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Economic Reforms: Liberalisation, Privatisation and Globalisation (LPG). The Economic crisis of June 1991 In 1991, a crisis in the balance of payments, fiscal imbalance, and domestic price rise led to the introduction of economic reforms in the country.
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Economic Reforms:Liberalisation, Privatisation and Globalisation (LPG)
The Economic crisis of June 1991 • In 1991, a crisis in the balance of payments, fiscal imbalance, and domestic price rise led to the introduction of economic reforms in the country. • Foreign exchange reserves, which wegenerally maintain to import petroleum and other important items, dropped to levels that were not sufficient for even a fortnight. • The country met with an economic crisis relating to its debt. Particularly, the government was not able to make repayments on its borrowings (dollar denominated) from abroad; • Fiscal deficit reached a level of 7.7 % of GDP in 1990-91. 2
The country had to pledge 67 tons of gold to external agencies to raise a loan of USD 605 million to tide over balance of payments crisis. • Rising prices of essential goods- inflation rate 13-14 %. • All this led the government to introduce a new set of policy measures (economic reforms) which changed the direction of our developmental strategies. • Liberalisation, Privatisation, and Globalisation (LPG) have been the three pillars of the economic reforms process initiated by then government and furthered by successive governments thereafter. 3
Liberalisation It is the process of liberating economy from various regulatory and control mechanisms of the state and of giving greater freedom to private enterprise. Under the process of economic reforms, liberalisation has taken place in almost all major sectors of the economy including industry (manufacturing), services, infrastructure, banking, capital markets, taxation, and external sector (foreign trade and investments). It allows greater flexibility, reduces cost / product prices and saves effort of business enterprises. It increases efficiency, and competitiveness of business. It fosters innovation and results into better products. Therefore above all, it serves the consumer better.
Multiple forms of liberalisation Delicensing (industrial license required only in six industries) Dereservation of industries earlier reserved for public sector / small scale sector. Reduction in quantum of administrative controls / clearances for economic activity. Freedom to public sector undertakings (PSUs) to access capital markets. Corporatisation of departmental undertakings Permission to corporates for buy-back of shares Increase in investment ceiling of small-scale enterprises
Multiple forms of liberalisation (contd.) Liberalisation of tax provisions Operational freedom to banks to enter insurance sector, open new branches / introduce new products, set their lending rates. Reduction in reserve ratios (CRR / SLR). Shifting of products and industries from administered price mechanism. Freedom in distribution of select industrial products. Conversion of the excise system from specific to ad valorem rates and adoption of value-added tax (VAT). Simplification of tax structure/procedures, reduction of taxes.
Multiple forms of liberalisation (contd.) • Tax exemptions, holidays, and concessions. • Phased manufacturing programme discontinued. • Removal of mandatory convertibility clause. • Softening of MRTP regulations. • Foreign exchange reforms (devaluation & free exchange rate).
Privatisation Expresses faith in market system and its forces. Is not merely transfer of ownership of government owned assets into private hands. It also refers to a process in which major economic decisions concerning production, exchange, distribution and consumption are entrusted to the market forces and decisions are taken by a large number of individual and private units. It thus gives freedom to own and operate business assets and take market driven independent decisions. It generates competition. Market mechanism (an integral part of privatisation) takes care of the allocative function in the economy.
Forms of Privatisation Divestiture, i.e. sale of govt. equity, in full or part, held in public sector undertakings to private cos./individuals. Franchising of public sector services to designated private companies. Licensing of technology of public sector units to private enterprises. De-reservation of industries /economic activities earlier reserved exclusively for public sector; i.e. private sector allowed to enter into those reserved activities (roads, shipping ports, airports, insurance, power transmission & distribution, telecommunications etc.).
Forms of Privatisation Privatisation of management in which govt. retains ownership but management is entrusted to private hands through lease or management contracts. Freedom to banks to determine their own lending rates in view of market trends. Freeing of deposit rates of banks (subject to ceilings). Freeing of a number of products from administered price mechanism. Contracting out number of services by public sector units (like catering in Railways, electricity/water/telephone bill payments etc.) to private enterprises.
Most of the above measures discussed above counted both for liberalisation as well as privatisation. Nevertheless, together, these represent marketisation of the economy in which free private enterprise has a larger role to play.
Globalisation • It is a process of global integration of products, technology, labour, investment, information, and even cultures. It tends to narrow down international differences in prices, wage rates, and interest rates. • Share of ‘foreign trade’ in ‘national income (GDP)’ of an economy (foreign trade orientation) is an important indicator of the extent of its globalisation. • Globalisation of business takes place through international trade, foreign investment, joint ventures, international licensing, franchising, sub-contracting, international horizontal and vertical integration of industries, strategic alliances, international market sharing agreements, advertising and information exchange.
Globalisation (contd.) • Argument for globalisation is based on ‘gains from trade’ • Globalisation expresses desirability for foreign capital and considers it complementary to domestic investment. • It opens new business opportunities, encourages competition, provides spin-off advantages, and enhances knowledge. • Necessary safeguards, however, have to be provided to reduce its adverse effects in form of dumping, external dependence, erosion of economic sovereignty, and deterioration of balance of payments.
Globalisation (contd.) • Globalisation, as part economic reforms in India (post 1991), is a result of: • Internal economic compulsions; • External pressure from international community particularly from institutions like IMF, the World Bank, and the WTO; • As well as trend towards globalisation in a number of developing countries.
Measures towards Globalisation in India, post 1991: • Allowing foreign capital, technology, and workforce to participate in Indian economy. • Offering incentives to MNCs and NRIs to invest in India; • Increase in the limit of foreign direct investment (FDI) in number of sectors; • Creation of Foreign Investment Promotion Board as separate body to study and clear FDI proposals on fast track basis; • Sustained reduction in the customs duty rates on a number of import items;
Continued - • Decanalising oil, agricultural products, ores trade; • Free import of a large number of items through open general license; • Reduction / elimination of Quantitative Restrictions (QRs) on a number of import items (715 goods w.e.f. 2001); • Simplification and standardization of a number of export-import procedures and documentation; • Establishment of Special Economic Zones (SEZ); • Wide range of facilities and incentives to export-oriented units (EOU);
Continued - • Replacement of Foreign Exchange Regulation Act (FERA) with more liberal Foreign Exchange Management Act (FEMA), 1999. • Permitting Indian companies to collaborate with foreign companies in the form of foreign joint ventures (FJVs); • Full convertibility of rupee in current account; • Allowing the rupee to determine its own exchange rate in the international market without official intervention; • Allowing foreign institutional investors (FIIs) to invest in Indian capital market;
Continued - • Allowing Indian companies to procure funds from foreign countries through ‘Euro Issues’ and ‘Global Deposit Receipts’ (GDR); • Allowing Indian Mutual funds to invest in foreign companies; • Permission to exporters to keep foreign exchange accounts abroad to finance trade transactions;
