Economic Reforms: Liberalisation, Privatisation and Globalisation (LPG)

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Economic Reforms Liberalisation, Privatisation
and Globalisation (LPG)
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• The Economic crisis of June 1991
• In 1991, a crisis in the balance of payments,
  fiscal imbalance, and domestic price rise led to
  the introduction of economic reforms in the
  country.
• 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 country met with an economic crisis relating
  to its debt. Particularly, the government was not
  able to make repayments on its borrowings (dollar
  denominated) from abroad
• Fiscal deficit reached a level of 7.7 of GDP in
  1990-91.

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• The country had to pledge 67 tons of gold to
  external agencies to raise a loan of USD 605
  million to tide over balance of payments crisis.
• Rising prices of essential goods- inflation rate
  13-14 .
• All this led the government to introduce a new
  set of policy measures (economic reforms) which
  changed the direction of our developmental
  strategies.
• Liberalisation, Privatisation, and Globalisation
  (LPG) have been the three pillars of the economic
  reforms process initiated by then government and
  furthered by successive governments thereafter.
  

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Liberalisation
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Liberalisation  

• It is the process of liberating economy from
  various regulatory and control mechanisms of the
  state and of giving greater freedom to private
  enterprise.
• Under the process of economic reforms,
  liberalisation has taken place in almost all
  major sectors of the economy including industry
  (manufacturing), services, infrastructure,
  banking, capital markets, taxation, and external
  sector (foreign trade and investments).
• It allows greater flexibility, reduces cost /
  product prices and saves effort of business
  enterprises. It increases efficiency, and
  competitiveness of business. It fosters
  innovation and results into better products.
  Therefore above all, it serves the consumer
  better.

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Multiple forms of liberalisation

• Delicensing (industrial license required only in
  six industries)
• Dereservation of industries earlier reserved for
  public sector / small scale sector.
• Reduction in quantum of administrative controls /
  clearances for economic activity.
• Freedom to public sector undertakings (PSUs) to
  access capital markets.
• Corporatisation of departmental undertakings
• Permission to corporates for buy-back of shares
• Increase in investment ceiling of small-scale
  enterprises

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Multiple forms of liberalisation (contd.)

• Liberalisation of tax provisions
• Operational freedom to banks to enter insurance
  sector, open new branches / introduce new
  products, set their lending rates. Reduction in
  reserve ratios (CRR / SLR).
• Shifting of products and industries from
  administered price mechanism.
• Freedom in distribution of select industrial
  products.
• Conversion of the excise system from specific to
  ad valorem rates and adoption of value-added tax
  (VAT).
• Simplification of tax structure/procedures,
  reduction of taxes.

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Multiple forms of liberalisation (contd.)

• Tax exemptions, holidays, and concessions.
• Phased manufacturing programme discontinued.
• Removal of mandatory convertibility clause.
• Softening of MRTP regulations.
• Foreign exchange reforms (devaluation free
  exchange rate).

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Privatisation
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Privatisation

• Expresses faith in market system and its forces.
• Is not merely transfer of ownership of government
  owned assets into private hands.
• It also refers to a process in which major
  economic decisions concerning production,
  exchange, distribution and consumption are
  entrusted to the market forces and decisions are
  taken by a large number of individual and private
  units.
• It thus gives freedom to own and operate business
  assets and take market driven independent
  decisions.
• It generates competition. Market mechanism (an
  integral part of privatisation) takes care of the
  allocative function in the economy.

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Forms of Privatisation

• Divestiture, i.e. sale of govt. equity, in full
  or part, held in public sector undertakings to
  private cos./individuals.
• Franchising of public sector services to
  designated private companies.
• Licensing of technology of public sector units to
  private enterprises.
• De-reservation of industries /economic activities
  earlier reserved exclusively for public sector
  i.e. private sector allowed to enter into those
  reserved activities (roads, shipping ports,
  airports, insurance, power transmission
  distribution, telecommunications etc.).

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Forms of Privatisation

• Privatisation of management in which govt.
  retains ownership but management is entrusted to
  private hands through lease or management
  contracts.
• Freedom to banks to determine their own lending
  rates in view of market trends.
• Freeing of deposit rates of banks (subject to
  ceilings).
• Freeing of a number of products from administered
  price mechanism.
• Contracting out number of services by public
  sector units (like catering in Railways,
  electricity/water/telephone bill payments etc.)
  to private enterprises.

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• Most of the above measures discussed above
  counted both for liberalisation as well as
  privatisation. Nevertheless, together, these
  represent marketisation of the economy in which
  free private enterprise has a larger role to
  play.

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Globalisation
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Globalisation

1. It is a process of global integration of
   products, technology, labour, investment,
   information, and even cultures. It tends to
   narrow down international differences in prices,
   wage rates, and interest rates.
2. Share of foreign trade in national income
   (GDP) of an economy (foreign trade orientation)
   is an important indicator of the extent of its
   globalisation.
3. Globalisation of business takes place through
   international trade, foreign investment, joint
   ventures, international licensing, franchising,
   sub-contracting, international horizontal and
   vertical integration of industries, strategic
   alliances, international market sharing
   agreements, advertising and information exchange.
   

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Globalisation (contd.)

1. Argument for globalisation is based on gains
   from trade
2. Globalisation expresses desirability for foreign
   capital and considers it complementary to
   domestic investment.
3. It opens new business opportunities, encourages
   competition, provides spin-off advantages, and
   enhances knowledge.
4. Necessary safeguards, however, have to be
   provided to reduce its adverse effects in form of
   dumping, external dependence, erosion of economic
   sovereignty, and deterioration of balance of
   payments.

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Globalisation (contd.)

• Globalisation, as part economic reforms in India
  (post 1991), is a result of
• Internal economic compulsions
• External pressure from international community
  particularly from institutions like IMF, the
  World Bank, and the WTO
• As well as trend towards globalisation in a
  number of developing countries.

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• Measures towards Globalisation in India, post
  1991
• Allowing foreign capital, technology, and
  workforce to participate in Indian economy.
• Offering incentives to MNCs and NRIs to invest in
  India
• Increase in the limit of foreign direct
  investment (FDI) in number of sectors
• Creation of Foreign Investment Promotion Board as
  separate body to study and clear FDI proposals on
  fast track basis
• Sustained reduction in the customs duty rates on
  a number of import items

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• Continued -
• Decanalising oil, agricultural products, ores
  trade
• Free import of a large number of items through
  open general license
• Reduction / elimination of Quantitative
  Restrictions (QRs) on a number of import items
  (715 goods w.e.f. 2001)
• Simplification and standardization of a number of
  export-import procedures and documentation
• Establishment of Special Economic Zones (SEZ)
• Wide range of facilities and incentives to
  export-oriented units (EOU)

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• Continued -
• Replacement of Foreign Exchange Regulation Act
  (FERA) with more liberal Foreign Exchange
  Management Act (FEMA), 1999.
• Permitting Indian companies to collaborate with
  foreign companies in the form of foreign joint
  ventures (FJVs)
• Full convertibility of rupee in current account
• Allowing the rupee to determine its own exchange
  rate in the international market without official
  intervention
• Allowing foreign institutional investors (FIIs)
  to invest in Indian capital market

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• Continued -
• Allowing Indian companies to procure funds from
  foreign countries through Euro Issues and
  Global Deposit Receipts (GDR)
• Allowing Indian Mutual funds to invest in foreign
  companies
• Permission to exporters to keep foreign exchange
  accounts abroad to finance trade transactions