LIBERALIZATION AND PRIVATIZATION

Liberalization
Liberalization was brought up with the fact that any restrictions, which became a hindrance to
development and growth will put to an end.
Largely, these reforms made government regulations and policies lose. It allowed for opening up
of economic borders for foreign investment as well as multinationals.

New Economic Policy

1. Industrial Sector Reforms
2. Financial Sector Reforms
3. Tax Reforms
4. Foreign Exchange Reforms
5. Trade and Investment Policy Reforms

Industrial Sector Reforms

Scenario Till 1991

 Industrial licensing under which every businessperson had to get permission from the
government officials to start a firm or close a firm.
 Government permission was also required to decide the amount of goods that could be
produced.
 Private sector was not allowed in many industries.
 Some goods could be produced only in small-scale industries.
 Government used to control the prices and distribution of selected industrial products,
which led to corruption.
Scenario Since 1991

 Many of the restrictions as stated above were removed.

 Industrial licensing was abolished for almost all products except alcohol, cigarettes,
hazardous chemical, industrial explosives, electronics, aerospace, drugs and
pharmaceuticals.
 Subsequent to 1991, only industries which were reserved for public sectors were defence
equipment, atomic energy generation and railway transport.
 Many goods produced by small-scale industries were de-reserved.
 In many industries, the market has been allowed to determine the prices.
Financial Sectors Reforms
 RBI’s role was transformed from regulator to facilitator of financial sector.
 Private sector banks, both domestic as well as foreign were established.
 Gradually FDI limits/FPI limits were increased in various sectors
 Bank were given permission to generate resources from India and abroad.
 Several reforms were brought in insurance, money markets and capital markets etc.

Tax Reforms
 Since 1991, there has been a continuous reduction in the taxes on individual income.
 It was felt that high rate of income tax were important reason for tax evasion and hence
moderate tax rates in income tax as well as corporate tax are introduced.
 Many procedures have been simplified.
 Reforms have been introduced in indirect taxes and the most recent one is Goo ds and
Services Tax (GST).

Foreign Exchange Reforms

The crisis of 1991 and devaluation of rupee against foreign currencies was the starting point of
foreign exchange reforms.

 Rupee was devalued against foreign currencies.

 Devaluation of rupee was done basically to increase exports and ultimately to build up
foreign exchange reserves.
 Devaluation led to increase in the inflow of foreign exchange.
 Subsequently, demand and supply of foreign exchange determined exchange rates and
government’s intervention is quite minimal in this aspect, rarely, RBI intervenes which is
known as “managed float”.

Trade and Investment Policy Reforms

 Gradually quantitative restrictions on imports and exports were eased.
 Import licensing was abolished except in case of hazardous and environmentally sensitive
industries.
 Quantitative restrictions on imports of manufactured consumer goods and agricultural
products were also fully removed from April 2001.
 Export duties have been removed to increase the competitiveness of the Indian goods in
the international markets.
 FDI/FPI are liberalized gradually.

Privatization
Privatization largely refers to giving more opportunities to the private sectors, such that the role
of the public sector is reduced.
The main objectives of privatization are reducing the workload of the public sector, providing
better goods and services to the end users, improving the government’s financial condition, and
many more. It is a way to allow the entry of foreign direct investment and bringing healthy
competition into the economy.
There are two ways of privatization
1. By withdrawal of the government of ownership and management i.e., coming out of
majority control of public sector companies.
2. By outright sale of public sector companies.
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 Most of the profitable undertakings were originally formed during 1950s and 1960s,
when self-reliance was important element of public policy.
 They were setup with the intention of providing infrastructure and direct employment to
the public.
 Subsequently, government gave managerial and operational autonomy by declaring them
as Navaratnas, Miniratnas etc. however, the privatization of public sector enterprises
could not take place on the desired lines and probably this is one of the failure of the
government’s New Economic Policy of 1991.

Advantages and Disadvantages of Privatization

Advantages:-

 Improved efficiency
 Lack of political interference
 Long term view instead of short term by politicians
 Pressure from shareholders
 Increased competition
 Government will raise revenue from the sale.
Disadvantages:-

 Natural monopoly may occur

 Public interest may not be served
 Government loses out on potential dividends
 Problem of regulating private monopolies
 Fragmentation of industries
 Short-termism of firms through dividend pay-outs.