Liberalisation Privatisation Globalisation (LPG) Part 1 - In 25 years did India achieve anything? Video Lecture | Indian Economy for Government Exams (Hindi) - Bank Exams

[Music]
[Applause]
hello and welcome to study IQ in this
lecture we will discuss about the
background of LPG policy that is
liberalisation privatization and
globalization in India and we will
discuss about the immediate after
effects of the liberalization
privatization and globalization so let
us start LPG an appraisal in 1991 India
met with an economic crisis related to
external debt so this was in the year
1991 India was not able to make
repayments for its borrowings from
abroad so India was not able to make the
repayments on the borrowings from abroad
and as a result the Forex of the country
dropped so forex reserves dropped and as
a result of decrease in forex reserves
the price of essential commodities
increased so essential goods the prices
increased and this led to huge inflation
in the country and also a and also a
shortage of forex reserves let us see
what was the background of this crisis
background if we look at the background
of this crisis we can divide the causes
into two reasons mainly one is internal
factors and second one external factors
so both internal as well as external
factors were responsible for this b.o.b
crisis or balance of payment crisis in
the country first let us see what
whether internal causes first of all the
expenditure of the government was more
than the revenue that means expenditure
was more than the revenue of the
government this will lead to deficit or
fiscal deficit so as a result what will
happen when fiscal deficit increases the
government borrowings also increases so
in order to meet the expenditures the
government will borrow money from
various sources and this can be from
abroad also so when government borrows
money from abroad you should understand
that government will have to repay the
amount along with the interest in
of dollars which is Forex so government
will need adequate forex reserves in
order to make the repayments so this was
one recent increase expenditure of the
government led to borrowings from abroad
and this had to be bailed in terms of
forex this was one reason for decrease
in forex reserves of the country and
what were the reasons for this increased
expenditure of the government this
increased expenditure was due to various
reasons like the developmental policies
of the government when we learned about
the 5-year plans in India we will in
detail see what were the developmental
policies of the government during that
time but in short the gunman had various
developmental policies and programs
during this time and because of those
policies the expenditure were always
more than the revenue of the government
and the reason was that government had
given priority to the social sector as
well as defense the third reason was
that the government did not earn
sufficiently from taxation and pious use
the rate of Taxation during that time
was high and due to the increased rate
of Taxation what the general public did
was many people evaded tax so tax
evasion was very common because of the
higher rates of Taxation and this has
led to decreased tax collection so the
revenue from taxation was less for the
government also PS use they also did not
earn sufficiently what was a recent
pious use did not earn sufficiently
pious did not earn sufficiently because
of inefficiency what was the causes for
inefficiency during that time pious use
well under the political control so PhDs
are completely owned by the government
and this was obviously under the
political control
so as the PS used are under the direct
control of the government there were lot
of red tape ISM because they had to get
the permission from the government to
implement anything so any minor change
also required
permission of the government and there
was increased red tape ISM also the
political pressure was so high or
political influence was high so these
were all reasons for inefficiency in the
PS use which led to insufficient revenue
collection from the PS use so because of
all these reasons government had to
borrow money in order to meet the
expenditure of the government so even at
times government had to borrow for
consumption expenditure also so this led
to huge borrowings which led to
increased sabores had to be paid back in
terms of Forex and this led to shortage
of Forex in the economy so these are the
internal factors coming to the external
factors there are mainly two external
factors
one was the Gulf War so during the Gulf
War the prices of the oil shoot up so
increased price of oil increased the
import expenditure of the government we
were highly dependent on imports for our
oil requirements of import expenditure
also increased so import also has to be
paid in terms of dollar so this is also
another issue so increase in the prices
of oil led to increased expenditure on
government imports and this also led to
shortage in forex reserves another
reason was the disintegration of USSR so
what happened was USSR disintegrated and
what we had signed a counter trade
agreement with USSR India had a counter
trade agreement with USSR so according
to this Agreement the counter trade
agreement USSR and in India had agreed
that if suppose India exports thousand
dollars commodities from USSR USSR would
import the same thousand dollars
commodities from India that means there
was no need of Forex or
was not required so according to the
counter trade agreement USSR agreed to
buy the same quantity of commodities or
the same amount of commodities which
India would import from USSR so if India
is importing some amount of commodities
from USSR the USSR would buy or import
from India the same as the USSR would
import from India for the same amount so
this was the counter trade agreement and
with the disintegration of USSR the
counter trade agreement became invalid
so now what India had to do India had to
pay in order to import from USSR so
India's import expenditure again
increased because now India has to pay
to the different docks of USSR if import
has to take place so CTA or the counter
trade agreement became invalid so these
were the factors that culminated into
the shortage of Forex in the country so
India run short of forex and India had
to and India was not even able to pay
back the borrowings or the interest so
what ended it in the approach the World
Bank and the IMF so the only solution
left to thing there was to approach the
World Bank and IMF and India asked for 7
billion as loan so India asked for their
aid and the amount was seven billion
dollars World Bank and IMF agreed that
they will give this loan to India but on
one condition what was the condition the
condition was to liberalize and open up
the economy so what does this liberalize
and open up the economy mean let us see
firstly it meant that it should reduce
the role of government remove
restrictions on private sector remove
restrictions on private sector and also
remove trade restrictions between India
and other countries remove so what does
this mean reduce the role of government
it means that now government cannot
control everything government should
just be a facilitator it will not have
the autonomy to control everything
government should reduce its role to a
facilitator remove restrictions of
private sector it means that
privatization should take place our
private sector should be allowed to
function in the economy so private
sectors should be given more autonomy
and freedom in order to establish
institutions in the economy remove trade
restrictions between India and other
countries it means that tariffs on trade
should come down so trade tariffs should
come down and this should ensure free
flow of goods and services from India to
other countries and from other countries
to India as well so these were this is
the so this was the condition given by
the World Bank and the IMF and in order
to comply with this conditions India
announced the NEP or the new economic
policy so what is NEP any basic set of
policies and broadly we can divide any P
into two oneness stabilization policies
and other one is structural reform
policies so let us see stabilization and
secondly structural reform policies now
let us see stabilization policies so you
must understand here that stabilization
policies are short-term policies what
does the term stabilization means
stabilize to correct to rectify to bring
it back to the original position so the
aim of the stabilization policies were
to bring back the economy to normal so
it was just to stabilize to bring back
economy into the normal situation so the
aim of the stabilization policies where
to correct some of the weaknesses that
had arise during the be of the crisis so
to correct the weaknesses as we said to
stabilize the economy or to bring back
the economy to normal so what are the
weaknesses that arise in during the
b.o.b crisis first one we said
increasing the prices of essential goods
and other commodities which is known as
inflation inflation means the persistent
rise in the prices of commodities in the
market so we said that during this
crisis the prices
had shoot up in the market and this led
to higher rates of inflation in the
economy and secondly we said that we had
a huge shortage of forex reserves so
second weakness was shortage of Forex so
the aim of stabilization policies were
to rectify these two mistakes that does
inflation control and shortage of Forex
these two should be regulated so this
was the aim of aim or purpose of the
stabilization policy so coming to the
structural reform policies let us see
what the structural reform policies
there are long term policies never aimed
at making a long term impact on the
economy for example investments from
abroad that is FDI FIA etcetera if they
will have a very long term impact in the
economy so such policies were under the
structural reform policies so the aim of
this structural reform policies left to
improve the efficiency of the economy
and to increase the competition or
competitiveness of the economy
efficiency and competitiveness so you
know efficiency and competitiveness can
be achieved in a long term or long run
so this was the objective of structural
reform policies now let us see LPG in
detail liberalization privatization and
globalization first let us make an
analysis of the liberalisation
liberalisation means opening up of
various sectors of the economy
so liberalizing so by liberalize in
various sectors are open open to the
private sector as well as to the foreign
so private and foreign
so now policies are liberal all rules
are liberal so now let us see what does
liberalisation meant for various sectors
first of all the industrial sector
earlier industrial sector was regulated
through licensing so this was before the
liberalisation it was regulated through
the licensing system private sector
not allowed in many sectors so private
we're not allowed to make investment in
various sectors under the industry also
many sectors under the industry was
reserved for small-scale industries so
reservations were there also the
government had control over price and
distribution of various commodities
price and distribution what does it mean
it means that the price of certain
commodities were decided by the
government so at what value it should be
sold in the market so such things were
divided so such things were decided by
the government and distribution means
quantity of the commodities how much of
commodities or what quantity of
commodities should be sold in the market
all this well decided by the government
so there were licensing also private
sector was not allowed to make
investment in certain areas also
reservations for small-scale industries
were also made also the price and
distribution was decided by the
government market had no role price and
distribution actually ideally markets
should decide the demand and supply
forces should decide but here the
government decided the price and also
the quantity of distribution so this was
the condition before liberalisation so
now let us see what happened after
liberalisation after liberalisation
industrial licensing was abolished and
it was kept for only few industries so
industrial licensing abolished except a
few industries industrial licensing was
not required before liberalisation we
said that private sectors were
restricted to make investment in certain
areas but after liberalisation what
happened was private sector was given
the choice and freedom of investing in
almost all the areas except a few areas
or few industries so private sector well
private sector was given the freedom to
invest in different sectors in the
economy and only a few sectors were
reserved for the public sector or the
government
and this were the railways defense it
Sidra
so exceptions were railway atomic energy
defense XE drop we also said that there
were reservations before liberalisation
means reservation for small-scale
industries
so after liberalisation what the
government would did was D reserving D
reservations so it meant that the
reservations were taken away so now
anybody can invest the most important
one was that market was allowed to
determine the price and distribution how
does the market determine price and
distribution based on demand and supply
forces so according to the demand and
supply the market can automatically
decide the price of commodities and also
the amount of distribution or what
quantity should be distributed in the
market so this was decided by the market
now let us come to the financial sector
the financial sector of the economy
includes commercial banks investment
banks stock exchanges foreign exchanges
etc so before the liberalisation our Bay
was the regulator of the financial
institutions in the country our Bay was
the regulator you should remember this
is a regulator not facilitator so what
happened after liberalisation was that
the role of the RBA decreased from that
of regulator to facilitator so what is
the difference between regulator and
facilitator regulator means that the
person or the institution which
regulates or controls everything so
before liberalisation are they
controlled everything or the financial
sector but when it became a facilitator
it means that our bay is now responsible
to make policies and programs which will
facilitate or which will help in
transactions but not control it is not
completely controlled by the ARB a so it
became a facilitator another change that
was seen in
financial sector was that new private
banks as well as foreign vines were
allowed to invest in the country so this
led to the arrival of private and
foreign banks new private and foreign
banks were set up in the country and
later on the government appointed the be
Mulholland committee also that was
recently the be Mulholland committee
which was responsible for setting up our
criteria for establishment of private
banks and foreign banks in the country
and be multi-line committee is a very
important company which we will discuss
when we discuss the banking module so
this committee name you should remember
and this committee is responsible for
giving the criteria of giving licenses
or issuing licenses to the private
sector as well as foreign banks another
important thing is foreign institutional
investors or fi eyes we're allowed to
make investment in Indian financial
markets so FIS we're allowed to make
investment in the financial market of
the country and examples of FII merchant
banks mutual funds pension funds etc so
they were allowed to make investment in
Indian financial market next let us see
what were the tax reforms tax reforms
after the liberalisation the taxation
and the public expenditure is together
known as the fiscal policy of the
government so fiscal policy of a
government means the expenditure of the
government or the public expenditure
plus
taxation so expenditure plus taxation
will give you fiscal policy as you know
taxes are of two types one is direct
taxes and another one is indirect taxes
so now first let us see what was the
impact on direct taxes so direct taxes
are collected directly from the income
of individuals plus profit of firms so
profit and income they're taxable under
the direct taxes when we discuss the
background of this crisis we said that
the revenue of the government was less
so one reason we said was insufficient
tax revenues so let us see what was the
reason we already said
that the tax rates were high tax rates
were high and this motivated people to
evade taxes since the tax rates were
high people who are not willing to pay
taxes to the government and this reduced
the tax revenues of the government this
was a condition before the
liberalisation so after the
liberalisation what the government did
was government reduced this tax rates so
tax rates were reduced and this resulted
in less number of tax evasions so when
tax rates are reduced tax evasions also
reduced and what is the impact of
reducing tax evasions let us see one
thing voluntary disclosure of taxes or
income so tax payments increased
therefore the revenue of the government
also increased so revenue of the
government increased when the revenue of
the government increases with that of
expenditure what would happen deficit
will reduce so deficit reducing means
borrowings of the government will come
down so borrowings came down this was
one impact another impact was increase
in savings so there was increase in
savings with the financial institutions
so if you are not paying taxes can you
save your money in balance no you have
to disclose your income if you want to
save the money in banks so when there is
more tax evasion savings will be less so
when tax payments increases what will
happen people are willing to save their
money in banks so reduce rates of
Taxation had multiple effects one
purchasing power of the people all
personal disposable income we have
already seen what is personal disposable
income personal disposable income is
income minus tax payments so when people
have more personal disposable income
their purchasing power increases so with
reduced rates of Taxation the personal
disposable income of people or
households increased
so when personal is possible income
increases they will have more money to
save their savings will increase also if
they have to pay taxes they have to show
their income so in that scenario they
are willing to save their money in
financial institutions so this led to
increase savings in the economy and what
is the impact of increased savings in
the economy and increase in savings will
lead to increase in investments so an
increased savings means increase
investments in the economy again the
corporation tax was also gradually
reduced and coming to the indirect taxes
efforts were taken to reform the
indirect tax also establishment of a
common national market was the aim of
the government common national market
and now we have fulfilled this aim
through the GST goods and services tax
so GST or common national market will
enhance simplification and also
encourage better complaints and we will
discuss GST in detail in a later module
now let us see what were the reforms
made in the foreign exchange sector
foreign exchange after liberalisation
through Beaver's devalued devaluation of
rupee so what does devaluation we have
already discussed what is devaluation
but for your understanding I'll tell you
again devaluation is the process by
which the central bank of an economy
reduces the value of that particular
currency so in case of rupee the value
is brought down so it is not an
automatic process this is an intentional
process and this is done by the central
bank of an economy in case of India are
paid as this and devaluation is a very
important topic with devaluation you
also have revaluation also there is
depreciation and appreciation all these
four terms are very very important and
this explanation will require one entire
session so I'll definitely discuss
revaluation depreciation etc in one
module so here you must understand the
rupee was devalued by the central bank
which means the value of rupee has come
down let us see how suppose before the
devaluation one dollar equal to sixty
rupee let us suppose this was before the
devaluation so now the value of rupee
has come down so rupees so for one
dollar you have to pay now
sixty-six rupee that means the value has
come down you have to pay more rupee in
terms of dollar so this is devaluation
and what will be the impact of the
evaluation the evaluation will help in
more inflow of foreign capital so this
will help in the inflow of foreign
capital into the country now let us see
what were the reforms made in trade and
investment trade and investment we have
seen that with the liberalisation of the
economy more foreign companies came into
India or more foreign competition came
in terms of trade there were increased
competition in that market so
competition was high in the market by us
this competition high this was because
of foreign investment and foreign
investment means not really capital but
also technology so this led to adoption
of modern technologies in the economy
more capital in the economy so our local
industries were also compelled to adopt
modern technologies and this led to
improved competitiveness in the market
which led to increased output we have
also said that licensing was abolished
import licensing was also taken away so
more imports came into Indian economy
which means that we had surplus of
commodities in the market so imports
increased so there was more supply in
the market supply more than the demand
which led to decrease in price
in the market inflation reduced when
supplies more than the demand what will
happen price will come down also tariffs
were reduced tariffs were reduced which
means that there is no lesser
restriction on the quantity of
commodities coming to the Indian market
so this also increase in large
competition and also the supply in the
market became huge so that the price
were under control and there was
controlled inflation in the economy
again export duties were reduced export
duties that means Indian exporters had a
fair chance of exporting to other
countries this increased the competitive
position of Indian goods in the foreign
market so exports were also easy export
duties were less and coming to the
investment what happened foreign
investment flow into the country foreign
investment as a result we had capital we
had technology also there was
improvement in the infrastructure of the
country so all this led to the growth
and development of the country
[Music]
[Applause]
[Music]