LPG

Liberalisation , Privataisation and Globalisation

Rationale of economic reforms-crisis of 1991

• NI was growing at the rate of 0.8%• Inflation reached the height of 16.8%• Balance of payment crisis was to the extent

of10,000 crores.• India was highly indebted country. It ws paying

30,000 crores interest charges per year.• Foreign exchange reserves were only 1.8 billion

dollars which were sufficient for three weeks.

• India sold large amount of gold to Bank of England.

• India applied for the loan from World Bank and IMF

to the extent of 7 billion dollars.

• Fiscal deficit was more than 7.5%.

• Deficit financing was around 3%.

• Trade relation with Soviet block had broken down.

• Remittances from non-residence Indians stopped due

to war un Arab countries.

• Prices of petroleum products was very high.

For Availing loan , IMF and World Bank expected India to:

• Liberalise and open up the economy by removing

restrictions on the private sector,

• Reduce the role of the government in many areas

• Remove trade restrictions.

India agreed to the conditionalities of World Bank

and IMF.

Economic Reforms Since 1991- New Economic Policy

• ECONOMIC REFORMS:

Economic reforms or structural adjustment is a

long-term multi-dimensional package of various

policies and programmes for further economic

development.

NEP1991:

In July 1991, Prime Minister Narasimha Rao along with his

Finance Minister Manmohan Sigh initiated the

economic liberalisation of 1991, to remove the

inefficiencies in the economic system.

OBJECTIVES OF NEP1991:

• To reduce fiscal deficit and to have relative price stability.

• To reduce the area of operation of the public sector and to open up more areas for the private sector.

• To liberalise industrial policy and abolish industrial licensing for most of the private sector industries.

• To encourage inflow of foreign capital by granting more concessions to foreign direct investment.

• To liberalise foreign trade by reducing tariff duties and abolishing quota restrictions in case of many imports.

Components of NEP 1991

1. MACROECONOMIC STABILISATION- demand side

management:

This is a short-run measures to return to low and stable

inflation and a sustainable fiscal and balance of

payments position.

o Control of inflation

o Fiscal correction

o Improvement in a balance of payment s situation

Structural adjustment –supply side management

This is a long run measures to remove the bottlenecks and obstacles in the growth path of an economy. These policies includes :

Trade and capital flow reformsIndustrial deregulationPublic sector reforms and disinvestmentFinancial sector reformsThe goals is to abolish controls, eliminate bureaucratic

hurdles and redtapism and make the decision making process efficient and transparent.

NEP –Policy of Liberalisation, Privatisation And Globalisation(LPG)

Structural reforms can be seen with

respect to:

• Liberalisation

• Privatisation

• globalisation

LIBERALISATIONLiberalisation means removing all unnecessary controls and restrictions like permits, licenses, protectionist duties, quotas, etc. imposed by the government.

In 1991, government was enforcing regulation in many ways.

o Industrial licensingo Private sector was not allowed in many industries.o Some goods only produced in small scale industries.o Price controls and control on distribution of

selected industrial products.

• Import licence.

• Foreign exchange control

• Restrictions on investment by big business house etc.

These controls resulted in:

a) Consumption delays

b) Inefficiency

c) Losses

d) High cost economy

Objectives of liberalisation

• To raise internal competitiveness of industrial

production.

• To raise foreign investment and technology.

• To reduce debt burden of the country.

• To get an opportunity to export to developed

countries and to import capital goods and

machinery from them.

Liberalisation MeasuresIndustrial

sector reforms.

Financial sector reforms.

Tax reforms.Foreign Exchange reforms.

Trade policy reforms

Industrial sector reforms• Except for 6 industries related

to security and strategic concerns:

a) Liquorb) Cigarettesc) Industrial explosivesd) Defence equipmentse) Drugs and pharmaceuticalsf) Dangerous chemicals

Abolition of Industrial Licensing.Contraction of public sector.Reforms in small scale sectorConcessions in the MRTP Act.

PRIVATISATION

PRIVATISATION Improving govt: financial composition

• Raising funds from the sales Improving the performance of

an enterprise • Increasing efficiency• Requiring enterprises to meet

performance objectives• Relief from public sector

financial constraints.

It is defined as

the transfer of a

function, activity

or organisation

from the public to

the private sector.

Objectives :

Privatisation measures

means sale of a part of equity holdings held by the government in any public sector undertaking to private investor.

Two methods: Minority sale Strategic sale

The govt: has decided to give special treatment to some of the important profit making PSUs and they were given the status of Navratnas.

1. Disinvestment2.Policy for Navratnas.

GLOBALISATION

• It refers to growing economic interdependence among countries in the world with regard to technology, capital, information, goods and services etc:

FEATURESOpening and planning to expand business

throughout the world.Erasing the difference between domestic

and foreign marketBuying and selling goods and services

from / to any countries in the world.Locating the production and other physical

facilities on a considerations of the global business dynamics, irrespective of national considerations

Global sourcing of factors of production i.e. raw material, components ,machinery, technology, finance etc. are obtained from the best source anywhere in the world

Global orientation of organizational structure and management culture

FACTORS

• Technological Advances in communication

• Improvements in transportation and Technology

• other Factors:

ADVANTAGE• Increase in Trade in Goods and Services• Free flow of technology• Increase in industrialization• Increase in production and higher standard of

living. • Commodities at lower price with high quality • Increase in jobs and incomes• Balanced human development

DISADVANTAGE• Loss of domestic industries• Exploits human resources• Decline in incomeo Transfer of natural resources• Widening gap between rich and poor• Dominance of foreign institute

Out sourcing

• Means obtaining goods and services by contract from an outside source.

• The main services which are being outsourced from India by developed countries are:

1. Voice-based business processes2. Banking3. Railway inquiry4. Record keeping5. Accountancy etc:

Main Organisations for Facilitating Globalisation

• IMF

• WORLD BANK

• WTO

IMF

• Came to exist on dec.27,1945 with the signing of its Articles of Agreement.

• It commenced operations on March 1,1947Objectives:1. Promoting international monetary cooperation.2. Helps in facilitating the expansion and balanced growth of

international trade.’3. Promoting exchange stability.4. Helps in expanding international liquidity (convertability to cash )5. Expand capital investment in underdeveloped countries 6. Remove disequilibrium in the balance of payments7. Establish multilateral trade and payments.8. Helps to generate higher employment and income.

World Bank(IBRD)

• Affilited with united Nations a