NCERT Summary: Liberalization- 1

liberalization

1. Deregulation of the Industrial Sector:

   • Industrial Licensing:

     • Before 1991, industrial licensing was a major hindrance as entrepreneurs needed government permission to start, close, or determine production levels for their firms.
     • Certain industries were reserved for the public sector, and private participation was restricted in many sectors.
     • Price fixation and distribution controls were imposed on selected industrial products.

   • Reform Measures:

     • Post-1991 reforms removed several restrictions. Industrial licensing was abolished for most product categories, except for items like arms and ammunition/defence items, industrial explosives, alcoholic drinks, cigarettes, and certain hazardous chemicals.
     • Atomic energy generation remains in the public sector; defence manufacturing is open to private players (subject to licensing/FDI), and railway infrastructure permits private/FDI participation while core operations remain public.
     • Reservation of certain goods for small-scale industries was fully scrapped in 2015.
     • Market forces were allowed to determine prices in many industries.

2. Financial Sector Reforms:

   • Role of the Reserve Bank of India (RBI):

     • The financial sector in India was heavily regulated by the RBI, with control over commercial banks, investment banks, stock exchange operations, and the foreign exchange market.
     • RBI determined aspects such as the reserve requirements of banks, interest rates, and the nature of lending to various sectors.

   • Reform Measures:

     • The aim was to reduce the regulatory role of the RBI and shift towards a more facilitating role in the financial sector.
     • Reforms aimed to grant financial institutions greater autonomy in decision-making without constant consultation with the RBI.
     • This shift from regulation to facilitation allowed financial institutions more flexibility in setting interest rates, determining lending practices, and managing their operations.

3. Tax Reforms:

   • Pre-Liberalization Scenario:

     • The tax system was complex and characterized by high rates.
     • Multiple layers of indirect taxes led to cascading effects, increasing the overall tax burden on businesses.

   • Reform Measures:

     • Post-1991, tax reforms aimed to simplify the tax structure, reduce rates, and remove distortions.
     • The introduction of the Goods and Services Tax (GST) in 2017 further streamlined the taxation system by replacing multiple indirect taxes with a single, unified tax.

4. Foreign Exchange Markets:

   • Pre-Liberalization:

     • Strict controls were imposed on foreign exchange transactions.
     • A fixed exchange rate system was followed.

   • Reform Measures:

     • Liberalization measures allowed greater flexibility in the foreign exchange market.
     • The move towards a market-determined exchange rate system facilitated smoother cross-border transactions and increased foreign investment.

5. Trade and Investment Sectors:

   • Pre-Liberalization:

     • Trade policies were restrictive, with high tariffs and import licensing.
     • Foreign investment was limited, and the approval process was cumbersome.

   • Reform Measures:

     • Liberalization of trade policies involved reducing tariffs and simplifying procedures.
     • Foreign Direct Investment (FDI) norms were relaxed, allowing for greater foreign participation in various sectors.
     • Special Economic Zones (SEZs) were introduced to attract foreign investments with favorable policies.

Navaratnas and public Enterprise Policies

1. Navaratnas and Mini Ratnas:

1. Background:

   • In 1996, the Indian government identified nine Public Sector Undertakings (PSUs) and declared them as "Navaratnas" to enhance their efficiency and competitiveness in the globalized environment.
   • These Navaratnas were given greater managerial and operational autonomy to make decisions independently and improve profitability.
   • Additionally, 97 other profitable PSUs were designated as "Mini Ratnas" with similar autonomy.

2. Navaratnas:

   • The first set of Navaratnas included companies such as Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL), Oil and Natural Gas Corporation Ltd (ONGC), Steel Authority of India Ltd (SAIL), and others.
   • The status provided them with more freedom to operate and compete globally.

3. Performance and Partial Privatization:

   • The granting of Navaratna status was seen as a positive step for the performance of these companies.
   • However, scholars argue that the government's approach toward these companies later involved partial privatization through disinvestment.

4. Recent Government Decision:

   • The government has decided to retain Navaratnas in the public sector and support their expansion in global markets. The emphasis is on enabling them to raise resources independently.

2. Banking Sector Reforms:

• Establishment of Private Sector Banks:

  • Post-reform policies led to the establishment of private sector banks, both Indian and foreign.

• Foreign Investment in Banks:

  • In private sector banks, aggregate foreign investment is permitted up to 74% (with route conditions); in public sector banks, the cap is 20%.

• Autonomy for Banks:

  • Banks fulfilling certain conditions were given freedom to set up new branches without prior approval from the Reserve Bank of India (RBI).
  • Banks were granted autonomy in generating resources both domestically and internationally.

• Foreign Institutional Investors (FIIs):

  • Foreign Portfolio Investors (FPIs)-including global funds such as mutual funds and pension funds-were allowed to invest in Indian financial markets.

3. Tax Reforms:

• Direct Taxes:

  • There has been a continuous reduction in taxes on individual incomes since 1991.
  • Moderate rates of income tax are now considered to encourage savings and voluntary disclosure of income.

• Corporation Tax:

  • The rate of corporation tax, which was initially high, has been gradually reduced.

• Indirect Taxes:

  • Reforms aimed to simplify the indirect tax structure to establish a common national market for goods and commodities.
  • Simplification of procedures and substantial lowering of tax rates to encourage better compliance.

4. Foreign Exchange Reforms:

• Devaluation of Rupee (1991):

  • In 1991, the Indian government devalued the rupee against foreign currencies to resolve the balance of payments crisis.
  • This move increased foreign exchange inflow and set the tone for a more market-driven exchange rate system.

• Market-Determined Exchange Rates:

  • Exchange rates are now often determined by market forces based on demand and supply of foreign exchange.

5. Trade and Investment Policy Reforms:

• Quantitative Restrictions:

  • India, pre-reform, followed a regime of quantitative restrictions on imports, encouraging tight control over imports and high tariffs.

• Liberalization Measures:

  • Reforms aimed at dismantling quantitative restrictions on imports and exports.
  • Reduction of tariff rates and removal of licensing procedures for imports.
  • Import licensing abolished except for hazardous and environmentally sensitive industries.

• Export Duties:

  • Export duties are used episodically and rationalised (applied or withdrawn as needed) to manage domestic and external market conditions.

6. Global Expansion of Indian Companies:

• Tata Group's Examples:

  • Tata Tea acquired Tetley in the UK in 2000.
  • Tata Steel bought NatSteel in Singapore in 2004.
  • Tata Motors completed the buyout of Daewoo's heavy commercial vehicle unit in South Korea.
  • Videsh Sanchar Nigam Ltd (VSNL) acquired Tyco's undersea cable network across three continents.

• Investments in Bangladesh:

  • Tata Group planned to invest Rs. 8,800 crore in fertilizer, steel, and power plants in Bangladesh.

• Overall Impact of Globalization:

  • Globalization allowed Indian companies to expand their operations globally, acquiring companies and investing in various sectors abroad.