Liberalization Privatization Globalization1

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Liberalization, Privatization,

Globalization

General Economics


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Economics:Liberalization,Privatization,Globalization 2

Reasons for implementing LPG

Excess of consumption andexpenditure over revenue resultingin heavy government borrowings.

Growing inefficiency in the use ofresources.

Over protection to industry Mismanagement of firms and the

economy Mounting losses of public sector

enterprises


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Reasons for implementing LPG

Various distortions like poortechnological development shortage offoreign exchanges; and imprudent

borrowings from abroad andmismanagement of foreign exchangereserves.

Low foreign exchange reserves.

Burden of national debt.

Inflation.


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Liberalization

Liberalization refers to relaxation ofprevious government restrictionsusually in areas of social and

economic policies. Thus, whengovernment liberalizes trade itmeans it has removed the tariff,

subsidies and other restrictions onthe flow of goods and servicesbetween countries.


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Privatisation

It refers to the transfer of assets orservice functions from public toprivate ownership or control and the

opening of the hitherto closed areasto private sector entry. Privatisationcan be achieved in many ways-

franchising, leasing, contracting anddivesture.


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Conditions for privatisaton

Liberalisation and de-regulation ofthe economy is an essential pre-

requisite if privatisation is to takeoff and help realize higherproductivity and profits.


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Conditions for privatisaton

Capital markets should besufficiently developed to be able to

absorb the disinvested publicsector shares.


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Arguments in favour of privatisation

Privatisation will help reducing theburden on exchequer.

It will help the profit making public

sector units to modernize and diversifytheir business.

It will help in making public sector

units more competitive.


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It will help in improving the qualityof decision-making of managersbecause their decisions will bemade without any politicalinterference.


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Privatisation may help in reviving sickunits which have become a liability onthe public sector.

Without government financial backing,capital market and internationalmarket will force public sector to beefficient


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Arguments against privatisation

Privatisation will encourage growthmonopoly power in the hands of big

business house. It will result in greaterdisparities in income and wealth.

Private enterprise may not show any

interest in buying shares of loss-making and sick enterprises.


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Arguments against privatisation

Privatisation may result in lop-sideddevelopment of industries in the country.

The limited resources of the privateindividuals cannot meet some of the vitaltasks which alter the very character of theeconomy.

The private sector may not uphold theprinciples of social justice and publicwelfare.


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Privatization

Privatization offers bothopportunities and threats to the

economy. We have to privatize insuch a manner that we make themaximum opportunities while at

the same time minimizing thethreats to the economy.


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Disinvestment

Disinvestment means disposal ofpublic sectors unit's equity in themarket or in other words selling of

a public investment to a privateentrepreneur. It means selling ofgovernment share in one PSU to

other PSUs or private sector orbanks.


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Disinvestment

In India, disinvestment hasprogressed slowly. It has been

carried out in a hasty, unplannedand hesitant manner. As a result,the progress has been quite poor.


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Privatization and Disinvestment in India

Privatization in India generally is inthe form of disinvestment of equity.In general, here privatisation has not

led to 100% transfer of control frompublic sector to private sector unit.Only in exceptional cases, 100%

privatization has taken place (e.g.Centaur Hotel).


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Example of Privatization in India

Lagan jute machinery companylimited (LJMC).

Modern food industries limited

(MFIL) Bharat aluminium company limited

(BALCO)

Hotel Corporation of India limited(HCI)

Hindustan Zinc limited (HZL)

Paradeep Phosphates Limited (PPL)


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Methods of Disinvestment

Initially, equity was offered to retailinvestors through domestic public

issues. This was followed byissuance of the Global DepositoryReceipts (GDRs) to tap the

overseas markets.


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Other methods includes cross-holding(the government simply selling part ofits shares in one PSU to other PSUs),

warehousing (governments ownfinancial institutions buyinggovernments stake in select PSUs andholding them until and third buyer

emerged) and retaining golden share(retaining governments stake up to26% in the PSU to protect its interest).


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Of late, the government waspursuing the strategic sale

method. Under this method, thegovernment sells a major portionof its stake to a strategic buyer and

also gives over the managementcontrol.


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Under strategic sales method,disinvestment price would bemarket based and not prefixed,

PSUs shares sale would be underthe department of Disinvestmentand disinvestment would be

delinked from the union budgetexercise.


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Presently the government has decided tocall off the disinvestment of stake throughstrategic sale in 13 profit-making centralpublic sector enterprises. It is consideringthe public offer route to sell minoritystakes in these enterprises. Of late (in2005-06), it has resorted to Differential

Pricing Method and sold the shares ofPSUs to public sector financial institutionand banks.


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Globalisation

Globalisation means integratingthe domestic economy with theworld economy. It is a process

which draws countries out of theirinsulation and makes them joinrest of the world in its march

towards a new world economicorder.


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Globalisation

It involves increasing interactionamong national economic system,more integrated financial markets,economies of trade, higher factormobility, free flow of technologyand spread of knowledgethroughout the world.


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Cases for Globalisation

It is argues that Globalisation of underdeveloped countries will improve theallocative efficiency of resource, reducethe capital output ratio and increaselabour productivity, help to develop theexport spheres and export culture,increase the inflow of capital, updated

technology that gives a boost to theaverage growth rate of the economy.


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It will help to restructure theproduction and trade pattern in acapital scarce, labour abundant

economy in favour of labour-intensive goods and techniques.

Foreign capital will be attracted and

with its entry, updated technologywill also enter the country.


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With the entry of foreign competition andthe removal of import tariff barriers,domestic industry will be subject to priceand quality improving effects in the

domestic economy.

It is also believed that the efficiency of

banking and financial sectors willimprove, as there wil l be competit ion fromforeign capital and foreign banks.


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It is believed that the main effects ofintegration will be felt in theindustrial and related sectors. At

result cheaper and high qualityconsumer goods will bemanufactured at home. Besides,

employment opportunities wouldalso go up.


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Cases against Globalisation

The globalisation process is in essence atremendous redistribution of economicpower at the world level which willincreasingly translate into a redistributionof political power.

One study reveals that in the globalisingworld the economics of the world are

ironically moving away from one anothermore than coming together.


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With the lightening speed at whichglobalisation is taking place, it isincreasing the pressure on economiesfor structural and conceptual

readjustments to a breaking point. It is becoming hard for the countries to

ask their public to go through the pains

and uncertainties of structuraladjustment of the sake of benefits yet tocome.


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Globalisation is helping more the

developed economies than the developingeconomies.. Like India, it is argued that itis true that letting in Cokes and Pepsis

have led to opening doors for INTEL, butthe sum total of their investment has beenvery less in relation to their investmentabroad. None of the multinationals has set

up manufacturing plants in India orsigned any technology transfer agreementwith any Indian company.


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Measures towards Globalisation

Convertibility of Rupee: To make thecurrency fully convertible i.e., allow it todetermine its own exchange rate in theinternational market without any official

intervention.

Import Liberalisation: As per therecommendation of the World Bank, free

trade of all items except negative list ofimports and exports has been allowed.


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Measures towards Globalisation

Opening the economy to foreigncapital: The government has taken anumber of measures to encourage

foreign capital in India. Manyfacilities and incentives have beenoffered to the foreign investors and

non-resident Indians in the neweconomic policy.


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Effects of Globalisation of Indian economy

Indias share in the world exportwhich had fallen 0.53% in 1991

from 1.78% per cent in 1950, hasreversed trends and has improvedto 1% in 2005.


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Our foreign currency reserveswhich had fallen to barely one

billion U.S. dollars in June, 1991rose substantially to about 180bill ion U.S dollars in March 2007.


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Exporters are responding well tosweeping reforms in exchange rateand trade policies. The average

growth of export has been more than20% per annum since 2002-03.

Exports now finance nearly 65% of

imports, compared to only 60% in thelatter half of the eighties.


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The current account deficit was over3% of GDP in 1990-91. In 2004-05 and2005-06, we again had current accountdeficit of (-) 0.4 and (-) 1.1 per cent

respectively. Our external debt crises reduced from

$8 billion to $3 billion from 1990-91 to

1996-2006 respectively. Markets have started responding to

the movements abroad


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International confidence in India has beenrestored.

Consumer are benefited through largevariety of consumer goods, improved

quality of goods and in some cases andreduced price of consumer durable.

Programmes of quality management and

research and development aresystematically conducted by corporatesector.


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Main organization for facilitating globalisation

There are many internationalorganisation which have facilitated theprocess of globalisation. We shall study

three main organisations here. Theseare

International Monetary Fund (IMF)

World Bank World Trade Organisation (WTO)


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International Monetary Fund

IMF was organized in 1946 andcommenced its operation in March

1947. The main objectives:

The elimination or reduction of

existing exchange control


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International Monetary Fund

The establishment and maintenanceof currency convertibility with stableexchange rate

The widest extension of multilateraltrade and payments.

The solving of short-term balance of

payment problems faced by itsmember nations


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Function of IMF

It functions as a short-term creditinstitution

It provides machinery for the orderly

adjustment of exchange rates. It is a reservoir of the currencies of

all the members nation who can

borrow the currency of other nations.


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Function of IMF

It provides machinery forinternational consultations.

It monitors economic and financialdevelopment of its members andprovides policy advice aimed at

crisis preventions.


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The World Bank The international Bank for Reconstruction

and Development (IBRD) more popularlyknown as the world bank was formed as apart of the deliberations at Bretton woods

in 1945. The World Bank was floated inorder to give loan to members countries,initially for the reconstruction of their(world) war-ravaged economies, and laterfor the development of the economies ofthe poorer member countries.


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Objectives of World Bank

Investing in the people, particularly

through basic health and education. Focusing on social development.

Protecting the environment

Supporting and encouraging privatebusiness development.

Promoting reforms to create a stable

macro-economic environment, conduciveto investment and long-term planning.


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Functions of World Bank

To help its members countries in the

reconstruction and developmental of theirterritories by facilitating the investment ofcapital for productive purposes.

To encourage private foreign investment andcredit by providing guarantee of repayment ofthe private investors.

To promote the long-term balanced growth of

international trade and the maintenance ofequilibrium in balance of payment of itsmember countries.


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The World Trade Organisation

The WTO came in to existence on 1stJanuary,1995. The WTO is a powerfulbody which broadly aims at making

the whole world a big village wherethere is free flow of goods andservices and where there are no

barriers to trade.


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Features of WTO

The WTO is the main organimplementing the Multilateral TradeAgreements.

The WTO is global in itsmembership.

It is the forum for negotiationsamong its member.


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Features of WTO

It is a full-fledged internationalorganisation in its own right

The WTO has legal personality.

The decision-making under WTO iscarried out by consensus.


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Functions of WTO

The WTO shall facilitate theimplementation, administration andoperation of world trade agreements.

The WTO shall provide the forum fortrade negotiations among its

members countries.


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Functions of WTO

The WTO shall handle trade disputes.

The WTO shall monitor national trade

policies.

It shall provide technical assistance

and training to developing countries


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Multiple Choice Question

Question 1 The following are the ways of

privatization:

divestiture

denationalization

Franchising

all the above


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Multiple Choice Question

Question 1 The following are the ways of

privatization:

divestiture

denationalization

Franchising

all the above


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Question 2

Which of the following factors cause manygovernments to undertake programmes ofpublic sector reforms, according to Prof.Samuel Paul?

economic inefficiency in the productionactivities of the public sector ineffectiveness in the provision of goods

and service rapid and in reasonable expansion of the

bureaucracy all the above


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Question 2

Which of the following factors cause manygovernments to undertake programmes ofpublic sector reforms, according to Prof.Samuel Paul?

economic inefficiency in the productionactivities of the public sector ineffectiveness in the provision of goods

and service rapid and in reasonable expansion of the

bureaucracy all the above


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Question 3

Reasons for privatization are

inefficiency indifference andcorruption

indifference and corruption

inefficiency and irresponsibility

inefficiency, indifference,

irresponsibility and corruption


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Question 3

Reasons for privatization are

inefficiency indifference andcorruption

indifference and corruption

inefficiency and irresponsibility

inefficiency, indifference,

irresponsibility and corruption

Q i 4


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Question 4

Globalization means

domestic liberalization

external sector liberalization

both (a) and (b)

none of the above

Q i 4


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Question 4

Globalization means

domestic liberalization

external sector liberalization

both (a) and (b)

none of the above

Q i 5


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Question 5

External sector liberalization means relaxing restriction on international flow

of goods and services

relaxing restriction on production,investment and prices

increasing the roll of market

relaxing restrictions on international flowof goods, services, technology andcapital.

Q i 5


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Question 5

External sector liberalization means

relaxing restriction on international flowof goods and services

relaxing restriction on production,investment and prices

increasing the roll of market

relaxing restrictions on international flow

of goods, services, technology andcapital.

Q i 6


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Question 6

The main causes for economic reforms growing inefficiency in the use of

resources

over production of industry mismanagement of firms and the

economy

all the above

Q i 6


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Question 6

The main causes for economic reforms growing inefficiency in the use of

resources

over production of industry mismanagement of firms and the

economy

all the above

Q i 7


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Question 7

Industrial licensing was abolished for allprojects except for

12 industries

14 industries

18 industries

20 industries

Q i 7


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Question 7

Industrial licensing was abolished for allprojects except for

12 industries

14 industries

18 industries

20 industries

Q i 8


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Question 8

How many industries are registeredunder the public sector?

5 industries

3 industries

6 industries

9 industries

Q ti 8


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Question 8

How many industries are registeredunder the public sector?

5 industries

3 industries

6 industries

9 industries

Q ti 9


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Question 9

Up to-------------------------- direct foreigninvestment allowed in high priorityindustries

49% 55%

51%

50%

Q ti 9


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Question 9

Up to-------------------------- direct foreigninvestment allowed in high priorityindustries

49% 55%

51%

50%

Q ti 10


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Question 10

How many percent of FDI were allowedin Banking sector?

30%

49%

60%

51%

Q ti 10


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Question 10

How many percent of FDI were allowedin Banking sector?

30%

49% 60%

51%

Q estion 11


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Question 11

The different facets of new economic reform can besummarized as

disinvestment in public sector, delicensing ofprivate industries

reducing agriculture subsidies and reducing taxrates

liberalization, privatization and globalization

containing fiscal deficit and reducing moneysupply

Q estion 11


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Question 11

The different facets of new economic reform can be

summarized as

disinvestment in public sector, delicensing ofprivate industries

reducing agriculture subsidies and reducing taxrates

liberalization, privatization and globalization

containing fiscal deficit and reducing money

supply

Question 12


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Question 12

New Economic Reform aims at thefollowing objectives

privatization liberalization

Globalization

all the above

Question 12


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Question 12

New Economic Reform aims at thefollowing objectives

privatization liberalization

Globalization

all the above

Question 13


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Question 13

Financial sector reforms mainly relate to

banking sector

insurance sector

both (a) and (b)

transport sector

Question 13


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Question 13

Financial sector reforms mainly relate to

banking sector

insurance sector

both (a) and (b)

transport sector

Question 14


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Question 14

Expand FRA

Foreign ratio agreement

Foreign rate agreement

Forward ration agreement

Forward rate agreement

Question 14


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Question 14

Expand FRA

Foreign ratio agreement

Foreign rate agreement

Forward ration agreement

Forward rate agreement

Question 15


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Question 15

The rupee was devalued twice in -----------------

June 1991

August 1991 September 1991

July 1991

Question 15


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Question 15

The rupee was devalued twice in -----------------

June 1991

August 1991 September 1991

July 1991

Question 16


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Question 16

Foreign Exchange Regulation Act waspassed in the year

1973

1971 1972

1974

Question 16


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Question 16

Foreign Exchange Regulation Act waspassed in the year

1973

1971 1972

1974

Question 17


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Question 17

Expand QR

Quantitative Restrictions

Quota Restriction

Both (a) and (b)

None of the above

Question 17


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Question 17

Expand QR

Quantitative Restrictions

Quota Restriction

Both (a) and (b)

None of the above

Question 18


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Question 18

The QR were removed on ------------------

720 items

730 items

710 items

714 items

Question 18


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Question 18

The QR were removed on ------------------

720 items

730 items

710 items

714 items

Question 19


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Question 19

Expand SDR

Securities drawing rights

Special draw rights

Special drawing rights

None of the above

Question 19


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Question 19

Expand SDR

Securities drawing rights

Special draw rights

Special drawing rights

None of the above

Question 20


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Question 20

Disinvestment means disposal of public sectors units

equity in the market

relaxation of previous governmentsocial and economic policies

transfer of assets

none of the above

Question 20


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Question 20

Disinvestment means disposal of public sectors units

equity in the market

relaxation of previous governmentsocial and economic policies

transfer of assets

none of the above

Question 21


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Question 21

Expand TRIPs Trade related intelligent property

rights

Trade related intellectual propertyrights

Trade related intellectual prosperity

rights All the above


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Liberalization Privatization

Globalization

Liberalization Privatization Globalization1

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