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Class 11 Economics Chapter 3 Liberalisation Privatisation and Globalisation Notes

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Economic reforms are the long term dynamic combination of policies and programme for the speedy growth, efficiency in production and make a competitive environment.

Question: Why did government of India announced new economic policy in 1991?

                          Or

What is the need of adopting economic reform in India in 1991?

Answer:- Before 1991, the condition of Indian economy was in a state of crises. The economy was nearly in the condition of getting collapse.

♦ Fall in foreign exchange reserve

Due to the process of industrialization the imports of the economy grew much faster than the amount of exports. Increase in imports reduces the foreign exchange reserve of the economy.

♦ Failure of Public sector

One of the most important factors which led to the economic reforms is the low rate of development of public sector undertakings. The low rate of development causes massive poverty and unemployment in the economy.

♦ Hign fiscal deficit

Fiscal deficit refers to borrowing by the government on account of the excess of its expenditure over revenue during a year.
It was estimated to be 5.4% of GDP in 1981-82 and increase to 8.4% of GDP in 1990-91. It represents the poor financial condition of the economy.

♦ Deficit in Balance of payment

Balance of payment refers to the satistical statement of receipt and payment of country with rest of the world in an accounting year Due to slow growth of exports and huge increment in imports the balance of payment of our economy remains in deficit (Foreign payments>Foreign receipts)

In order to eliminate the situation of crises from Indian economy, Prime Minister P.V.Narsimha roa along with the finance minister Dr. Manmohan Singh introduced the new economic policy in 1991.
It includes

1. Liberalization

2. Privatization

3. Globilization

The set of policies introduced by the government is placed under 2 different groups (popularly known as measures of new economic policy)

♦ Stabilization measures

It refers to short time policies/measures which aim at correcting the deficit in balance of payment and controlling the inflation

♦ Structural reform measures

It refers to long term measures aims at improving the efficiency of economy and increasing the international competitiveness.
Elements of New Economic Policy

1. Liberalization

The removal of entry and growth restrictions on private sector enterprises or the removal of trade barriers is known as liberalization.
Before 1991, government imposed many restrictions on private enterprises which restricts them to take risk or to get indulge in a big project.
According to the policy of 1991, the government tries to remove such barriers so that the private sector of the economy shall grow.
In order to get liberalized, government introduced

I. Industrial sector reform II. Financial sector reform III. Fiscal reform
IV. Foreign exchange reform
V. Trade and investment policy reforms

I. Industrial sector reforms

Under industrial sector, government provides liberalization in the following ways
                       
♦ Reducing industrial licensing

The new economic policy abolished the requirement of licensing except for the following five industries, i.e, liquor, cigarette, defence equipments, industrial explosives and dangerous chemicals.
                   
 ♦  Decreasing the role of public sector

The number of industries reserved for public sector isnow reduced for 17 to 3 i.e., defence equipments, atomic energy generations and railways. 

♦  Making MRTP act (Monopoly restrictive trade practice act,1970) more liberal

Now big industrialist are no longer required to seek prior government approval for expansion and established of new industries.
 
♦ Freedom to import capital goods

Indian industrialist will be free to import machinery or raw material for rest of the world. In order to expand and to modernize their industries.

II. Financial sector reforms

♦ Establishment of private sector bank

According to this policy private sector will now be able to open up a bank in

India as well as in rest of the world. The basic purpose of adoption this policy is to increase competition which ultimately leads to lower rate of interest and good quality of service.

♦ Changing the role of Reserve Bank of India

The role of RBI is now changed from regulator to facilitator of financial sector. It means that the financial sector can take decision on many matters without consulting from RBI.

♦ Foreign investment limit

Foreign investment limit in banks was increased upto 51%, i.e., foreign investment are allowed to invest in Indian financial markets.
♦After fulfilling certain conditions, banks were given freedom to set up new branches and rationalize existing branches without any approval of RBI.

♦ Ease of expansion

After fulfilling certain conditions, banks were given freedom to set up new branches and rationalize existing branches without any approval of RBI.

III. Fiscal reforms or tax reforms

It refers to the reforms in government taxes and public expenditure policies.

It is the compulsory payment made by the citizen of a country to the government without receiving any direct benefit in return.

Taxes are of 2 types:-

♦ Direct tax:-

They are those taxes that are imposed on property and income of an individual or a company, and are paid directly by them to the government.
Example:- Income tax, Corporate tax, wealth tax etc.

♦ Indirect tax:-

They are those taxes which affects the income and property of individuals and companies through their consumption expenditure.

They are imposed on goods and services.

Example:- GST (Goods and Service tax), Excise duty etc.

Reduction in Direct tax

The rate of direct tax is reduced so that it encourage the citizen to promote saving and voluntary disclosure of income.
The government also regulate and reduce the rate of indirect tax, so that a common national market for goods and services can be established.
The process of taxation is also simplified so that a common man can easily understand and accept the structure.

IV. Foreign exchange reforms

It refers to the rate at which the currency of one country is exchanged with the currency of other country.
Foreign exchange rate measures the number of units of currency required to exchange with one unit of other currency.
Example:- 1$ = 62 rupees

The above rate means that 62 rupees are required to exchange with 1 dollar. The foreign exchange reform was introduced in order to bring stability in import and export and to stabilize the crises of balance of payment.
The reforms are

♦ Devaluation of Rupee:-

Devaluation refers to decrease in the value of domestic currency by the government.
In order to attract foreign investors and to increase the amount of foreign exchange the government reduces the value of domestic currency.

♦ Adopting Flexible exchange rate system

It refers to a system in which the exchange rate is determined by the forces of demand and supply of different currencies in the foreign exchange market. I.e., the currency which is in demand, has higher exchange rate and the currency whose supply is more, is less valuable and hence it is exchanged at a lower rate.

The value of currency is allowed to fluctuate freely.

V. Trade and investment reforms

Before 1991, heavy tariff and quota system was implemented by the government to protect domestic industries. But this policy results in reduction of efficiency and slow growth of the economy.
So in order to boost up the competition and to foreign investments, government of India implemented trade and investment reforms which are as follows:-
♦ Reduction in Quota (upto maximum possible limit)

♦ Removal of Export duty

♦ Reduction in import duty

♦ Import licensing was abolished (removed)

Except in case of hazardous and environmentally sensitive industries.

2. Privatization

The transfer of ownership right from public sector undertaking to private sector undertaking is known as privatization.
♦ Contraction of public sector According to this policy, the private sector are no longer restricted to entry in any industry (except atomic power, railways and defence).

♦ Government companies have been sold by the central government to private capitalist which were incurring losses in 1991.

♦ Privatization of public sector undertaking (PSU) by selling off part of equity to the public this process is known as disinvestment.

♦ The government has also attempt to improves the efficiency of few PSUs by giving them additional power and freedom to enter joint venture, raise debts etc.

The government has listed 9 public sector undertaking with the name of ‘Navratna Companies’. 

“NAVRATNAS”
 INDIAN OIL
BHARAT PETROLEUM
ONGC
SAIL
HINDUSTAN PETROLEUM
 BHEL
IPCL
VIDESH SANCHAR NIGAM LTD.
} NTPC

3. Globalization

The integration of domestic economy with world economy is known as globalization.
In other words, it may be defined as a process associated with increasing openness, growing economic interdependence and depending economic integration in the world economy.
Policies promoting globalization:-

Increase in limit of equity in foreign investment

The equity limit which was 40% was now upgraded to 51% and even higher. The concept of increasing the limit is to welcome foreign investment and increase the flow of foreign exchange.

♦ Reduction in tariff

The amount of tax imposed on import of goods is also reduced upto the maximum possible limit. So that international competition and technological upgradation can be enjoyed.

♦ Removal of quantitative restrictions

The quota system was abolished by the government of india to promote trade (upto the maximum limit)

India being the member country of World trade Organization (WTO) since april 2001, totally removed the quantitative restrictions on foreign trade.

♦ Partial convertibility of rupee

It refers to a system where in the currency is allowed to determine its own exchange rate in the international market on the basis of demand and supply (without any direct official intervention)
The convertibility of rupee attracts the foreign investors to invest in India.

Outsourcing

This is one of the most important outcomes of globalization. Under this, a company hires regular services from external sources (mostly from other countries) which were previously done internally. The low wage rates, availability of skilled manpower and existence of special economic zones have made it a destination for global outsourcing in the post reform period. The main services which are outsources from India by developing countries are call centres, film editing, music recording, record keeping etc.

Special economic zones (SEZs)

It is an economic zone which was established by the government of India for industrial development.
In such zones various facilities were provided by thegovernment-

♦ Cheap raw materials

♦ Infrastructural facilities

♦ Five year tax free plan

♦ Flexibility in labour laws

Achievements of New Economic policy 1991

♦ Increase in rate of economic growth

The Indian economy was no longer a stagnant economy. The policy of 1991 pulls out the economy from stagnancy to a developing country.
The growth of GDP increases from 5.6% in 1991-91 to 7.6% in 2015-16.

♦ Rise in foreign exchange reserve

Due to relaxation in tariff and increasing the limit of foreign direct investment, the foreign exchange reserve of the economy increases from $3,362 million in
1990 to $25,186 million in 1995.

♦ Foreign investment also increases from $100 million in 1991 to $150 million in 1995.

♦ The rate of inflation also decreases from 17% in 1990 to 6.5% in 2001.

♦ Fiscal deficit of the economy is also reduced from 8.5% to less than 5%.

♦ The deficit in balance of payment also comes under control.

♦ Due to the removal of export duty, the exports of India started to increase.

Demerits of New Economic policy 1991

♦ Neglected agriculture sector as the new economic policy has special emphasizes on industrial and IT sector.

♦ Security of job has been decreased because of entry of FDI and multinational companies.

♦ Small scale and cottage industries has declined because of increase in competition due to globalization.

♦ The metropolitan cities are developed with lacking behind the development of rural areas.

♦ The disinvestment policy was also not favourable for domestic investor.

♦ Leads to unbalanced growth between the sectors.

♦ Spread of consumerism (the promotion of the interests of consumers)

The new policy has been encouraging a dangerous trend of consumerism by encouraging the production of luxuries and items of superior consumption. World

Trade Organization (WTO)

Before WTO, GATT (General agreement of tariff and trade) was established in 1948 with 23 countries as the global trade organization to admister all international trade agreements by providing equal opportunities to all the countries in international market for trading purposes.
The WTO came into existence on 1st January 1995 as the successor organization to the GATT.
The WTO is body incorporated for the purpose of making the whole world a village wherein goods and services can flow without any undue barriers.
The headquarter of WTO is located in Geneva (Switzerland). The WTO has 164 members and 23 observer governments.
The current director-general of WTO is Roberto Azevedo of Brazil (since 1st September 2013).

Role/Functions of WTO

♦ To facilitates international trade.

♦ To provide financial assistance to the member country in international trade.

♦ Always tries to remove the tariff barriers between the countries.

♦ Acts as a watch dog in international trade.

♦ Acts as a forum for trade negotiations.

♦ To provide a platform to member countries to decide future strategies related to trade and tariff.

♦ To administer the rules and processes related to dispute settlement.

Summary

♦ New Economic Policy in 1991

♦ Factors responsible for economic reform

♦ Elements of New Economic Policy

♦ Liberalization

♦ Privatization

♦ Globalization

♦ Stabilization measures

♦ Structural reform measures

♦ Liberalization

♦ Industrial sector reform

♦ Financial sector reform

♦ Fiscal reform

♦ Foreign exchange reform

♦ Trade and investment policy reforms

♦ Privatization

♦ Globalization

♦ Outsourcing

♦ Achievements of New Economic policy 1991

♦ Demerits of New Economic policy 1991

♦ World Trade Organization (WTO)

♦ Role/Functions of WTO