Assignment 115

7/27/2019 Assignment 115

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DAVPE_XI_Eco LPG: An Appraisal Page 1 of 9

CLASS XIINDIAN ECONOMY

CHAPTER 3LIBERALISATION, PRIVATISATION & GLOBALISATION: AN APPRAISAL

THE RATIONALE OF ECONOMIC REFORMS CRISIS OF 1991

Domestic Economy:1. There was inefficient management of the Indian economy in the 1980s.

The govt expenditure was more than the govt. revenue. Govt. was notable to generate sufficient revenue from internal sources such as taxation.

2. To finance the deficit the government borrowed heavily from banks,people of the country and international financial institutions.

3. Development policies required that even though the revenues were low,govt. still had to spend to solve the problems like unemployment, povertyand population explosion. Such programmes did not generate additional

revenue.4. Prices of many essential goods rose sharply.5. The income from PSUs was also not high enough meet additional

expenditure. Many PSUs were suffering losses.

Foreign Trade1. Imports grew at a very high rate without matching growth of exports.2. Sufficient attention was not paid to boost exports to pay for the growing

imports.3. Scarce foreign exchange was spent on meeting consumption needs.4. Foreign exchange reserves dropped to levels that were not sufficient for

even a fortnight.5. The government was not able to make repayments on its borrowings fromabroad.

6. There was not sufficient foreign exchange to pay the interest oninternational loans.

Govt. approached IBRD (International Bank for Reconstruction & Developmentcommonly called World Bank) and IMF (International Monetary Fund) for longterm loans. While granting the loan, the World Bank and IMF insisted on majorchanges in development policies. In this way the idea of New Economic Policy(NEP) germinated. NEP included three main polices namely, Liberalisation,Privatisation and Globalisation (LPG).

LIBERALISATIONLiberalisation means freeing the economy from govt. control. It put an end to allthe rules and laws which were aimed at regulating the activities of private sector.Following are the major changes taking place in important areas under theliberalisation policy:


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controlled by RBI. RBI would fix the interest rate structure for the commercialbanks. The banks required prior approval of RBI on all policy issues includingopening of new branches, Now the role of RBI is more of a facilitator. The banksand financial institutions are given more autonomy, which more independence indeciding the policy matters. The interest rates and foreign exchange are allowed

to be determined by market forces.

PRIVATISATION

Government companies can be converted into private companies in two ways:1. By withdrawal of the government from ownership and management of

Public Sector Undertakings (PSUs).2. By outright sale of public sector companies

Disinvestment: Privatisation of PSUs by selling off part of the equity (share) tothe public is known as disinvestment.

The purpose of Disinvestment is to improve financial discipline and to facilitatemodernization. Private capital and managerial capabilities would improve theefficiency of PSUs.

Government adopted following two main methods for disinvestment:1. Minority Sale: Equity is offered to investors through domestic public

issue. The govt transfers minority share to private persons. Themanagement control is not transferred.

2. Strategic Sale: Govt sells majority share above 51% to the private sector.It is called strategic as management is transferred to the private sector asa matter of strategy.

Profit making PSUs, however, should not be disinvested. They are not onlyearning profit which means revenue for the government, they are also servingsocial welfare. There is a need to modernise them and make them morecompetitive and efficient.Therefore profit making PSUs were given autonomy in taking managerialdecisions. They were given special status such as Navratnas and Mini Ratnas

NavratnasIn 1996 the government chose nine PSUs and declared them as Navratnas. Thefollowing PSUs were given the special status of Navratnas

o IOC (Indian Oil Corporation)

o BPCL (Bharat Petroleum Corporation Limited)

o HPCL (Hindustan Petroleum Corporation Limited)

o ONGC (Oil and Natural Gas Corporation)

o SAIL (Steel Authority of India Limited)

o IPCL (Indian Petrochemicals Corporation Ltd.)

o BHEL (Bharat Heavy Electricals Limited)


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8. To ensure greater sharing of new technology especially for the benefit ofdeveloping countries.

Bilateral and Multilateral trade

Trade agreement between two countries is called bilateral trade. Suchtrade is beneficial for the developing countries as all the countries are ableto sell something or the other in international market.Trade agreement between three or more countries is called multilateralagreement. Such agreement benefits the developed countries. Thedeveloping countries are unable to sell as they cannot compete withdeveloped countries.

Tariff and Non-tariff barriersTariff Barriers: Tariff barriers means increased tariff, which is tax onimported goods. It is imposed on imports to make them relatively costlier.

Tariffs are imposed to protect domestic industry from foreign competition.Non-tariff Barriers: Measures other than tariff to protect the domesticindustry from foreign competition are called non-tariff barriers. Theexamples are quantitative restrictions (quota) on exports and imports.

ASSESSMENT OF NEW ECONOMIC POLICY

Positive Impact1. The growth of GDP increased from 5.6% during 1980-91 to 6.4% during

1992-2001. The Tenth Plan (2002-2007) has projected the GDP growthrate at 8%.

2. Foreign investment increased from about US $ 100 million in 1990-91 toUS $ 150 billion in 2003-04.

3. Foreign exchange reserves increased from about US $ 6 billion in 1990-91to US $ 125 billion in 2004-05.

4. The growth of agriculture and industrial sector has declined whereas thegrowth of service sector has gone up.

5. India became a successful exporter of auto parts, engineering goods, ITsoftware and textiles.

There has been high growth of the service sector in India, There is increase indemand for services because:

1. It is more profitable for the other countries to contract services fromdeveloping countries.

2. There is easy availability of skilled manpower at lower wage rate.

Negative Impact

Not being able to solve the basic problems facing our economy in theareas of employment, agriculture, industry, infrastructure development andfiscal management


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Growth and Employment: NEP has not generated sufficient employmentopportunities


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Adverse effect on agriculture: The growth rate in agriculture has beendecreasing during the reform period because of the following reasons:

1. There has been reduction in public investment in agricultureespecially in infrastructure which includes irrigation, power, roads,research and development (R&D)

2. Removal of fertilizer subsidy has led to increase in the cost ofproduction adversely affected small and marginal farmers3. Increased international competition had an adverse effect on

farmers because ofi. Reduction in import duties on agricultural productsii. Removal of minimum support pricesiii. Lifting of quantitative restrictions on agricultural

products4. There has been a shift from production for the domestic market

towards production for the export market. The focus of the farmersis on cash crops rather than food grains. This has created pressure

on prices of food grains Adverse effect on Industrial Sector

1. Industrial growth has recorded a slow down because of cheaperimports and inadequate investment in infrastructure.

2. Foreign Competition resulted in cheaper imports (especiallyChinese goods) replacing the demand for domestic goods

3. Infrastructure facilities, including power supply remainedinadequate due to lack of investment

4. No access to developed countries markets because of non-tariffbarriers. India removed quota restrictions on import of textiles fromUSA and other developed countries. However USA has not

removed their quota restriction on import of textiles from India andChina.

Disinvestment1. The assets of PSUs have been undervalued and sold to the private

sector. It has resulted in substantial loss to the government.2. Funds collected from disinvestment were used to finance the

budget deficit (to fill the gap between government expenditure andgovernment revenue). It should have been used for thedevelopment of PSUs and building social infrastructure.

Reforms and Fiscal Policies1. Tax reductions have not resulted in increase in tax revenue.

2. Tariff reduction have curtailed the scope for raising revenuethrough custom duties3. Tax concessions given to promote foreign investment further

reduced the scope for raising tax revenues


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Critique of Globalisation Policy

Globalisation was seen as an opportunity in terms of greater access to globalmarkets, latest technology and increased possibility of large industries to becomeimportant players in international sphere.

However globalisation has proved to be a strategy of the developed countries toexpand their markets in other countries. Following are the negativeconsequences of the globalisation policy:

1. It has compromised the welfare and identity of people belonging topoor countries.

2. It has widened the disparities (inequality) between people and nations.3. It increased the income and quality of consumption of high-income

groups only. The middle class and the poor persons did not get muchbenefit.

4. Growth has been concentrated in selected areas in the service sector

especially telecommunications, information technology, finance,entertainment, travel and hospitality services, real estate and trade.5. It ignored vital sectors of the economy like agriculture and industry

which provide livelihood to millions.

QUESTIONS

1. Why were reforms introduced in India?2. How many countries are members of the WTO?3. What is the meaning of liberalisation? Explain the following component

policies of the liberalisation:a. Deregulation of the industrial sectorb. Financial sector reformsc. Tax reformsd. Foreign exchange reformse. Trade and Investment Policy Reforms

4. What is disinvestment? What was the purpose of disinvestment?5. Why is the disinvestment policy being criticised?6. What do you understand by privatisation?7. What is the globalisation policy? What it tries to achieve?8. What is the most important function of the RBI?9. How was RBI controlling the commercial banks?10.What do you understand by devaluation of rupee?11.Distinguish between the following:

a. Strategic and Minority saleb. Bilateral and Multilateral tradec. Tariff and Non-tariff barriers

12.Why are tariffs imposed?13.What is the meaning of quantitative restrictions?


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14.Those public sector undertakings which are making profits should beprivatised. Do you agree with this view? Why?

15.Do you think outsourcing is good for India? Why are developed countriesopposing it?

16.India has certain advantges which makes it a favourite outsourcing

destination. What are these advantages?17.Do you think the Navratna policy of the government helps in improving theperformance of Public Sector Undertakings (PSUs) in India? How?

18.What are the major factors responsible for the high growth of the servicesector?

19.Agriculture sector appears to be adversely affected by the reform process.Why?

20.Why has the industrial sector performed poorly in the reform period?21.Discuss economic reforms in India in the light of social justice and welfare.22.Discuss the positive impact of the New Economic Policy.23.Discuss the negative impact of the New Economic Policy.

24.Write a short note on Navratnas and Mini Ratnas.25.Name any four Public Sector Undertakings (PSUs) who have been giventhe status of Navratnas. Write full names.

26.How far the fiscal policy been successful during the reform period?27.When was the World Trade Organisation established?28.Write full name of WTO and GATT.29.What were the major policies imposed by World Trade Organisation?30.Do you think globalisation policy has delivered what it promised? Explain

with suitable reasons.

Assignment 115

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