LIBERALIZATION, PRIVATIZATION AND GLOBALIZATION
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 crisis was further compounded by rising prices of essential goods. All these led the government to introduce a new set of policy measures which changed the direction of our developmental strategies
Economic Reforms
Factors responsible for economic reforms are:
Fall in foreign exchange reserve (Prices of many essential goods rose sharply. Imports grew at a very high rate without matching growth of exports). Adverse balance of payments resulted repayment crisis. Mounting fiscal deficit as government expenditure grew faster than revenue ( The continuous spending on development policies like unemployment, poverty and population explosion did not generate additional revenue). Rise in prices, which has a negative impact on Investment. Failure of public enterprises because of very low return on high Investment. The Gulf crisis increases crude oil prices which negatively affected BOP. High rate of deficit financing. Collapse of soviet block
Also no country or international funder was willing to lend to India. 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. India agreed to the conditionality's of World Bank and IMF and announced the New Economic Policy (NEP). The NEP consisted of wide ranging economic reforms. The thrust of the policies was towards creating a more competitive environment in the economy and removing the barriers to entry and growth of firms. This set of policies can broadly be classified into two groups:
The stabilization measures: Stabilization 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.
The structural reform measures: 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 heads viz., liberalization, privatization and globalization.
Liberalization
It means removing all unnecessary control and restrictions like permits licenses, protectionist duties quotas etc. In other words, It may be defined as the loosening of the government regulation in a country to allow for private sector companies to operate business transactions with fewer restrictions.
Though a few liberalization measures were introduced in the 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive.
The industrial sector, financial sector, tax reforms, foreign exchange markets and trade & investment sectors which received greater attention in and after 1991.
Reforms under Liberalization
Deregulation of Industrial Sector
In India, regulatory mechanisms were enforced in various ways: Industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or to decide the amount of goods that could be produced. Private sector was not allowed in many industries. Some goods could be produced only in small scale industries and Controls on price fixation and distribution of selected industrial products. Reform policies are introduced after 1991 are: Abolition of Industrial Licensing. Contraction off Public Sector. Freedom to Import capital goods.
The only industries which are now reserved for the public sector are defense equipment, atomic energy generation and railway transport( partially opened now). Many goods produced by small scale industries have now been deserved. In many industries, the market has been allowed to determine the prices.
Financial Sector Reforms
The financial sector in India is regulated by the Reserve Bank of India (RBI), all the banks and other financial institutions in India are regulated through various norms and regulations of the RBI.
One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of the financial sector.
The reform policies led to the establishment of private sector banks, Indian as well as foreign. Foreign investment limit in banks was raised to around 50 percent. Those banks which meet or fulfill certain conditions have been given freedom to set up new branches without the approval of the RBI and rationalize their existing branch networks.
Though banks have been given permission to generate resources from India and abroad, certain managerial 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 the government's taxation and public expenditure policies, which are collectively known as its fiscal policy. Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion.
In order to encourage better compliance on the part of taxpayers many procedures have been simplified and the rates also substantially lowered.
Foreign Exchange Reforms
It includes reforms relating to foreign exchange and foreign trade. Now, more often than not, markets determine exchange rates based on the demand and supply of foreign exchange.
Trade and Investment Policy Reforms
Liberalization of trade and investment regime was initiated to increase international competitiveness of industrial production and also foreign investments and technology into the economy. In order to protect domestic industries, India was following a regime of quantitative restrictions(tariffs) on imports.
The trade policy reforms aimed at Dismantling of quantitative restrictions on imports and exports Reduction of tariff rates and Removal of licensing procedures for imports. 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.
Privatization
It implies shedding of the ownership or management of a government owned enterprise. Government companies are converted into private companies in two ways: By withdrawal of the government from ownership and management of public sector companies or By outright sale of public sector companies.
Privatization of the public sector enterprises by selling off part of the equity of PSEs to the public is known as disinvestment. The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernization. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions.
Globalization
It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries. It is turning the world into one whole or creating a borderless world.
Outsourcing
In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country.
In recent times, because of the growth of fast modes of communication, particularly the growth of Information Technology (IT). With the help of modern telecommunication links including the Internet, the text, voice and visual data in respect of these services is digitized and transmitted in real time over continents and national boundaries.
Most of the multinational corporations, and even small companies, are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.
World Trade Organization
World Trade Organization, as an institution, was established in 1995. It replaced the General Agreement on Trade and Tariffs (GATT). GATT was established in1948 with 23 countries as the global trade organization to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes. WTO is expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade. 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.
Indian Economy During Reforms
Growth of an economy is measured by the Gross Domestic Product. The growth of GDP increased from 5.6 percent during 1980-91 to 8.2 percent during 2007-1012.
During the reform period, the growth of agriculture has declined. While the industrial sectors reported fluctuation, the growth of the service sector has gone up. This indicates that the growth is mainly driven by the growth in the service sector.
The Twelve Plan (2012-2017) envisages the GDP growth rate at 9 or 9.5 per cent. In order to achieve such a high growth rate, the agriculture, industrial and service sectors have to grow at the rates of 4 to 4.2, 9.6 to 10.9 and 10 percentage points, respectively. However, some scholars rise apprehensions over the projection of such high rates of growth as unsustainable.
The opening up of the economy has led to rapid increase in foreign direct investment and foreign exchange reserves. Now, India is one of the largest foreign exchange reserve holders in the world.
India is seen as a successful exporter of auto parts, engineering goods, IT software and textiles in the reform period. Rising prices have also been kept under control.
On the other hand, the reform process has been widely criticized for not being able to address some of the basic problems facing our economy especially in the areas of employment, agriculture, industry, infrastructure development and fiscal management.
Growth and Employment
Though the GDP growth rate has increased in the reform period, the reform-led growth has not generated sufficient employment opportunities in the country.
Reforms in Agriculture
Reforms have not been able to benefit agriculture, where the growth rate has been decelerating. Public investment in the agriculture sector has been reduced in the reform period. The removal of fertilizer subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers.
A number of policy changes such as reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative restrictions on agricultural products.
Export- oriented policy strategies in agriculture, there has been a shift from production of food grains to cash crops. Therefore pressure on food grains.
Reforms in Industry
Industrial growth has also recorded a slowdown. This is because of decreasing demand of industrial products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc.
Globalization is, thus, often seen as creating conditions for the free movement of goods and services from foreign countries that adversely affect the local industries and employment opportunities in developing countries.
Moreover, a developing country like India still does not have the access to developed countries markets because of high non-tariff barriers. For Example, although all quota restrictions on exports of textiles and clothing have been removed in India, U.S.A. has not removed their quota restriction on import of textiles from India and China
Disinvestment
Every year, the government fixes a target for disinvestment of PSEs. Critics point out that the assets of PSEs have been undervalued and sold to the private sector. This means that there has been a substantial loss to the government.
Moreover, the proceeds from disinvestment were used to offset the shortage of government revenues rather than using it for the development of PSEs and building social infrastructure in the country.
Reforms and Fiscal Policies
Economic reforms have placed limits on the growth of public expenditure especially in social sectors. The tax reductions in the reform period, aimed at yielding larger revenue and to curb tax evasion, have not resulted in an increase in tax revenue for the government. Also, the reform policies involving tariff reduction have curtailed the scope for raising revenue through customs duties. In order to attract foreign investment, tax incentives were provided to foreign investors which further reduced the scope for raising tax revenues. This has a negative impact on developmental and welfare expenditures.
Share
& Comment
Tweet