Liberalization, Privatisation and Globalisation Chapter Notes | Economics Class 12 - Commerce PDF Download

Introduction

• India followed a mixed economy model post-independence combining capitalist and socialist systems. This resulted in heavy regulations which impeded economic growth. In 1991, facing a severe financial crisis, India introduced significant economic reforms.
• Crisis of 1991: The immediate cause was the balance of payments crisis, leading to near-depletion of foreign exchange reserves and an inability to repay international debt.

Background

Economic Issues (1980s): High government spending without enough revenue. Borrowing increased to cover deficits.

Foreign Exchange Crisis: High imports (e.g., petroleum) with low exports. Foreign reserves dropped to critically low levels.

Crisis in the Late 1980s: Borrowing became unsustainable; reserves couldn’t cover imports.

IMF/World Bank Loan: India took a $7 billion loan with conditions to reform the economy.

New Economic Policy (1991): Introduced Stabilisation (short-term fixes for inflation and reserves) and Structural Reforms (long-term efficiency improvements).

Key Reforms: Liberalisation, Privatisation, and Globalisation to reduce government control, encourage the private sector, and integrate with the global economy.

Liberalization

The basic aim of liberalization was to put an end to those restrictions which became hindrances in the development and growth of the nation. The loosening of government control in a country and when private sector companies start working without or with fewer restrictions and the government allows private players to expand for the growth of the country depicts liberalization in a country.

Objective: To reduce state involvement in business by transferring ownership and management from public to private sectors, aiming to increase efficiency and productivity.

Methods of Privatisation

Disinvestment

• Purpose: To improve financial discipline and leverage private sector efficiencies by selling government stakes in public enterprises.
• Implementation: Executed through public offerings or strategic sales, often used to reduce public debt.

Strategic Sale

• Goal: Fully or partially sell companies to private investors to revitalize underperforming assets and reduce fiscal burdens on the government.

Granting Autonomy

• Navratna, Maharatna, and Miniratna Statuses: Certain PSUs were given increased operational and financial autonomy to enhance competitiveness and efficiency without strict governmental oversight.

Impact of Privatisation

Positive Outcomes

• Efficiency and Productivity: Increased operational efficiencies and financial performance due to competitive pressures and better management.
• Capital Influx: Generated significant revenue for the government, aiding in fiscal management and infrastructure investment.

Challenges

• Employment Concerns: Job losses due to operational restructuring and efficiency drives.
• Social Objectives: Potential neglect of the broader social goals previously mandated for public enterprises.
• Asset Valuation: Issues with the undervaluation of assets and lack of transparency in the sale process, raise concerns about the loss of public wealth.

Globalisation

Objective: Integrate India's economy with the global market to promote free trade, attract foreign investment, and facilitate technological exchanges.

Key Facets of Globalisation

Outsourcing

• Description: India became a key destination for business process outsourcing due to cost advantages and a skilled workforce, boosting employment and contributions to GDP.

World Trade Organisation (WTO)

• Role: India uses its membership to advocate for reduced trade barriers globally and push for fair trade practices, benefiting from increased trade and investment.

Mechanisms of Globalisation

• Trade Liberalisation: Reduction of tariffs and non-tariff barriers, improving market access for Indian goods, and increasing the availability of foreign products.

• Investment Reforms: Eased regulations to attract foreign direct and institutional investments, enhancing capital flow into India's markets and industries.

• Technology Exchange: Enabled access to advanced technology, modernizing sectors like telecommunications and manufacturing, and improving productivity.

Impact of Globalisation

Positive Outcomes

• Economic Growth: Significant growth in the services sector, particularly IT and BPO, enhancing exports and creating jobs.
• Global Integration: Increased India's influence in international economic discussions and policies.

Challenges

• Competition for Local Industries: Intensified competition from foreign entities affected local businesses.
• Economic Disparities: Benefits of globalization were uneven, often favoring urban and well-connected regions over rural areas.

Indian Economy During Reforms: An Assessment

Sectoral Impact

• Agriculture: Limited benefits from reforms, with reduced public investment and increased production costs.
• Industry: Exposure to global competition impacted domestic industries adversely due to cheaper imports and inadequate infrastructure investments.
• Services: Significant growth, particularly in IT and telecommunications, which became major contributors to India’s GDP and exports.

Foreign Investments and Reserves

• FDI/FII: Increased significantly from $100 million in 1990-91 to $30 billion in 2017-18.
• Foreign Exchange Reserves: Grew from $6 billion (1990-91) to $413 billion (2018-19).

Key Export Sectors

• India became a key exporter of auto parts, pharmaceuticals, engineering goods, IT software, and textiles.

Criticism of Reforms

• Employment: GDP growth did not generate sufficient employment.
• Agriculture: Public investment dropped, with rising costs for small farmers and increased competition from imports.
• Industry: Slowed growth due to cheaper imports and inadequate infrastructure investment.
• Disinvestment: Public sector assets sold at low prices, with proceeds used to cover government revenue shortages.

Fiscal Challenges

• Reduced tax revenue due to tax cuts and incentives for foreign investors, limiting funds for social sector development.

Conclusion

Mixed Outcomes: While globalization facilitated market expansion and technological advances, it also led to increased economic disparities and reduced government control over economic policies. The benefits of economic reforms were unevenly distributed, favoring certain sectors over others, particularly benefiting the high-income groups and service sectors over agriculture and industry.