Chapter-3 , Notes , Liberalisation ,Privatisation and Globalisation (LPG) Policy 1991
Ch- Liberalisation ,Privatisation and Globalisation (LPG) Policy 1991
New Economic Policy (other name)
Or
Economic Reforms (other name)
To
manage the economic crisis of 1991, India govt. approached IBRD
(International Bank for Reconstruction & development], World Bank & IMF
[ International monetary fund].received
a loan of 7 Billion dollars to avail this
loan world Bank & IMF expected India to follow 3 conditions
1)
To Remove restrictions on the pvt.
Sector
2)
To Reduce the role of Govt. in
economic development
3)
To remove trade restrictions /
Barriers.
India agreed on the condition of world
Bank & IMF & announced LPG Policy.
Measures
of New Economic Policy:-
The new economic Policy was announced
in July 1991. The main aim of the policy was to create a Competitive environment
in the economy & remove Barriers on the entry & growth of the firms
The
new economic policy contain 2 measures :-
1. Stabilisation Measures
:-It refers to short term measures which aim at:-
· To
maintain a Balanced BOP..
· To
control Inflation.
2. Structural Reform measures:- It refer to as long term measures which aim
at
· To
improve the efficiency of the economy .
· To
Increase international Competitiveness
NEED
FOR LPG POLICY OR NEED FOR NEW ECONOMIC POLICY OR NEDED FOR ECONOMIC REFORMS
1. Poor Performance of Public Sector:-
during 1951-90 , public sector was assigned an important role to work for the
economic development of India. However,
the overall performance was very disappointing. Govt enterprises
suffered the huge losses as a result, the Government recognised the need LPG
policy
2. Deficit in Balance of Payments (BOP):
Deficit in BOP arises when, Imports exceed Exports. Even after imposing heavy
taxes, there was a sharp rise in imports and
there was slow growth of exports as a result new economic policy is
required to build a strong export sector
3. Extreme Inflationary :
There was rise in general price level in the economy due to shortage of
essential goods. As a result LPG policy is required to tackle the Inflation
4. Fall in foreign exchange reserves:
In 1991, fall in foreign exchange reserve led to the foreign exchange crisis in
the country. Foreign exchange reserves is inadequate to finance imports, to pay
interest on loan, as a result LPG policy is required, to increase the foreign
exchange reserve by developing export sector
5. Huge burden of debt :- The expenditure of the government was much
higher than revenue. As a result, government had to borrow money from banks,
public and from international financial institutions like world bank and IMF
etc. As a result LPG policy is required to pay off the debts.
6. Inefficient Management:
The management of the Indian economy was inefficient because govt was not even
able to generate sufficient revenue from internal sources as a result the LPG
policy is required to tackle the situation
Five
reforms Under liberation :-
1. Industrial
sector reforms
2. Financial
sector reforms
3. Tax
reforms / fiscal reforms
4. Foreign
Exchange reforms / External sector reforms
5. Trade
and Investment sector reforms
1. Industrial sector reforms :-
Govt
introduced the industrial sectors reforms on 24 July 1991 . it includes the
following
Ø
Reduction
of industrial licensing :- this new policy abolished industrial
licensing fpr all the projects except following [liquor , cigarette , defence equipments, industrial explosives and
dangerous chemical ]
Now
no licensing is needed to setup a new industry to expand the existing
industries and to diversify a business however licensing is required for
industries relating to securities
Ø
Decrease
in the role of public sector :- There was
substantial reduction in the role of public sector for the development of
public sector .now only 3 sectors are exclusive reserve for public sector
a)
Defense
b)
Atomic
c)
Railways
Ø
De-reservation
under small scale Industries :- Many goods produced
by small scale Industries are now de reserved . the market was allowed to
determined the price according to demand and supply and not by the govt.
Ø Monopoly and restrictive trade
practice Act [MRTP]
Under
this act the prior approval for merger , amalgamation etc. are now eliminated
2. Financial sector Reforms :-
It includes financial institute like
commercial bank, investment bank foreign exchange market and stock exchange
The financial sector in India is
controlled by RBI
1.
Change
in the role of RBI :- Role of RBI was reduced from regulator
to facilitator financial sector are now allowed to take decisions on many
matters even without consulting RBI
2.
Origin
of Pvt. Bank :-Under this Pvt. Banks can be
established . It increase the competition & provided benefit to consumer
with lower interest rate on the loans
3.
Increase
in the limit of foreign Investment :-
The limit of foreign investment in bank was raised to 51% foreign
institutional investors was now allowed
to invest in Indian financial market.
4.
Expansion
process :- banks were given freedom to set up new
branches even without the approval of RBI
3.
Tax reforms / fiscal policy reforms :-
It refer to reforms of govt. taxation
and expenditure policy . it is also called fiscal policy taxes are of two type
(1) Direct Taxes :-It consist of taxes on the Income of individual
& profit of the companies like income tax
(2) Indirect Taxes:- It consist of those taxes which are imposed on
goods and services i.e. on consumption
Tax
reforms includes the following :-
A.
Reduction
in taxes :- Since 1991 there has been a continuous
reduction in income tax because higher taxes rates were the main reason for tax
evasion . now due to moderate rate of taxes there is encouragement of saving
and Investment
B.
Reforms
of Indirect taxes :- various reforms have been made in
Indirect Taxes to facilitate the establishment of common market of goods .
C.
Simplification
of process :-In order to encourage tax payers many
procedure has been simplified
GST (goods and services taxes )
The GST act was passed in the parliament on 29 march 2017 to introduced
a unified Indirect tax system in India The GST act Implemented on 1st July 2017It help to generate additional tax
revenue for the govt. reducing tax evasion and to create one nation one tax one
market
4.
FOREIGN EXCHANGE REFORM EXTERNAL SECTOR
REFORM
1)
Devaluation
of Indian Rupee:- Devaluation means reduction in the
value of domestic currency in term of foreign currency rupee was devalued which
leads to increase in exports and also inflow of foreign currency
2)
Market
Determination of exchange rate:- The govt allowed market force of demands supply to determine the exchange
rate in the economy
5.TRADE
AND INVESTMENT POLICY REFORM
Before 1991 a lot of tariff Quota were
imposed on imports to protect the domestic industries . The protection reduce the efficiency of domestic industries
so this reform were introduced to increase the competition to promote foreign
investment in India and to promote efficiency of domestic industries
Trade and Investment policy reform
includes the following
1)
Removal
Of Quota:- Under the new economic policy quantitative
restrictions on export and import were reduced Quantitative restriction on
import of consumer goods and on
agriculture goods were fully removed from
April 2001
2)
Removal
of export duty:- Export duties were removed to
Increase the competitive Position of Indian goods
3)
Reduction
of Import duty :- Import Duties were reduced to improve
the position of domestic goods.
4)
Relaxation
of import licensing :- The Import license are abolished
except in case of hazardous goods this encourage domestic producer to Improve
their efficiency
Privatisation:-
It means transfer of Ownership
management and control of private sector enterprises to the private sector
Privatisation
implies greater role of private sector in the development of economy it can be
done in two ways.
Transfer of ownership of public sectors companies to the private
sectors
By selling a part of equity of PSU to
the general public or private sector
The purpose of Privatisation was to
improve financial discipline and to facilitate Modernisation . Managerial
capabilities of Pvt. sector will help in Improving the performance of PSU
BENEFIITS
AND LOSSES DUE TO PRIVATISATON
BENEFITS
1)
Privatisation leads to reduction
in defizi budget . Govt enterprises were putting large burden
on the economy due to huge losses . Privatization reduced the financial burden
of the Govt .
2)
Privatization abolished the monopoly
of govt
sector and help in improving the competition .
3)
Privatisation will be helpful in
providing greater decision making process because of no involvement of govt .
4)
Privatisation leads to consumer
choices because the survival of private sector is mainly dependent on the
satisfaction of customers .
LOSSES
1)
Private sector enterprises mainly
operate with the objective of profit maximization thus they neglect the social
welfare .
2)
Privatization leads to concentration
of economic powers
3)
Private Sector does not take any
interest in the project which are risky .It means privatization leads to LOP
sided growth [ Unbalanced Growth ]
4)
Privatization leads to rise in the
level of unemployment because there is always a fear of retrenchment / lay off in the private jobs .
Que:-
Write a short note on Mavratnas ,Maharatnas and Miniratnas.
Ans:-Govt
made attempts to improve the efficiency of PSU by giving them autonomy for
taking managerial decisions
Some PSU have been granted the status
of mavratnas and miniratnas
In order to enables PSU to be more
effective govt started granting [Mavratna] status to PSU
The granting of Mavratna status
resulted in better performance of these companies
Apart from this other profit making
companies were granted operational and managerial autonomys they are referred
as Miniratnas as on 13 th sep 2017 There are [8] Maharatna, [16] Mavratna and [74] Miniratnas .
GLOBALISATION
:-
It means intergrating our economy with
the world economy by removing trade barriers
It involves creation of network and
activities joining economic social and geographical boundaries
Globalization aims to create a
borderless world
CHANGES
MADE BY GLOBALISATION / STRATEGIES PROMOTING GLOBALIZATION
1)
The new economic policy specified a
list of priority Industries in which automatic permission will be available for
FDI upto 57 percent of foreign equity
2)
In respect of foreign technology
agreement automatic permission is provided i.e no permission is now required
for living foreign technicians
3)
In order to make international
adjustment , rupee was devalued by 20 percent which leads to rise in exports
and discouraged imports .
4)
In order to bring the Indian economy
with global competition , the peak rate of custom duty has been reduced from 25
percent to 10 percent
5)
The new economic policy remove all the
barrier and restriction on the external trade and allowed demands supply force
to play a greater role .
BENEFITS
OF GLOBALISATION
1)
Greater access to global market
2)
Advanced technology
3)
Better future opportunities for large scale Industries
POINTS
AGAINST GLOBALISATION
1)
Benefits of globalization were limited
to developed countries only because they only are able to expand the markets
2)
Globalisation compromises with the
welfare of people belonging to poor
countries
3)
Globalisation increases the disparities
among the people
OUTSOURCING
Outsourcing refers to contracting out
some of its activities to a third party which were earlier performed by
organization itself for eg
1)
Many companies have started outsourcing security services
2)
Many companies have started
outsourcing calling business
Outsourcing is one of the important
outcome of the globalization process . It
has increased in recent time because of the growth of communization and
growth of IT
India has become a favourable destination of outsourcing for most of the Multinational companies
because of low wage rate and availability of skilled manpower .
SOME
OF THE SERVICES OUTSOURCED TO INDIA
1)
Call
center and business process outsourcing [BPO]
2)
Record
keeping
3)
Accountancy
4)
Banking
services
5)
Music
Recording
6)
Film
editing
7)
Clinical
advice
SOME
IMPORTANT MEANINGS
1)
BILATERAL
TRADE = Trade between two countries is called
Bilateral Trade
2)
MULTILATERAL
TRADE =Trade between more than two countries is
called multilateral trade .
3)
TARIFF
BARRIERS = The barriers which are imposed on imports to
make the imports more costly.
4)
NON
TARIFF BARRIERS =The barriers which are imposed on the
amount of import and export i.e Quota/ Quantitative restrictions.
WTO
[ WORLD TRADE ORGANIZATION]
prior to WTO , GATI(General Agreement
of Trade and Tariff ) was established in
1948 ,with 23 countries GATI was set up to control multilateral trade agreement
by providing equal opportunities to all the countries in the international
market .WTO was found in 1995 as an organisation to the GATI
the WTO agreement cover trading of
goods as well as services to facilitate
international trade at present there are 164 member country of WTO & all
the members are required to follow laws and policies of WTO .
India was the member of WTO fulfilled
all the commitment and has taken reasonable steps of removing tariffs and
Quotas
FUNCTION
OF WTO
1. To
facilitates International trade by removing tariffs and non tariff barriers .
2. To
established the rule based trading System
3. To
enlarge Production and trade of Services
4. To
ensure optimum utilization of resources .
5. To
protect the environment .
QUE:- SHOULD INDIA BE A MEMBER OF WTO
?
ANS:-Some
scholars are of the view that there is no Use for the developing like India to
be a member of WTO According to them
Major
volume of International trade occur among the developed countries and not among
the developing countries
Developing
countries are being cheated and they are forced to open up the market for
developed countries
ARGUMENT
IN FAVOUR OF LPG POLICY
1.
Increase
in the rate of economic growth
The growth rate of GDP was 5.6 in
1980-1991 . During 2017-18 the growth rate of GDP becomes 6.7%& in 2018-19
. The GDP growth rate is estimated at 7.2%
During the reform period the growth of
agriculture has decline and the Industrial sector has gone up . Services sector
showed highest growth rate of 103% in 2014-15.
2.
Inflow
of FDI
Due to LPG policy their has been rapid
Increase in the FDI FDI Increase from 100million dollar in 1991 to 73.5 billion
dollar in 2014-15
3.
Rise
in foreign exchange reserve
There
has been increase in foreign exchange reserve from 6 billion dollar in 1991 to
321 billion dollar in 2014-15 . India is one of the largest foreign holder in
the world .
4. Rise In exports:- During
the reforms period India experienced a significant Increase in export of Auto
parts , Engineering goods IT software & Textile Jute .
5.
Control
of Inflation :-
Due
to LPG policy the annual rate of Inflation reduced from the peak (highest )
level of 17% in 1991 to 5.48% in 2015-16
ARGUMENT AGAINST LPG POLICY
1.
Growing
Unemployment :-GDP growth rate has Increased in the reform
period but even after such growth we failed to generate sufficient employment
in the economy
2. Neglect of agriculture :- the
new economic policy has neglected the Agriculture sector as compared to
Industries and services sector
(i) Reduction of public Investment :-Public
Investment in Agriculture has been reduced specially in Infrastructure like
Irrigation , power Etc
(ii) Removal of subsidy :-
removal of subsidy increased the cost of production which adversely affect the
small farmers.
(iii) Reduction of Import duty :-Reduction
of Import duty on agriculture goods and removal of quotas adversely affect the
Indian farmer as they have to face the competition
(iv) Due
to globalisation the production shifted from foods crops to cash crops
3)
Low
level of Industrial growth :-Industrial growth
recorded a slowdown due to following reasons .
a) Cheaper Imported goods :-Due
to globalisation cheaper Imported goods replaced the demand for domestic goods
and the domestic producer started facing competition
b) Lack of Infrastructure :-
The Infrastructure facilities including power supply was Inadequate
c) Ineffective Disinvestment Policy :-Govt.
has fixed a target for disinvestment of PSU . the target was 56,000 Cr where
the achievement was 34,500 Cr . Disinvestment policy of Govt.was not successful
because the Assets of PSU were Undervalued & sold to private sector .
Moreover , proceeding from disinvestment were use to compensate the shortage of
Govt revenue .
4)
Tax reduction in the reform period was
ineffective because it did not result in increase in revenue of the govt.
5)
Growth has been concentrated onlt in
some selected areas of services . sector such as telecommunication, IT, finance
,Entertainment etc rather than agriculture and Industries .
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