liberalisation privatisation and globalisation

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liberalisation privatisation and globalisation Introduction

You have studied in the previous chapter that, since independence, India followed the mixed economy framework by combining the advantages of the capitalist economic system with those of the socialist economic system.

Some scholars argue that, over the years, this policy resulted in the establishment of a variety of rules and laws, which were aimed at controlling and regulating the economy, but ended up instead in hampering the process of growth and development.

liberalization privatisation and globalization Others state that India, which started its developmental path from near stagnation, has since been able to achieve growth in savings, developed a diversified industrial sector that produces a variety of goods, and has experienced a sustained expansion of agricultural output which has ensured food security.

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 petroleum 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 measures.

liberalisation privatisation and globalisation Important Notes

  1. Liberalization:
    • Definition: Liberalization refers to the relaxation of government regulations and restrictions in various sectors of the economy.
    • Objectives: It aims to promote economic efficiency, competitiveness, and innovation by allowing market forces to play a greater role.
    • Key Aspects: Liberalization often involves deregulation of industries, removal of trade barriers, and easing of restrictions on foreign investment.
    • Impact: Liberalization can lead to increased competition, improved productivity, and higher economic growth rates. However, it can also result in challenges such as income inequality and market volatility.
  2. Privatization:
    • Definition: Privatization involves the transfer of ownership and control of state-owned enterprises (SOEs) to private individuals or entities.
    • Objectives: Privatization aims to enhance efficiency, reduce government intervention in the economy, and raise funds for the government.
    • Methods: Privatization can occur through methods such as public offerings, asset sales, or strategic partnerships with private companies.
    • Impact: Privatization can lead to increased competition, improved service quality, and greater innovation in formerly state-controlled industries. However, it can also result in job losses and concerns about equity and access to essential services.
  3. Globalization:
    • Definition: Globalization refers to the interconnectedness and integration of economies, societies, and cultures on a global scale.
    • Key Aspects: Globalization involves the free flow of goods, services, capital, information, and people across national borders.
    • Drivers: Technological advancements, trade liberalization, and deregulation have accelerated the pace of globalization.
    • Impact: Globalization can create opportunities for economic growth, investment, and cultural exchange. However, it can also lead to challenges such as income inequality, cultural homogenization, and environmental degradation.

liberalisation privatisation and globalisation Explanation


The origin of the financial crisis can be traced back to the inefficient management of the Indian economy in the 1980s. For implementing various policies and general administration, the government generates funds from various sources such as taxation and running of public sector enterprises.

When expenditure exceeds income, the government borrows to finance the deficit from banks, as well as from people within the country and from international financial institutions. When importing goods like petroleum, payment is made in dollars earned from exports.

Development policies required that, even though revenues were very low, the government had to overspend its revenue to meet challenges like unemployment, poverty, and population explosion. Continued spending on government development programs did not generate additional revenue. Moreover, the government was not able to

generate sufficiently from internal sources such as taxation. When the government was spending a large share of its income on areas that do not provide immediate returns, such as the social sector and defense, there was a need to utilize the rest of its revenue in a highly efficient manner.

The income from public sector undertakings was also not very high to meet the growing expenditure. At times, our foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs. Neither was an attempt made to reduce such profligate spending nor sufficient attention given to boost exports to pay for the growing imports.

In the late 1980s, government expenditure began to exceed its revenue by such large margins that meeting the expenditure through borrowings became unsustainable. Prices of many essential goods rose sharply. Imports grew at a very high rate without matching the growth of exports.

As pointed out earlier, liberalisation privatisation and globalisation foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks. There was also not sufficient foreign exchange to pay the interest that needed to be paid to international lenders. Additionally, no country or international funder was willing to lend to India.

India approached the International Bank for Reconstruction and Development (IBRD), popularly known as the World Bank, and the International Monetary Fund (IMF).

and received $7 billion as a loan to manage the crisis. For availing the loan, these international agencies expected India to liberalize and open up the economy by removing restrictions on the private sector, reducing the role of the government in many areas, and removing trade restrictions between India and other countries.

India agreed to the conditionalities of the 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 and the structural reform 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. In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and keep rising prices under control.

On the other hand, liberalisation privatisation and globalisation 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


As pointed out in the beginning, rules, and laws aimed at regulating economic activities became major hindrances in growth and development. Liberalization was introduced to put an end to these restrictions and open various sectors of the economy.

Though a few liberalization measures were introduced in the 1980s in areas such as industrial licensing, export-import policy, technology upgradation, fiscal policy, and foreign investment, reform policies initiated in 1991 were more comprehensive.

Let us study some important areas, such as the industrial sector, financial sector, tax reforms, foreign exchange markets, and trade and investment sectors, which received greater attention in and after 1991.

Deregulation of the Industrial Sector:
In India, regulatory mechanisms were enforced in various ways:

  1. Industrial Licensing: Every entrepreneur had to get permission from government officials to start a firm, close a firm, or decide the amount of goods that could be produced.
  2. Restrictions on the Private Sector: Private sector participation was restricted in many industries.
  3. Emphasis on Small-Scale Industries: Some goods could be produced only in small-scale industries.
  4. Controls on Price Fixation and Distribution: Controls were imposed on price fixation and distribution of selected industrial products.

The reform policies introduced in and after 1991 removed many of these restrictions. Industrial licensing was abolished for almost all product categories, except for alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals.

The only industries now reserved for the public sector are a part of atomic energy generation and some core activities in railway transport. Many goods produced by small-scale industries have now been dereserved. In most industries, the market has been allowed to determine prices.

Financial Sector Reforms:
The financial sector includes financial institutions such as commercial banks, investment banks, stock exchange operations, and foreign exchange markets. The financial sector in India is regulated by the Reserve Bank of India (RBI).

All banks and other financial institutions in India are regulated through various norms and regulations of the RBI. The RBI decides the amount of money that banks can keep with themselves, fixes interest rates, and determines the nature of lending to various sectors.

One of the major aims of financial sector reforms is to reduce the role of the RBI from regulator to facilitator of the financial sector. This means that the financial sector may be allowed to make decisions on many matters without consulting the RBI.

The reform policies led to the establishment of private sector banks, both Indian and foreign. The foreign investment limit in banks was raised to around 74 percent. Banks that fulfill certain conditions have been given the freedom to set up new branches without the approval

of the RBI and rationalize their existing branch networks. Although banks have been permitted 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 involve reforms in the government’s taxation and public expenditure policies, collectively known as its fiscal policy. There are two types of taxes: direct and indirect. Direct taxes consist of taxes on the incomes of individuals, as well as profits of business enterprises.

Since 1991, there has been a continuous reduction in taxes on individual incomes, as it was felt that high rates of income tax were an important reason for tax evasion. It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income. The rate of corporation tax, which was very high earlier, has been gradually reduced. Efforts have also been made to reform indirect taxes, taxes levied on commodities, in order to facilitate the

Establishment of a Common National Market:
In 2016, the Indian Parliament passed a law, Goods and Services Tax Act 2016, to simplify and introduce a unified indirect tax system in India. This law came into effect in July 2017. It is expected to generate additional revenue for the government, reduce tax evasion, and create a ‘one nation, one tax, and one market’ scenario.

Another component of reform in this area is simplification. To encourage better compliance on the part of taxpayers, many procedures have been simplified and the tax rates substantially lowered.

Foreign Exchange Reforms:
The first important reform in the external sector was made in the foreign exchange market. In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies.

This led to an increase in the inflow of foreign exchange. It also set the tone to free the determination of rupee value in the foreign exchange market from government control. 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 the trade and investment regime was initiated to increase the international competitiveness of industrial production and attract foreign investments and technology into the economy. The aim was also to promote the efficiency of local industries and the adoption of modern technologies.

Privatization and Foreign Direct Investment (FDI):
The government envisaged that privatization could provide a strong impetus to the inflow of Foreign Direct Investment (FDI). Additionally, efforts have been made to improve the efficiency of Public Sector Undertakings (PSUs) by granting them autonomy in making managerial decisions. For instance, some PSUs have been granted special status as Maharatnas, Navratnas, and Miniratnas.


Although globalization is generally understood to mean the integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves the creation of networks and activities transcending economic, social, and geographical boundaries.

liberalisation privatisation and globalisation

Links in such a way that the happenings in India can be influenced by events happening miles away. It is turning the world into one whole or creating a borderless world.

This is one of the important outcomes of the globalization process. In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country (like legal advice, computer service, advertisement, security — each provided by respective departments of the company).

As a form of economic activity, outsourcing has intensified, in recent times, because of the growth of fast modes of communication, particularly the growth of Information Technology (IT). Many of the services such as voice-based business processes (popularly known as BPO or call centers), record keeping,

accountancy, banking services, music recording, film editing, book transcription, clinical advice, or even teaching are being outsourced by companies in developed countries to India. 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 multinational corporations, and even small companies, are outsourcing their services to India where they can

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