Liberalisation privatisation and globalisation ncert upsc notes

ECONOMIC REFORMS SINCE 1991

• After forty years of planned development, India achieved a strong industrial base and became self-sufficient in food grain production, yet a major segment of the population continued depending on agriculture for livelihood.
• In 1991, a crisis in the balance of payments led to the introduction of economic reforms in the country.

3.1 INTRODUCTION

• Since independence, India followed a mixed economy framework combining features of both capitalist and socialist economic systems.
• Some scholars argue this created numerous rules and regulations that ended up hampering growth and development.
• Others point out positive achievements from near stagnation: growth in savings, a diversified industrial sector producing varied goods, and sustained expansion of agricultural output ensuring food security.
• In 1991, an external debt crisis erupted:
  • The government was unable to make repayments on borrowings from abroad.
  • Foreign exchange reserves dropped to levels insufficient to finance imports for even a fortnight (two weeks).
  • The crisis was further compounded by sharp price rises of essential goods.
• These economic pressures forced the adoption of a new policy framework that fundamentally changed India’s developmental strategies.

3.2 BACKGROUND

• Origin of the Crisis: Inefficient management of the Indian economy during the 1980s.
• Fiscal Imbalance:
  • Government development spending consistently overshot revenues to address issues like unemployment, poverty, and population growth, but failed to generate sufficient additional income.
  • Revenue generation from internal sources like taxation and returns from public sector undertakings were inadequate.
  • Spending on non-immediate return areas like defense and social sectors required efficient resource use, but profligate spending persisted.
  • Foreign exchange reserves borrowed from international institutions and abroad were spent on consumption needs rather than boosting export growth to pay for imports.
• Debt and Solvency Crisis (Late 1980s):
  • Government expenditure exceeded revenue by unsustainable margins.
  • Sharp price increases in essential items occurred alongside rapid import growth unmatched by exports.
  • Foreign exchange reserves were inadequate to finance imports for more than two weeks and insufficient to pay interest due to international lenders.
  • No country or international agency was willing to lend to India.
• Bailout and Conditionalities:
  • India approached the International Bank for Reconstruction and Development (IBRD / World Bank) and the International Monetary Fund (IMF), receiving a $7 billion loan.
  • Conditions attached to the loan required India to:
    • Liberalise and open up the economy.
    • Remove restrictions on the private sector.
    • Reduce the role of the government across many areas.
    • Eliminate trade restrictions between India and other nations.
• New Economic Policy (NEP): India consented to these conditionalities and announced the NEP to remove barriers to firm entry and growth and foster competitive conditions.
• Classification of NEP Policies:
  • Stabilisation Measures: Short-term policies aimed at correcting balance of payments weaknesses and controlling rising inflation (maintaining foreign exchange reserves and price stability).
  • Structural Reform Measures: Long-term policies aimed at improving economic efficiency, removing rigidities across sectors, and raising international competitiveness.
• Reforms were structured under three main pillars: Liberalisation, Privatisation, and Globalisation.

3.3 LIBERALISATION

• Introduced to remove regulatory rules and laws that had become major barriers to growth and development.
• While some piecemeal liberalisation occurred in the 1980s (licensing, export-import policies, technology upgrades, fiscal policy, foreign investment), the 1991 reforms were far more comprehensive.

Deregulation of Industrial Sector

• Prior to 1991, industrial regulation consisted of:
  • Strict industrial licensing to start, close, or expand production.
  • Prohibition of private sector entry in many sectors.
  • Goods reservation exclusively for small-scale industries.
  • Price controls and regulated distribution of selected industrial goods.
• Post-1991 reform changes:
  • Industrial licensing was abolished for almost all product categories, except:
    • Alcohol
    • Cigarettes
    • Hazardous chemicals
    • Industrial explosives
    • Electronics
    • Aerospace
    • Drugs and pharmaceuticals
  • Reservation for the public sector was reduced strictly to parts of atomic energy generation and core activities in railway transport.
  • Many goods produced by small-scale industries were dereserved.
  • Market forces were permitted to determine prices in most industries.

Financial Sector Reforms

• Includes commercial banks, investment banks, stock exchanges, and foreign exchange markets, regulated by the Reserve Bank of India (RBI).
• Shifted the RBI’s role from a regulator to a facilitator, allowing financial entities greater autonomy without mandatory prior consultation.
• Enabled the establishment of private domestic and foreign banks.
• Foreign investment limits in banks were raised to around 74 per cent.
• Banks meeting criteria were granted freedom to open new branches and rationalize networks without RBI approval.
• Banks were permitted to raise resources domestically and abroad, while RBI retained certain managerial oversights to safeguard depositors and national interests.
• Foreign Institutional Investors (FIIs) such as merchant bankers, mutual funds, and pension funds were permitted to invest in Indian financial markets.

Tax Reforms

• Addressed government taxation and public expenditure policies (fiscal policy).
• Direct Taxes: Continuous cuts in personal income tax rates since 1991, based on the rationale that high rates caused tax evasion while moderate rates promote savings and voluntary compliance. Corporation tax rates were gradually reduced.
• Indirect Taxes: Reformed to facilitate the establishment of a common national market.
• Goods and Services Tax (GST): A 2016 constitutional amendment empowered Union and State governments to enact GST laws to generate revenue, curb evasion, and realize ‘one nation, one tax and one market’.
• Procedures were simplified and tax rates substantially lowered to enhance overall tax compliance.

Foreign Exchange Reforms

• The rupee was immediately devalued against foreign currencies in 1991 to resolve the balance of payments crisis and stimulate foreign exchange inflows.
• Set the foundation for freeing exchange rate determination from government control, allowing foreign exchange markets to determine rates based on demand and supply.

Trade and Investment Policy Reforms

• Aimed at enhancing international competitiveness of domestic industries, promoting foreign investment, and introducing modern technologies.
• Dismantled previous protectionist policies characterized by high tariffs and quantitative restrictions that had fostered inefficiency.
• Specific measures:
  • Dismantled quantitative restrictions on imports and exports.
  • Reduced tariff rates across sectors.
  • Abolished import licensing, except for hazardous and environmentally sensitive goods.
  • Fully eliminated quantitative restrictions on imports of manufactured consumer goods and agricultural products by April 2001.
  • Removed export duties to improve price competitiveness of Indian goods abroad.

3.4 PRIVATISATION

• Defined as shedding government ownership or management of state-owned enterprises.
• Executed via two mechanisms:
  1. Withdrawal of government ownership and management from public sector enterprises.
  2. Outright sale of public sector companies.
• Disinvestment: Selling off portions of Public Sector Enterprises (PSE) equity to the public to enforce financial discipline, facilitate modernization, and utilize private capital and managerial capabilities.
• Envisaged as a means to encourage larger inflows of Foreign Direct Investment (FDI).

Box 3.1: Navratnas and Public Enterprise Policies

• Inspired by the legendary Navratnas of King Vikramaditya’s court, the government designated select PSEs as Maharatnas, Navratnas, and Miniratnas to infuse professionalism, autonomy, and global competitiveness.
• Provided operational, managerial, and financial autonomy to maximize profits.
• Examples:
  • Maharatnas: Indian Oil Corporation Limited (IOCL), Steel Authority of India Limited (SAIL).
  • Navratnas: Hindustan Aeronautics Limited (HAL), Mahanagar Telephone Nigam Limited (MTNL), Indian Railway Catering and Tourism Corporation Limited (IRCTC).
  • Miniratnas: Bharat Sanchar Nigam Limited (BSNL), Airport Authority of India (AAI).
• Originally established in the 1950s–1960s to pursue self-reliance, build infrastructure, provide employment, and deliver goods at nominal costs.
• Critics point out that partial privatization occurred via disinvestment rather than helping them expand as global players; recently, the government resolved to retain them in the public fold while enabling them to access capital markets.

3.5 GLOBALISATION

• Involves integrating the national economy with the world economy, creating networks that transcend economic, social, and geographic boundaries to build a borderless, interdependent world.

Outsourcing

• An outcome of globalisation where companies contract regular services from external/foreign providers previously handled in-house (e.g., legal advice, IT, security, accounting, advertising).
• Accelerated rapidly due to advances in Information Technology (IT) and telecommunications.
• Services outsourced to India include business process outsourcing (BPO/call centres), record keeping, accountancy, banking, music recording, film editing, book transcription, clinical advice, and teaching.
• Voice, visual, and data materials are digitised and transmitted globally in real-time.
• India became a leading outsourcing hub due to low wage rates and the availability of skilled, English-speaking manpower.

Box 3.2: Global Footprint!

• Demonstrates the outward expansion of Indian companies:
  • ONGC Videsh: Projects in 16 countries.
  • Tata Steel: Founded 1907; operations in 26 countries, exports to 50 countries, and employs ~50,000 workers abroad.
  • HCL Technologies: Offices in 31 countries, employing ~15,000 persons abroad.
  • Dr. Reddy’s Laboratories: Expanded from an Indian supplier to operating manufacturing plants and research labs globally.

World Trade Organisation (WTO)

• Founded in 1995 as successor to the General Agreement on Tariffs and Trade (GATT, founded 1948 with 23 countries).
• Objectives: Establish a rule-based multilateral trade regime free of arbitrary trade barriers, expand production and trade of services, ensure optimal resource utilization, and protect the environment.
• Covers trade in goods and services via bilateral and multilateral agreements.
• India’s Role and Perspective:
  • Has actively shaped rules and championed developing nations’ rights.
  • Met commitments by lowering tariffs and removing quantitative import limits.
  • Concerns raised: Trade remains heavily concentrated among developed nations; developing countries face non-tariff barriers and access barriers abroad while being pressured to open their own markets and curb agricultural support.

3.6 INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT

• GDP Growth Trends:
  • Total GDP growth rose from 5.6% (1980–91) to 9.4% in 2021–22.
  • Service sector growth led overall GDP growth throughout the post-reform era.
  • Sectoral growth comparison:
    • Agriculture: Decelerated over the period (3.6% in 1980–91; 3.3% in 1992–2001; 2.3% in 2002–07; 3.2% in 2007–12; 1.5% in 2012–13; 4.2% in 2013–14; 4.8% GVA in 2021–22).
    • Industry: Fluctuated (6.5% in 1980–91; 7.1% in 1992–2001; 9.4% in 2002–07; 7.4% in 2007–12; dropped to 3.6% in 2012–13; recovered to 12.7% GVA in 2021–22).
    • Services: Consistently strong (8.2% in 1980–91; 6.7% in 1992–2001; 7.8% in 2002–07; 10% in 2007–12; 8.1% in 2012–13; 7.8% in 2013–14; 9.2% GVA in 2021–22).
• Foreign Inflows and Reserves:
  • Foreign investment (FDI + FII) surged from ~$100 million in 1990–91 to $23 billion in 2022–23.
  • Foreign exchange reserves rose from ~$6 billion in 1990–91 to $646 billion in 2023–24, placing India among the largest reserve holders globally.
  • India became a major global exporter of auto parts, engineering goods, pharmaceuticals, software, and textiles.

Growth and Employment

• While GDP growth expanded rapidly, it did not create commensurate employment opportunities (jobless growth concerns).

Reforms in Agriculture

• Agriculture was negatively affected by reforms:
  • Public investment fell, especially in critical rural infrastructure (irrigation, power, roads, extension, market facilities).
  • Fertiliser subsidy reductions increased cultivation costs, severely hitting small and marginal farmers.
  • Removal of quantitative import restrictions and tariff cuts increased exposure to international price volatility and competition.
  • Low Minimum Support Prices (MSP) undermined returns.
  • Shift from domestic food crops to export-oriented cash crops exerted upward pressure on food prices.

Reforms in Industry

• Industrial performance experienced slowdowns and volatility:
  • Inflows of cheap foreign imports displaced demand for domestically produced manufactured goods.
  • Domestic producers faced inadequate infrastructure investment (such as irregular power supplies).
  • Non-tariff barriers maintained by developed nations (e.g., persistent US textile quotas on Indian and Chinese goods despite India dropping all quotas) limited export potential.

Disinvestment

• Disinvestment proceeds were often used to cover government revenue deficits rather than funding social infrastructure or PSE modernisation.
• PSE assets were frequently sold below their actual worth, leading to criticism over the loss of valuable public assets.
• Realized receipts: ₹3,040 crore in 1991–92 against a ₹2,500 crore target; approximately ₹46,000 crore mobilized in 2022–23.

Reforms and Fiscal Policies

• Limits were placed on welfare and developmental spending.
• Tax reductions did not produce the anticipated boost in total tax collections.
• Customs tariff cuts curtailed customs revenues.
• Granting tax holidays and incentives to attract foreign investors constrained room for government revenue generation.

Box 3.3: Siricilla Tragedy!

• Power sector reforms led to the discontinuation of subsidised power and substantial increases in power tariffs.
• In the powerloom textile sector of Siricilla (Andhra Pradesh), power cuts reduced production, cutting wages that were tied to output.
• The resulting livelihood crisis led 50 powerloom weavers to commit suicide.

3.7 CONCLUSION

• Debate on Globalisation:
  • Proponents: Present it as an opportunity offering access to global markets, cutting-edge technology, and global reach for domestic enterprises.
  • Critics: View it as an agenda driven by advanced economies that compromises the economic security, identity, and welfare of the poor while widening domestic and global inequality.
• Structural Criticisms in India:
  • The 1991 crisis arose from deep structural inequalities; critics argue externally guided reform packages aggravated these disparities.
  • Gains remained heavily skewed towards high-income brackets.
  • Growth concentrated in specific service niches (IT, telecommunications, hospitality, finance, entertainment, real estate) rather than vital employment-generating sectors like agriculture and manufacturing.

Recap

• India enacted economic reforms in 1991 due to high inflation, an acute foreign exchange drain, unsustainable import bills, and conditionalities attached to assistance from the IMF and World Bank.
• Domestic reforms targeted industrial deregulation and financial sector liberalization; external reforms targeted exchange rate flexibility and import liberalization.
• Disinvestment and opening sectors to private participation aimed to bring financial discipline and efficiency to public enterprises.
• Globalisation integrates the domestic economy with world markets, with outsourcing becoming a predominant phenomenon.
• The WTO seeks to ensure optimal resource utilization via an enforceable, rule-based global trading framework.
• Post-reform GDP growth was propelled primarily by the services sector, while agricultural growth declined and industrial growth fluctuated.
• Agriculture suffered from decreased public investment, subsidy withdrawals, and international competition.
• Industrial growth was undermined by cheap imports, inadequate infrastructure, and market access hurdles in foreign markets.

Reference Ncert Documents

https://ncert.nic.in/textbook/pdf/keec103.pdf