Libralization, Privatization and Globalization
- 2. The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the LPG or Liberalisation, Privatisation and Globalisation model. The primary objective of this model was to make the economy of India the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world INTRODUCTION
- 3. Factors which lead to 1991 economic reforms : ● Rise in Prices: The inflation rate increased from 6.7% to 16.7% due to rapid increase in money supply and the country’s economic position became worse. ● Rise in Fiscal Deficit: Due to increase in non-development expenditure fiscal deficit of the government increased. Due to rise in fiscal deficit there was a rise in public debt and interest. In 1991 interest liability became 36.4% of total government expenditure. ● Increase in Adverse Balance of Payments: In 1980-81 it was Rs. 2214 crore and rose in 1990- 91 to Rs. 17,367 crores. To cover this deficit large amount of foreign loans had to be obtained and the interest payment got increased. ● Fall in Foreign Exchange Reserves: India’s foreign exchange reserve fell to low ebb in 1990-91 and it was insufficient to pay for an import bill for 2 weeks.
- 4. LIBERALIZATION Liberalization in economics means minimising the government's restrictions and regulations in an economy, in return for higher involvement of private organisations. In short, liberalisation means the removal of restrictions in order to promote economic development. Economic reforms Industrial Sector Reforms Financial Sector Reforms Fiscal Reforms External Sector Reforms
- 5. Industrial Sector Reforms under Liberalization : Liberalization virtually implied de-regulation of industrial sector of the economy. Following observations highlight how it happened: ● Abolition of Industrial Licensing ● Contraction of Public Sector ● De-reservation of Production Areas ● Expansion of Production Capacity ● Freedom to Import Capital Goods Financial Sector Reforms under Liberalization : Liberalization implied a substantial shift in the role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector. Fiscal Reforms under Liberalization : Fiscal Reforms are the policies set for the government's taxation and public expenditure policies. All macroeconomic related issues are part of fiscal policies designed by the central government. External Sector Reforms : This includes foreign exchange reforms, and foreign trade policy reforms. Foreign Exchange Reforms : Foreign exchange reforms were initiated in 1991 with the devaluation of the Indian rupee against foreign currencies. Foreign Trade Policy Reforms :The 1991 policy allowed export houses and trading houses to import a wide range of items. The government also permitted the setting up of trading houses with 51 per cent foreign equity for the purpose of promoting exports
- 6. POSITIVE IMPACT NEGATIVE IMPACT ● Free flow of capital: Liberalisation has enhanced the flow of capital by making it affordable for the businesses to reach the capital from investors and take a profitable project. ● Diversity for investors: The investors will be benefitted by investing a portion of their business into a diversifying asset class. ● Impact on agriculture: In this area, the cropping designs have experienced a huge change, but the impact of liberalisation cannot be accurately measured. Government’s restrictions and interventions can be seen from the production to the distribution of the crops. ● The weakening of the economy: An enormous restoration of the political power and economic power will lead to weakening the entire Indian economy. ● Technological impact: Fast development in technology allows many small scale industries and other businesses in India to either adjust to changes or shut their businesses. ● Mergers and acquisitions: Here, the small businesses merge with the big companies. Therefore, the employees of the small companies may need to enhance their skills and become technologically advanced. This enhancing of skills and the time it might take, may lead to non-productivity and can be a burden to the company’s capital.
- 7. PRIVATIZATION It means the transfer of ownership, management, and control of the public sector enterprises to the private sector.The government ceases to be the owner of the entity or business. Objectives of Privatisation : ● Greater efficiency. ● Revealing the true and full cost of the service provided. ● Promotion of technological advancement. ● Development of capital market.
- 8. POSITIVE IMPACT NEGATIVE IMPACT ● Greater efficiency. ● Lower taxes for residents. ● Reduced opportunities for political influence to drive services. ● Better services through competition. ● Increased Competition ● A greater opportunity for fraud and corruption to occur. ● Higher costs for consumers. ● Inflexibility due to long-term contracts. ● Profit, rather than residents' needs, as a primary motivator.
- 9. GLOBALIZATION Economic globalization refers to the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies. The Benefits of Globalization ● Increased Flow of Capital. ● Better Products at Lower Prices. ● Collaboration and Shared Resources. ● Cross-Cultural Exchange. ● Spread of Knowledge and Technology. ● Quick Technological Advances. ● Increased Household Income. ● Increased Open-Mindedness and Tolerance.
- 10. POSITIVE IMPACT NEGATIVE IMPACT ● Broadens Access to Goods and Services ● Increase in industrialization ● Can Lift People Out of Poverty ● Increases Cultural Awareness ● Information and Technology Spread More Easily With Globalization ● Higher Standard of living. ● Workers Can Lose Jobs to Countries With Low-Cost Labor ● Globalization Hasn’t Protected Labor, Environmental or Human Rights ● Loss of domestic industries ● Empowers Multinational Corporations ● Decline in income ● Increased Competition ● Deforestation and loss of biodiversity caused by economic specialization and infrastructure development
- 11. Conclusion LPG reforms were introduced in the Indian economy to make a transition from an open to a closed economy and tide over the balance of payment crisis. These reforms enabled increased participation of domestic and international firms in business activities leading to better economic growth. However, at the same time, it exposed the developing sectors of the economy to global competition.