Cheat Sheet: Liberalisation, Privatisation and Globalisation : An Appraisal | Economics Class 12 - Commerce PDF Download

Background

• Crisis Origins: 1980s mismanagement; government spending exceeded revenue from taxes and public enterprises, leading to heavy borrowing.
• Foreign Exchange Crisis: Imports outstripped export earnings, reducing reserves to cover only two weeks of imports by 1991.
• Spending Drivers: High expenditure on the social sector, defence, and development to tackle unemployment, poverty, and population growth.
• Outcomes: Rising prices, inability to service foreign loans, shortage of lenders.
• Response: $7 billion loan from World Bank/IMF, requiring economic liberalisation, reduced government role, and trade barrier removal.
• New Economic Policy (NEP): Stabilisation for balance of payments/inflation; structural reforms for efficiency/competitiveness.

Liberalisation

Liberalisation removed restrictive regulations to boost economic growth, with major reforms in 1991.

Deregulation of Industrial Sector

• Pre-1991 Controls: Industrial licensing, private sector restrictions, small-scale production limits, price/distribution controls.
• Reforms: Abolished licensing (except for alcohol, cigarettes, hazardous chemicals, explosives, electronics, aerospace, pharmaceuticals); reserved atomic energy, select railways for the public sector; de-reserved small-scale goods; introduced market-driven pricing.

Financial Sector Reforms

• Objective: Shift RBI from regulator to facilitator, enhancing financial sector autonomy.
• Changes: Established private banks, raised foreign investment limit to ~74%, allowed branch expansion, permitted Foreign Institutional Investors (FIIs) in markets.

Tax Reforms

• Direct Taxes: Reduced income/corporate tax rates to reduce evasion, promote savings.
• Indirect Taxes: Goods and Services Tax (GST, 2016), unified market, reduced evasion.
• Simplification: Streamlined procedures, lowered rates for compliance.

Foreign Exchange Reforms

• Rupee devalued in 1991 to increase foreign exchange inflow.
• Shifted to market-determined exchange rates.

Trade and Investment Policy Reforms

• Pre-1991: High tariffs, import restrictions, and licensing slowed manufacturing.
• Reforms: Abolished import licensing (except hazardous goods), removed quantitative restrictions by 2001, reduced tariffs, and eliminated export duties.

Privatisation

• Definition: Transfer of government enterprises to the private sector via ownership withdrawal or sale.
• Disinvestment: Selling public sector equity to the public.
• Objectives: Improve financial discipline, modernise, leverage private expertise, boost FDI.
• Measures: Granted PSUs autonomy; designated maharatnas, navratnas, miniratnas.

Globalisation

• Definition: Integration with the global economy, fostering interdependence across boundaries.
• Outsourcing: Companies hire services (e.g., IT, call centres) from India due to low costs, skilled labour, enabled by IT advancements.

World Trade Organisation (WTO)

• Established: 1995, succeeding GATT (1948).
• Objectives: Rule-based trade, expand service trade, optimise resources, and protect the environment.
• India’s Role: Liberalised trade, reduced tariffs, advocates for developing countries.
• Criticism: Limited benefits due to trade favouring developed nations, unfair subsidy complaints, and market access imbalances.

Indian Economy During Reforms: An Assessment

 Growth

• Service sector led growth; agriculture slowed; industry fluctuated.
• Decline in 2012-15; agriculture peaked in 2013-14.

Foreign Investment and Exchange Reserves

Exports and Challenges

• Strengths: Exports in auto parts, pharmaceuticals, IT, textiles; controlled inflation.
• Weaknesses: Inadequate focus on employment, agriculture, industry, infrastructure, and fiscal management.

Growth and Employment

• High GDP growth but insufficient job creation.

Reforms in Agriculture

• Slowed growth; reduced public investment.
• Higher costs from partial fertiliser subsidy removal; increased competition from import policy changes.
• Export focus raised domestic food prices.

Reforms in Industry

• Slowed due to low demand, cheaper imports, and poor infrastructure.
• Globalization increased competition; non-tariff barriers (e.g., US textile quotas) limited market access.

Disinvestment

• Criticism: Undervalued PSU assets sold; proceeds covered revenue shortfalls, not reinvested.

Reforms and Fiscal Policies

• Limited social sector spending; tax cuts, tariff reductions, and investor incentives reduced revenue.
• Impacted developmental/welfare expenditures.