LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

INTRODUCTION

• After independence, India followed a planned and mixed economic system.
• The government played a dominant role in economic activities.
• Over time, this system resulted in:
  • Low economic growth
  • Inefficiency in public sector
  • Fiscal deficit
  • Balance of payments crisis
• In 1991, India introduced economic reforms.
• These reforms are known as Liberalisation, Privatisation and Globalisation (LPG).
• The aim was to make the Indian economy:
  • More competitive
  • Market-oriented
  • Integrated with the global economy

BACKGROUND (WHY ECONOMIC REFORMS WERE INTRODUCED)

1. Indian Economy Before 1991

• Heavy government control over industries
• Industrial licensing system (License Raj)
• Restrictions on:
  • Foreign investment
  • Imports
  • Private sector participation
• Dominance of public sector enterprises

2. Economic Problems in the Late 1980s

a) Low Economic Growth

• Growth rate was slow and unstable.
• Known as the “Hindu Rate of Growth” (around 3–4%).

b) Fiscal Deficit

• Government expenditure exceeded revenue.
• Increased borrowing led to rising public debt.

c) Balance of Payments Crisis

• Imports exceeded exports.
• Foreign exchange reserves fell drastically.
• In 1991, India had reserves sufficient for only two weeks of imports.

d) Inflation

• Continuous rise in prices reduced purchasing power.
• Affected poor and middle-class families.

e) Inefficiency of Public Sector

• Many public sector enterprises were:
  • Overstaffed
  • Loss-making
  • Poorly managed

3. International Pressure

• India approached International Monetary Fund (IMF) and World Bank for financial assistance.
• These institutions suggested:
  • Structural reforms
  • Opening up of the economy

4. Adoption of New Economic Policy (1991)

• Introduced by the Government of India.
• Based on three pillars:
  • Liberalisation
  • Privatisation
  • Globalisation

LIBERALISATION

Meaning of Liberalisation

• Liberalisation means reducing government control and restrictions on economic activities.
• Objective: Increase efficiency, productivity, and competition.

Objectives of Liberalisation

• End the License Raj
• Encourage private sector participation
• Increase competitiveness
• Improve efficiency of industries
• Promote economic growth

Major Liberalisation Measures

1. Abolition of Industrial Licensing

• Most industries were freed from licensing requirements.
• Entrepreneurs could start businesses without prior government approval.
• Only a few industries like:
  • Defence
  • Atomic energy
  • Hazardous chemicals required licenses.

2. Reduction in Import Duties

• Import duties and tariffs were reduced.
• Made foreign goods cheaper and accessible.
• Increased competition for domestic industries.

3. Deregulation of Industrial Sector

• Removal of restrictions on:
  • Expansion
  • Production capacity
• Firms could decide output based on market demand.

4. Financial Sector Reforms

• Reduced control over banks.
• Introduction of private and foreign banks.
• Interest rates deregulated.
• Improved efficiency and transparency.

5. Tax Reforms

• Reduction in corporate and personal income tax rates.
• Simplification of tax structure.
• Broadened tax base.

Impact of Liberalisation

Positive Effects

• Increased competition
• Improvement in efficiency
• Growth of private sector
• Better quality goods and services

Negative Effects

• Small industries faced stiff competition
• Some industries became uncompetitive
• Increased unemployment in certain sectors

PRIVATISATION

Meaning of Privatisation

• Privatisation refers to reducing government ownership and increasing private sector participation in economic activities.

Objectives of Privatisation

• Improve efficiency
• Reduce fiscal burden on government
• Encourage competition
• Increase productivity

Forms of Privatisation

1. Disinvestment

• Selling government shares in public sector enterprises.
• Government retains partial ownership.

2. Complete Privatisation

• Transfer of ownership and management to private sector.

3. Outsourcing

• Contracting out services to private agencies.

Reasons for Privatisation

• Public sector inefficiency
• Heavy losses and poor performance
• Political interference
• Overstaffing

Advantages of Privatisation

• Better management
• Increased efficiency
• Profit-oriented approach
• Technological upgradation
• Reduced government burden

Criticism of Privatisation

• Profit motive may ignore social welfare
• Job insecurity for workers
• Concentration of economic power
• Neglect of backward regions

GLOBALISATION

Meaning of Globalisation

• Globalisation refers to integration of the Indian economy with the world economy.
• Free flow of:
  • Goods
  • Services
  • Capital
  • Technology
  • Information

Objectives of Globalisation

• Increase foreign investment
• Promote exports
• Access to global markets
• Technological advancement

Measures of Globalisation

1. Reduction of Trade Barriers

• Lower tariffs and quotas.
• Easier import and export procedures.

2. Promotion of Foreign Investment

• Allowing Foreign Direct Investment (FDI).
• Entry of multinational corporations (MNCs).

3. Liberal Foreign Exchange Policy

• Market-determined exchange rate.
• Easier availability of foreign exchange.

4. Role of WTO

• India became a member of the World Trade Organization.
• Followed global trade rules and agreements.

Impact of Globalisation

Positive Effects

• Increased foreign investment
• Better technology
• Employment generation in services
• Increased consumer choices

Negative Effects

• Threat to domestic industries
• Cultural homogenisation
• Unequal distribution of benefits
• Environmental issues

INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT

1. Growth of GDP

• Significant improvement in economic growth.
• India became one of the fastest-growing economies.

2. Agricultural Sector

• Growth remained slow.
• Reduction in public investment.
• Dependence on monsoon continued.

3. Industrial Sector

• Increased competition improved efficiency.
• Growth uneven across industries.

4. Service Sector

• Fastest-growing sector.
• IT, banking, telecom, tourism expanded rapidly.

5. Employment

• Growth was not employment-intensive.
• Rise in informal sector jobs.
• Job insecurity increased.

6. External Sector

• Exports increased.
• Foreign exchange reserves improved.
• India integrated with global economy.

7. Social Impact

Positive

• Reduction in poverty ratio
• Rise in middle class
• Better access to goods and services

Negative

• Rising income inequality
• Regional imbalance
• Marginalisation of small farmers and workers

CONCLUSION

• Economic reforms marked a turning point in India’s development strategy.
• LPG policies helped India:
  • Achieve higher growth
  • Integrate with global economy
  • Improve efficiency
• However, reforms also led to:
  • Inequality
  • Job insecurity
  • Neglect of agriculture
• Reforms should be:
  • Inclusive
  • Balanced
  • Focused on social welfare
• Sustainable development requires combining economic growth with equity and social justice.