Chapter: Liberalisation, Privatisation, and Globalisation: An Appraisal
Introduction
India followed a mixed economy model post-independence, blending capitalism and socialism.
Over the years, this resulted in an economy bound by various rules and regulations that hindered growth.
Despite achievements like food security, industrial diversification, and agricultural expansion, by 1991, India faced a severe economic crisis.
The crisis, compounded by rising prices and a debt burden, led to the introduction of new economic policies focusing on reforms.
Background
The 1980s saw inefficient economic management.
The government funded development programs by borrowing from both domestic and international sources.
Government expenditures exceeded revenues, and foreign exchange reserves dropped drastically.
Imports continued to grow without matching exports, pushing India towards a Balance of Payments (BoP) crisis.
India approached the International Monetary Fund (IMF) and the World Bank for loans and had to agree to their conditionalities to liberalize the economy.
Liberalisation
Liberalisation aimed to reduce government control and open various sectors to the market.
Major reforms were introduced in areas like:
3.1 Deregulation of the Industrial Sector
Earlier, industrial licensing required government permission to start a firm, decide production levels, or shut down businesses.
Reforms abolished licensing for most industries except a few (e.g., alcohol, explosives, and drugs).
Price controls and restrictions on the private sector were also lifted.
3.2 Financial Sector Reforms
The financial sector, traditionally controlled by the Reserve Bank of India (RBI), saw significant changes:
Banks were given more autonomy.
Private sector banks (Indian and foreign) were allowed to enter the market.
Foreign Institutional Investors (FIIs) were encouraged to invest in Indian financial markets.
3.3 Tax Reforms
Tax reforms focused on reducing direct taxes (personal and corporate) to curb tax evasion and encourage compliance.
Indirect taxes (levied on goods and services) were simplified.
The introduction of the Goods and Services Tax (GST) aimed to create a unified market by replacing various indirect taxes.
3.4 Foreign Exchange Reforms
In 1991, the rupee was devalued, which increased foreign exchange inflows and set the stage for market-driven exchange rates.
3.5 Trade and Investment Policy Reforms
Import restrictions were reduced, and tariff rates were cut to promote competition.
Export duties were removed, and licensing requirements for imports were largely abolished to increase India's global trade competitiveness.
Privatisation
Privatisation refers to transferring ownership or management of public sector enterprises (PSEs) to private players.
4.1 Disinvestment
The government began selling part of its stake in PSEs through disinvestment.
The goal was to improve financial discipline, bring in private investment, and facilitate modernization.
However, critics argued that many PSEs were sold at undervalued prices, causing a loss to the government.
4.2 Autonomy for PSEs
To enhance their efficiency, profitable PSEs were granted greater autonomy and categorized as Maharatnas, Navratnas, and Miniratnas based on their performance.
These PSEs could make managerial decisions independently, improving their competitiveness in a liberalized economy.
Globalisation
Globalisation is the integration of the Indian economy with the global economy.
5.1 Outsourcing
Outsourcing refers to hiring services from other countries. It became common in industries like IT, where Indian firms offered cost-effective solutions to global companies.
5.2 Role of the WTO
India became a member of the World Trade Organisation (WTO) in 1995, committing to trade liberalization and ensuring equal access to global markets.
Indian Economy During Reforms: An Assessment
Since 1991, India's GDP growth has been significant, with the service sector growing the fastest.
6.1 Growth and Employment
While GDP grew, critics argue that employment generation did not match the growth rate. Industrial growth slowed due to cheap imports and infrastructure constraints.
6.2 Agricultural Sector
Public investment in agriculture decreased, resulting in lower productivity. Additionally, small farmers faced higher production costs due to fertilizer subsidy cuts.
6.3 Industrial Sector
The industrial sector saw fluctuating growth, facing competition from foreign goods and inadequate infrastructure.
6.4 Foreign Exchange and Investment
Foreign Direct Investment (FDI) and foreign exchange reserves grew significantly. India became a major exporter of IT services, textiles, and pharmaceuticals.
Conclusion
The economic reforms of 1991 introduced liberalisation, privatisation, and globalisation, which reshaped the Indian economy.
While the reforms achieved higher growth and increased foreign investment, challenges remain, especially in the agricultural and industrial sectors.
