indian economy to: (i) Achieve
growth in savings; (ii) Develop a diversified industrial sector; and (iii) Achieve food security through sustained
expansion of agricultural output.

3,2 REASONS FOR ECONOMIC REFORMS REASONS FOR ECONOMIC REFORMS

The economic condition of India in the year 1991 was very

Poor Performance of Public Sector
miserable. It was due to the cumulative effect of number
of reasons. Let us discuss the various reasons, which aroused Deficit in Balance of Payments
the need for making major economic reforms in the country:
Inflationary Pressures
l. Poor Performance of Public Sector: In the 40 years
Fall in Foreign Exchange Reserves
~eriod (1951-90), public sector was assigned an
important role to work for the economic development Huge Burden of Debts
of India. However, except for few public enterprises,
Inefficient Management
the overall performance was very disappointing.

3.1
 . . -•vprne~t
Chapter 3 •
Liberalisation, Privatisation and Globalisation: An Appraisal
umber of public sector enterprise
. ed by a good n s, the 3.3
Considering the huge losses mcurror making necessary reforms. . th
___ ;co,1 the need f fi ·t ;n BOP arises when foreign payment f For availing . e loan, ~he~e international agencies expected India to liberalise and open up the economy by:
Govemment ~=-- BOP)· De a ... . . s or • Removmg restrictions on the private sector;
. . B Janee of Payments ( . rts Even after imposing heavy tariffs and fi~,. • Reducing the role of the government in many areas; and
2. Deficit m a
. • from expo ·
ceed foreign receipts .
d th
On the other han , ere was s ow growth
1 ·~g • Removing trade restrictions.
unports ex . in unports- . th • t ti of
ere was a sharp nse . f Indian goods in e in erna onal market
quotas, th . and high pnces o . India agreed to the conditions of World Bank and IMF and announced the New Economic Policy.
exports due to low quality . t t rise in the general price level in the econo 3 .3 T HE NEW ECONOMIC POLICY
. There was a consis en . d ni.y
3. Inflationary Pressures. d hortage of essential goo s. .
. ey supply an s The New Economic Policy (NEP) was announced in July 1991. It consisted of wide range of
due to increase 1Il mon . Foreign Exchange Reserve (also termed as Fo
. E h nge Reserves. . . rex economic reforms. The main aim of the policy was to create a more competitive environment
4. Fall in Foreign xc a ts (like convertible foreign currencies, Gold, Spe . 1 in the economy and remove the barriers to entry and growth of firms.
X &se,ve5) are externa1 asse cza
Reserves or F he C t al Bank for direct financing ofexternal payments imbalances The New Economic Policy can be broadly classified into two kinds of measures:
Drawing Rights, etc.J held by t en rf ll to the lowest level and it led to the foreign exchan ·
• change reserves e ge 1. Stabilisation Measures: They refer to short-term measures which aim at:
In 1991, f oreignex . change reserves declined to a level that was not adequate·
crisis in the country. Foreign ex . (i) Correcting weaknesses of the balance of payments by maintaining sufficient foreign
• To finance imports for not more than two ":eeks; ~d exchange reserves; and
• t that needs to be paid to international lenders. , (ii) Controlling inflation by keeping the rising prices under control.
• To pay th e mteres . . .
· temational funder was willing to lend to India. 2. Structural Reform Measures: They refer to long-term measures which aim at:
Moreover, no country or m
s. Huge Burden of Debts: The expenditure of the government was ~uch higher 1!1an revenue. (i) Improving the efficiency of the economy; and
As a result, government had to borrow money from banks, public and from international (ii) Increasing international competitiveness by removing the rigidities in various
segments of the Indian economy.
financial institutions. I
Main Policies of New Economic Policy
6. Inefficient Management: The origin of the financial crisis can be traced from the inefficient
management of the Indian economy. ., The government initiated a variety of policies which fall under three heads:
• The government had to generate surplus revenue to meet challenges like unemployment 1. Liberalisation 3. Globalisation
poverty and population explosion. However, there was no additional revenue due to 2. Privatisation
continuous spending on development programmes by the government. Moreover, Liberalisation, Privatisation and Globalisation or 'LPG' are the supporting pillars, on which
government was not able to generate sufficient revenue from internal sources such as the structure of new economic policy of our Government has been erected and implemented
since 1991.
taxation, nmning of public sector enterprises, etc. '·
• Government expenditure began to exceed its revenue by such large margins that ii
became unsustainable.
• At times,
. . the. foreign exchan ge b orrowe d from other countries • and mternatton
· · al Economic Reforms of 1991 are often described as the New Economic Policy or the policy of LPG
financral institutions was spe t · in place of the policy of LQP.
n on meeting consumption needs. Moreover, nei'ther
any attempt was made to red ch fli ·· I • Llberallsatlon (L) instead of Licensing (L) for industries and trade.
attention w . b uce su pro gate or reckless spending nor suffioen • Privatisation (P) instead of Quotas (Q) for industrialists.
as given to oost exports to pay for growin im orts
• Globallsatlon (G) instead of Permits (P) for exports and imports.
Crisis of 1991 Forced India for Financial help from IMF d g p . .I
To manage the econonu· . . f an World Bank
c cns1s o 1991 Indian G
• International Bank for Reconstru ti' overnment approached for loan from: ldQiiji4·iii3iH·iiijir1¥+iiMMii4·iii41
Bank (to facilitate lending for r; O~d _Development (IBRD) popularly known as World
• International Monetary Fund (~ns) cti~n and developmen;); and
problem)
India av - d $. • •
(to avail short t
• erm loans to solve Balance of Payrnen
IS •
llberallsatlon
+'
Privatisation
(Refers to transfer of ownership,
t
Globallsatlon
. 1
a1 e 7 b1ll1on loan fro (Refers to removal of Entry and Growth (Refers to Integrating the National
Finance Minister in 1991 m these agencies as loan ·an '-
restrictions on the Private Sector) management and control of Public
Sector to Private Sector)
Economy with World Economy)
the economic crisis loo .and he was greatly ackno . Dr. Manmohan Singh was the Indi
rrung large on the Indian E wledged for his capabilities to steer awaY Let us discuss them one by one.
conomy.
 Indian Economic De
1
- - - - - - - - - - - - - - - - - - - - - - -- - - - ---.:...:: ve opllltn1 Chapter 3 • Liberalisation, Privatisation and Globalisation: An Appraisal 3.5
3.~

A 3,4 LIBERALISATION rnment restrictions in India in the areas of lie . approval for expansion, establishment of new undertakings, merger, amalgamations, etc.
Prior to 1991, there we
re numerous gove J 1 1991 , a pack age of econo
Jin in foreign exchange, etc. In u y
enslllg,
. were eliminated. MRTP Act has been replaced by Competition Act, 2002, which is more
import and export trade, dea 'chgs k d the beo-inning of process of 'Liberalisation' in In~c liberal. The Competition Act, 2002 was amended by the Competition (Amendment) Act,
unced whi mar e o---- . dia. 2007 and again by the Competition (Amendment) Act, 2009.
refonns was anno ' ,1 try and growth restrictions on the pnvate sector.
l' tion means remova 1o, en
Libera ,sa . d gulation and reduction of government controls and gr Financial Sector Reforms
L'b
1
alisation mvo1ves ere eater
• er fr d ) Of private investment, to make economy more competitive. Financial sector includes financial institutions like commercial banks, investment banks, stock
autonomy ( ee om .
. business is oiven free hand and 1s allowed to run on commercial 1;~_ · exchange operations and foreign exchange market. The financial sector in India is controlled
• Under this process, o- ~ ies.
• The purpose of liberalisation was: . . by the Central Bank - Reserve Bank of India (RBI). RBI is known as the apex (supreme) body
• To unlock the economic potential of the country by encouraging private sector and as it occupies the top most position in the monetary and banking system of the country. RBI
multinational corporations to invest and expand; and decides the amount of money (i.e. deposits) that the banks can keep with themselves, fixes
• To introduce much more competition into the economy and creating incentives for interest rates and nature of lending to various sectors.
increasing efficiency of operations. , The reforms introduced under financial sector are:
• The economic reforms taken by the Government under liberalisation include the follow) : 1. Change in the Role of RBI: The role of RBI was reduced from regulator to facilitator offinancial
(i) Industrial Sector Reforms (iv) Foreign Exchange Reforms f sector. As a result, financial sector was allowed to take decisions on many matters, without
(ii) Financial Sector Reforms (v) Trade and Investment Policy consulting the RBI.
(iii) Tax Reforms Reforms ' As a regulator (prior to liberalisation), RBI used to fix interest rate structure for the Commercial Banks.
Let us now discuss each reform in detail. After changing the role as a facilitator (post-liberalisation), RBI now facilitates the free market forces
Industrial Sector Reforms to act accord ingly. In the post liberalisation era, greater autonomy has been ensured for financial
I!'"- institutions for their functioning.
In order to make necessary reforms in the industrial sector, the Government introduced its new
2. Origin of Private Banks: The reform policies led to the establishment of private sector banks,
industrial policy on July 24, 1991. The various measures under industrial policy reforms include:
Indian as well as foreign. For example, Indian banks like ICICI and foreign banks like
1. Reduction in Industrial Licensing: The new policy abolished industrial licensing for all the
HSBC increased the competition and benefitted the consumers through lower interest
projects, except for 18 industries. This number was further reduced to 5 industries. They rates and better services.
are: (i) Distillation and brewing of alcoholic drinks; (ii) Cigars and cigarettes of tobacco
3. Increase in limit of Foreign investment: The limit offoreigninvestment in banks was raised to
and manufactured tobacco substitutes; (iii) Electronic Aerospace and defence equipments;
(iv) Industrial explosives; (v) Specified Hazardous chemicals. around 74%. Foreign Institutional Investors (FII) such as merchant bankers, mutual funds
and pension funds were now allowed to invest in Indian financial markets.
• ~o licences were needed (i) To set up new units; or (ii) Expand or diversify the existing
line of manufacture. Though banks have been given permission to generate resources from India and abroad, certain aspects
have been retained with the RBI to safeguard the interests of the account-holders and the nation.
• However, compulsory licensing is required for the above mentioned 5 industries on
account of environmental, safety and strategic considerations 4. Ease in Expansion Process: Banks were given freedom to set up new branches (after fulfillment
2. Decrease in role of Public Sect . On f . . . . of certain conditions) without the approval of the RBI.
~r. e the striking features was the substantive reducliOn
O
in the role of th bli
the New Econo~~ p0clisector mbthe future industrial development of the country. Under Tax Reforms
cy, num er of ind tri d ed
from 17 to 8' which was •unner Tax reforms refer to reforms in government's taxation and public expenditure policies, which are
t.. ~ L
reduced t0us· t es
thrreserved for public sector was re uc
Railways and Defence Eqmpments.• JUS ee (in 2010-11) namely Atomic Energy, collectively known as its 'Fiscal Policy'. Taxes are of two types:
3. ~e-reservation under small-scale ind . • Direct Taxes consist of taxes on incomes of individuals as well as profits of business
mdustries were de-reserved In . ustnes: Many goods produced by small scale enterprises. For example, Income tax (taxes on individual incomes) and Corporate tax
th · · many mdu tr· ·
e prices through forces of them k ( s ies, the market was allowed to deternune (taxes on profits of companies).

.
4 Mo 1· ar et andnotbyd· • t)
· nopo ies and Restricf T irective policy of the govemmen · • Indirect Taxes refer to those taxes which affect the income and property of persons through
liberalisatio d Ive rade Practices (MRTP f
nan expansion schemes th . ) Act: With the introduction° their consumption expenditure. Indirect taxes are generally imposed on goods and services.
' e requ1rem t f ·or For example, Goods and Services Tax (GST).
en or large companies, to seek prt
 Indian Economic Develop~
'" 1nt
Chapter 3 • Liberalisation, Privatisation and Globalisation : An Appraisal 3.7
L
, - • made are: 1 there has been a continuous red
. Tax Re,ow~ . Since 199 , Uclj . 4. Relaxation in Import Licensing Sys tem: The Import licensing was abolished, except in
The maior . t' n of Direct Taxes. t s were an important reason for tax eva . on Ill case of hazardous and environmentally sensitive industries. This encouraged domestic
R tionabsa 10 high tax ra e . s1on. I .
1. a d corporate tax as t of income tax encourage savings and v t industries to import raw materials at better prices, which raised their efficiency and made
income an ed that moderate ra es oIUn!aty
now widely accept . them more competitive.
losure of income. d the developmental and welfare expenditure of gover Another important feature of new economic policy was the promotion of the policy of"Privatisation''.
dise . ns negativelyaffecte . nrnent
However, taxreduct,o C 'derable reform have been made m indirect
.
d irec t Taxes: onsi d d -es to -""' 3.5 PRIVATISATION
2 Refonns in InJishment of common n
ational market for goo s an commodities.
Privatisation means transfer of ownership, management and control ofpublic sector enterprises
facilitate estab d to encourage better compliance on the part of taxp to the entrepreneurs in the private sector.
3. Simplification of Process: In o: erlified ay~,
rocedures have been sunp . . 29th M h 2 Privatisation implies greater role of the private sector in the economk activities of the country.
manyp . (GST)ActwaspassedintheParlramenton arc , 017tosimpflfyand Over the years, Indian Government has diluted its stake in several public enterprises, including
The Goods and Serv,ce~Tax tem in India The Act came into effect on 1'' July, 2017. GST has be
. d nified indirect tax sys · . . en IPCL, IBP, Maruti Udyog, etc.
mtro uce u . dd'f al revenue for the government, reducrng tax evasion and creating 'on
successful ,n generating a I ion e Privatisation can be done in two ways:
nation, one tax and one market'.
1. Transfer of ownership and management of public sector companies from the government
Foreign Exchange Reforms to the Private Sector;
The important reforms made in the foreign exchange market are: 2. Disinvestment: Privatisation of the public sector undertakings (PSU) by selling off part of
1. Devaluation of Rupee: Devaluation refers to deliberate reduction in the value of domestic the equity of PSUs to the public. This process is known as disinvestment.
currency vis-ii-vis any foreign currency by the government of a country. To overcome Balance The purpose of privatisation was mainly to improve financial discipline and facilitate
of Payments crisis in 1991, the rupee was devalued against foreign currencies. This led to modernisation. It was also believed that private capital and managerial capabilities will help
an increase in the inflow of foreign exchange. in improving performance of the PSUs.
2. Market Determination of Exchange Rate: The Government allowed rupee value to be free For"Arguments in Favour of Privatisation" and "Arguments Against Privatisation'; refer Power Booster Section.
from its controL As a result, market forces of demand and supply determine the exchange
value of the Indian rupee in terms of foreign currency.
Trade and Investment Policy Reforms The government also made attempts to improve the efficiency of public sector undertakings by
Before 1991, a lot of restricti (high tau.us
..:u tecl giving them autonomy in taking managerial decisions.
. . ons and quotas) were imposed on imports to pro
the domestic mdustries How this . .. • For instance, some PSUs have been granted special status as navratnas and miniratnas.
of dom ti . d . · ever, protection reduced the efficiency and competitiveness
es c m ustries and led t0 th · l 1
• In order to infuse professionalism and enable PSU's to compete more effectively In the liberalised
policy were initiated: err s ow growth. So, the reforms in the trade and investmen global environment, government started granting 'Navratnas' status to PSUs.
• To increase the intemati 0 nal • They were given greater managerial and operational autonomy in taking various decisions, to
competitive f· d . .
• To promote foreign investm ts ness O m ustrial production. run the company efficiently and to increase their profits.
• To promote efficiency of local~ dand ~echnology into the economy. • The granting of navratna status resulted in better performance of these companies.
Th ·
e important trade and investment m . ustries and a d option ·
of modem technologies. • Apart from this, other profit-making enterprises were granted greater operational, financial and
1. Removal of Quan ft f TJO_izcy reforms include: managerial autonomy and they were referred as 'Miniratnas'. As on February, 2022, there are:
Poli . ' a ive restrictions on I . » 11 Maharatnas {like Indian Oil Corporation Limited, Stttl Authority of Ind/a Ltd., etc.};
cy, quantitative restrictions . mports and Exports· Under the New EconoJ!ll'
» 13 Navratnas {like Bharat Electronics Limited, Container Corporation of India Limited, etc.};
quantitati • on Imports d · le
rodu ts ve restrictions on imports f an exports were greatly reduced. For exaJllP _; » 74 Mlnlratnas {Like Airports Authority oflndla, Antrlx Corporation Limited, etc.}.
P c were full o manufactu d •cuJfUl'ill
2. Removal f E y removed from April 2001 re consumer goods and agn
of Indian o xp~rt Duties: Export d . . -4 3 .6 GLOBALISATI ON
goads 111 the int • uties were remov d • . • nnsiti()II
3. Reduction in 1 ernanonaJ market e to mcrease the competitive r-· Globalisation means integrating the national economy with the world economy through
the competiti mport Duries: Import d . s. removal of barriers on international trade and capital movements.
b Veness of d Uties w ed
etter Prices. omestic industries ~re considerably reduced which unproV' I • Globalisation generally means as integration of the economy of the country with the world
as1tenab1 , •aisa economy.
ed them to import raw matetl
 Indian Economic Dev 1 :W,
_ : _ _ - - - - - - - - - -.::...:.:.:e op~ ,
Cha pter 3 • Liberalisation, Privatisation and Globalisation: An Appraisal
3.~ . outcome of the set of various policies 3.9
15
. . mplex phenomenon. It ~erdependence and integration. that • Globalisation compromises the welfare and identity of people belonging to poor countries.
However, 1t IS a co ds greater Ill . social
• . f nn the world towar . . . trafiSCending economic, and geograph:_ . • Market-driven globalisation increases the economic disparities among nations and people.
aun to trans o ks and actiVltles Id ."l:ill
• It involves creation of netW~r . ·ms to create a borderless wor . • As a result of Globalisation, MNCs have gained strong position in the developing countries,
.es In short, globa/lSiltzon az due to which domestic companies are forced to face stiff competition.
boundari . f the Indian Economy
Changes made by the Globalisation o _,.,.;fied list of high technology and high inves1-n,-. outsourcing
· p !icy prepared a st""~~· · il bl e for foreign
· ,i;_
-·"'Ill Outsourcing refers to hiring business services from external
1. The New Econonuc O • pennission will be ava a .
. . industries in which automatic ~o:ci sources, mostly from other countries, which were previously
pnonty 5~ er cent of foreign equity- '
investment up to P ments automatic permission is provided m· high provided internally or from within the country. These services
f . technology agree , include legal advice, computer services, advertisement, security,
2. In respect of oreign f pees 1 crore. No permission is now required for 1..,_,
. ·ty . dustry upto a sumo ru hn l b •iumg etc. In other words, outsourcing refers to contracting out some
pnon m . . f tin indigenously developed tee o ogy a road.
foreign techniaans or or tes g of its activities to a third party which were earlier performed
. t mational adjustment of Indian currency, rupee was devalued in July by the organisation.
3 In order to makem e disc d· rt d · edth
. 199Ibynearly20percent.Itstimulatedexports, . ourage rmpo san raIS einflux
• Outsourcing is one of the important outcomes of the IT Industry is seen as a major
of foreign capital. globalisation process. Outsourcing is emerging as a major contributor to India's exports
T • tegrate Indian economy with world, the Union Budget 1992-93 made Indian rupee activity in industrial and service sectors.
4
· p~:ally convertible and then the rupee was made fully convertible in 1993-94 budget
• It has intensified in recent times because of the growth of fast modes of communication,
s. A new five year export-import policy (1992-97) was announced by the Government to particularly the growth of Information Technology (IT).
establish the framework of globalisation of India's foreign trade. The policy removed all
• With the help of modem telecommunication links, the text, voice and visual data in respect
restrictions and controls on the external trade and allowed market forces to play a greater
of these services is digitised and transmitted in real time over continents and national
role in respect of exports and imports. boundaries.
6. In order to bring the Indian economy within the ambit of global competition, the
• India has become a favourable destination of outsourcing for most of the MNC' s because of:
government has modified the customs duty to a considerable extent. Accordingly, the
peak rate of customs duty has been reduced from 250 per cent to 10 per cent. • Availability of Skilled Manpower: India has vast skilled manpower which enhances
the faith of MNCs for investment in India.
Positive and Negative Traits of Globalisation
• Favourable Government Policies: MNCs get various
The_~rocess of globalisation through liberalisation and privatisation policies, has produced types of lucrative offers from the Indian Government
positive as well as negative results, both for India and other countries. such as tax holidays, tax concessions, etc.
In Favour of Globalisation • Low Wage Rates and availability of cheap Jabour in
Globalisation resulted in: India for skilled work.
• Greater access to global markets; • Considerable growth of Indian IT industry, which has
• Advanced technology; proved its competitive strength in the world.
The age of outsourcing has
• Better future prospects for lar e indus . . . 1 For example, Indian Business Process Outsourcing (BPO) generated employment
players in the international ar:na. tries of developing countries to become rmportan
companies are already gaining prominence and earning opportunities through Call Centers
• Better prospects for skilled
their skills. peop1e across the globe to increase their earnings by utiliSiJl8 precious foreign exchange.
• Developed Countries oppose outsourcing to India because:
Against Globalisation
• Outsourcing leads to outflow of funds from the developed countries to India, which
Globalisation has been criticized b reduces the income disparities between the two countries.
. Ysome scholars b
• Benefits of globalisation ace ecause according to them: • Outsourcing reduces the employment generation and creates job insecurity in the
th . k rue more to develo d a11d
eir mar ets in other countries. pe countries as they are able to exp developed countries.

.............._
,,- 3.10'--_ _

World Trade Organisation (WTOI

Origin ofWorldTra e
d organisation (WTOI
d T 'ff (GA TT)
ment on Trade an an
Indian Economic Developrri

"1! r Chapter 3 • Liberalisation, Privatisation and Globalisation: An Appraisal

3.7 AN APPRAISAL OF LPG POLICIES (ECONOMIC REFORMS )

Economic reforms created mixed reactions at different levels. Let us discuss some of the positive
3.11

Prior to WTO, Gen er al Agree · · 48 ·th 23 ~RGANIZAT101; / and negative aspects of economic reforms.
tablished as global trade organisation, m 19 Wl
was es_ GATI was set up to administer all multilateral trade TheWorld Tra~ Arguments in Favour of Economic Reforms
countnes. • · to all coun tn'es m
'ding equal opporturuties · (WTO) intends to supervise and The following are some of the important arguments advanced in favour of economic reforms:
agreements by proVI liberalize international trade
. . al market wro wasfounded in 1995 as the successor 1. Increase in rate of Economic Growth: The growth in GDP was 5.6% during 1980-91 as
the mtemabOn ·
compared to growth rate of 6.7% in 2017-18. In the first quarter of 2022-23, (i.e. April to
organisation to the GAIT. . .. . June) GDP growth was recorded at an impressive 13.5%.
• The wro agreements cover trade in goods as well as services, to facilitate mtemationaJ trade.
• During the reform period, the growth of agriculture has declined and industrial sector
• At present, there are 164 member countries of WTO and all the members are required lo
reported fluctuation, whereas, growth of service sector has gone up. This indicates that
abide by laws and policies framed under WTO rules. the growth is mainly driven by the growth in the service sector.
• As an important member of WTO, India has been in the forefront of framing fair global
• During 2012-15, there has been a setback in the growth rates of different sectors.
rules, regulations and advocating the interests of the developing world. Agriculture recorded a high growth rate during 2013-14, but witnessed negative growth
• India has kept its commitments made to the WTO. India has taken reasonable steps 10 rate in the subsequent year. Service sector witnessed the highest ever growth rate of
liberalise trade by removing quantitative restrictions on imports and reducing tariff rates. 10.3% in 2014-15. The industrial sector witnessed a steep decline during 2012-13, but
began to show a positive growth thereafter.
• Some Major Functions of WTO:
(i) To facilitate international trade (both bilateral and multi-lateral trade) through 2. Inflow of Foreign Investment: The opening up of the economy has led to the rapid increase
removal of tariff as well as non-tariff barriers; in foreign direct investment (FDI). The foreign investment (FDI and foreign institutional
investment) increased from about US $100 million in 1990-91 to US$ 30 billion in 2017-18.
(ii) To establish a rule-based trading regime, in which nations cannot place arbitrary
With launch of 'Make in /ndia 'initiative in September 201 4, Foreign Direct Investment (FDI) Policy was
restrictions on trade; further liberalised. Due to this reason, FDI inflow in India increased by 48%.
(iii) To enlarge production and trade of services;
3. Rise in Foreign Exchange Reserves: There has been an increase in the foreign exchange
(iv) To ensure optimum utilisation of world resources; and reserves from about US$ 6 billion in 1990-91 to about US$ 443 billion in 2018-19, which
(v) To protect the environment. increased to US$ 550.14 billion (as on 25 th November, 2022 as per RBI). India is one of the
Should India be a member ofWTO? largest foreign exchange reserve holders in the world.
4. Rise in Exports: Since 1991, India experienced considerable increase in exports of auto
Some scholars are of the view that there is no use for a developing country like India to be a
member of the WTO. According to them: parts, pharmaceutical goods, engineering goods, IT software and textiles.
5. Control on Inflation: Increase in production, tax reforms and other reforms helped in
(i) Major volume of international trade occurs among the developed nations; and
controlling the inflation. The annual rate of inflation reduced from the peak level of 17%
(ii) Developing countries are being cheated as they are forced to open up their markets for in 1991 to around 5.48% in 2015-16. For 2022-23, RBI estimates indicate that inflation will

q-
developed countries and are not allowed access to markets of developed countries.
Bilateral Trade: Trade (export and Import) between two countries is knoV.:n as Bilateral Trade.
Multi-lateral Trade: Trade between more than two countries is known as Multi-lateral Trade.
Tariff Barriers: The barriers .
. which are imposed on imports of goods and services to ma
relatively costlier and to protect the domestic producers from the stiff international competi\
are known as Tariff Barriers. For example, Import Duties.
Non-Tariff Barriers: The barriers which are imposed on quantity of import and export of,goods
and services. For example, Quota and Import Licensing.
be around 6.7 per cent.
6. Increase in role of Private sector: Abolition of licensing system and removal of restrictions
on entry of the private sector, in areas earlier reserved for the public sector, have enlarged
the area of operation of the private sector.
Criticism of Economic Reforms
n
Critics have raised a series of criticism against the New Economic Reforms, especially in the
I0
areas of employment, agriculture, industry, infrastructure development and fiscal management.
1. Growing Unemployment: Though the GDP growth rate has increa~ ~e reform period,
but such growth failed to generate sufficient employment opportunities m the country.
 Indian Economi 0
-- c tvel 0

Chapter 3 • Liberalisation, Privatisation and Globalisation: An Appraisal 3.13

3 - ~ ·c policy has neglected the agricultural
. re· The new econom1 Sector
2 Neglect of Agncultu ~ade and services sector. . . as • Tariff reduction decreased the scope for raising revenue through customs duties.
· mpared to industry, . t· Public investment m agriculture sector, espe . • Tax incentives provided to foreign investors to attract foreign investment further
co bl' ,nvestmen • k · C!a!Jy ·
(i') Reduction of pu ic d . •gation power, roads, mar et linkages and
hich inclu es irn , . resear
I!\ reduced the scope for raising tax revenues.
infrastructure, w d ~,cial role in the Green Revolution), has been ..,, ch
. (which playe a c, rc,,uted. 6. Spread of Consumerism: The new policy has been encouraging a dangerous trend of
andextenS10n f fertilizer subsidy increased the cost of prod consumerism by encouraging the production of luxuries and items of superior consumption.
,r b 'd • RemovaI o Ucti
(ii) Removal o, su si Y· d th small and marginal farmers. OIi,
7. Unbalanced Growth: Growth has been concentrated only in some select areas in the services
hich adversely affecte e .
w . d d tion in import duties: This sector has been experiencing a nu,,,•. sector, such as telecommunication, irlformation technology, finance, entertainment, travel
... L 'be alisat10n an re uc . . -·"-'!
(111) 1 ch . (a) Reduction in import duties on agricultural prod and hospitality services, real estate and trade, rather than vital sectors, such as agriculture
of olicy changes su as. . . f . . Ucts,
P f rrurum·
- um support price; and (c) Lifting o quantitative restncti ' and industry, which provide livelihood to millions of people in the country.
(b) RemovaI o ff ons
. ul ducts All these policies adversely a ected the Indian fanne
on agnc turaI pro · . . . . rsas ,tJJ 3.8 DEMONETISATION
e increased international competition.
theynow have to fac . . . . On the sth of November, 2016, the Government of India made an announcement with profound
(iv) Shift towards cash crops: Due to Export-oriented policy strategies m agriculture, the
implications for the Indian economy. It was decided to demonetise high value currency notes of
production shifted from food grains to cash crops for the export market. It led tori5e
denomination of~ 500 and, 1,000 with immediate effect, ceasing to be legal tender, except for a
in the prices of food grains. few specified purposes. Demonetisation is the act of removing a currency unit of its status as Legal Tender.
3. Low level of Industrial Growth: Industrial growth recorded a slowdown due to the
These notes accounted for almost 86% of the country's cash supply. As per the scheme, people
following reasons: had to deposit the invalid currency in the banks and restrictions were also placed on cash
(i) Cheaper Imported Goods: Due to globalisation, there was a greater flow of goods and withdrawals. In other words, restrictions were placed on the convertibility of domestic money
capital from developed countries and as a result, domestic industries were exposed and bank deposits.
to imported goods. Cheaper imports replaced the demand for domestic goods and
The aim of demonetisation was to curb corruption, counterfeiting the use of high denomination
domestic manufacturers started facing competition from imports. For example,
notes for illegal activities and especially the accumulation of 'black money' generated by income
cheaper Chinese goods pose a big threat to Indian manufacturers.
that has not been declared to the tax authorities.
(ii) Lack of infrastructure facilities: The infrastructure facilities, including power supply,
Features of Demonetisation
have remained inadequate due to lack of investment.
(iii) Non-Tariff Barriers by Developed countries: All quota restrictions on exports oftextil~ 1. Demonetisation is viewed as a 'Tax Administration Measure' . Cash holdings arising from
and clothing have been removed from India. But some developed countries, like declared income was readily deposited in banks and exchanged for new notes. However,
USA have not removed their quota restrictions on import of textiles from India. people holding black money had to declare their unaccounted wealth and pay taxes at a
4 1nd penalty rate.
· fective Disinvestment Policy: The government has always fixed a target for
dismve~tment of Public Sector Enterprises (PSEs). For instance, in 1991-92, it was targeted 2. Demonetisation is also interpreted as a shift on the part of government indicating that Tax
~o mobilise' 2,SOO crore through disinvestment. The government was able to mobilise Evasion will no longer be tolerated or accepted.
3,040 crore more than the t t In ...
achi arge · 20 17-18, the target was~ 1 00 000 crore, whereas,u, 3. Demonetisation also led to channelizing savings into the formal financial system. Though,
evement was about' 1,00,057 crore. ' ' much of the cash deposited in the banking system is bound to be withdrawn. But, some
However, according to some schol . . not of the new deposits schemes offered by the banks will continue to provide base loans, at
successful because: ars, the disinvestment policy of government was lower interest rates.
• The assets of PSEs were und 4. Demonetisation also aims to create a less-cash or cash-lite economy, i.e., channeling more
1
• Moreover, such proceed frerva and sold to the private sector. -'
s om d1sinvestrn h rtage savings through the formal financial system and improving tax compliance.
government revenues rather than u . . ent were used to compensate s o . . • However, digital transactions require internet connectivity as they need cell phones
social infrastructure th sing it for the development of PSEs and bu1ldW
e country for customers and Point-of-Sale (PoS) machines for merchants.
m·

5. Ineffective Tax Policy· Th t ·

· e ax reduction· h i rgeI • On the contrary, these disadvantages are counterbalanced by an understanding that it
revenue and to curb tax evas· B . 1i:i t e reform period was done to generate a helps people into the formal economy, thereby increasing financial saving and reducing
ion. ut 1t did for tlt
government. ' not result in increase in tax revenue tax evasion.
 ~~- --
!-14 - - ----__.::____________
___ .. P~T
Indian Economic Develo
Chapter 3 •
. · · · · ·
Liberalisation, Pnvat1sat1on and Globalisation: An Appraisal 3.15

a, • The last dealer in the supply chain passes on the added GST to the consumer, making GST
IWP'IWRllt &llfilil::: re a destination-based consumption tax.
Digitalization has broadly impact three sections of society: , ·• • The provision of availing input credit at each stage of value chain helps in avoiding the
1. The poor, who are largely outside the digital economy;
2. The less affluent. who are becoming part of the digital economy have been covered unde
cascading effect (tax on tax) under GST, which is expected to reduce prices of commodities
and benefit the consumers.
Jan Ohan Accounts and RuPay cards; and r
3. The affluent, who are fully conversant with digital transactions. Types of Taxes under GST
The types of taxes levied under GST are:
Impact of Demonetisation (i) Central Goods and Services Tax (CGST): It is the GST levied on the 'Intra-State' supply
1. Money /Interest rates i. Decline in cash transactions. of goods or services by the Centre.
ii. Bank deposits increased.
iii. Increase in financial savings. (ii) State Goods and Services Tax (SGST): It is the GST levied on the 'Intra-State' supply of
Declined since some high demonetised notes were not returned and real estate goods or services by the State (including Union Territories with legislature).
2. Private wealth
prices fel~ (iii) Integrated Goods and Services Tax (IGST): It is the GST levied on the 'Inter-State' supply
3. Public sector wealth No effect. of goods or services and is collected by the Centre. IGST is equivalent to the sum total
Digital transactions amongst new users and use of RuPay Cards and Aadhar of CGST and SGST.
4. Digitization
Enabled Payment System (AEPS) increased. Demonetisation has increased the Some Facts about GST
popularity of e-wallets.
s. Real estate Prices declined. 1. Sin gle Tax Structure: GST aims to subsume a multiple taxes into one single tax across
Rise in income tax collection because of increased disclosure. the country and make goods uriiformly priced across India. Though, in this process, some
goods become costly and some become cheaper.
3.9 GOODS AND SERVICES TAX (GST)
2. Effect on Prices: With the implementation of GST, luxury goods have become costlier,
GST or "Goods and Services Tax" is a comprehensive Indirect Tax which has replaced many while items of mass consumption have become cheaper.
Indirect Taxes in India. The Goods and Services Tax Act was passed in the Parliament on 29t
3. Consump tion Based T ax: GST is a 'Consumption Based Tax', i.e. the tax is received by
March, 2017. The Act came into effect on !51 July, 2017. It is a comprehensive, multi-stage,
the state in which the goods or services are consumed and not by the state in which such
destination-based tax that is levied on every value addition. GST has been identified as one ol
the most important tax reforms post-independence. goods are manufactured. For example, if a product is manufactured in Tamil Nadu and
travels through the country before it reaches Delhi, where the buyer or consumer pays tax
The Government of India implemented GST following the credo of 'One Nation and One Tax'
for it. Both the Centre and the State have their share in this tax.
and wanting a unified market in order to ensure the smooth flow of goods and services acros.l
the country. 4. Invoice Matching: The Indian GST will have a mechanism of matching of invoices. Input
• Taxapartfr b · ,,. Tax Credit of purchased services and goods will be available only when the inward supply
ta om emg a source of revenue for growth also plays a key role in making u~
S te accountable to its taxpayers. Effective taxation ensures that public funds are effectively details filed in by buyer matches the outward supplies details filed in by supplier. GST
employed m fulfillin • b" . network is a self-regulating mechanism, which not only checks tax frauds and tax evasion,
g socia1O Jectives for sustainable development
• Among other benefits GST . · but also brings in more and more businesses into the formal economy.
compliance redu th 'ta b is expected to improve the ease of doing business in taX
' ce e x urden b limina · . · 5. Anti-Profiteering Measure: It is one of the key features of the recently implemented GST
mitigatetaxevasion,broaden the or y ting tax-on-tax, improve tax admin1stratton.
law. These measures prevent entities from making excessive profits. As per the Anti-
• GST has replaced 17 · d' ganised segment of the economy and boost tax revenues.
m irect taxes (like v l A Till Profiteering rules, the benefit of reduced GST tax rates and increased input tax credit should
etc.) and 23 cesses of the Centr a ue dded Tax, Service Tax, Excise Duty, Sales '
be passed on to the consumer in the form of reduced price. A National Anti-Profiteering
returns and assessments Ithe and the . States' thereb Yelimin
" ating
. the need for filing multip\e
th . as rationalised th al !IS Authority (NAA) has been constituted for efficient administration of these provisions.
e supply chain from producers tO e tax treatment of goods and services 0
• GST is charged at e consumers. 6. Registration under GST: A business whose aggregate turnover in a financial year exceeds
st
in the previ st ach age of value addition d th • ts 20 lakhs has to compulsorily register under Goods and Services Tax. This limit is set at
ous ages of value chain thr an e supplier off-sets the levy on inpu

·- ough the tax credit mechanism.

-.
10 lakhs for North Eastern and hilly states flagged as special category states.
i 3.16

Input Tax Credit under GST

Input Tax Credit means reducing the taxes paid on inputs from taxes to be .paid on output. When a
supply of services or goods are supplied to a taxable person, the GST charged ts known as Input 1: ny
supplier at each stage is pennitted to avail credit of GST paid on the purchase of goods ax. The
services and can set off this credit against the GST payable on the supply of goods and and!or
Chapter 3

s.
• Liberalisation, Privatisation and Globalisation: An Appraisal

be subject to IGST in addition to the applicable customs duties.

3.17

4. GST on Imports: Import of goods and services is treated as inter-State supplies and would

to be made by him. Thus, the final consumer bears the GST charged by the last sup li se~ces
supply chain, with set-off benefits at all the previous stages. Hence, the tax will be ~v~r III the
on the value added, which results in avoiding double taxation. ied Only
For example, if tax payable by a manufacturer on the output, i.e. final product is~ 450
has already paid tax of~ 300 on input, i.e. purchases, then he can claim 'Input Credit' and he
and he needs to deposit only ~ 150 in taxes. of~ 3(X)
INPUTS
GST Rates: CGST, SGST and IGST are levied at rates mutually agreed upon by the Centre
and the States under the aegis of the GST Council. There are four tax slabs namely 5%,
12%, 18% and 28% for all goods or services. Exports and supplies to SEZ are zero-rated.
6. Payment of GST: There are various modes of payment of tax available to the taxpayer,
including Internet banking, debit/ credit card and National Electronic Funds Transfer
(NEFT)/Real Time Gross Settlement (RTGS).
GSTCouncil
Goods and Services Tax Council is a constitutional body for making recommendations to the
Union and State Government on issues related to Goods and Services Tax.
1. Constitution: As per Article 279A of the amended Constitution, the GST Council w hich

0
(A, Band CJ

•e-·
will be a joint forum of the Centre and the States, shall consist of the following members:
GST paid on purchase of • Chairperson: Finance Minister.

0· .•
inputA=~70 • • • •••••••••••
• Vice Chairperson: Chosen amongst the Ministers of State Government.
• Members: MoS (Finance) and all Ministers of Finance/ Taxation of each State.
GSTpaidon purchase of GSTon
input B = no B :· • . • • • • • • • · • • • · · • · OUTPU'I! Output=~ 450 2. Quorum: 50% of the total number of Members of the Goods and Services Tax Council shall

GST paid on purchase of

inputC=~100
0 ·... ••... •
C}
• • • • • • • • '1 constitute the quorum at its meetings.
3. Majority required for taking Decisions: Every decision of the GST Council shall be taken
at a meeting, by a majority of not less than 75% of the weighted votes of the members
present and voting, in accordance with the following principles, namely:
GSTto be paid by Manufacturer= GST on Output - GST on Inputs= f 450 - (f 70 + f 130 + fl 00J = f 150
• Vote of the Central Government shall have a weightage of one-third of the total votes
cast, and
• Votes of all the State Governments taken together shall have a weightage of two-thirds
of the total votes cast, in that meeting.
GST will benefit in the following ways:
1. Reduction in overall tax burden.
2. No hidden taxes.
3. Development of a harmonised national market for goods and services.
4. Higher disposable income in hand, education and essential needs.
5. Customers to have wider choice.
6. Increased economic activity.
7. More employment opportunities.

Key Features of GST

1. Applicability of GST: The territorial spread of GST is the whole country. ()()(is
2. Applicable on Supply of Goods and Services: GST is applicable on the 'supply' of g
or services as against the earlier concept of tax on the manufacture or sale of goods or 00
the provision of services.
3.
Consumption Based Tax: It is based on the principle of destination-based consuxnP tiOO

I
tax against the earlier principle of origin-based taxation.
 Chapter 3 • Liberalisation, Privatisation and Globalisation : An Appraisal
3.18 3.19

I G~j~ ~ EVISIONOFKEVPOINTS .ii ,~,rt, 'ic' - ~ • Tax Reforms refer to reforms in government's taxation and public expenditure policies, which are collectively
known as its Fiscal Polley. Taxes are of two types: (a) DlrectTaxes; and (bl Indirect Taxes.The major Tax Reforms
l =- 'or making major economic reforms in the cou
ious reasons,, n1ry...._
include:
EconomlcReforms:nievar (Iv) Fall in foreign exchange reserves ..., (i) Rationalisation of Direct Taxes (iii) Simplification of Process
Reasons fo r · s tor (ii) Reforms in lndirectTaxes
(i) Poor Performance of Public ec (v) Huge burden of debts
Foreign Exchange Reforms included the following reforms:
(ii) Deficit in Balance of Payments (vi) Inefficient Management
(i) Devaluation of Rupee: To overcome Balance of Payments crisis, the rupee was devalued against foreign
(iii) Inflationary Pressures d' Government approached World Bank and IMF and r~ . · currencies.
C . • of 1991, In 1an d d' . --~
To manage Economic nsis h ·nternational agencies expecte In 1a to liberalise and
T the loan t ese I (ii) Market Determination ofExchange Rate: The Government allowed rupee value to be free from its control.
s 7 billion as loan.by·For(a)avai mg . '. t' s on Private Sector; (b) Reducing role of government in
Removing restric 10n
OP!q
mair, Trade and Investment Polley Reforms: The important trade and investment policy reforms Include:
up the economy · . .
) R moving Trade Restrictions. (i) Removal of Quantitative restrictions on (iii) Reduction in Import Duties
areas; and (c e unced to create a more competitive environment in theec
• pO r y(NEP) wasanno onoin, Imports and Exports (iv) Relaxation in Import Licensing System
, The New Economic ic d wth of firms. NEP can be broadly classified into two kinds of measu (ii) Removal of Export Duties
and remove barriers to entry an gro Ill
(i) Stabilisation Measures; and (ii) Structural Reform Measures. . . , Privatisation means transfer of ownership, management and control of public sector enterprises to the
rt term measures which aim at:
Stabilisation Measures: They refer t o sho - . . entrepreneurs in the private sector. Privatisation can be done in 2 ways: (a) Transfer of ownership and
. k
(i) Correcting wea nesses o f BOP by maintaining sufficient foreign exchange reserves. management to Private Sector; and (b} Disinvestment.
(ii) Controlling inflation by keeping rising prices under control. , Globalisation means integrating the national economy with the world economy through removal of barriers
, Structural Reform Measures: They refer to long-term measures which aim at: on international trade and capital movements.
(i) Improving efficiency of the economy. • Positive Traits of Globalisation: Globalisation resulted in: (a) Greater access to global markets; (b) Advanced
(ii) Increasing international competitiveness. Technology; (c) Better future prospects for large industries of developing countries.
Main Policies of New Economic Policy: The government initiated a variety of policies which fall underthm • Negative Traits of Globalisation:
heads: (i) Liberalisation; (ii) Privatisation and (iii) Globalisation. (i) Benefits of globalisation accrue more to developed countries.
(ii) Globalisation compromises the welfare and identity of people belonging to poor countries.
""'°"
• Liberalisation means removal of entry and growth restrictions on the private sector. The purposi d
liberalisation was to unlock the economic potential of the country and to introduce much more competiti), (iii) Market-driven globalisation increases economic disparities among nations and people.
into the eco~omy. Liberalisation included the following economic reforms: • Outsourcing refers to hiring business services from external sources, mostly from other countries, which
(1) Industrial Sector Reforms (iv) Foreign Exchange Reforms were previously p rovided internally or from within the country. India has become a favourable destination
(ii) Financial Sector Reforms (v) Trade and Investment Policy Reforms of outsourcing because of low wage rates and availability of skilled manpower.
(iii) Tax Reforms
, • World Trade Organisation (WTO) was founded in 1995 as the successor organisation to the GAIT. As an
• Industrial Sector Reforms•Th • . important member of WTO, India has been in the forefront of framing fair global rules, regulations and
. • e various measures under industrial policy reforms include:
(,) Reduction in Industrial L· · . Th . advocating the interests of the developing world.
for a sh rt . f . IC~nsmg. e new policy abolished industrial licensing for all the project~exceil
o 11st o industries. • According to some scholars, India should not be a member ofWTO because:
(ii) Decrease in role of Public Sector· The . . (i) Major volume of international trade occurs among the developed nations; and
have been considerabl r d · number of industries, exclusively reserved for the public se<II
("') Y e uced. (ii) Developing countries are being cheated as they are forced to open up their markets for developed
"' De-reservation under small-scale in . countries and are not allowed access to markets of developed countries.
st
de-reserved. du "es: Many goods produced by small scale Industries wilt
• Bilateral Trade refers to trade between two countries.
(iv) Monopolies and Restrictive Trade Practices M .
approval for expansion mer ( RTPJ Act: Requirement for large companies to seek p¢ • Multi-lateral Trade refers to trade between more than two countries.
• Financial Sector Ref .' ger, etc. were eliminated. • Tariff Barriers refer to barriers which are imposed on imports to make them relatively costly and to protect
orms included th f the domestic production.
(i) Change m the Role of RBI· Th e ollowing reforms:
(ii) Origin of Pr,v t · e role of RBI was red d e(tOC • Non-Tariff Barriers refers to barriers which are imposed on the amount of Imports and exports.
(iii) Increase a _e Banks:The reform policies d uce from regulator to facilitator of financial 5
1n 11m,tofFore· i Ie to the est bl' h k • Arguments In Favour of Economic Reforms
(iv) Ease in Ex •gn nvestment· Lim·it ff a is ment of private sector ban s.
pans/on Pr · o oreign · d Sl'io- (i) Increase in rate of Economic Growth (iv) Rise In Exports
of RBI. ocess: Banks were giv f investment In banks raised to aroun .I
en reedom t 0 PP'°" Iii) Inflow of Foreign Investment (v) Control on Inflation
set up new branches without the a
(iii) Rise In Foreign Exchange Reserves (vi) Increase in the role of Private Sector