LIBERALISATION, PRIVATISATION AND
GLOBALISATION AN APPRAISAL
INTRODUCTION
In 1991, India met with an economic crisis relating to its external debt. The government was not able to make repayments on its borrowings from abroad. Foreign exchange reserves to import petrol and other important items dropped
to levels that were not sufficient for even a fortnight. Rising prices of essential goods added to these problems. The government introduced a new set of policy which changed the direction of our developmental strategies.
BACKGROUND
The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s.
• The government generates funds from various sources such as taxation, running of public sector enterprises etc. Government expenditure became more than income and the government borrows money to finance the deficit from banks and also from people within the country and from international financial institutions.
• When we import goods like petroleum, we pay in dollars which we earn from our exports.
• Government spend more money to solve problems like unemployment, poverty and population explosion.
• The government was not able to generate enough money from taxes.
• The income from public sector undertakings was also not very high to meet the growing expenditure.
• Foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs.
• No attempt was made to reduce such wasteful spending or enough attention was given to improve exports to pay for the growing imports.
• Government expenditure began to exceed its revenue by such large margins that it became unsustainable.
• Prices of many essential goods rose sharply.
• Imports grew at a very high rate without matching growth of exports.
• There was also not sufficient foreign exchange to pay the interest that needs to be paid to international lenders.
India approached the International Bank for Reconstruction and Development
(IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected India to liberalise and open up the
economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions.
India announced the New Economic Policy (NEP). This set of policies can broadly be classified into two groups:
• Stabilisation measures and
• Structural reform measures
Stabilisation measures are short-term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. This means that there was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control.
Structural reform policies are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the strictness of the Indian economy. The government started a variety
of policies namely, liberalisation, privatisation and globalisation. The first two are policy strategies and the last one is the outcome of these strategies.
LIBERALISATION
Meaning: Liberalisation means to put an end to these restrictions and open up various sectors of the economy. Liberalisation measures were introduced in 1980s in areas of:
• Industrial licensing
• Export-import policy
• Technology up gradation
• Fiscal policy and
• Foreign investment
Reform policies initiated in 1991 were more comprehensive liberalisation.
DEREGULATION OF INDUSTRIAL SECTOR:
In India, regulations on industries were:
(i) Industrial licensing (A licence was required from government to start a firm, close a firm or to decide how much to produce)
(ii) Private sector was not allowed in many industries
(iii) Some goods could be produced only in small scale industries and
(iv) Controls on price fixation and distribution of selected industrial products.
REFORM POLICIES FOR INDUSTRIES
a) Industrial licensing was abolished (Except for alcohol, cigarettes, hazardous chemicals industrial explosives, electronics, aerospace and drugs and pharmaceuticals.)
b) Industries reserved for the public sector are defence equipments, atomic energy generation and railway transport.
c) Many goods produced by small scale industries have now been dereserved.
d) The market has been allowed to determine the prices.
FINANCIAL SECTOR REFORMS
Financial sector includes financial institutions such as commercial banks, investment banks, stock exchange operations and foreign exchange market. The financial sector in India is controlled by the Reserve Bank of India (RBI).
The major aims of financial sector reforms are:
a) To reduce the role of RBI from regulator to facilitator of financial sector (Financial sector is allowed to take decisions on many matters without consulting the RBI.)
b) Establishment of private sector banks, Indian as well as foreign.
c) Foreign investment limit in banks was raised to around 50 per cent.
d) Banks have been given freedom to set up new branches without the approval of the RBI
e) Expand existing branch networks.
f) Banks have been given permission to generate resources from India and abroad
g) Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets.
TAX REFORMS
Tax reforms are concerned with the reforms in government's taxation and public expenditure policies which are collectively known as its fiscal policy.
There are two types of taxes:
Direct taxes consist of taxes on incomes of individuals as well as profits of business enterprises.
Reforms in Direct taxes
• Since 1991, there has been a continuous reduction in the taxes on individual incomes
• It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income.
• The rate of corporation tax (Profit Tax) has been reduced. Indirect taxes are taxes imposed on commodities to facilitate the establishment of a common national market for goods and commodities.
Reforms in Indirect Taxes
• Tax payment procedures have been simplified and the rates also substantially lowered.
FOREIGN EXCHANGE REFORMS
• To resolve the balance of payments crisis, the rupee was devalued against foreign currencies which increased the inflow of foreign exchange.
• Exchange rates based on the demand and supply of foreign exchange.
TRADE AND INVESTMENT POLICY REFORMS
• Liberalisation of trade and investment regime was initiated to increase international competitiveness
• The aim was also to promote the efficiency of the local industries and the adoption of modern technologies.
• Removal of quantitative restrictions on imports and exports
• Reduction of tariff rates and
• Removal of licensing procedures for imports
• 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
• Export duties have been removed to increase the competitive position of Indian goods in the international markets.
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