Shri. K.M. Savjani & Smt. K.K.

Savjani
B.B.A./B.C.A College, Veraval
A
Presentation on
LPG
Subject:
International Business Environment
Presented By
Dr. Bhupendra J. Chavda
(Assistant Professor & H.O.D.)
M.Com., B.Ed., NET. , PhD.
What is Liberalisation?

 The term liberalisation denotes removing restrictions from

certain private individual activity, typically pertaining to
economic system. Commonly, liberalisation is used in the
context of a government relaxing its previously imposed
restrictions on economic or social policies. 
 Economic liberalisation refers to a situation where
inessential restrictions and controls are removed from a
country’s economy to ensure that businesses and
enterprises can maximise their contribution. It is, however,
important to note that liberalisation does not mean an
uncontrolled economy.
Objectives of Liberalization Policy
• To increase competition amongst domestic
industries.
• To encourage foreign trade with other countries
with regulated imports and exports.
• Enhancement of foreign capital and technology.
• To expand global market frontiers of the
country.
• To diminish the debt burden of the country.
 Economic Liberalisation in India

 The Indian economy was liberalised in the year 1991. In India, the concept
of economic liberalisation was introduced to attain several objectives –
industrialisation, expansion in the role of private and foreign investment,
and introducing a free market system. Restrictions were relaxed for private
companies to enter several core industries, which were previously reserved
for public sector.

 Why was liberalisation initiated in India? 

 Economic liberalisation in India was bolstered by its balance of payments

crisis in 1985. This crisis rendered the country incapable of paying for its
essential imports and servicing its debt payments. India was pushed to the
brink of bankruptcy therein.   

 As a response to it, the then finance minister of India, Dr. Manmohan

Singh, introduced economic liberalisation in India. 
Advantages of liberalisation

1. Free capital flow in the economy - Liberalisation has enabled free

movement of capital in our country, allowing companies to access the same
easily from investors. In the pre-liberalisation period, undertaking lucrative
projects was a taboo due to the dearth of capital, which was rectified in
1991, initiating higher growth rates.

2. Diversification of investor portfolio - Post-liberalisation, investors have the

liberty to invest a percentage of their portfolio into a diversified asset class,
thus generating more profit.

3. Improvement of stock market performance - Relaxation of economic laws

also leads to a rise in the stock market’s value, thus encouraging more
trading among investors.

4. Impact on the agricultural sector - Even though the impact of liberalisation

on the agricultural sector cannot be measured accurately, in the period post-
1991, there was a significant modification in cropping patterns throughout
the country.
Disadvantages of liberalisation

1. Economic destabilisation - Such a severe economic reform led to the

redistribution of political and economic power that destabilised the Indian
economy to quite an extent.

2. Increased competition from MNCs -  In the period pre-liberalisation,

multinational companies had no role to play in the Indian economy.
However, soon after, Indian companies faced increased competition from
MNCs, which threatened the existence of several smaller firms.

3. FDI impact on banking sector -  Lifting restrictions from foreign direct

investment in the banking and insurance sectors led to a downfall in the
government’s stakes in both these sectors.

4. Increase of acquisitions and merger - The increased scope of mergers and

acquisitions in the post-liberalisation period has posed a threat to the
employees of smaller firms. On the event of a merger with bigger
companies, employees of the smaller firms had to undergo rigorous re-
skilling that led to a stagnation of productivity.
Six measures of liberalisation taken by
the Government of India
 (i) Exemption of industries from licensing: The government
exempted all industries (except for alcohol, cigarettes, hazardous
chemicals, explosives, electronic aerospace and drugs) from any
kind of industrial licensing.

 (ii) Expansion of Industries: Industries are free to expand

themselves according to the needs of market. Even government
approval is not required. Ceiling for capital has also been abolished.

 (iii) Freedom of Production: According to the new economic

policy producers are free to produce goods of their choice
Measures of liberalisation taken by the
Government of India
 (iv) Going away with the concept of MRTP: Now, there are no
‘MRTP’ companies. These companies can take their own
investment decision and expansion plans.

 (v) Extending Investment Limit of Small Industries: According

to the new policy investment limit of small scale industries have
been increased to one crore, so that they may modernise these
industries.

 (vi) Inviting Direct Foreign Investment: The Indian companies

can invite the foreign investors to invest in their industries which
has further enlarged and expanded many Indian industries.
Privatization
 Concept of Privatization :- Privatization is the transfer of control of
ownership from public sector to private sectors. It means the conversion of
property rights from the public to private owners. The two elements of
Privatization are as follows :
 1. De-reservation of public sectors :- The de-reservation of public sectors
has enabled the entry of private sectors in those industries which were
reserve only for public sectors. This has led to improve customers service
& efficiency of the firms. At present, 3 industries has reserved for public
sector are Railways, Atomic energy, & Specified minerals.
 2. Dis-investment of Public sector :- Dis-investment is a process of
selling government equity in PSUs (Public Sector Undertaking) to private
parties. The disinvestment is undertaken to achieve good customers
service, overcome political interference, overcome corruption in PSUs,
improve efficiency of PSUs.
Objectives of Privatization
• Improve the financial situation of the government.
• Reduce the workload of public sector companies.
• Raise funds from disinvestment.
• Increase the efficiency of government
organizations.
• Provide better and improved goods and services
to the consumer.
• Create healthy competition in the society.
• Encouraging foreign direct investments (FDI) in
India.
Advantages of Privatisation :-

• Improved Performance: Private companies are profit-incentivised rather

than politically motivated. Privatization, therefore, allows companies to
turn more efficient by eliminating unnecessary elements within an
organisation like overwhelming bureaucracy & red tape. 

 Moreover, private companies assess their employees based on their

performance and adequately incentivize better performance. This factor
spurs overall performance in an organisation. 

• Better Customer Service: Since private companies are profit-driven and

function in a competitive market, their primary focus rests on efficient
customer service. State-run companies lack this feature as they face no
competition and are not financially motivated. Furthermore, customer
service is enhanced in privatisation due to elimination of unnecessary
bureaucratic hassle. 
Advantages of Privatisation :-

• Improved Management: Privatization fosters improved management of a company. As

managers of a privately-owned organization are accountable to the company’s owners, it
becomes their responsibility to ensure efficient management. 

 This factor of accountability is less intense in public sector companies which results in poor and
inefficient operations that may ultimately harm the economy.

• Rid of Political Intervention: One of the primary benefits of privatization is lack of

government influence. Public sector undertakings are mostly driven by political agenda, and its
decisions rely on which courses are more politically convenient. Private sector companies are
absent of any political motives and driven by profitable decisions. 

• Attraction of Investments: Privately-owned companies attract higher investments from stock

exchanges due to their economically and financially sound infrastructure that gains investor
confidence. A higher inflow of investments, both local and foreign, bolsters the economy. 

 Examples of Privatization in India:

 Privatisation of Bharat Aluminium Company in 2005

• Privatisation of Delhi and Mumbai airports in 2006
Disadvantages of Privatisation :-

 1. Natural monopoly
 A natural monopoly occurs when the most efficient number of firms in an industry is one. For
example, tap water has very significant fixed costs. Therefore there is no scope for having
competition amongst several firms. Therefore, in this case, privatisation would just create a
private monopoly which might seek to set higher prices which exploit consumers. Therefore it is
better to have a public monopoly rather than a private monopoly which can exploit the
consumer.
 2. Public interest
 There are many industries which perform an important public service, e.g., health care,
education and public transport. In these industries, the profit motive shouldn’t be the primary
objective of firms and the industry. For example, in the case of health care, it is feared
privatising health care would mean a greater priority is given to profit rather than patient care.
Also, in an industry like health care, arguably we don’t need a profit motive to improve
standards. When doctors treat patients, they are unlikely to try harder if they get a bonus.
 3. Government loses out on potential dividends.
 Many of the privatised companies in the UK are quite profitable. This means the government
misses out on their dividends, instead going to wealthy shareholders.
Disadvantages of Privatisation :-

 4. Problem of regulating private monopolies.

 Privatisation creates private monopolies, such as the water companies and rail
companies. These need regulating to prevent abuse of monopoly power. Therefore,
there is still need for government regulation, similar to under state ownership.
 5. Fragmentation of industries
 In the UK, rail privatisation led to breaking up the rail network into infrastructure
and train operating companies. This led to areas where it was unclear who had
responsibility. For example, the Hatfield rail crash was blamed on no one taking
responsibility for safety. Different rail companies has increased the complexity of rail
tickets.
 6. Short-termism of firms
 As well as the government being motivated by short term pressures, this is something
private firms may do as well. To please shareholders they may seek to increase short
term profits and avoid investing in long term projects. For example, the UK is
suffering from a lack of investment in new energy sources; the privatised companies
are trying to make use of existing plants rather than invest in new ones.
Measures of Privatization taken by the Government of India

1) Public offering of shares: all or part of a shares of the

public limited company are offered for sale to the public as
a running concern.
2) Private sale of shares: all or part of the shares of a state
owned enterprise are sold to a private individual or a group
of purchasers in the private corporate sector.
3) New private investment in a state owned enterprise:
primary share issues are subscribed by the private sector or
public.
4) Sale of Government or state enterprises assets: the
assets of the public sector are sold as private sale instead
of shares..
Measures of Privatization taken by the
Government of India
5) Reorganisation or fragmentation into smaller units: a
holding company with a number of subsidiaries can be
privatised separately.
6) Management/Employee buy out: the management or the
employees acquire the controlling interest in the unit in
which the shares are purchased on credits extended by
Government or financial institutions.
7) Lease and management contract: the ownership
remains with the Government while the lessee assumes
full responsibility for operations and maintenance. Under
management contract, the owner pays for the management
and operational control
Globalisation:
 It means to integrate the economy of one country with
the global economy. During Globalization the main
focus is on foreign trade & private and institutional
foreign investment. It is the last policy of LPG to be
implemented.
 Globalization as a term has a very complex
phenomenon. The main aim is to transform the world
towards independence and integration of the world as a
whole by setting various strategic policies. Globalization
is attempting to create a borderless world, wherein the
need of one country can be driven from across the globe
and turning into one large economy.
Advantages of Globalization
• Employment: The establishment of special economic zones has
increased the number of jobs available. There are export
processing units established all over the world, which have
helped employ thousands of people. The multinational
companies of the west have been providing employment
opportunities to the people by outsourcing employees.
• Compensation: There has been an increase in the level and
amount of payment compared to the domestic companies. The
main reason for this is that domestic or home companies lack
skill and knowledge compared to multinational companies. An
increase in compensation is leading to changes in the
management structure of the companies too. 
• Standard of living: With the emergence of globalisation, there
has been a change in people's standard of living. The difference
in the purchasing behaviour of people has increased the
standards of living of people. Therefore, the evolution and
development of business have raised the standards of living of
people. 
Advantages of Globalization
• Increased investment: Globalisation has led to an
increase in cross-border investments. This has led to
companies investing and opening branches in different
countries across the globe. The increase in investment
across the borders has enhanced the welfare of both
countries. 
• Development of infrastructure: Technological
advancement has helped improve the infrastructure of
countries. With the help of technology, the countries are
achieving overall development. 
• Foreign exchange reserves: With the help of
globalisation, there is a constant flow of capital in the
international financial flows. This capital flow helps
countries build foreign exchange reserves. 
Disadvantages of Globalization
 1. Inequality: Globalisation has been linked to rising inequalities in income and wealth.
Evidence for this is the growing rural–urban divide in countries such as China, India and
Brazil. This leads to political and social tensions and financial instability that will
constrain growth. Many of the world’s poorest people do not have access to basic
technologies and public goods. They are excluded from the benefits.
 2. Inflation: Strong demand for food and energy has caused a steep rise in commodity
prices. Food price inflation (known as agflation) has placed millions of the world’s poorest
people at great risk.
 3. Vulnerability to external economic shocks – national economies are more connected
and interdependent; this increases the risk of contagion i.e. an external event somewhere
else in the world coming back to affect you has risen / making a country more vulnerable
to macro-economic problems elsewhere
 4. Threats to the Global Commons: Irreversible damage to ecosystems, land
degradation, deforestation, loss of bio-diversity and the fears of a permanent shortage of
water afflict millions of the world’s most vulnerable
 5. Race to the bottom – nations desperate to attract inward investment may be tempted to
lower corporate taxes, allow lax health and safety laws and limit basic welfare safety nets
with damaging social consequences
Disadvantages of Globalization
 6. Trade Imbalances: Global trade has grown but so too have trade
imbalances. Some countries are running big trade surpluses and these
imbalances are creating tensions and pressures to introduce protectionist
policies such as new forms of import control. Many developing countries
fall victim to export dumping by producers in advanced nations (dumping
is selling excess output at a price below the unit cost of supply.)
 7. Unemployment: Concern has been expressed by some that capital
investment and jobs in advanced economies will drain away to developing
countries as firms switch their production to countries with lower unit
labour costs. This can lead to higher levels of structural unemployment.
 8. Standardisation: Some critics of globalisation point to a loss of
economic and cultural diversity as giant firms and global multinational
brands dominate domestic markets in many countries.
 9. Dominant global brands – globalisation might stifle competition if
global businesses with dominant brands and superior technologies take
charge of key markets be it telecommunications, motor vehicles and so on.
Measures of Globalization taken by the Government of India

 Measure 1# Import Liberalization:

 For liberalizing foreign trade, import controls through licensing was abolished.
 With this almost all items of capital goods, raw materials, intermediate goods can be
freely imported subject only to payment of customs duties. For some time
quantitative restric­tions on consumer goods remained but with effect from 1995 all
quantitative restrictions, even on imports of consumer goods, have been lifted.
 To liberalize imports peak customs duties which in some cases were as high as over
300 per cent were lowered in stages to 150 per cent in July 1991, to 85 per cent in
Feb. 1993, 50 per cent in 2002. The average import duty was further reduced to 31
per cent in 2003 and to 20 percent in Jan. 2004, to 15 per cent in 2005 and further to
12.5% in 2006.
 Import duties on capital goods have been reduced even below 20 per cent for certain
categories. This phased reduction in exceptionally high customs duties and a phased
removal of quantitative restrictions on imports has substantially reduced anti- export
bias in the earlier trade and balance of payment policies.
Measures of Globalization taken by the Government of India

 Measure 2# Imports of Gold and Silver:

 Imports of Gold and Silver have been considerably liberalized. This reduced the incentive for
smuggling. In Jan. 2004 imports of gold were made free from any commission charged for it.
 Measure 3# Market-Determined Exchange Rate:
 An important measure in external sector was to devalue the rupee in July 1991 and after about 2
years in 1993 exchange rate was changed from basket based pegged exchange rate system to
market-determined exchange rate. With this the exchange rate of the rupee today is determined
by demand and supply conditions in the foreign exchange markets.
 Measure 4# Convertibility of Rupee:
 Another important reform for globalizing the Indian economy was the convertibility of rupee on
balance of payments on current account. This implies the importers can get their required
quantity of foreign exchange by converting their rupee resources into dollars from the foreign
exchange market. The exporters do not have to surrender their foreign exchange (US dollar or
EU Euro) earned abroad to RBI but can now sell them in the foreign exchange markets.
Measures of Globalization taken by the Government of India

 Measure 5# Liberalisation of Foreign Investment:

 The new economic policy adopted since 1991 considerably liberalized the scope of foreign
investment, both direct and portfolio. Earlier investment by foreign companies required prior
approval of the government and was restricted to 40 per cent equity participation and was also
subjected to the conditions of technology transfer to India. Besides, foreign investment was
permitted in priority areas only. Foreign portfolio investment was allowed mainly into a limited
number of public sectors bond issues.
 The new economic policy of 1991 provided for automatic approval of foreign direct investment,
that is, no prior permission from the government is required up to 51 per cent of the total equity
capital of the firms in 34 priority indus­tries. In 1996, the government raised this ceiling limit for
automatic approval from 51 per cent to 74 per cent for foreign equity participation.
 Criteria for approval of foreign investment greater than 51 per cent equity participation prior to
1996 (and greater than 74 per cent after 1996) in priority industries and foreign equity
participation in non priority industries which was approved on case to case basis was quite
liberalized to attract more foreign investment.
 Besides, it is worth mentioning that elimination of industrial licensing restric­tions, opening up to
the private sector of a number of industries previously reserved for the public sector which
increased the growth of domestic corporate sector also served to promote foreign private
investment.
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