Chapter 3: India 1991- LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL
There is a consensus in the world today that economic development is not all and the GDP is not necessarily a measure of progress of a society. ---K.R. Narayanan
• 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, which we generally maintain to import petrol and other important items, dropped to levels that were not sufficient for even a fortnight.
• The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s. Neither was an attempt made to reduce such profligate spending nor sufficient attention was given to boost exports to pay for the growing imports.
• 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 agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy (NEP).
• This set of policies can broadly be classified into two groups: the stabilisation measures and the 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. In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and keep the rising prices
under control. On the other hand, structural reform policies are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy. The government initiated a variety of policies which fall under three headsviz., liberalisation, privatisation and globalisation.
LIBERALIZATION and PRIVATIZATION:
• Deregulation of Industrial Sector: Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes, hazardous chemicals industrial explosives, electronics, aerospace and drugs and pharmaceuticals. The only industries which are now reserved for the public sector are defence equipments, atomic energy generation and railway transport.
• 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). One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector. Foreign investment limit in banks was raised to around 50 per cent. Those banks which fulfil certain conditions have been given freedom
to set up new branches without the approval of the RBI and rationalise their existing branch networks. Though banks have been given permission to generate resources from India and abroad, certain aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation. 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 and indirect. Direct taxes consist of taxes on incomes of individuals as well as profits of business enterprises. Since 1991, the rate of direct taxes has been gradually reduced. Efforts have also been made to reform the indirect taxes, taxes levied on commodities.
• Foreign Exchange Reforms: the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. (* please study devaluation of currency)
• Trade and Investment Policy Reforms: Before 1991, India was following a regime of quantitative restrictions on imports. This was encouraged through tight control over imports and by keeping the tariffs very high. After 1991, Import licensing was abolished. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001. Export duties have been removed to increase the competitive position of Indian goods in the international markets.
• Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the public is known as disinvestment.
• The first set of navaratna companies included Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), Oil and Natural Gas Corporation Ltd (ONGC), Steel Authority of India Ltd (SAIL), Indian Petrochemicals Corporation Ltd (IPCL), Bharat Heavy Electricals Ltd (BHEL), National Thermal Power Corporation (NTPC) and Videsh Sanchar Nigam Ltd (VSNL). Later, two more PSUs—Gas Authority of India Limited (GAIL) and Mahanagar Telephone Nigam Ltd (MTNL)—were also given the same status.
GLOBALIZATION:
• It involves creation of networks and activities transcending economic, social and geographical boundaries.
There is a consensus in the world today that economic development is not all and the GDP is not necessarily a measure of progress of a society. ---K.R. Narayanan
• 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, which we generally maintain to import petrol and other important items, dropped to levels that were not sufficient for even a fortnight.
• The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s. Neither was an attempt made to reduce such profligate spending nor sufficient attention was given to boost exports to pay for the growing imports.
• 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 agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy (NEP).
• This set of policies can broadly be classified into two groups: the stabilisation measures and the 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. In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and keep the rising prices
under control. On the other hand, structural reform policies are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy. The government initiated a variety of policies which fall under three headsviz., liberalisation, privatisation and globalisation.
LIBERALIZATION and PRIVATIZATION:
• Deregulation of Industrial Sector: Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes, hazardous chemicals industrial explosives, electronics, aerospace and drugs and pharmaceuticals. The only industries which are now reserved for the public sector are defence equipments, atomic energy generation and railway transport.
• 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). One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector. Foreign investment limit in banks was raised to around 50 per cent. Those banks which fulfil certain conditions have been given freedom
to set up new branches without the approval of the RBI and rationalise their existing branch networks. Though banks have been given permission to generate resources from India and abroad, certain aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation. 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 and indirect. Direct taxes consist of taxes on incomes of individuals as well as profits of business enterprises. Since 1991, the rate of direct taxes has been gradually reduced. Efforts have also been made to reform the indirect taxes, taxes levied on commodities.
• Foreign Exchange Reforms: the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. (* please study devaluation of currency)
• Trade and Investment Policy Reforms: Before 1991, India was following a regime of quantitative restrictions on imports. This was encouraged through tight control over imports and by keeping the tariffs very high. After 1991, Import licensing was abolished. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001. Export duties have been removed to increase the competitive position of Indian goods in the international markets.
• Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the public is known as disinvestment.
• The first set of navaratna companies included Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), Oil and Natural Gas Corporation Ltd (ONGC), Steel Authority of India Ltd (SAIL), Indian Petrochemicals Corporation Ltd (IPCL), Bharat Heavy Electricals Ltd (BHEL), National Thermal Power Corporation (NTPC) and Videsh Sanchar Nigam Ltd (VSNL). Later, two more PSUs—Gas Authority of India Limited (GAIL) and Mahanagar Telephone Nigam Ltd (MTNL)—were also given the same status.
GLOBALIZATION:
• It involves creation of networks and activities transcending economic, social and geographical boundaries.
Global Footprint!
Owing to globalisation, you might find many Indian companies expanding their
wings to many other countries. In 2000, Tata Tea surprised the world by
acquiring the UK based Tetley, the inventor of the tea bag, for Rs 1,870 crore.
In the year 2004, Tata steel bought the Singapore-based Nat steel for Rs 1,245
crore and Tata Motors completed the buyout of Daewoo’s heavy commercial
vehicle unit in South Korea for Rs 448 crore. Now VSNL is acquiring Tyco’s
undersea cable network for Rs 572 crore, which will control over 60,000 km
undersea cable network across three continents. The Tatas also plan to invest
Rs 8,800 crore in fertiliser, steel and power plants in Bangladesh.
Source: Business Today, 22 May 2005.
World Trade Organisation (WTO):
The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes.
The WTO agreements cover trade in goods as well as services to facilitate international trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing greater market access to all member countries.
The foreign investment, which includes foreign direct investment and foreign institutional investment, has increased from about US $ 100 million in 1990-91 to US $ 150 billion in 2003-04. There has been an increase in the foreign exchange
reserves from about US $ 6 billion in 1990-91 to US $ 125 billion in 2004-05. At present, India is the sixth largest foreign exchange reserve holder in the world.
Globalization: dark side of it
1. The removal of fertiliser subsidy has led to increase in the cost of production
2. Indian farmers now have to face increased international competition.
3. Because of exportoriented policy strategies in agriculture, there has been a shift from production for the domestic market towards production for the export market.
4. Cheaper imports have, thus, replaced the demand for domestic goods.
5. Although all quota restrictions on exports of textiles and clothing have been
removed from our side, U.S.A. has not removed their quota restriction on import of textiles from India and China!
.... example:- Siricilla Tragedy!
As a part of liberalisation, privatisation and globalisation, the government
started to reform the power sector. The most important impact of these reforms
has been a steep hike in power tariff. Since the powerlooms, on which a large
number of industrial workers in cottage and small-scale sector depend, are
driven by power energy, the impact of high tariff on them has been very serious.
Further, while the power sector reforms have led to hike in tariffs, the power
producers have failed in providing quality power to the powerloom industry.
Since the wages of the powerloom workers are linked to the production of
cloth, power-cut means cut in wages of weavers who were already suffering
from hike in tariff. This led to a crisis in the livelihood of the weavers and fifty
powerloom workers committed suicide in a small town called ‘Siricilla’ in Andhra
Pradesh.
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