5 Liberalisation

7/28/2019 5 Liberalisation

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LIBERALISATION
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Liberalization (orliberalisation) refers toa relaxation of previous governmentrestrictions, usually in areas of social or

economic policy. In some contexts thisprocess or concept is often, but notalways, referred to as deregulation
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In short economics liberalization means

Open competition

Free trade

Privatisation

End of licensing

End of registration

Freedom of import-export

Freedom of capital investment

Freedom from bureaucratic control

To narrow down the public sector


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Liberalization vs

Democratization There is a distinct difference betweenliberalization and democratization, which areoften thought to be the same concept.Liberalization can take place without

democratization, and deals with acombination of policy and social changespecialized to a certain issue such as theliberalization of government-held property for

private purchase, whereas democratization ismore politically specialized that can arisefrom a liberalization, but works in a broaderlevel of government.liberalization.


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The main aim of liberalisation was todismantle the excessive regulatoryframework which acted as a shackle onfreedom of enterprise. Over the years, the

country had developed a system of license-permit raj. The aim of the new economicpolicy was to save the entrepreneurs fromunnecessary Harassment of seeking

permission from the Babudom (thebureaucracy of the country) to start anundertaking.


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The major purpose of liberalisation was tofree the large private corporate sector formbureaucratic controls. It, therefore, started

dismantling the regime of industriallicensing and controls.


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Liberalisation is a process by which theeconomy is opened up and stringentregulatory measures are relaxed to a large

extent.


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The list of industries in which industrial Licensing is compulsory:

1. Distillation and brewing of alcoholic drinks2. Hazardous chemicals3. Sugar4. Animal fats and oils5. Cigars and Cigarettes of tobacco and manufactured tobacco substitutes6. Petroleum (other than crude) and its distillation products7. Coal and Lignite8. Paper and newsprint except bagasse-based units9. Tanned or dressed fur skins10. Raw hides and skins, leather, chamois leather and patent leather11. Plywood, decorative veneers, and other wood based products12. Asbestos and asbestos-based products

13. Industrial explosives14. Drugs and Pharmaceuticals15 . Electronics, aerospace and defense equipment: all types


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The various dimensions of financialliberalization are:

Abolishing credit controls.

Deregulating interest rates.

Allowing free entry into the banking industry or more

generally into financial services industry.

Making banks autonomous.

Putting banks in private ownership.

Freeing international capital flows.


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Disadvantages

The major problems concerned with liberalization can besummarized as under:

(1) In so far as fiscal deficits are financed by moneycreation and growing, financial liberalization serves toaccelerate inflation which coupled with an over- valuedexchange rate, promotes capital flight.

(2) Liberalisation does raise real interests and results inan increased diversity of financial instruments. Innocent

investors may be taken in by the rather fanciful termsoffered.

(3) Competition is not automatically enhanced. It canlead to domination by big institution that has market

controlling powers.
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(4) Distortions in credit allocation or self dealing bybanks can produce efficiency gains.

(5) Deregulation can shorten the horizons of savers andinvestors, leading to a drawing up of long-term finance.

(6) Sometimes there can be problems of moral hazard.

(7) Pressure on profits and profitability can lead tospeculation and create problems of systemic failures.

(8) With fewer entry restrictions, it has been possible formany entrants to make inroads into this lucrative sector,some antisocial elements can enter the field directly orindirectly.


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(9) A number of companies can incorporate their ownfinance companies to make finance available on easyterms for purchase of their products, this phenomenoncan also be used against the interest of the society.

(10) It should also be noticed that liberalization can alsoresult in the increase in instability. In general, financialliberalization represents a profound change in theeconomic rules. It can increase the riskiness of

traditional behaviour or introduce new inexperiencedplayers. In these circumstances, disasters can also take

place.


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Advantages Full use of resources

Production will increase Export will increase

Improve in mass media

Improve information technology

Development of science and technology Indian economy will become competitive

Good will and understanding

Improvement in the efficiency of public sector

Expansion of industrialization

Consumer will be benefitted

More equal development of society

Indian economy will get linked with world economy

Security of country

Develop small and cottage industries


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Advantages

Liberalisation can well be considered an investment inthe future financial well being of a nation. It helps thebanking industry as a whole by providing:

1. Increased financial flexibilities of firms.

2. Reduced transaction costs.

3. Improved allocation efficiency.

4. Attraction of new capital to financial intermediaries.

5. Stronger and more competitive banking institutions. 6. Better and diversified portfolios.

7. More effective conduct of monetary policy.


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8. Meaningful competition in banking services byallowing greater role to private sector and foreign banks.

9. Technological up-gradation of banks through wide useof computers and modern communication systems.

10. Removing major regulatory impediments to profitableworking of banks.

11. Relaxation in the regulations covering foreigninvestment and foreign exchange.

12. Easy access to foreign capital.


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Industrial Policy 1991

Meaning: -The Government of India announced the new industrialpolicy (NIP) on 24th July, 1991. The NIP aims at liberalisation ofIndian industry. The main objectives of the NIP are:

1. Attainment of international competitiveness.

2.Development of backward areas.3. Encouraging competition within Indian industry.4. Efficient use of productive resources.5. Full utilisation of plant capacities to generate employment.

6. Revival of weak units, etc.


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Main features ofindustrial policy

of 1991 and liberalisation Abolition of licensing system Amendment in monopolies and restrictive trade practice

act METP act

Restricted the role of public sector Investment of foreign capital

Import of foreign technology

Collaboration with foreign trading companies

Policy related to small scale industries Establishment of new industries

Facilities of retrenched workers
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Objectives of the Industrial Policy of the Government are

to maintain a sustained growth in productivity;

to enhance employment;

to achieve optimal utilization of human resources;

to attain international competitiveness Development of indigenous technology through greater investment

in R&D and bring in new technology to help Indian manufacturingunits Incentive for industrialization of backward areas

Ensure running of PSUs on business lines and cut their losses

Protect the interests of workers

Abolish the monopoly of any sector in any field of manufactureexcept on strategic or security grounds.

to transform India into a major partner and player in the global

arena.


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Economic Liberalization in IndiaPast Ach ievements and Futu re Chal lenges

6 August 2011

Confederation of Indian Industry

E i R f


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The early burst of reforms in the early to mid nineties made sweeping changes such as

Reduction in tariff barriers

Removal of barriers to entry in industry

Removal of controls in the financial sector

Encouragement to foreign investment and technology

Rationalization of tax structure

These have ensured macroeconomic stability and driven the economy towards greatercompetitiveness

These measures have also helped India in emerging as a resurgent, vibrant anddynamic nation, leading global growth

India is the second fastest growing economy in the world after China

India was able to withstand the repercussion of the global economic crisis Indias participation is required in all global negotiations ranging from global trade to

climate related deals

Economic Reforms

CII R l


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Post-1991, CII worked on multiple fronts to facilitate liberalization:

Engaged with administration to calibrate policies to sequence reforms and minimizeindustry adjustment pains

Sensitized officials and Members of Parliament for reforms through sustainedinteraction

Worked with industry to build consensus recommendations

Organized seminars to disseminate awareness among industry

Interacted persuasively with different stakeholders across society to create buy-in

Globalisation was a key plank ofCIIs endeavours since 1991. Some ofCIIs pioneeringinitiatives that helped industry to align with global imperatives include:

Arranging outward missions through networking with international governments,industry associations, institutes and academia for opening new avenues for Indianindustry

Initiating Quality Movement in India; Sundaram Fasteners first company to get

ISO9000 certification (1991) Organising exhibitions/shows to showcase Indian products

Initiating debate on key economy/ industry issues

Laying thrust on Corporate Governance: Developing Code of Corporate Governance

CIIs Role

Robust GDP Growth


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Robust GDP Growth

5.3

%

1.4

%

5.4

%5.7

%6.4

% 7.3

%8.0

%

4.3

%

6.

7%

6.4

%

4.4

%5.8

%

3.8

%

8.5

%

7.5

%

9.5

%

9.6

%

9.3

%

6.8

%8.0

%8.5

%

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(Rs.

000'Crore)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Y-O-YGrowth

(%

GDP GDP Growth Rate

Source: Economic survey 2010-11 and CSO

GDP has surged from 5.7% during1991-00 to 7.7% during 2001-11

-0.5

%

3.4

%3.8

%

3.8% 5

.1% 5

.9%

2.4

%

4.7

%

4.5

%

2.5

% 4.1

%

2.1

%

6.8

%7.1

%7.8

%

8.0

%

7.8

%

5.3

% 6.5

%7.1

%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(Rs.)

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%5.0%

6.0%

7.0%

8.0%

9.0%

Y-O-YGrow

th(%

Per Capita Income Growth in Per Capita Income

GDP

Per Capita Income

Per Capita Income has more thandoubled from Rs. 15,826 in 1991

to Rs. 41,129 in 2011; has beenincreasing at an average annualrate of about 7% since 2004

Structural Change in GDP Composition
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Structural Change in GDP Composition

GDP has undergone a marked structural change over a span of two decades

Agriculture contribution has shrunk to 16.6% in 2011 from 34.0% in 1991 Share of tertiary sector has increased commendably, in fact is becoming

engine of growth

Flat growth in Secondary sector is however, a cause of worry given thereducing employment elasticity of agricultural sector

Composition of GDP (1991 v/s 2011)

34.0%

23.2%

42.7%

Agriculture, 16.6%

Industry, 25.7%

Services, 57.7%

1991

2011


Savings and Investment (as % of GDP)


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Savings and Investment (as % of GDP)

Savings as a proportion of GDP moved up by more than ten percentage pointsfrom 22.8% in 1991 to 33.7% in 2010

Investment to GDP ratio also jumped from 26.0% to 30.8%, however expectedto declined to 29.5% in 2011 due to rising interest rate

22.8%

21.5%

21.2%

21.9%

24.4%

24.4%

22.7%

23.8%

22.3%

24.8%

23.7%

23.5%

26.3%

29.8%

32.4%

33.5%

34.6%

36.9

%

32.2%2

6.0%

22.1%

23.1%

22.5%

25.5%

26.2%

24.0%

25.3%

23.3%

25.9%

24.3%

22.8%

25.2% 27.

6% 3

2.8%

34.7%

35.7%

38.1%

34.5%

33.7%

30.8%

-

500

1,000

1,500

2,000

2,500

3,000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

(Rs.000'Crore)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Y-O-YGrowth(%)

Savings Investment Savings as % of GDP Investment as % of GDP


Merchandise and Service Trade
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Merchandise and Service Trade

18.

5

18.

3

18.

9

22.

7

26.

9

32.

3

34.

1

35.

7

34.

3

37.

5

45.

5

44.

7

53.

8

66.

385.

2

105.

2

128.

9 166.

2

189.0

182.

2

250.

5

27.

9

21.

1

24.

3

26.

7

35.

9

43.

7

48.

9

51.

2

47.

5

55.

4

57.

9

56.

3

64.

580.

01

18.

9 157.1

1

90.

7

257.

63

08.

5

300.

6

380.

9

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(US$

Billion)

Merchandise Exports Merchandise Imports

Merchandise exports soared to crossUS$250 bn in 2011 from US$ 18.5 bn in1991, about 14 fold increase

Service exports went up to US$132 bn in2011 from mere US$ 4.6 bn in 1991,registering a CAGR of 18.3%

Backed by robust exports of IT andITes services; close to $60 billion in2010-11

Merchandise and Service imports grownat a CAGR of about 14.0% and 17.1%respectively

Faster rise in imports over exportshave undoubtly widened trade deficityet it has helped in keeping globaldemand alive in the wake of theglobal economic crisis

Trade as a proportion of GDP hasincreased magnificently from 9.0% in1991 to 87.9% in 2011

Source: RBI

4.6

5.0

4.7

5.3

6.1

7.3

7.5 9

.4 13.2

15.7

16.3

17.1

20.8 2

6.9

43.2

57.7

73.8

90.3

106.0

95.8

132.0

3.6

3.8

3.6

4.7

5.5 7

.5

6.7

8.1

11.0

11.6

14.6

13.8

17.1

16.7 2

7.8 3

4.5 4

4.3 5

1.5

52.0 6

0.0

8

4.3

-10.0

10.0

30.0

50.0

70.0

90.0

110.0

130.0

150.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(US$

Billion)

Service Exports Service Imports

Merchandise Trade

Service Trade
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SENSEX


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SENSEX

Steps taken over the last two decades have resulted into maturing of nascent

financial market. Further, robust economic growth and fast pace ofglobalization has led to buoyant investors sentiment

SENSEX has increased from a level of 1908.9 in 1991 to 18518.2 in 2011 ata CAGR of 12.0%

Tre nds in Capital M arket - SENSEX ans BSE 100

0.0

3,000.0

6,000.0

9,000.0

12,000.0

15,000.0

18,000.0

21,000.0

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

SENSEX BSE 100

Source: BSE, bseindia.com

Move Towards Inclusive Growth
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Move Towards Inclusive Growth

While the first phase of reforms had unleashed economic growth, it was feltthat the benefits of growth must be more equitably distributed

Starting 2005, the UPA government has shifted the focus to inclusive growththrough greater allocation to socially beneficial schemes and programmes

Total Plan Allocation increased markedly from Rs. 9.6 thousand crore in1991 to Rs. 335.5 thousand crore in 2011-12, nearly 35 fold increase

Source: Budget and Government Sources

Some flagship schemes

Bharat Nirman - Total Budget allocation for 2011-12: Rs. 58,000 crore

NREGA - Total Budget allocation for 2011-12: Rs. 40,000 crore

JNNURM - Total Budget allocation for 2011-12: Rs. 49 crore

CIIs Initiative on Socio Responsibilities


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Corporate Social Responsibility

Set up Social Development and Community Affairs Council in 1995

Developed Action Agenda for Affirmative Action and worked to generateawareness and intensify industry efforts

Facilitates industry interventions in society through NGO partnerships

Undertakes public health and community welfare activities in factories

Spearheaded the India Business Trust for HIV/AIDS

Environment Management Set up Environment Management Division after Rio Summit in 1992

Initiated Green Building movement in India through its Centre of ExcellenceGreen Business Center

Engages in climate change mitigation efforts

CII s Initiative on Socio Responsibilities

Social indicators


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Social indicators

Overall literacy rate has gone up from justover half to almost three-quarters during1991 and 2011

Literacy level among female folk which

constitutes about half of the populationhas nearly doubled

Among young people, the rates are higheras the Right to Education law kicks in

Source: Economic Survey

52.2%

74.0%

64.1%

82.1%

39.3%

65.5%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Overall Males Females

1991 2011

35.6%

27.5%

35.0%

28.3%

37.0%

25.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Total Rural Urban

1991 2005

Overall, poverty has declined by eight

percentage points from as high as 35.6% in1991 to 27.5% in 2005

Decline was more pronounced in urban areasas compared to rural areas

Urban poverty fell by double digits. Ruralpoverty came down by seven percentagepoints

Literacy Rates

Poverty Estimates

Source: Planning Commission

Major Plans for Infrastructure Development
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Sector Deficit Eleventh Plan (2007-12) Targets

Roads/

Highways

65,590 km of NH comprise only 2% ofnetwork; carry 40% of traffic; 12% 4-laned; 50% 2-laned; and 38% single-laned

6-lane 6,500 km in GQ; 4-lane 6,736 km NS-EW; 4-lane 20,000 km; 2-lane 20,000 km;1,000 km Expressway

PortsInadequate berths and rail/roadconnectivity

New capacity: 485 m MT in major ports; 345m MT in minor ports

Airports

Inadequate runways, aircraft handlingcapacity, parking space and terminalbuildings

Modernize 4 metro and 35 non-metroairports; 10 greenfield airports

Railways

Old technology; saturated routes; slowspeeds (freight: 22 kmph; passenger: 50kmph)

8,132 km new rail; 7,148 km gaugeconversion; modernize 22 stations;dedicated freight corridors

Power

13.8% peaking deficit; 9.6% energyshortage; 40% transmission anddistribution losses; absence ofcompetition

Add 78,577 MW; access to all ruralhouseholds

Source: Planning Commission

Major Plans for Infrastructure Development

Power and Road


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Power and Road

Source: CMIE, Industry Analysis Service

Installed Capacity in Power Sector: All India

66,086.3

153,774.8

-

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

140,000.0

160,000.0

180,000.0

1991 2011

MW

Total installed capacity has more than doubledduring 1991 and 2011

Even after 20 years, thermal power remained themost dominant form

There is a need to change the present compositionin favour of hydro, nuclear and other bio-producepower to conserve coal for industrial purposes

Road Length

2,327.4

4,236.4

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

1991 2008

(000'Km)

Source: Ministry of Road, Transport and Highways

Public-private-multilateral partnerships havebeen successful in implementing highwaysprogramme

NHAI to award 7,994 km of highway projectsin the FY 2012

Going to generate demand for cement,steel, and bitumen of worth Rs 42,000 crore

Though the sectoral performance hasimproved, yet to be enhanced considerablyto ensure optimal utilization of resourcesand to avoid overrunning ofcost

Installed Capacity: Power

Road Length

Steel and Telecom
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Steel and Telecom

Steel production has surged nearly five foldin last 20 years

India fourth largest steel producer in the

world and is expected to become thesecond largest producer by 2013

Steel production capacity to touch 120Million Tonnes by 2013 and over 150Million Tonnes by 2020

Source: CMIE, Industry Analysis Service

Finished Steel Production

13,566.0

66,013.0

-

10,000.0

20,000.0

30,000.0

40,000.0

50,000.0

60,000.0

70,000.0

1991 2011

(000'Tonnes)

Telecom S ubscriber Base

5.1

826.9

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1991 2011

(Millions

)

Source: Department of Telecommunications, Ministry of Communications and Information Technology

Private sector participation has lead to sharpreduction in tariffs and rapid increase inpenetration of basic/mobile telephones

Registering a CAGR of 29.0% during 1991and 2011

Teledensity improved from 0.6 (per 100person) in 1991 to 66.2 twenty years later

Finished Steel Production

Telecom

Challenges


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High inflation level above comfortable zone9.4% in June 2011

Industrial slow downIIP has grown by 5.6% in May 2011 as compared to 8.5% in May 2010

Falling investment - 30.8% in 2010 to 29.5% in 2011

High interest rates have impacted credit to MSMEs in manufacturing sector as well as keyindustries Non food credit growth to MSMEs declined from 21.1% in April, 2010 to 20.6% in April,2011

Inadequate infrastructure continues to be a major structural bottleneck

Shrink in FDI inflows due to structural bottlenecks In 2010-11, FDI inflows shrunk by 28% toUS$ 27 billion from a level of US$ 38 billion in 2009-10

Weak enforcement and monitoring

Likely overshooting of fiscal deficit Though fiscal deficit is budgeted at 4.6% for FY 2012,however, developments in recent months like deceleration in growth, high crude oil prices, high subsidyand rising interest rates are casting doubts

Challenges

Agenda for further reforms


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Investment Climate:

FDI in sectors such as retail, insurance, defence, etc needs to be expanded drastically

Rapid clearance of large projects

Financial Sector Reforms:

Liberalize financing guidelines

Facilitate increased access to international debt markets

Encourage development of the corporate debt market

Agriculture Sector Reforms:

Allow FDI in food retailing to integrate distorted supply chain Encouragement to PPP model in strengthening agriculture research and extension programmes

Exempting horticulture produce from APMC Act

Move towards unified national market and allow free movement of produce

Infrastructure:

For greater investment in infrastructure policy framework needs to be made more friendly

Social Sector:

Much better delivery of government services to the poor with the support of state governments

Agenda for further reforms

CII has been a strong partner to gov ernment dur ing the reforms per iod and w i l l

cont inue to bui ld the partnership of Government and industry to make India a

developed nat ion in the next two decades


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Privatisation

Privatisation means endorsing / assigningthe ownership of a publicproperty/business to a private party.


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Uses

1)Development would be faster(due to competition withthe other private parties)2)Innovative solutions (due to again competition with theother private parties)

3)effective & time bound results4)cost cuttings5)improves quality in work6)in turn more services to public are possible

7)increase the productivity8)significant Growth in the business9)controlled monitoring of public property gives public inturn good services


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The benefits of privatization include:-better quality products-lower priced products-more efficient firms which have lower costs

-makes costs lower for other firms who use the productthe privatized firm produces-this increases employment and incomes across theeconomy

-Government no longer needs to subsidize product-Government makes revenue from asset sale to spendon health, education etc-Promotes technological advancement, again creating

jobs and growing incomes


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Possible Losses

1)always a threat to working staff.

2)as private parties try to extract work from minimumresources, down sizing is the common problem3)un-employment increases4)if the private party is inefficient, there is everypossibility of the business winding up.5)more restrictions on many things6)purely commercial in nature and lacks ethical / human

morale at times.


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Thank You

5 Liberalisation

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