Challenges of liberalization, Privatisation, Globalisation | Public Administration Optional for UPSC (Notes) PDF Download

Introduction

Economic reforms in India began in 1985 under Prime Minister Rajiv Gandhi, who aimed to reduce government control and open up the economy to the private sector.

First Phase of Liberalisation:

• The government took measures to remove controls and restrictions on various industries, marking the initial phase of liberalisation.

Key Measures Introduced:

• Cement Industry: Decontrolled, allowing private sector participation in cement production.

• Sugar Industry: Increased the share of free sale sugar to support the sugar industry.

• Asset Limits: Raised the ceiling on asset limits for large business houses from Rs. 20 crores to Rs. 100 crores.

• Drug Industry: Delicensed 94 drugs, removing them from the purview of the Monopolies and Restrictive Trade Practices (MRTP) Act.

• Electronics Industry: Freed from MRTP Act restrictions, inviting foreign firms to participate.

• Broadbanding Scheme: Introduced to allow firms to produce a range of products within specified capacity limits.

• Expansion of Broadbanding: Extended to 25 categories of industries, including four-wheelers, chemicals, pharmaceuticals, petrochemicals, and typewriters.

• Rajiv Gandhi's Approach: Although some liberalisation occurred, Rajiv Gandhi did not take a strong stance on privatisation and globalisation.

• Shift in Policy: It was under Prime Minister P.V. Narasimha Rao in 1991 that a new industrial policy was introduced, significantly departing from the earlier 1956 policy.

• Balance of Payments Crisis: India faced a severe balance of payments crisis in 1991, with a doubling current account deficit and dwindling foreign currency reserves.

• Economic Policy Aims: The economic policy aimed at liberalisation, globalisation, and privatisation.

Liberalisation

• The primary goal of liberalisation was to dismantle the excessive regulatory framework that restricted the freedom of enterprise. Over time, India had developed a system known as the "licence-permit raj." The new economic policy aimed to relieve entrepreneurs from the unnecessary hassle of seeking permission from the bureaucracy (referred to as "Babudom") to start a business.
• Large business houses faced challenges in starting new enterprises because the Monopolies and Restrictive Trade Practices (MRTP) Act imposed a ceiling on asset ownership, limiting it to Rs. 100 crores. If a business had assets exceeding this limit, its application was rejected after scrutiny by the MRTP Commission.
• The MRTP limit was deemed outdated due to rising prices and needed a review. The private sector lobby argued that the limit prevented big industrial houses from investing in heavy industry and infrastructure, which required substantial upfront investment.
• To encourage large businesses to enter core sectors such as heavy industry, infrastructure, petrochemicals, and electronics with significant projects, the MRTP limit was scrapped. The major purpose of liberalisation was to free the large private corporate sector from bureaucratic controls.
• The industrial policy of 1991 abolished industrial licensing for all projects except for a short list of 18 industries. Over time, this list was further reduced. For instance, on April 14, 1993, the Cabinet Committee on Economic Affairs decided to remove three items from the list of 18 industries reserved for compulsory licensing: motor cars, white goods (such as refrigerators, washing machines, air-conditioners, and microwave ovens), and raw hides and skins and patent leather.
• The dereservation of the automotive and white goods sectors aimed to increase investment in these industries to meet the growing demand of the large middle class, estimated at 250 to 300 million people. These products were no longer considered luxury items but essential domestic appliances that alleviate household chores.
• The liberalisation of the automotive sector led to improved designs in two-wheelers, fostering competition in global markets and enhancing domestic markets through better quality and standards. For instance, a car comprises around 20,000 components, all manufactured in the small-scale sector.
• The small-scale sector's automotive component manufacturing experienced a significant boost, and by the end of the reform decade, this sector captured global markets. In response to market demand, the government liberalised industries producing these goods and freed them from industrial licensing, facilitating the transition from liberalisation to globalisation.
• The abolition of licensing for raw hides and skins and patent leather aimed to boost exports. Given the substantial potential for leather and high-quality shoe exports, the government removed licensing requirements to enable large-scale units to realise this potential through modern technology.

 List of Industries in which Industrial Licensing is Compulsory: 

1. Coal and Lignite
2. Petroleum (other than crude) and its distillation products
3. Distillation and brewing of alcoholic drinks
4. Sugar
5. Animal fats and oils
6. Cigars and Cigarettes of tobacco and manufactured tobacco substitutes
7. Asbestos and asbestos-based products
8. Plywood, decorative veneers and other wood-based products
9. Raw hides and skins, leather, chamois leather, and patent leather
10. Tanned or dressed furskins
11. Paper and newsprint except bagasse-based units
12. Aerospace and defence equipment: all types
13. Industrial explosives
14. Hazardous chemicals
15. Drugs and pharmaceuticals

 This long list got truncated to six by 1999.

Globalisation 

Economic Reforms: Liberalisation, Globalisation, and Privatisation
Globalisation aims to blend the Indian economy with the global economy and is a key part of economic reforms. It involves: 

• Reducing trade barriers to allow free movement of capital and services across countries. 
• Creating an environment for the free flow of capital and technology. 
• Allowing the free movement of labour between countries. 

Different Views on Globalisation:

• Some advocates, especially from developed countries, focus on trade, capital, and technology flows as the main components of globalisation.
• Developing countries argue that the movement of labour is also crucial for true global integration.

Measures to Promote Globalisation:

• Reducing Import Duties: Import duties have been significantly lowered to improve the efficiency of the tax system and encourage exports.
• Encouraging Foreign Investment: The government has implemented measures to facilitate foreign investment in various industries, including allowing higher foreign equity in joint ventures.
• Promoting Foreign Technology Agreements: Automatic permissions for foreign technology agreements in high-priority industries have been introduced to encourage technological collaboration.

Privatisation

Forms of Privatisation

• Ownership measures
• Organisational measures
• Operational measures

Ownership measures:
This assesses the degree of privatisation based on ownership transfer from public enterprises to the private sector. Ownership can be transferred to individuals, cooperatives, or corporations and includes:

• Total decentralization: Complete transfer of ownership to the private sector.
• Joint Venture: Partial ownership transfer with various levels, such as 25%, 51%, or 74% transfer to the private sector.
• Liquidation: Sale of assets to buyers who may use them for the same or different purposes.
• Workers’ co-operative: Transfer of ownership to workers who form a cooperative, with bank loans to facilitate share purchases.

Organizational measures:
These involve limited state control and include:

• Holding companies: Top-level decision-making with autonomy for smaller operating companies.
• Leasing: Transfer of asset use to private bidders for a specified period with profit assurances.
• Restructuring: Financial restructuring to improve financial health and basic restructuring to shed activities to smaller units.

Operational measures:
These focus on organisational structure and include:

• Granting autonomy in decision-making to public enterprises.
• Providing incentives for workers and executives to enhance efficiency and productivity.
• Allowing procurement of inputs from the market to reduce costs.
• Developing criteria for investment planning.
• Permitting public enterprises to raise funds from the capital market for diversification or expansion plans. 

Liberalisation, globalisation, and privatisation are means to achieve societal goals, just as nationalisation and regulatory frameworks were. 

• Goals: To achieve high growth rates in national and per capita income, full employment, self-reliance, reduced income and wealth inequality, decreased poverty levels, and a society based on equality and absence of exploitation. 
• Issues with Public Sector: Excessive bureaucratic controls, overstaffing, low returns on investment, poor work ethic, inappropriate entry into consumer goods sectors, and loss-making enterprises burdening the exchequer. 
• Purpose of Reforms: Measures under liberalisation, globalisation, and privatisation aim to rectify public sector issues for greater efficiency and improved economic growth. 
• Expected Outcomes: Higher growth rates are seen as remedies for improving employment levels, reducing poverty, and enhancing living standards. 

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Review of Economic Reforms Related to Liberalization, Globalization, and Privatization 

• The advocates of the reforms process claim a number of achievements. Critics of reforms have drawn attention to various aspects of reform. However, there seems to be a general agreement among all political parties that the reforms are a historical necessity and it would not be possible to reverse the reform process. 
• Even the left parties, after the collapse of Soviet Union, have veered round the view that reforms in the form of liberalisation, privatisation and globalisation will have to be undertaken. The focus of the debate is to ensure that whereas the reform process has helped to accelerate the growth, the benefits of the growth have not percolated to poor and weaker section of the society. It would, therefore, be desirable to consider the various arguments so as to understand the manner in which the measures taken need to be modified so as to achieve the objective of growth with the social justice. 
• The Common Minimum Programme of the Congress-led united front in 2004-05 resolved to restrict privatisation only to the loss making enterprises. There would be no further shedding of public sector enterprises that are being run profitably as was done by the National Democratic Alliance led by the Bharatiya Janata Party.

Accordingly, the erstwhile independent Ministry of Disinvestment was converted to one department in the Ministry of Finance with the Union Government. 

• Higher Growth Rate Achieved: The reform process has resulted in an average growth rate of over 6 percent during the last 10 years (1992-93 to 2002-03). This translates to an average per capita GDP growth rate of 4 percent, a feat not observed in the previous 50 years of planning. 
• Control of Inflation: The early 1990s faced double-digit inflation, peaking at 13.6 percent in 1992-93 due to various factors like high fiscal deficits, rupee devaluation, and commodity shortages. However, from 1995-96 onwards, inflation began to decelerate, with the period from 1996-97 to 2000-01 witnessing the lowest average inflation since the mid-1950s. The decline in inflation was aided by a shift in the source of reserve money creation, moving away from monetization of the budget deficit by the Reserve Bank of India (RBI).
• Reform of the Public Sector: The primary goal of economic reforms is to enhance the public sector's rate of return. This involves reducing overstaffing in public sector undertakings (PSUs) through voluntary retirement schemes. The National Renewal Fund (NRF) was established to provide compensation for voluntary retirement and to facilitate retraining and redeployment of workers.
• Disinvestment and Privatization: The government has been offering equity in selected public sector enterprises to mutual funds and financial institutions as a token of privatization. However, the disinvestment program did not gain momentum in subsequent years, and the proceeds have been primarily used to reduce the budget deficit rather than strengthening PSUs.
• Attracting Foreign Capital: The reform process aimed to attract foreign capital through globalization. Real private fixed investment increased significantly, and India became a top destination for foreign direct investment (FDI). However, direct foreign investment remains lower than non-resident Indian contributions, and a significant portion of foreign investment is in non-priority sectors.
• Fiscal Deficit and Subsidies: The structural adjustment program aimed to reduce fiscal deficit, which improved initially but worsened later due to government wage revisions. The need to reduce subsidies for a sustainable fiscal improvement is emphasized, although the Common Minimum Programme indicates challenges in this area.
• Exchange Rate of the Rupee: The exchange rate of the Rupee improved initially but later weakened, impacting international debt burden and foreign investor confidence. The RBI's intervention and liberalization of current account operations contributed to the Rupee's strengthening in the early 2000s.
• Foreign Exchange Reserves: Foreign exchange reserves improved significantly due to the reform process, with reserves reaching new highs by 2004. This was attributed to liberalization of FDI, foreign institutional investments, and NRI fund inflows reflecting investor confidence in India.

In conclusion, the policies of liberalization, globalization, and privatization, which represent economic reforms, have primarily focused on short-term objectives such as: - Controlling the worsening balance of payments situation - Building foreign exchange reserves - Reducing fiscal deficit - Controlling inflation However, the long-term goals of reducing poverty, achieving full employment, promoting self-reliance, and ensuring growth with social justice have been overlooked. The reform process has not yet been successful in reducing the fiscal deficit. Therefore, there is a need to reorient economic reforms to achieve the long-term goals of society, particularly full employment, self-reliance, and growth with social justice.