Economics: Class 11 (Part 1) — Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

In 1991, India faced a severe economic crisis primarily related to its external debt and balance of payments. The government was unable to make repayments on its foreign borrowings, and foreign exchange reserves dropped to levels insufficient to finance even two weeks of imports. This crisis was further aggravated by rising prices of essential commodities.

To manage the crisis, India approached the International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank, and the International Monetary Fund (IMF), securing a $7 billion loan. In return, these international agencies required India to liberalise its economy by removing restrictions on the private sector and reducing trade barriers. Consequently, India announced the New Economic Policy (NEP), which introduced wide-ranging reforms classified into:

• Stabilisation Measures: Short-term policies aimed at correcting balance of payments weaknesses and controlling inflation.
• Structural Reform Measures: Long-term policies aimed at improving economic efficiency and international competitiveness.

Prior to 1991, strict regulatory mechanisms like industrial licensing, public sector reservation, and price controls hindered growth. The 1991 reforms introduced major deregulations:

• Abolition of industrial licensing for almost all industries, except for a few hazardous or sensitive categories (e.g., alcohol, cigarettes, industrial explosives).
• Reduction of industries reserved exclusively for the public sector (retaining only atomic energy and core railway transport activities).
• Dereservation of many goods previously reserved for small-scale industries.

The financial sector, regulated by the Reserve Bank of India (RBI), underwent significant changes to transition the RBI's role from a regulator to a facilitator:

• Establishment of private sector banks (both domestic and foreign).
• Increase in foreign investment limits in banks to around 74%.
• Permission for Foreign Institutional Investors (FII), such as mutual funds and pension funds, to invest in Indian financial markets.

Tax reforms focused on the government's fiscal policy to increase revenue and compliance:

• Continuous reduction in direct taxes (individual income tax and corporation tax) to discourage tax evasion and encourage savings.
• Simplification of indirect taxes to establish a unified national market, culminating in the introduction of the Goods and Services Tax (GST) in 2016.

External sector reforms aimed at integrating India with the global economy:

• Devaluation of the rupee against foreign currencies to boost exports and resolve the balance of payments crisis.
• Transition to a market-determined exchange rate system.
• Dismantling of quantitative restrictions on imports and exports, reduction of tariff rates, and abolition of import licensing.

Privatisation involves shedding the ownership or management of government-owned enterprises. This is often achieved through disinvestment, which is the sale of a portion of public sector enterprise (PSE) equity to the public. To improve efficiency and competitiveness, the government granted financial and managerial autonomy to select profitable PSEs, categorising them as:

• Maharatnas (e.g., Indian Oil Corporation, Steel Authority of India)
• Navratnas (e.g., Hindustan Aeronautics Limited)
• Miniratnas (e.g., Bharat Sanchar Nigam Limited)

Globalisation refers to the integration of the domestic economy with the world economy. A major outcome of this process is outsourcing, where companies hire regular services from external sources, often in other countries. India became a prime destination for global outsourcing (such as BPOs, call centres, and software services) due to low wage rates and the availability of skilled, English-speaking manpower.

The World Trade Organisation (WTO) was established in 1995 as the successor to the General Agreement on Trade and Tariffs (GATT). Its objectives include:

• Administering multilateral trade agreements.
• Providing equal trading opportunities to all member nations.
• Removing tariff and non-tariff barriers to ensure optimum utilization of world resources.

Post-1991, India witnessed rapid GDP growth, primarily driven by the service sector, while agriculture experienced a decline in growth rate and the industrial sector faced fluctuations.

While reforms stimulated overall GDP growth and foreign investment, they faced several criticisms:

• Agriculture: Neglected by reforms, leading to a decline in public investment in infrastructure (irrigation, power, roads) and reduced subsidies, which increased production costs for small farmers.
• Industry: Faced a slowdown due to competition from cheap imports, inadequate infrastructure, and non-tariff barriers in developed markets.
• Disinvestment: Critics argue that public assets were undervalued and sold to the private sector, and the proceeds were used to offset fiscal deficits rather than building social infrastructure.
• Fiscal Policy: Tax cuts and tariff reductions limited the government's scope for raising revenue, adversely affecting developmental and welfare expenditures.