Liberalisation, Privatisation and Globalisation: An Appraisal Class 11 Notes: CBSE Economics (Indian Economic Development) Chapter 3

Economic Policy of 1991

• In 1991, in an attempt to battle the severe economic crisis, the Government of India initiated a series of economic reforms called the New Economic Policy. 

• India announced the New Economic Policy (NEP) subject to the conditionalities of the World Bank and IMF. Broad classification of this policy is:

• Stabilisation measures: These were the short term measures to correct issues such as inflation, and deficit in balance of payments.

• Structural reform measures: These were long term measures that focused upon enhancing the international competitiveness, and efficiency of the economy.

• The three major components of this policy were: 

• Liberalisation 

• Privatisation 

• Globalisation.

Economic Reforms: 

In India, economic reforms were implemented for the following reasons:

• Decreasing Foreign exchange reserves: Foreign exchange reserves, which the government usually has in hand to import gasoline and other essentials, plummeted to levels that were insufficient to last even a fortnight. The government was unable to repay its foreign borrowings.

• Poor performance of the public sector: During the period 1951–1990, the public sector was given a significant role in development policies. However, the majority of government enterprises performed poorly. They were losing a lot of money because of ineffective management.

• Inflationary BoP or imports exceeding exports: Imports increased at a rapid pace, but not at the same rate as exports. Even after establishing high taxes and quotas, the government was unable to limit imports. Exports, on the other hand, were quite low due to the bad quality and high pricing of our items in comparison to foreign commodities.

• Government has massive debts: The government's investment on different developmental projects exceeded its earnings from taxation. Therefore, the public authority acquired cash from banks, public and global financial organisations such as the International Monetary Fund (IMF) and other sources.

Liberalisation

The independence of the economy from direct or physical constraints imposed by the government is referred to as liberalisation. It is commonly defined as the relaxation of government regulations in a country to allow private sector enterprises to conduct business activities with fewer limitations. This refers to the opening of economic boundaries for multinational and foreign investment in emerging countries.

Various liberalisation measures were taken in respect to foreign trade, technological upgradation, exports-imports and foreign investment.

Financial Sector Reforms

• RBI’s role was transformed from a regulator to a facilitator of the financial sector.

• As a regulator, the RBI would fix the interest structure for commercial banks. But as a facilitator, it would only facilitate the free play of the market forces and let the banks decide their interest rates.

• Indian financial markets were also open to Foreign Institutional Investors (FII), like merchant bankers, mutual funds, and pension funds.

Tax Reforms (Fiscal Reforms)

• There has been a reduction in the taxes and simplification of the structure of taxes on individual incomes since 1991. Fearing a heavy burden and complex nature of taxes, people would often evade taxes.

• Reforms have also been made in taxes levied on commodities. The Goods and Services Tax which was passed in 2016 and came to effect in 2017, was expected to generate additional government revenue and prevent tax evasion.

Foreign Exchange Reforms

• In 1991, the Indian rupee was devalued against foreign currencies to fix the balance of payment imbalance. 

• Followed by the devaluation, the exchange value of the Indian rupee in the international money market was left to the free play of market forces.

Trade and Investment Policy reforms

• After liberalization, import quotas prevalent in the Foreign Trade Policy were removed. 

• Reduction in tariff rates were made.

• The policy of import licensing was almost scrapped except in the case of a few goods. 

• There was a reduction of import duty to enhance competitiveness in the domestic market. 

• Export duty was withdrawn to enhance the competitiveness of Indian goods in the international market.

• From April 2001, quantitative restrictions on imports have been removed.

Privatisation

• It refers to the process of involving the private sector in the ownership of the state-owned enterprise. 

• The transfer of government ownership to the public sector can take place in two ways: 

1. Outright sale of the government enterprises to private entrepreneurs 

2. Withdrawal of government ownership and management from the mixed enterprises.

• Disinvestment is also a type of privatisation where the government sells off a part of its share of the capital of PSUs to private investors.

Strategies Adopted for Privatisation:

• Providing a strong impetus for FDI inflows: Privatisation strives to provide a solid foundation for FDI inflows. Increased FDI inflows strengthen the economy's financial position.

• Increasing the efficiency of public-sector endeavours (PSUs): Giving PSUs decision-making authority increases their efficiency. Some businesses were accorded the Navratna and Miniratna designations.

Globalisation

It refers to the integration of a country’s economy with the global economy.  

Features

Some of the features of globalisation are a follows:

• Liberalisation: It represents the freedom of entrepreneurs to develop any industry, trade, or business enterprise, whether within or outside of their own country.

• Economic Activity Globalization: Domestic markets, as well as the global market, govern economic activity. It refers to the process of merging the domestic and global economies.

• Trade liberalisation: It advocates for the unrestricted flow of trade between all nations. It advocates for industry and commerce to be free of overbearing regulatory and protective laws and restrictions.

• Privatisation: Globalisation implies removing the state from control of means of production and distribution and allowing free movement of industrial, commercial, and economic activities among individuals and companies.

• Increased Collaborations: One characteristic of globalisation is the encouragement of entrepreneurial collaborations in order to ensure fast modernisation, development, and technical improvement.

Outsourcing

• This outcome of globalization refers to a system of hiring business services from the outside world. 

• These services can include call centers, transcription, clinical advice, teaching/coaching, BPOs, KPOs, accounting, banking services etc. 

• India is becoming an important destination to outsource because of the availability of cheap labour and  revolutionary growth in the IT industry in India thus making India a destination for global outsourcing.

World Trade Organisation

• On January 1, 1995, the organisation GATT was replaced by the World Trade Organization. Its headquarters are in Geneva, Switzerland.

• It is also a member-driven rule-based organisation, in that all decisions are made by member states based on a general consensus. 

• The World Trade Organisation (WTO), is expected to play an important role in the globalisation of world economies. It is intended to encourage international trade by lowering tariffs and eliminating non-tariff barriers.

Assessment of LPG Policies

Merits

• Growth: 

The Indian economy has become a more vibrant economy. The overall level of economic activity has trended up as indicated by an impressive increase in the growth rate of GDP. Following the implementation of LPG policy, GDP growth reached as high as 8% per year.

• Rise in FDI:

There has been a substantial rise in foreign direct investment (FDI) and foreign institutional investment (FII). The foreign exchange reserves have also shown considerable growth.  As a result, India is now one of the largest foreign exchange reserve holders in the world.

• Increased Exports: 

India has emerged as a leading exporter of a variety of goods like auto parts, pharmaceutical goods, engineering goods, IT software and textiles.

• A check on Inflation:

Owing to a greater flow of goods and services in the economy, LPG policies brought a check on inflation.

Demerits

• Unemployment

The growth-led reforms failed to generate sufficient employment opportunities in the country.

• Reforms in Agriculture

The growth of GDP has primarily been triggered by the growth of secondary and tertiary sectors. The agricultural sector has suffered serious neglect and its growth rate has depleted to a miserably low level. As a result, India is experiencing a growing disparity between its rural and urban economies.

• Reforms in Industry

Due to decreasing demand for industrial products, industrial growth has recorded a slowdown. The decreasing demand can be due to cheaper imports, inadequate investment in infrastructure, etc. The opening up of the economy has imposed increasing competition from imports on domestic manufacturers and the infrastructure remains inadequate.

• Disinvestment

There has been a substantial loss to the government and the outright sale of public assets because the assets of PSUs have been undervalued and sold to the private sector. Instead of being used to develop the social infrastructure of the country, the proceeds from the sale of such assets are used to offset the shortage of government revenues.

• Reforms and Fiscal Policies

The growth of public sector expenditures has been limited by economic reforms, especially in the social sectors. The tax reductions were expected to curb tax evasion and increase government revenue, but no increase in tax revenue was witnessed. To entice foreign investment, tax breaks were offered to international investors. This further reduced the scope for increasing tax revenue.

Indian Economy During Reforms: An Assessment: 

The assessment of the Indian economy during the reforms highlights the transformative impact of the 1991 economic changes. These reforms, centred on Liberalisation, Privatisation, and Globalisation, led to a significant shift from a controlled, inward-looking economy to a more open and competitive market. The reforms spurred rapid industrial growth, increased foreign investments, and brought about a more vibrant economy. However, they also posed challenges, such as the neglect of agriculture, uneven development, and the rise of consumerism, which have led to debates on the long-term sustainability and inclusiveness of these economic changes.

Reforms and Fiscal Policies:

In Class 11 Economics Chapter 3, "Reforms and Fiscal Policies" focuses on how the economic reforms of 1991 influenced India's fiscal policies. The reforms aimed at reducing the fiscal deficit by controlling government spending, increasing revenue through tax reforms, and promoting efficiency in public enterprises. These policies were designed to stabilise the economy, encourage private investment, and foster sustainable economic growth. The chapter also discusses the impact of these changes on the overall financial health of the country, highlighting both the successes and challenges of implementing these fiscal reforms.

5 Important Topics of Class 11 Economics Chapter 3 Liberalisation Privatisation and Globalisation Notes

Importance of Class 11 Economics Chapter 3 Notes PDF

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Tips for Learning the Class 11 Economics Chapter 3 Notes on Liberalisation, Privatisation and Globalisation: An Appraisal

• Learn important terms like liberalisation, privatisation, and globalisation to build a solid foundation.

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• Relate the concepts to real-life examples, such as how globalisation has influenced Indian businesses and consumer choices.

Conclusion

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