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chapter 3 Liberalisation, Privatisation And Globalisation: An Appraisal
As discussed in the previous chapter, India adopted a mixed economy framework after independence, aiming to combine the benefits of capitalism and socialism. While some argue this led to excessive regulation hindering growth, others highlight India's achievements in savings, industrial diversification, and food security since stagnation.
In 1991, India faced a severe economic crisis. The government struggled to repay foreign debts, and foreign exchange reserves dropped to a critically low level, barely sufficient for a fortnight's imports. Rising prices of essential goods exacerbated the crisis. This led the government to implement a new set of policy measures, fundamentally altering India's developmental strategy. This chapter explores the background of this crisis, the measures adopted (Liberalisation, Privatisation, Globalisation), and their impact on different sectors of the economy.
Introduction
India's economic journey since independence involved navigating between capitalist and socialist models within a mixed economy framework. While this approach is credited with some achievements, critics point to over-regulation as a barrier to growth, while supporters emphasize gains in savings, industrial diversity, and food security.
Mixed Economy Framework
India chose a path combining elements of both capitalism and socialism.
Economic Crisis In 1991
In 1991, India experienced a significant economic crisis characterized by external debt issues and critically low foreign exchange reserves. This crisis necessitated a fundamental shift in economic policy.
Background Of The Crisis
The financial crisis of 1991 stemmed largely from the inefficient management of the economy in the 1980s. Government expenditure consistently exceeded revenue, leading to unsustainable borrowing. While spending on development programs was necessary, it didn't generate sufficient revenue, and internal sources like taxation were inadequate. Expenditure on social sectors and defense also required efficient management of remaining revenues. Income from public sector undertakings (PSUs) was low. Foreign exchange reserves, often borrowed, were sometimes used for consumption rather than productive investment. Exports did not grow sufficiently to pay for rising imports, further depleting reserves. Prices of essential goods rose sharply.
Background
The economic difficulties of the 1980s culminated in the critical situation of 1991, forcing India to seek external assistance and undertake significant reforms.
Inefficient Management Of Indian Economy
Poor financial management in the decade leading up to 1991 was a major contributor to the crisis.
Government Expenditure Exceeds Revenue
A persistent fiscal deficit, where government spending was much higher than its income, became unsustainable.
Unsustainable Borrowings
Relying heavily on borrowings to cover the growing deficit was not a long-term solution.
Rising Prices And Imports
Sharp increases in the prices of essential goods and high growth in imports without corresponding export growth worsened the economic situation.
Declining Foreign Exchange Reserves
Foreign exchange reserves fell to a point where they could not finance even two weeks of imports. There was insufficient foreign exchange to pay interest on international loans, and no country or international institution was willing to lend to India.
Lack Of Willingness To Lend To India
India's precarious financial situation made it difficult to secure further international loans.
Approach To World Bank And IMF (Loan And Conditionalities)
Facing this crisis, India approached the **International Bank for Reconstruction and Development (IBRD)**, known as the World Bank, and the **International Monetary Fund (IMF)**. These institutions provided a loan of $7 billion but imposed conditionalities. India was required to liberalize and open its economy, reduce the government's role in many areas, and remove trade restrictions.
New Economic Policy (NEP) Announced
Agreeing to these conditionalities, India announced the **New Economic Policy (NEP)**, a set of comprehensive economic reforms aimed at creating a more competitive environment and removing barriers to entry and growth for firms.
Classification Of Policies (Stabilisation And Structural Reform)
The NEP policies were broadly categorized into two groups:
- Stabilisation Measures: Short-term steps to correct balance of payments problems and control inflation (maintaining sufficient foreign exchange reserves and keeping prices in check).
- Structural Reform Measures: Long-term policies to improve economic efficiency and international competitiveness by removing rigidities in various sectors.
The government initiated a variety of policies under the broad headings of **Liberalisation, Privatisation, and Globalisation**.
Liberalisation
Liberalisation was introduced to dismantle the rules and laws that had become obstacles to economic growth and development. While some liberalization measures were taken in the 1980s, the 1991 reforms were much more comprehensive, focusing on several key areas.
Ending Restrictions And Opening Sectors
The core aim of liberalisation was to remove various restrictions and open up different sectors of the economy.
Comprehensive Reforms After 1991
The reforms introduced in 1991 were extensive, impacting multiple aspects of the economy.
Deregulation Of Industrial Sector
Prior to 1991, the industrial sector was heavily regulated through measures such as industrial licensing, restrictions on private sector entry in many industries, reservation of goods for small-scale industries, and controls on price fixation and distribution.
Removal Of Restrictions
The 1991 reform policies significantly reduced these restrictions.
Abolition Of Industrial Licensing
Industrial licensing was largely abolished, except for a few specific product categories like alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs/pharmaceuticals.
Industries Reserved For Public Sector
Only a small part of atomic energy generation and some core railway transport activities remained reserved exclusively for the public sector.
Dereservation Of Small-scale Industries
Many goods previously reserved for small-scale industries were dereserved.
Market Determines Prices
In most industries, prices were now allowed to be determined by market forces.
Financial Sector Reforms
Reforms were also undertaken in the financial sector.
Financial Sector Includes
This sector includes institutions like commercial banks, investment banks, stock exchanges, and the foreign exchange market.
Regulation By RBI
The financial sector in India is regulated by the **Reserve Bank of India (RBI)**, which sets norms for banks regarding reserves, interest rates, and lending.
Major Aim: Reduce RBI's Role To Facilitator
A key goal of these reforms was to change the RBI's role from a stringent regulator to a facilitator, allowing the financial sector greater autonomy in decision-making.
Establishment Of Private Sector Banks
The reforms led to the establishment of private sector banks, both Indian and foreign.
Foreign Investment Limit Raised
The limit on foreign investment in banks was raised to around 74%.
Freedom To Set Up New Branches
Banks meeting certain conditions were given the freedom to open new branches and rationalize their networks without RBI approval.
Generating Resources From India And Abroad
Banks were permitted to generate resources from both domestic and international sources, although the RBI retained some control over managerial aspects to protect the interests of account holders and the nation.
Foreign Institutional Investors (FII) Allowed
Foreign Institutional Investors (FIIs) like merchant bankers, mutual funds, and pension funds were allowed to invest in Indian financial markets.
Tax Reforms
Reforms related to government taxation and public expenditure (fiscal policy) were implemented.
Concerned With Taxation And Public Expenditure Policies (Fiscal Policy)
Tax reforms aimed at changing the government's approach to raising and spending funds.
Direct Taxes (Income Tax, Corporation Tax)
Direct taxes include income tax on individuals and profits of businesses.
Reduction In Taxes On Individual Incomes
Income tax rates for individuals were reduced to discourage tax evasion and encourage savings and voluntary income disclosure.
Reduction In Corporation Tax Rate
The corporation tax rate on business profits was also gradually lowered from its previously high levels.
Reform Of Indirect Taxes
Efforts were made to reform indirect taxes (taxes on commodities) to facilitate a common national market.
Introduction Of GST (2016 Amendment)
A significant reform was the introduction of the Goods and Services Tax (GST) in 2016, following a constitutional amendment. GST is expected to generate revenue, reduce evasion, and create a unified national market ("one nation, one tax, one market").
Simplification Of Procedures And Lower Rates
Tax procedures were simplified, and rates were substantially lowered to encourage taxpayer compliance.
Foreign Exchange Reforms
Reforms in the external sector began with the foreign exchange market.
Devaluation Of Rupee (1991)
As an immediate response to the balance of payments crisis in 1991, the Indian rupee was devalued against foreign currencies, aimed at increasing foreign exchange inflow.
Free Determination Of Rupee Value
This action also signaled a move towards freeing the rupee's value from government control in the foreign exchange market.
Markets Determine Exchange Rates
Exchange rates are now largely determined by the demand and supply of foreign exchange in the market.
Trade And Investment Policy Reforms
Liberalizing trade and investment aimed to enhance the international competitiveness of industries and attract foreign investment and technology.
Increased International Competitiveness
The goal was to make India's industrial production more competitive on a global scale.
Aim To Promote Efficiency And Modern Technologies
These reforms also sought to improve the efficiency of domestic industries and encourage the adoption of modern technologies.
Regime Of Quantitative Restrictions On Imports
Prior to the reforms, India maintained tight controls on imports through quantitative restrictions and high tariffs to protect domestic industries. This policy led to inefficiency and slower growth in the manufacturing sector.
Trade Policy Reforms Aim At
Trade policy reforms focused on three main areas:
Removal Of Import Licensing
Import licensing was abolished, except for specific hazardous and environmentally sensitive industries.
Removal Of Quantitative Restrictions
Quantitative restrictions on imports of manufactured consumer goods and agricultural products were completely removed from April 2001.
Removal Of Export Duties
Export duties were removed to enhance the competitiveness of Indian goods in international markets.
Privatisation
Privatisation is a key component of the 1991 reforms, aimed at reducing the government's role in running enterprises.
Shedding Ownership Or Management
It involves the government transferring ownership or management of its enterprises to the private sector.
Two Ways Of Conversion
Government companies can be converted into private companies through two main methods: withdrawing government ownership/management or outright sale of public sector companies.
Disinvestment Of Public Sector Enterprises
Selling off a part of the equity (shares) of Public Sector Enterprises (PSEs) to the public is known as **disinvestment**. The government set annual targets for disinvestment, which were often met or exceeded (e.g., target of ₹2500 crore in 1991-92 exceeded to ₹3040 crore; target of ₹1,00,000 crore in 2017-18 met with ₹1,00,057 crore achievement).
Purpose Of Sale (Improve Financial Discipline, Modernisation)
The stated purposes of disinvestment were to improve the financial discipline and facilitate the modernization of PSEs.
Utilisation Of Private Capital And Managerial Capabilities
It was anticipated that private capital and managerial expertise could effectively improve the performance of PSEs.
Impetus To Inflow Of FDI
Privatisation was also expected to boost the inflow of Foreign Direct Investment (FDI).
Attempts To Improve Efficiency Of Psus (Autonomy)
Alongside disinvestment, the government also attempted to enhance the efficiency of PSEs by granting them greater managerial autonomy.
Granting Special Status (Maharatnas, Navratnas, Miniratnas)
Some profitable PSEs were given special status as **Maharatnas, Navratnas, and Miniratnas**, providing them with greater operational and financial freedom to improve performance and profitability.
While the official reasons for disinvestment were improving performance, critics argue that it involves undervaluing public assets and selling them off, resulting in substantial loss to the government. Furthermore, the proceeds from disinvestment have often been used to cover government revenue shortfalls rather than for developing PSEs or building social infrastructure.
Globalisation
Globalisation is a complex phenomenon generally understood as the integration of a country's economy with the world economy. It is a result of policies promoting greater interdependence and integration across economic, social, and geographical boundaries.
Integration With World Economy
Globalisation involves connecting the domestic economy with the global economic system.
Complex Phenomenon
It's not a simple process but encompasses various interconnected changes.
Creation Of Networks And Activities
Globalisation facilitates the creation of cross-border networks and activities.
Turning The World Into One Whole
It aims to create a more interconnected, "borderless" world where events in one region can influence those far away.
Outsourcing
Outsourcing is a significant outcome of globalisation, particularly intensified by advancements in Information Technology (IT).
Important Outcome Of Globalisation
Outsourcing is a prominent feature of the globalized economy.
Company Hires Regular Service From External Sources
It involves companies contracting regular services from external providers, often located in other countries, instead of performing them internally.
Intensified Due To Growth Of Fast Modes Of Communication (IT)
Rapid communication technologies, especially IT, have greatly facilitated outsourcing.
Examples Of Outsourced Services
Many services like call centers (BPO), accounting, banking, music recording, clinical advice, and even teaching are outsourced by companies in developed countries to countries like India, where skilled manpower is available at lower costs. Digital transmission of data over telecommunication links enables this real-time transfer of services across borders.
Telecommunication Links And Data Transmission
Modern communication infrastructure is essential for the flow of outsourced services.
Multinational Corporations And Small Companies Outsourcing To India
India has become a major destination for global outsourcing in the post-reform period.
Low Wage Rates And Skilled Manpower Advantage
India's low wage rates and large pool of skilled workers are key attractions for outsourcing.
World Trade Organisation (WTO)
The **World Trade Organisation (WTO)** is a key institution facilitating global trade.
Founded In 1995 (Successor To GATT)
It was established in 1995, succeeding the General Agreement on Trade and Tariff (GATT) founded in 1948.
Objective: Administer Multilateral Trade Agreements
The WTO's role is to administer multilateral trade agreements, aiming to provide equal opportunities for all countries in international trade.
Expected To Establish A Rule-based Trading Regime
It is expected to create a predictable, rule-based trading system where nations do not impose arbitrary trade restrictions.
Purpose: Enlarge Production And Trade Of Services, Resource Utilisation, Environment Protection
The WTO also aims to expand trade in goods and services, ensure efficient global resource use, and protect the environment.
Agreements Cover Goods As Well As Services
WTO agreements cover both trade in goods and services to promote international trade by removing barriers.
India As An Important Member (Framing Rules, Advocating Developing World Interests)
India is a significant member of the WTO, actively participating in framing rules and advocating for the interests of developing countries.
Commitments Towards Liberalisation
India has fulfilled its WTO commitments towards liberalizing trade by removing quantitative restrictions and reducing tariffs.
Scholars Question Usefulness Of Membership
Some scholars question the benefits of WTO membership for India, arguing that the bulk of global trade is among developed nations.
Trade Among Developed Nations
A large volume of international trade primarily takes place between developed countries.
Developed Countries File Complaints, Developing Feel Cheated
Developing countries feel disadvantaged as they are pressured to open their markets, while developed countries maintain barriers to imports, particularly agricultural subsidies and non-tariff barriers.
Forced To Open Markets, Denied Access To Developed Markets
This unequal access is a point of criticism against the WTO's functioning from the perspective of developing nations.
Indian Economy During Reforms: An Assessment
After three decades, it's important to assess the impact of the reform process on the Indian economy.
Performance During Reform Period
The reforms have led to notable changes in economic performance.
Sectoral Contribution to GDP (%):
| Sector | 1950-51 | 1990-91 |
|---|---|---|
| Agriculture | 59.0 | 34.9 |
| Industry | 13.0 | 24.6 |
| Services | 28.0 | 40.5 |
Growth Of GDP (Post-1991)
India witnessed rapid GDP growth post-1991, particularly in the first two decades.
Growth of GDP and Major Sectors (in %):
| Sector | 1980-91 | 1992-2001 | 2002-07 | 2007-12 | 2012-13 | 2013-14 | 2014-15 |
|---|---|---|---|---|---|---|---|
| Agriculture | 3.6 | 3.3 | 2.3 | 3.2 | 1.5 | 4.2 | – 0.2* |
| Industry | 7.1 | 6.5 | 9.4 | 7.4 | 3.6 | 5 | 7.0* |
| Services | 6.7 | 8.2 | 7.8 | 10 | 8.1 | 7.8 | 9.8* |
| Total | 5.6 | 6.4 | 7.8 | 8.2 | 5.6 | 6.6 | 7.4 |
Note: *Data pertaining to Gross Value Added (GVA). The GVA is estimated from GDP by adding subsidies on production and subtracting indirect taxes.
GDP Growth Rate Increase
The total GDP growth rate accelerated from 5.6% in 1980-91 to 8.2% in 2007-12.
Growth Of Different Sectors (Agriculture, Industry, Services)
During the reform period, agriculture growth declined, industry growth fluctuated, and the service sector saw rapid growth, becoming the primary driver of GDP growth.
Growth Driven By Service Sector
The service sector became the main engine of economic growth.
Setback In Growth Rates (2012-15)
There was a slowdown in growth rates across sectors between 2012 and 2015, with agriculture experiencing negative growth in 2014-15. The service sector continued to grow at a high rate, exceeding overall GDP growth.
Increase In Foreign Direct Investment And Foreign Exchange Reserves
Post-1991 reforms led to a significant increase in foreign investment (FDI and FII), from about \$100 million in 1990-91 to \$30 billion in 2017-18. Foreign exchange reserves also surged from about \$6 billion to \$413 billion in 2018-19, making India one of the largest holders globally.
India As Exporter Of Various Goods
India has emerged as a successful exporter of goods like auto parts, pharmaceuticals, engineering goods, IT software, and textiles since 1991.
Rising Prices Kept Under Control
The reforms have also helped in keeping rising prices under control.
Criticism Of Reform Process
Despite positive aspects, the reform process has faced criticism for not adequately addressing fundamental economic problems and potentially exacerbating existing inequalities.
Failure To Address Basic Problems
Critics argue that the reforms have not solved core issues like unemployment, agricultural distress, industrial slowdown, infrastructure gaps, and fiscal management problems.
Growth And Employment
While GDP growth has increased, it has not translated into sufficient employment generation.
Reform-led Growth Not Generated Sufficient Employment
The nature of growth post-reforms has been less employment-intensive.
Reforms In Agriculture
Agriculture appears to have been adversely affected by the reforms, with a decelerating growth rate.
Adverse Effects On Agriculture Sector
Key issues include:
Decline In Public Investment
Public investment in agricultural infrastructure (irrigation, power, markets, research) has decreased since 1991.
Increase In Cost Of Production (Fertiliser Subsidy)
Partial removal of fertiliser subsidies has increased production costs for farmers, particularly small and marginal ones.
Policy Changes Adversely Affect Indian Farmers
Reduced import duties on agricultural products, low minimum support prices, and lifting of import restrictions have exposed Indian farmers to increased international competition.
Shift Towards Export-oriented Policy Strategies
Policies promoting agricultural exports have led to a shift from food grain production for domestic consumption to cash crops for export, potentially impacting food grain prices.
Pressure On Prices Of Food Grains
Focusing on cash crops for export can put upward pressure on the prices of staple food grains in the domestic market.
Reforms In Industry
Industrial growth has also slowed down after the reforms.
Industrial Growth Slowdown
The manufacturing sector has not grown as rapidly as expected.
Decreasing Demand Of Industrial Products
Reasons for slowdown include decreasing demand, partly due to cheaper imports and inadequate infrastructure investment.
Cheaper Imports Replace Demand
Cheaper imported goods have displaced demand for domestically produced goods.
Domestic Manufacturers Face Competition
Indian industries face significant competition from imports.
Inadequate Infrastructure Facilities
Lack of sufficient infrastructure like power supply continues to be a constraint.
Globalisation Creates Conditions For Free Movement Of Goods
Globalisation, enabling free movement of goods and capital, can make developing countries' industries vulnerable.
Adverse Effect On Local Industries And Employment
The influx of cheaper imports can negatively impact local industries and employment opportunities in developing countries.
Lack Of Access To Developed Countries' Markets (Non-tariff Barriers)
Developing countries still face barriers to accessing markets in developed nations, such as non-tariff barriers, despite removal of quota restrictions (e.g., US quotas on Indian/Chinese textiles).
Disinvestment
The policy of disinvestment in PSEs has drawn criticism.
Target For Disinvestment
The government sets and often meets/exceeds targets for selling stakes in PSEs.
Critics Point Out Undervaluation Of Assets
Critics allege that public assets are sold below their true value.
Loss To Government And Sale Of Public Assets
This results in financial loss to the government and is seen as selling off valuable public resources.
Proceeds Used To Offset Revenue Shortage
Often, disinvestment proceeds are used to cover budget deficits rather than reinvesting in PSEs or social infrastructure.
Reforms And Fiscal Policies
Reforms have also impacted fiscal management.
Limits On Growth Of Public Expenditure (Social Sectors)
Public expenditure growth, especially in social sectors, has faced limitations.
Tax Reductions Not Resulted In Increased Revenue
Tax rate reductions, intended to boost revenue by curbing evasion, have not always led to a significant increase in overall tax collection.
Tariff Reduction Curtailed Revenue Scope
Reduction in tariffs has also limited the government's ability to raise revenue through customs duties.
Tax Incentives To Attract Foreign Investment
Providing tax incentives to attract foreign investors further reduces potential tax revenue.
Negative Impact On Developmental And Welfare Expenditures
These fiscal constraints can negatively affect government spending on developmental and welfare programs.
Conclusion
The process of globalisation, driven by liberalisation and privatisation, has brought both positive and negative consequences for India and other countries.
Positive And Negative Results Of Globalisation
Globalisation has had varied impacts globally.
Opportunity Argument
Some view globalisation as an opportunity, offering greater access to global markets, advanced technology, and allowing developing countries' large industries to become significant international players.
Critics Argument (Strategy Of Developed Countries)
Critics, however, argue that globalisation is a strategy by developed countries to expand their markets and that the externally advised reform policies in India further aggravated existing inequalities.
Compromised Welfare And Identity Of Poor Countries
It is argued that globalisation has compromised the well-being and cultural identity of people in poorer nations.
h3 class="yellowheading">Widened Economic Disparities
Market-driven globalisation is seen as increasing economic disparities between nations and individuals.
Indian Context Studies
Studies focusing on India suggest that the 1991 crisis was linked to deep-seated inequalities in Indian society.
Crisis Outcome Of Deep-rooted Inequalities
The crisis was not just financial but rooted in underlying societal issues.
Reform Policies Aggravated Inequalities
The subsequent reform policies, particularly the externally suggested package, may have worsened these inequalities.
Increased Income And Quality Of Consumption (High-income Groups)
The benefits of growth have disproportionately gone to high-income groups.
Growth Concentrated In Select Service Sectors
Growth has been concentrated in specific service sectors (telecommunication, IT, finance, etc.), which provide livelihoods to fewer people compared to vital sectors like agriculture and industry.
Lack Of Focus On Agriculture And Industry
The reform process is criticized for not adequately focusing on and benefiting the agriculture and industrial sectors that employ millions.
Recap
Summary of key points:
Problems Faced By Economy
India faced declining foreign exchange, increased imports, low exports, and high inflation.
Reasons For Changing Policies
The financial crisis and pressure from international institutions forced policy changes.
Major Domestic Reforms
Reforms in industrial and financial sectors were implemented.
Major External Sector Reforms
External sector reforms included foreign exchange deregulation and import liberalization.
Consensus On Reducing Public Sector Role
There was agreement to reduce the government's role in the economy through privatization and liberalization.
Globalisation As Outcome
Globalisation resulted from these policies, integrating India with the world economy.
Outsourcing As Major Activity
Outsourcing emerged as a significant economic activity.
Objective Of The WTO
The WTO aims to establish a rule-based global trade system.
Growth During Reforms
During the reforms, service sector growth was high, while agriculture and industry growth slowed.
Agriculture Sector Adversely Affected
Public investment declined, and policy changes negatively impacted agriculture.
Industrial Sector Performed Poorly
Industrial growth faced slowdown due to cheaper imports and insufficient investment.