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Liberalisation, Privatisation,and Globalisation – 30 years of LPG reforms – How India has changed?

Liberalisation, Privatisation,and Globalisation – 30 years of LPG reforms – How India has changed?

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  • GS 3 || Economy || Economic Reforms || Liberalization & Privatization

What is the issue?

  • India’s economy is facing exceptional headwinds yet again, battered by the Covid-19 pandemic.
  • A potentially historic budget is at our doorstep. The circumstances are ripe for deep reforms.

Factors which lead to 1991 economic reforms

  • Rise in Prices:The inflation rate increased from 6.7% to 16.7% due to rapid increase in money supply and the country’s economic position became worse.
  • Rise in Fiscal Deficit:Due to increase in non-development expenditure fiscal deficit of the government increased. Due to rise in fiscal deficit there was a rise in public debt and interest. In 1991 interest liability became 36.4% of total government expenditure.
  • Increase in Adverse Balance of Payments: In 1980-81 it was Rs. 2214 crore and rose in 1990- 91 to Rs. 17,367 crores. To cover this deficit large amount of foreign loans had to be obtained and the interest payment got increased.
  • Iraq War: In 1990-91, war in Iraq broke, which led to a rise in petrol prices. The flow of foreign currency from Gulf countries stopped and this further aggravated the problem.
  • Dismal Performance of PSUs:These were not performing well due to political interference and became big liability for government.
  • Fall in Foreign Exchange Reserves:India’s foreign exchange reserve fell to low ebb in 1990-91 and it was insufficient to pay for an import bill for 2 weeks. 

Reforms of 1991

  • In 1991, under the leadership of P, the New Economic Policy of India was introduced. V. Rao Narasimha. For the first time, this strategy opened the door to the Indian economy’s global exposure. The government of P. V. Narasimha Rao lowered import duties in this New Economic Strategy, opened up reserved sectors for private players, devalued the Indian currency to increase exports. This is also known as the Growth LPG Model.
  • It was the response to two distinct challenges.One was an immediate crisis in the BOP and the other was the challenge of overcoming the persistent problem of slow growth in India compared with other countries in East Asia.
  • Thus the 1991 reforms aimed at much more than dealing with the BOP crisis.
  • They have been criticized for being too gradual but gradualism had the advantage that the changes were accepted widely, and a consensus evolved in favour of the change.
  • Markets lost confidence in the ability of the government to handle the situation.
  • Foreign banks stopped extending new loans while insisting on repayment of old ones.
  • But the IMF lends only to countries willing to take the difficult decisions needed to bring the BOP into equilibrium.
  • It also took up the other challenge of slow growth.

Objectives of New Economic Policy 1991

  • Enter into the field of ‘globalization’ and make the economy more market-oriented.
  • Reduce the inflation rate and rectify imbalances in payment.
  • Increase the growth rate of the economy and create enough foreign exchange reserves.
  • Stabilize the economy and convert the economy into a market economy by the removal of unwanted restrictions.
  • Allow the international flow of goods, capital, services, technology, human resources, without too many restrictions.
  • Enhance the participation of private players in all sectors of the economy. For this, the reserved sectors for the government were reduced to just 3.

Steps under economic reforms of 1991

  • The branches of the new economic policy are threefold
  • Liberalization
  • Privatization
  • Globalization

Steps taken under Liberalisation

  • The liberalization of the economy and removal of license raj meant – doing business in big sectors was not open to many Indians.
  • The right to set interest rates was granted to commercial banks. Previously, the Indian Reserve Bank used to decide this.
  • The investment cap was increased to 1 crore for small scale industries.
  • The freedom to import capital goods such as machinery and raw materials from foreign countries was granted to Indian industries.
  • Earlier, the government used the full output capacity of factories to be set. Industries will now diversify their production capacity and reduce the cost of production. Based on business conditions, companies are now able to determine this.
  • Abolition of restrictive trade practices- Companies with assets worth more than Rs.100 crore were historically known as MRTP companies (according to the Monopolies and Restrictive Trade Practices (MRTP) Act 1969) and were subject to severe restrictions.
  • Industrial licensing and registration have been removed-the private sector is now free to start a new business venture without obtaining licenses, except for the following sectors.
    • Cigarette
    • Liquor
    • Industrial explosives
    • Defence equipment
    • Hazardous chemicals
    • Drugs

Steps taken under Privatization

  • Privatization refers to opening up the private sector to sectors for which the government sector was previously reserved. This mainly involved the sale to private players of PSUs (private sector undertakings). This was intended to eliminate the political interference that made them examples of inefficiencies in PSUs.
  • Under the privatisation reforms, the following steps were taken
    • Sale to the public and financial institutions of shares in PSUs. Maruti Udyog Ltd. shares, for instance, have been sold to private parties.
  • Disinvestment in PSU’s
    • The Govt. has started the process of disinvestment in those PSU’s which had been running into loss. It means that Govt. has been selling out these industries to the private sector. Govt. has sold enterprises worth 30,000 crores to the private sector.
  • Sale of shares of PSUs
    • Indian Govt. started selling shares of PSUs to public and financial institutions e.g. Govt. sold shares of Maruti Udyog Ltd. Now the private sector will acquire ownership of these PSU’s. The share of the private sector has increased from 45% to 55%.
  • The number of sectors reserved for the public sector has fallen from 17 to just 3. These are the
    • Transport and railway
    • Atomic energy
    • Mining of atomic minerals

Steps taken under Globalization

  • Globalization opened the Indian market to foreign players who brought in not only new products but also new technology from the developed world.
  • Tariff reduction: a gradual decrease in customs duties and export and import tariffs to make India attractive for foreign investment.
  • Long term foreign policy: for a longer time, trade policy was applied. The key characteristics of trade policy are
    • Liberal policy
    • Encouragement of open competition
    • Controls on foreign trade were removed
  • Before 1991, the positive list of freely importable products was controlled for imports into India. The list was replaced with a minimal negative list from 1992 onwards. Nearly all intermediate and capital products were released from the import restriction list.
  • It made the Indian currency partly convertible.
  • The foreign capital investment equity limit was increased from 40 percent to 100 percent.
  • Instead of the draconian Foreign Exchange Control Act, the Foreign Exchange Management Act (FEMA) was passed (FERA).

Positive outcomes

  • India’s GDP growth rate increased- During 1990-91 India’s GDP growth rate was only 1.1% but after 1991 reforms GDP growth rate increased year by year and in 2015-16 it was estimated to be 7.5% by IMF.
  • Since 1991, India has firmly established itself as a lucrative foreign investment destination and FDI equity inflows in India in 2019-20 (till August) stood at US$ 19.33 billion.
  • In 1991 the unemployment rate was high but after India adopted the new LPG policy more employment got generated as new foreign companies came to India and due to liberalization many new entrepreneurs started companies.
  • Per Capita income increased due to an increase in employment.
  • Exports have increased and stood at USD 26.38 billion as of October 2019.

Negative outcomes

  • In 1991, agriculture employed 72 percent of the population and contributed 29.02 percent of the GDP. Now the share of agriculture in the GDP has gone down drastically to 18 percent. This has resulted in a lowering of the per capita income of the farmers and increasing rural indebtedness.
  • Due to the opening up of the Indian economy to foreign competition, more MNCs are competing with local businesses and companies which are facing problems due to financial constraints, lack of advanced technology, and production inefficiencies.
  • Globalization has also contributed to the destruction of the environment through pollution by emissions from manufacturing plants and clearing of vegetation cover. It further affects the health of people.
  • LPG policies have to lead to widening income gaps within the country. The higher growth rate is achieved by an economy at the expense of declining incomes of people who may be rendered redundant.

Way forward

  • The 1991 economic reforms contributed to the country’s widespread economic growth.
  • Many industries, such as civil aviation and telecommunications, have seen great leaps in deregulation and have moved forward. Because of the end of the dreaded License Raj, India is also home to many start-ups and mushrooming companies. However, the method is far from complete and many areas need change.

Mains model question

  • Discuss the effects of Liberalization on various aspects of the Indian economy and society.

References